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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

** **

**x**** ANNUAL REPORT PURSUANTTO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For the fiscal year ended December 31, 2008**

 

**OR**

 

**o**** TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For the transition period from      to      **

 

**Commission file number 1-8993**

 

**MONTPELIER RE HOLDINGS LTD.**

(Exact name of Registrant as specified in its charter)

 

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

 

**Montpelier House, 94 Pitts Bay Road**

**Pembroke, Bermuda HM 08**

(Address of principal executive offices)

 

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

 

Securities registeredpursuant 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 |       | New York Stock Exchange                       |

 

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

 

Indicate by check mark if the Registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act Yes  x  No  o

 

Indicate by check mark if the Registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Exchange Act.Yes  o  No  x

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the ExchangeAct during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K orany amendment to this Form 10-K  x

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definition of “large accelerated filer”, “accelerated filer” and“smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Exchange 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, 2008, was $910,734,163.

 

As of February 25, 2009, 92,175,879 common shares were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

The definitive proxy statement relating to Montpelier Re Holdings Ltd.’sAnnual Meeting of Shareholders, to be held May 20, 2009, 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                                                                                               | 13         |
|                        | Investments, Cash and Cash Equivalents                                                                               | 15         |
|                        | Ratings                                                                                                              | 16         |
|                        | Competition                                                                                                          | 17         |
|                        | Regulation                                                                                                           | 17         |
|                        | Employees                                                                                                            | 24         |
|                        | Available  Information                                                                                               | 24         |
| Item 1A.                    | Risk Factors                                                                                                         | 25         |
| Item 1B.                    | Unresolved  Staff Comments                                                                                           | 33         |
| Item  2.                    | Properties                                                                                                           | 33         |
| Item 3.                     | Legal Proceedings                                                                                                    | 33         |
| Item 4.                     | Submission  of Matters to a Vote of Security Holders                                                                 | 34         |
|                        |                                                                                                                 |       |
| **PART II**            |                                                                                                                 |       |
| Item 5.                     | Market  for the Company’s Common Equity, Related Shareholder Matters and Issuer  Purchases of Equity Securities | 34         |
| Item 6.                     | Selected Financial  Data                                                                                             | 37         |
| Item 7.                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 38         |
| Item 7A.                    | Quantitative  and Qualitative Disclosures About Market Risk                                                          | 74         |
| Item 8.                     | Financial  Statements and Supplementary Data                                                                         | 77         |
| Item 9.                     | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure                                | 77         |
| Item 9A.                    | Controls and  Procedures                                                                                             | 77         |
| Item 9B.                    | Other Information                                                                                                    | 78         |
|                        |                                                                                                                 |       |
| **PART III**           |                                                                                                                 |       |
| Item 10.                    | Directors,  Executive Officers and Corporate Governance                                                              | 78         |
| Item 11.                    | Executive  Compensation                                                                                              | 78         |
| Item 12.                    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 78         |
| Item 13.                    | Certain  Relationships and Related Transactions, and Director Independence                                           | 78         |
| Item 14.                    | Principal  Accounting Fees and Services                                                                              | 78         |
|                        |                                                                                                                 |       |
| **PART IV**            |                                                                                                                 |       |
| Item 15.                    | Exhibits and  Financial Statement Schedules                                                                          | 79         |
|                        |                                                                                                                 |       |
| **SIGNATURES**              | 82                                                                                                                   |
|                             |                                                                                                                      |            |  |

 

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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 andprojections. Forward-looking statements rely on a number of assumptionsconcerning future events and are subject to a number of uncertainties andvarious risk factors, many of which are outside our control. See *“Risk Factors”*contained in Item 1A hereinfor specific important factors that could cause actual results to differmaterially from those contained in forward looking statements. In particular,statements using words such as “may,” “should,” “estimate,” “expect,”“anticipate,” “intend,” “believe,” “predict,” “potential,” or words of similarimport 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 Syndicate 5151 andMUSIC effectively; increases in our general and administrative expenses due tonew business ventures, which expenses may not be recoverable through additionalprofits; the cyclical nature of the reinsurance business; the levels of new andrenewal business achieved; opportunities to increase writings in our coreproperty and specialty reinsurance and insurance lines of business and inspecific areas of the casualty reinsurance market and our ability to capitalizeon those opportunities; the sensitivity of our business to financial strengthratings established by independent rating agencies; the inherent uncertainty ofour risk management process, which is subject to, among other things, industryloss estimates and estimates generated by modeling techniques; the accuracy ofestimates reported by cedants and brokers on pro-rata contracts and certainexcess-of-loss contracts where a deposit or minimum premium is not specified inthe contract; the inherent uncertainties of establishing reserves for loss andloss adjustment expenses, particularly on longer-tail classes of business suchas casualty; unanticipated adjustments to premium estimates; changes in the availability,cost or quality of reinsurance or retrocessional coverage; changes in generaleconomic and financial market conditions; changes in and impact of governmentallegislation or regulation, including changes in tax laws in the jurisdictionswhere we conduct business; our ability to assimilate effectively the additionalregulatory issues created by our entry into new markets; the amount and timingof reinsurance recoverables and reimbursements we actually receive from ourreinsurers; the overall level of competition, and the related demand and supplydynamics in our markets relating to growing capital levels in the reinsuranceindustry; declining demand due to increased retentions by cedants and otherfactors; the impact of terrorist activities on the economy; rating agencypolicies and practices; unexpected developments concerning the small number ofinsurance and reinsurance brokers upon whom we rely for a large portion ofrevenues; our dependence as a holding company upon dividends or distributionsfrom our reinsurance and insurance operating subsidiaries; and the impact offoreign currency 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 on November 14, 2001.  TheCompany, through its subsidiaries in Bermuda, the U.S., the United Kingdom (the“U.K.”) and Switzerland (collectively “Montpelier”), provides customized andinnovative reinsurance and insurance solutions to the global market.

 

At December 31, 2008 and 2007, the Company had $2,797.6 millionand $3,525.2 million of consolidated total assets, respectively, andshareholders’ equity of $1,357.6 million and $1,653.1 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 Operating Segments**

 

We currently operate through four operating segments consisting ofMontpelier Bermuda, Montpelier Syndicate 5151, MUSIC and Blue Ocean.  Each of our operating segments is a separateunderwriting platform through which we write reinsurance and insurancebusiness.  In addition to our operatingsegments, the activities of the Company, certain of its intermediate holdingand service companies and intercompany eliminations relating to inter-segmentreinsurance and service charges are collectively referred to as “Corporate andOther.”

 

Detailed financial information about each of our operating segments forthe three years ended December 31, 2008 is presented in Note 13 of theNotes to Consolidated Financial Statements included in this Form 10-K.  During 2008, we changed the composition ofour operating segments. All prior periods presented have been re-segmented toconform with the current presentation.

 

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

 

*Montpelier Bermuda*

 

Our Montpelier Bermuda segment consists of the collective operations ofMontpelier Reinsurance Ltd. (“Montpelier Re”) and Montpelier Marketing ServicesLimited (“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 reinsurance and insurance opportunitiesby utilizing proprietary risk pricing and capital allocation models andcatastrophe modeling tools.

 

 MMSL, our wholly-owned U.K.company based in London, provides marketing services to Montpelier Re.

 

At December 31, 2008 and 2007, our Montpelier Bermuda segment had$2,584.7 million and $3,168.9 million of total assets, respectively, andshareholder’s equity of $1,620.3 million and $1,895.1 million, respectively.

 

*Montpelier Syndicate 5151*

 

Our Montpelier Syndicate 5151 segment consists of the collectiveoperations of Montpelier Syndicate 5151 (“Syndicate 5151”), Montpelier CapitalLimited (“MCL”),  Montpelier UnderwritingAgencies Limited (“MUA”), Montpelier Underwriting Services Limited (“MUSL”),Montpelier Underwriting Inc. (“MUI”) and Montpelier Europa AG (“MEAG”).

 

Syndicate 5151, our wholly-owned Lloyd’s of London (“Lloyd’s”)syndicate based in London, was established on July 1, 2007. Syndicate 5151underwrites primarily short-tail lines, mainly property insurance andreinsurance, engineering and a limited amount of specialty casualty classessourced from the London, U.S. and European markets.

 

MCL, our wholly-owned U.K. company based in London, serves as Syndicate5151’s sole corporate member.

 

MUA, our recently established, wholly-owned Lloyd’s Managing Agentbased in London, currently manages Syndicate 5151. 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. company based in London, provides supportservices to Syndicate 5151 and MUA.

 

MUI and MEAG serve as our wholly-owned Lloyd’s Coverholders, meaningthat they are each authorized to enter into contracts of reinsurance andinsurance and/or issue documentation on behalf of Syndicate 5151. MUI, ourwholly-owned U.S. company based in Hartford, Connecticut, underwritesreinsurance and insurance business through managing general agents andintermediaries with a focus on program business.  MEAG, our wholly-owned Swiss company based inZug, focuses on reinsurance and insurance markets in Continental Europe and theMiddle East.  MEAG also providesmarketing services to Syndicate 5151 and, to a lesser extent, Montpelier Re.

 

At December 31, 2008 and 2007, our Montpelier Syndicate 5151segment had $96.3 million and $21.4 million of total assets, respectively, anda shareholder’s deficit of $9.1 million and $10.0 million, respectively.

 

*MUSIC*

 

Our MUSIC segment consists solely of the operations of Montpelier U.S.Insurance Company (“MUSIC”), our wholly-owned U.S. company based in Scottsdale,Arizona.

 

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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”) on November 1, 2007.  MUSIC is an admitted insurer in Oklahoma andis authorized as an excess and surplus lines insurer in 43 additional statesand the District of Columbia. At the time of acquisition, MUSIC had noemployees or in force premium. MUSIC underwrites smaller commercial propertyand casualty risks that do not conform to standard insurance lines.

 

At December 31, 2008 and 2007, our MUSIC segment had $68.8 millionand $72.9 million of total assets, respectively, and shareholder’s equity of$49.1 million and $53.9 million, respectively.

 

*Blue Ocean*

 

Our Blue Ocean segment consists of the collective operations of BlueOcean Re Holdings Ltd. (“Blue Ocean”) and Blue Ocean Reinsurance Ltd. (“BlueOcean Re”).

 

Blue Ocean, our wholly-owned Bermuda company based in Pembroke,Bermuda,  is a holding company that ownsBlue Ocean Re which is 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.

 

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 preferredshares on January 11, 2008, we owned 33.6% of such preferred shares.

 

Prior to Blue Ocean becoming a wholly-owned subsidiary, it wasconsidered a “variable interest entity” as defined under Financial AccountingStandards Board (“FASB”) Interpretation (“FIN”) No. 46R, entitled“Consolidation of Variable Interest Entities - an interpretation of AccountingResearch Bulletin No. 51 as amended” and was consolidated into ourfinancial statements.

 

At December 31, 2008 and 2007, our Blue Ocean segment had $1.2million and $240.4 million of total assets, respectively, and shareholder’sequity of $1.1 million and $135.2 million, respectively.

 

*Corporate and Other*

 

Our Corporate and Other activities consist of the operations of theCompany and certain of our intermediate holding and service companies includingMontpelier Technical Resources Ltd. (“MTR”) and Montpelier Agency Ltd. (“MAL”).

 

MTR, our wholly-owned U.S. company based in Woburn, Massachusetts,provides accounting, finance, risk management, advisory and informationtechnology services to many of our subsidiaries.

 

MAL, our wholly-owned Bermuda company based in Pembroke, Bermuda,provided Blue Ocean with underwriting, risk management, claims management,ceded retrocession management, actuarial and accounting services. MAL hasconducted no significant operations subsequent to the Blue Ocean Transaction.

 

**Our Strategy and Operating Principles**

 

We manage our business bythe following tenets:

 

*Maintaining a Strong Balance Sheet.*  Wefocus on maintaining a strong balance sheet in support of our underwritingactivities and actively manage our capital with a view towards maximizing ourfully-converted book value per share based on prudent risk tolerances. Ourcapital currently consists of our shareholders’ equity, debt and contingentcapital (our forward sale and share issuance agreements).   Also, as part of our capital managementstrategy, we may choose to reduce debt or return some capital to shareholdersthrough dividends, distributions or share repurchases.

 

*Enhancing Our Lead Position With Brokers and Cedants.*  Weoften take a lead position in underwriting treaties. Through the use ofunderwriting tools, our underwriters seek to identify those exposures whichmeet our objectives in terms of return on capital and underwriting criteria. Byleading reinsurance programs, we believe our underwriters attract, and canselectively write, 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 pricinginefficiencies that may exist in the market from time to time. To achieve this,we disseminate market information to our underwriting teams and facilitatepersonal contact among our underwriters. Generally, our underwriters use riskmodeling tools, both proprietary and third-party, together with their marketknowledge and judgment, and seek to achieve the highest available price perunit of risk assumed.

 

*Developing and Maintaining a Balanced Portfolio ofReinsurance and Insurance Risks.*  We aim to maintain a balancedportfolio of risks, diversified by product, geography and marketing sourcewithin each chosen class of business.  Weemploy risk management techniques to monitor correlation risk and seek toenhance underwriting returns through careful risk selection using advancedcapital allocation methodologies. We also actively seek to write more businessin classes experiencing attractive conditions and avoid those classes sufferingfrom intense price competition or poor fundamentals. We believe a balancedportfolio of 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 TimelyReinsurance and Insurance Solutions for Our Clients.*  Weaim to be a premier provider of global property and casualty reinsurance andinsurance products and aim to provide superior customer service. Our objectiveis to solidify long-term relationships with brokers and clients whiledeveloping an industry reputation for innovative and timely quotes fordifficult 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 thedirect result 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 intoretrocessional agreements for many of the same reasons that ceding companiesenter 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, the insurerinvests the money, earns investment income and may generate investment gainsand 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 investmentgains or losses are taken into account. The length of time between receiving premiums and paying out claims,commonly referred to as the “tail”, can significantly affect how profitablefloat can be.  Long tail losses, such asproduct liability, pay out over longer periods of time providing the insuranceor reinsurance company the opportunity to generate significant investment earningsfrom float.  Short tail losses, such asfire or 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.In the 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 froma single seat of operation in Bermuda. During 2007 we expanded our underwritingplatform to include operations located in 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 reinsurance and insurance underwriting teams work with proprietaryrisk analytic and exposure databases which have been designed to provideconsistent pricing, prudent risk selection and real-time portfoliomanagement.  Our underwriters adhere toguidelines established by senior management, as approved by the UnderwritingCommittee of our Board of Directors, and seek to: (i) limit the scope ofcoverage on regular property classes to traditional perils and generallyexclude perils or causes of loss that are difficult to measure such as cyberrisks, pollution and nuclear, 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 to analyzeand manage the reinsurance exposures we assume from cedants called CATM. Thiscomputer-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.  Themajority of our current treaty reinsurance book of business representsshort-tail property reinsurance including retrocessional business.  Our gross short-tail treaty reinsurancewritings totaled $496.8 million, $530.1 million and $576.8 million during theyears ended December 31, 2008, 2007 and 2006, respectively.  We also write a modest amount of long-tailtreaty reinsurance business, mainly casualty risks, which totaled $41.0million, $50.8 million and $56.3 million during the years ended December 31,2008, 2007 and 2006, 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 reflect aggregateunderwriting and investment risk.  Weseek to refine and improve each of these approaches based on operationalfeedback. Underwriting judgment involves important assumptions about mattersthat 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 acase-by-case basis.  Our direct insurancebusiness consists of a modest book of short-tail property business written byMontpelier Bermuda 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 smallportion 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 $54.5 million, $65.4 million and $94.4 million during theyears ended December 31, 2008, 2007 and 2006, respectively.  We also write a small amount of long-taildirect insurance and facultative reinsurance business, mainly casualty risks,which totaled $27.7 million and $7.5 million during the years ended December 31,2008 and 2007, respectively.  We did notwrite any long tail direct insurance and facultative reinsurance during 2006.

 

**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.  Prior to 2006,Montpelier Re was our only operating platform and today it continues to be ourprimary operating platform.

 

*Syndicate 5151*

 

Syndicate 5151 underwrites a book of non-marine property andengineering classes and a limited amount of specialty casualty business with aview to capturing business that would not normally find its way to our Bermudaunderwriters. Syndicate 5151 focuses primarily on non-catastrophe exposureswhile remaining within our core competency of underwriting short-tailedaccounts.  Syndicate 5151’s focus maychange from time to time based on market opportunities.

 

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

 

(i)          the Property Treaty division of MUI underwrites proportional and lowlayer excess-of-loss treaty business, mostly short-tail. MUI’s target market isexcess & surplus lines companies and regional and specialty insurancecompanies. This division looks for clients who have demonstrated ability to profitablyunderwrite their chosen classes and manage the catastrophe exposure associatedwith their risks.  The Property Treatydivision seeks meaningful participations and strives to create and maintainlongstanding relationships.

 

(ii)       the Brokered Property Facultative division of MUI underwrites aportfolio of North American property exposures attaching in a proportional,primary or excess-of-loss position.  Alarge majority of this business is catastrophe driven, and we heavily rely onour proprietary models to price and aggregate this business.

 

(iii)    the Direct Property Facultative division of MUI writes reinsurancebusiness that is produced without broker involvement.  The policies generally incorporatelow-frequency, high severity risks written on an excess-of-loss basis. Only asmall portion of this business is catastrophe driven. This division relies onstrong customer relationships developed through prompt and consistent clientresponse.  The Direct Property Facultativedivision targets large, national carriers writing large property exposures aswell as regional and specialty carriers.

 

MUI’s insurance business targets managing general agents and programbusiness.  MUI’s approach is to identify,develop and manage underwriters who have demonstrated expertise in theirspecific segments.  Despite the fact thatthe underwriting of these programs is outsourced, the management andadministration of this business is retained by MUI.

 

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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, to a lesserextent, Montpelier Re.

 

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.  As aresult, during 2007, Blue Ocean began returning capital to its shareholders andBlue Ocean Re ceased writing new business.

 

Blue Ocean Re did not write any new business in 2008 and has beenderegistered.  As of the date of the BlueOcean Transaction, Blue Ocean’s assets consisted primarily of cash andinvestments and it had no in force reinsurance contracts.

 

**Outwards Reinsurance Protection**

 

In the normal course of business, we purchase reinsurance fromthird-parties in order to manage our exposures. The amount of outwards reinsurance that we buy varies from year-to-yeardepending on our risk appetite, availability and cost.  All of our reinsurance purchases to date haverepresented prospective cover, meaning that the coverage has been purchased toprotect us against the risk of future losses as opposed to covering losses thathave already occurred but have not yet been paid. The majority of ourreinsurance contracts are excess-of-loss contracts covering one or more linesof business. To a lesser extent, we have also purchased quota share reinsurancewith respect to specific lines of our business. We also purchase industry losswarranty policies which provide us with coverage for certain losses we incur,provided they are triggered by events exceeding a specified industry loss size.In addition, for certain pro-rata contracts that we enter into, the associateddirect insurance contracts carry underlying reinsurance protection fromthird-party reinsurers, known as inuring reinsurance, which we net against ourgross 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 reinsurance security policy, reinsurers are generallyrequired to be rated “A-” (Excellent) or better by A.M. Best at the timethe policy is written. We also consider reinsurers that are not rated or do notfall within the above threshold on a case-by-case basis when collateralized upto policy limits, net of any premiums owed. We monitor the financial condition and ratings of our reinsurers on anongoing basis.

 

**Claims Management**

 

Our personnel administer claims arising from our reinsurance andinsurance 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.  We utilize a reserving methodology thatcalculates a point estimate for our ultimate losses. Our internal actuariesreview our reserving assumptions and our methodologies on a quarterly basis.Our third quarter and year-end loss estimates are subject to a corroborativereview by independent actuaries using generally accepted actuarial principles.The Audit Committee of our Board of Directors also reviews our quarterly andannual 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.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, demand surge and inflation.

 

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**

 

Property Catastrophe

 

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. Coveragecan also vary from “all natural” perils, which is the most expansive form, tomore limited types such as windstorm-only coverage.

 

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 the underwriters of a retrocedant may alter theirbook of business after retrocessional coverage has been bound.

 

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Property Specialty

 

We write Property Specialty reinsurance and insurance contracts thatinclude risk excess-of-loss, property pro-rata and direct insurance andfacultative reinsurance. Risk excess-of-loss reinsurance protects the cedingcompany on its primary insurance risks and facultative reinsurance transactionson a “single risk” basis. A “risk” in this context might mean the insurancecoverage on one building or a group of buildings or the insurance coverageunder a single policy which the reinsured treats as a single risk. Suchproperty risk coverages are written on an excess-of-loss basis, which providethe reinsured protection beyond a specified amount up to the limit set withinthe 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.

 

We write direct insurance and facultative reinsurance coverage oncommercial property risks where we assume all or part of a risk under a singleinsurance contract. We generally write such coverage on an excess-of-lossbasis. 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 write property pro-rata reinsurance contracts which reinsuresindividual property risks written on a proportional basis rather than on anexcess-of-loss basis.

 

Other Specialty

 

We write Other Specialty risks such as aviation liability, aviationwar, marine, personal accident catastrophe, worker’s compensation, terrorism,casualty and specialty reinsurance business. Aviation contracts are primarilywritten on a retrocessional excess-of-loss basis. We write stand-aloneterrorism coverage on a direct basis and through reinsurance treaties.  Beginning in 2006, we ceased renewing ourcatastrophe-exposed offshore marine business.

 

Coverage for worker’s compensation and personal accident catastrophecontracts are generally written to respond to losses in which a minimum of twoinsured persons are involved in the same event. However, we tend to attach atthe upper layers of such reinsurance programs where significantly more insuredpersons would need to be involved in the same event. We therefore regard ourworker’s compensation and personal accident classes as being catastropheexposed and relatively short-tail in nature.

 

Our casualty portfolio of risks focuses on selected classes with anemphasis on medical malpractice and casualty clash excess-of-loss reinsurancebusiness. Although we do write excess hospital treaty reinsurance, our medicalmalpractice book is biased towards excess physicians’ treaty reinsurance,generally single state insurers. In addition, we also write a limited amount ofauto liability coverage and errors and omissions business on an excess-of-lossbasis, and quota share treaties covering auto liability and commercial generalliability for municipalities in the U.S. Our current portfolio contains only a modest amount of casualty clashbusiness. Clash is a form of reinsurance that covers the ceding company’sexposure to multiple retentions that may occur when two or more of its insuredssuffer a loss from the same occurrence.

 

We have written a number of reinsurance and insurance contractsproviding coverage for losses arising from acts of terrorism. Most of thesecontracts exclude coverage protecting against nuclear, biological or chemicalattacks.  Losses arising from acts ofterrorism are typically covered on a limited basis, for example, where thecovered risks fall below a stated insured value or into classes or categorieswe deem less likely to be targets of terrorism than others or where an act ofterrorism does not meet the definition of “act of terrorism” set forth in theTerrorism Risk Insurance Act of 2002 (“TRIA”). TRIA was enacted to ensure theavailability of insurance coverage for certain types of terrorist acts in theU.S. 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 thedistinction between domestic and foreign acts of terrorism and retained theinsurer deductible level of 20% of direct earned premium for insured losses.

 

We write specialty reinsurance on an opportunistic basis. We targetshort-tail lines of business, often with low frequency and high severityprofiles, similar to catastrophe business. We also seek to manage thecorrelation of this business with our property catastrophe exposures throughthe use of CATM.

 

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Excess and Surplus Lines

 

We write certain insurance risks, referred to as excess and surpluslines, that do not conform to normal underwriting patterns for standardlines.  These risks, primarily smallercommercial property and casualty risks, are written through select general agents and brokers enabling us tocapitalize on the underwriting expertise, and the territorial and productknowledge of the producer.  These risksinvolve specialized treatment with respect to coverage, forms, price and otherpolicy terms.

 

**WRITTEN PREMIUMS**

 

**By Line of Business and Segment**

 

The following tables present our gross premiums written, by line ofbusiness, within each of our operating segments during the years ended December 31,2008, 2007 and 2006:

 

(Millions)

 
| **Year Ended December 31, 2008** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean** | ** ** | **Corporate  and Other** | ** ** | **Total**  | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|---------------------|------------|-------------------------------|------------|------------|------------|
| ** **                                           | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Property Catastrophe                                 | ** ** | **$**                   | **317.2**  | ** **                      | **$**      | **30.6**   | ** ** | **$**               | **—** | ** **                    | **$**      | **0.1**    | ** ** | **$** | **—** | ** ** | **$** | **347.9** | ** ** |
| Property Specialty                                   | ** ** | **106.6**               | ** ** | **40.6**                        | ** ** | **—** | ** ** | **—**          | ** ** | **—**                    | ** ** | **147.2**  | ** ** |
| Other Specialty                                      | ** ** | **74.4**                | ** ** | **45.0**                        | ** ** | **—** | ** ** | **—**          | ** ** | **—**                    | ** ** | **119.4**  | ** ** |
| Excess and Surplus Lines                             | ** ** | **—**              | ** ** | **—**                      | ** ** | **5.6**    | ** ** | **—**          | ** ** | **—**                    | ** ** | **5.6**    | ** ** |
| 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** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| Property Catastrophe                   |       |       |       | $                       | 348.2      |                            | $          | 2.0        |       | $              | —     |       | $          | 42.8 |   | $ | 393.0 |   |
| Property Specialty                     |       |       |       | 136.7                   |       | 5.8                             |       | —     |       | —         |       | 142.5      |       |
| Other Specialty                        |       |       |       | 110.8                   |       | 7.5                             |       | —     |       | —         |       | 118.3      |       |
| Excess and Surplus Lines               |       |       |       | —                  |       | —                          |       | —     |       | —         |       | —     |       |
| Total gross premiums written           |       |       |       | $                       | 595.7      |                            | $          | 15.3       |       | $              | —     |       | $          | 42.8 |   | $ | 653.8 |   |

 
| **Year Ended December 31,  2006** | ** ** | ** ** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **     | ** ** | ** ** | ** ** |
| Property Catastrophe                   |       |       |       | $                       | 301.6      |                            | $          | —     |       | $              | —     |       | $          | 94.8 |   | $ | 396.4 |   |
| Property Specialty                     |       |       |       | 206.8                   |       | —                          |       | —     |       | —         |       | 206.8      |       |
| Other Specialty                        |       |       |       | 124.3                   |       | —                          |       | —     |       | —         |       | 124.3      |       |
| Excess and Surplus Lines               |       |       |       | —                  |       | —                          |       | —     |       | —         |       | —     |       |
| Total gross premiums written           |       |       |       | $                       | 632.7      |                            | $          | —     |       | $              | —     |       | $          | 94.8 |   | $ | 727.5 |   |

 

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(1)          Represents an inter-segment reinsurance coveramong Montpelier Bermuda and Montpelier Syndicate 5151 which is eliminated inconsolidation.

 

**By Broker**

 

The majority of our reinsurance and insurance business is originatedthrough large third-party brokers. Brokers are intermediaries that assist the ceding company in structuringa program to meet their specific reinsurance needs. Once the ceding company hasapproved the terms of a certain reinsurance program, as quoted by the leadunderwriter or a group of reinsurers acting as such, the broker will offerparticipation to qualified reinsurers until the program is fully subscribed.  We seek to build long-term relationships withour brokers by providing: (i) prompt and responsive service onunderwriting submissions; (ii) innovative and customized reinsurance andinsurance solutions to our clients; and (iii) timely payment ofclaims.  We target brokers who are capableof supplying detailed and accurate underwriting data and can offer us a diversebook of business.  Brokers receivecompensation in the form of commissions based on negotiated percentages of thepremium they produce and performing other necessary services.  Broker commissions constitute a significantportion of our total acquisition costs.

 

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

The following table sets forth a breakdown of our gross premiumswritten by broker:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Aon Corporation (1)                             | ** ** | **$**                                      | **198.0**  | ** ** | **31** | **%** | $ | 201.2 |   | 31 | % | $ | 221.1 |   | 30 | % |
| Marsh & McLennan  Companies, Inc. | ** ** | **177.9**                                  | ** ** | **29** |   | 202.9 |   | 31 |   | 234.4 |   | 32 |   |
| Willis Group Holdings Limited                   | ** ** | **87.0**                                   | ** ** | **14** |   | 96.1 |   | 15 |   | 108.1 |   | 15 |   |
| All other brokers                               | ** ** | **121.2**                                  | ** ** | **20** |   | 139.5 |   | 21 |   | 144.2 |   | 20 |   |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written through brokers          | ** ** | **584.1**                                  | ** ** | **94** |   | 639.7 |   | 98 |   | 707.8 |   | 97 |   |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Gross premiums written otherwise                | ** ** | **36.0**                                   | ** ** | **6** |   | 14.1 |   | 2 |   | 19.7 |   | 3 |   |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Total gross premiums written                    | ** ** | **$**                                      | **620.1**  | ** ** | **100** | **%** | $ | 653.8 |   | 100 | % | $ | 727.5 |   | 100 | % |

 

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(1)          Aon Corporation acquired Benfield Group Limited in November 2008.  The historic gross premiums shown as sourcedby Aon Corporation 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 31,2008.  As such, we are highly dependenton these brokers and a loss of all or a substantial portion of the businessprovided by one or more of these brokers could have a material adverse effecton our business.

 

**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 individual operating segment.

 

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

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| U.S. and Canada                                 | ** ** | **$**                                      | **314.2**  | ** ** | **50** | **%** | $ | 338.5 |   | 52 | % | $ | 399.1 |   | 54 | % |
| Worldwide (1)                                   | ** ** | **121.2**                                  | ** ** | **19** | ** ** | 133.5 |   | 20 |   | 176.1 |   | 24 |   |
| Western Europe, excluding the U.K. and  Ireland | ** ** | **59.7**                                   | ** ** | **10** | ** ** | 51.6 |   | 8 |   | 25.6 |   | 4 |   |
| Worldwide, excluding U.S. and Canada (2)        | ** ** | **41.5**                                   | ** ** | **7** | ** ** | 33.8 |   | 5 |   | 33.7 |   | 5 |   |
| U.K. and Ireland                                | ** ** | **24.4**                                   | ** ** | **4** | ** ** | 34.2 |   | 5 |   | 11.9 |   | 2 |   |
| Japan                                           | ** ** | **23.1**                                   | ** ** | **4** | ** ** | 25.0 |   | 4 |   | 30.1 |   | 4 |   |
| Other                                           | ** ** | **36.0**                                   | ** ** | **6** | ** ** | 37.2 |   | 6 |   | 51.0 |   | 7 |   |
|                                            |       |                                       |       |   | ** ** |   |   |   |   |   |   |   |   |
| Total gross premiums written                    | ** ** | **$**                                      | **620.1**  | ** ** | **100.0** | **%** | $ | 653.8 |   | 100.0 | % | $ | 727.5 |   | 100.0 | % |

 

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(1)    “Worldwide” comprises reinsurance and insurance contracts that insureor reinsure risks in more than one geographic area and do not specificallyexclude the U.S. and Canada.

 

(2)    “Worldwide, excluding U.S. and Canada” comprises insurance andreinsurance contracts that insure or reinsure risks in more than one geographicarea 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 reserves involves aconsiderable degree of judgment and, as of any given date, is inherentlyuncertain.  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.

 

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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, 2008.  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 (the “MUSICAcquisition”) solely for the purpose of obtaining its multi-state insurancelicenses and its excess and surplus lines authorizations. See *“Acquired Loss Reserves - MUSIC”* containedin Item 1 herein.

 
| ** **                                                                                      | ** ** | **Consolidated Loss and LAE  Years ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| **(Millions)**                                                                                  | ** ** | **2001**                                                                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ENDING UNPAID  LOSS AND LAE RESERVES:                                                           |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross balance                                                                                   |       | $                                                                                     | —     |   | $ | 146.0 |   | $ | 249.8 |   | $ | 549.5 |   | $ | 1,781.9 |   | $ | 1,089.2 |   | $ | 860.7 |   | $ | 808.9 |   |
| Less: reinsurance  recoverables on unpaid losses                                                |       | —                                                                                |       | (16.7 | ) | (7.7 | ) | (94.7 | ) | (305.7 | ) | (197.3 | ) | (152.5 | ) | (122.9 | ) |
| Net liability                                                                                   |       | $                                                                                     | —     |   | $ | 129.3 |   | $ | 242.1 |   | $ | 454.8 |   | $ | 1,476.2 |   | $ | 891.9 |   | $ | 708.2 |   | $ | 686.0 |   |
|                                                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE NET  LIABILITY PAID:                                                                 |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 year later                                                                                    |       | $                                                                                     | —     |   | $ | 23.2 |   | $ | 41.3 |   | $ | 214.2 |   | $ | 716.1 |   | $ | 335.2 |   | $ | 192.5 |   |   |   |
| 2 years later                                                                                   |       | —                                                                                |       | 35.9 |   | 87.3 |   | 309.7 |   | 1,026.5 |   | 480.3 |   |   |   |   |   |
| 3 years later                                                                                   |       | —                                                                                |       | 52.5 |   | 109.1 |   | 325.2 |   | 1,150.4 |   |   |   |   |   |   |   |
| 4 years later                                                                                   |       | —                                                                                |       | 53.7 |   | 114.1 |   | 334.1 |   |   |   |   |   |   |   |   |   |
| 5 years later                                                                                   |       | —                                                                                |       | 56.2 |   | 117.0 |   |   |   |   |   |   |   |   |   |   |   |
| 6 years later                                                                                   |       | —                                                                                |       | 56.2 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 7 years later                                                                                   |       | —                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NET LIABILITY RE-ESTIMATED:                                                                     |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1 year later                                                                                    |       | $                                                                                     | —     |   | $ | 71.9 |   | $ | 144.5 |   | $ | 437.7 |   | $ | 1,452.4 |   | $ | 855.5 |   | $ | 604.1 |   |   |   |
| 2 years later                                                                                   |       | —                                                                                |       | 61.6 |   | 131.8 |   | 407.8 |   | 1,447.7 |   | 783.1 |   |   |   |   |   |
| 3 years later                                                                                   |       | —                                                                                |       | 61.5 |   | 130.7 |   | 400.3 |   | 1,398.4 |   |   |   |   |   |   |   |
| 4 years later                                                                                   |       | —                                                                                |       | 59.2 |   | 129.4 |   | 390.6 |   |   |   |   |   |   |   |   |   |
| 5 years later                                                                                   |       | —                                                                                |       | 59.2 |   | 128.0 |   |   |   |   |   |   |   |   |   |   |   |
| 6 years later                                                                                   |       | —                                                                                |       | 58.4 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 7 years later                                                                                   |       | —                                                                                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE NET  REDUNDANCY                                                                      |       | $                                                                                     | —     |   | $ | 70.9 |   | $ | 114.1 |   | $ | 64.2 |   | $ | 77.8 |   | $ | 108.8 |   | $ | 104.1 |   | $ | — |   |
|                                                                                            |       |                                                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RECONCILIATION OF  NET LIABILITY RE-ESTIMATED AS OF THE END OF THE LATEST RE-ESTIMATION PERIOD: |       |
| Gross re-estimated liability                                                                    |       | $                                                                                     | —     |   | $ | 61.0 |   | $ | 134.0 |   | $ | 521.5 |   | $ | 1,716.4 |   | $ | 964.1 |   | $ | 739.8 |   | $ | — |   |
| Less: re-estimated reinsurance  recoverable                                                     |       | —                                                                                |       | (2.6 | ) | (6.0 | ) | (130.9 | ) | (318.0 | ) | (181.0 | ) | (135.7 | ) | — |   |
| Net re-estimated  liability                                                                     |       | $                                                                                     | —     |   | $ | 58.4 |   | $ | 128.0 |   | $ | 390.6 |   | $ | 1,398.4 |   | $ | 783.1 |   | $ | 604.1 |   | $ | — |   |
| CUMULATIVE GROSS  REDUNDANCY                                                                    |       | $                                                                                     | —     |   | $ | 85.0 |   | $ | 115.8 |   | $ | 28.0 |   | $ | 65.5 |   | $ | 125.2 |   | $ | 120.9 |   | $ | — |   |

 

See *“Management’s Discussion and Analysisof 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.

 

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**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.

 

As of December 31, 2008, MUSIC had remaining gross loss and LAEreserves relating to business underwritten prior to the MUSIC Acquisition of$8.8 million (the “Acquired Reserves”). In support of the Acquired Reserves, at December 31, 2008, 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 $8.8 million. The market value of the trust depositwas $11.6 million as of December 31, 2008. In addition, we have received afull indemnification from GAINSCO covering any adverse development from itspast business. If the Acquired Reserves were to develop unfavorably duringfuture periods and the various protective arrangements, including GAINSCO’sindemnification, ultimately proved to be insufficient, these liabilities wouldbecome our responsibility.

 

**INVESTMENTS, CASH AND CASH EQUIVALENTS**

 

**Investments**

 

Our investment portfolio is managed by a small number of professionalinvestment advisors and 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. OurFinance Committee (the “Finance Committee”) establishes our investmentguidelines and monitors our investment activities. These objectives andguidelines stress diversification of risk, capital preservation, marketliquidity, and stability of portfolio income. Our investment advisors have theflexibility to invest our assets as they see fit provided that they comply withtheir individual objectives and guidelines. The Finance Committee regularly monitors our overall investment results,reviews compliance with our investment objectives and guidelines and ultimatelyreports the overall investment results to the Board of Directors. Ourinvestment guidelines specify minimum criteria on the overall credit qualityand liquidity characteristics of the portfolio. They also include limitationson the size of certain holdings as well as restrictions on purchasing certaintypes of securities or investing in certain industries.

 

As of January 1, 2007, we adopted Statement of FinancialAccounting Standard (“FAS”) 157 entitled *“FairValue Measurements”* and FAS 159 entitled *“The Fair Value Option forFinancial Assets and Financial Liabilities”.*   As a result, substantially all of our investments are now carried at fair value withchanges in fair value being reported as net realized and unrealized gains(losses) in our statement of operations. Prior to the adoption of FAS 157 andFAS 159, our available for sale investments were carried at fair value withchanges in fair value being reported as a separate component of shareholders’equity, with changes therein reported as a component of other comprehensiveincome.

 

The current components of our investment portfolio follows:

 

*Fixed Maturity Investments*.  As a provider of reinsuranceand insurance for natural and man-made catastrophes, we could become liable forsignificant losses on short notice.  As aresult, 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. As of December 31, 2008, our fixedmaturities had an average credit quality of “AA+” (Very Strong) by Standard &Poor’s and an average duration of 2.3 years. As of December 31, 2008, our fixed maturities comprised 81% of ourtotal investment 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.  We received afee from the borrower for the temporary use of our securities.

 

*Equity Securities*.  Over longer time horizons, webelieve that modest investments in equity securities will enhance ourinvestment returns.  Our equityinvestment strategy is to maximize our risk-adjusted total return throughinvestments in a variety of equity and equity-related instruments with a focuson value investing.  As of December 31,2008, equity securities comprised 12% of our total investment portfolio.

 

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*Other Investments*.  Our other investments consistof investments in limited partnership interests and private investment funds,event-linked securities (“CAT Bonds”), private placements and certainderivative instruments.  As of December 31,2008, other investments comprised 7% of our total investment portfolio.  As of December 31, 2008, we had unfundedcommitments to limited partnerships and private investment funds totaling$30.0 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.  We maintain a modest amount ofcash and cash equivalents at all times in order to be in a position to paylosses that arise on short notice, pay our operating expenses and unfundedobligations and meet other commitments and contingencies.  As of December 31, 2008, we held $219.6million in cash (including our restricted cash) and held $48.4 million of cashequivalents.

 

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 fromobligations to their policyholders. Therefore, ceding companies often require their reinsurers to have, andto maintain, strong financial strength ratings as assurance that their claimswill be paid.  Montpelier Re, Syndicate5151 and MUSIC each maintain financial strength ratings, as discussed below,from one or more rating agencies, including A.M. Best, Standard &Poor’s, Moody’s Investor Services and Fitch Ratings Ltd.

 

The financial strength ratings stated below are not evaluationsdirected to the investment community with regard to our 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,with a stable outlook), “A-” by Standard & Poor’s (Strong, with astable outlook), “Baa1” by Moody’s Investors Services (Adequate, 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, “Baa1” is the eighthhighest of twenty-one Moody’s Investors Services financial strength ratings and“A-” is the seventh highest of twenty-four Fitch Ratings Ltd. financialstrength 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 operational letterof credit facilities. A downgrade of Montpelier Re’s A.M. Best or Standard &Poor’s rating could also trigger provisions allowing some ceding companies toopt to cancel their reinsurance contracts with us. For the majority ofcontracts that incorporate ratings provision, a downgrade of below “A-” by A.M.Best, or “A-” by Standard and Poor’s constitutes grounds for cancellation.Either of these events could reduce our financial flexibility.

 

*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 claim thatcannot 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 canbe applied 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.

 

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In June 2008, Standard & Poor’s assigned Syndicate 5151an interactive Lloyd’s Syndicate Assessment (“LSA”) of “3-” (AverageDependency, with a stable outlook).  Arating of 3 is the third highest of five Standard & Poor’s LSAratings.  A syndicate assigned an LSA of“5” is considered to have a very low dependency on Lloyds’ single market ratingand is viewed 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).  Since its inception,MUSIC has ceded 75% of its business to Montpelier Re.  As a result, in the event that Montpelier Reis downgraded below “A-” by A.M. Best, our ability to write businessthrough MUSIC could be adversely affected.

 

*Blue Ocean Re*

 

Blue Ocean Re did not operate with a financial strength rating.  Historically, it collateralized itsreinsurance obligations to provide assurance to customers that it would be ableto honor its reinsurance obligations.  BlueOcean Re did not write any new business in 2008 and has been deregistered as aBermuda Class 3 insurer.

 

**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, IPC Holdings, Ltd., Lancashire Holdings Limited,various Lloyd’s syndicates, RenaissanceRe Holdings Ltd. and Validus Holdings,Ltd.  Competition varies depending on thetype of business being insured or reinsured and whether we are in a leadingposition or acting on a following basis. We also compete with various capitalmarket participants 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 reinsurance andinsurance 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, MUA and MMSL are regulated bythe U.K. Financial Services Authority (the “FSA”) and, in regard to Syndicate5151, the Council of Lloyd’s, MUI and MEAG are supervised 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”).  Priorto being deregistered as a Class 3 insurer in 2008, Blue Ocean Re wasregulated by the BMA.

 

**Bermuda Regulation**

 

The Insurance Act 1978 of Bermuda and related regulations, as amended(the “Insurance Act”), regulates the insurance business of Montpelier Re, andprior to its deregistration as a Class 3 insurer, Blue Ocean 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 on Bermuda insurance companies solvency andliquidity standards and auditing and reporting requirements and grants the BMApowers to supervise, investigate, require information and the production ofdocuments and to intervene in the affairs of insurance companies.

 

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In July 2008 the Insurance Amendment Act 2008 was promulgated (the“Amendment Act”).  The Amendment Actcreated a new supervisory framework for Bermuda insurers by establishing newrisk-based regulatory capital adequacy and solvency margin requirements,including the calculation of a Class 4 insurer’s Enhanced CapitalRequirement (“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 below.

 

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 of relativerisk within individual institutions under review on an ongoing basis, includingthrough the scrutiny of regular audited statutory financial statements, and, asappropriate, meeting with senior management during onsite visits.

 

*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 of Directorsas Montpelier Re’s principal representative and has been approved by the 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.  Witheffect from December 31, 2008, Class 4 insurers are also required toprepare and file with the BMA audited annual financial statements prepared inaccordance with GAAP or International Financial Reporting Standards.

 

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*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 insurercertifying that the minimum solvency margin and, in the case of the solvencycertificate, the minimum liquidity ratio, have been met and whether the insurercomplied with 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.

 

*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 standardmathematical model that correlates the risk underwritten by Bermuda insurers tothe capital that is dedicated to their business. The framework that has beendeveloped applies a standard measurement format to the risk associated with aninsurer’s assets, liabilities and premiums, including a formula to take accountof 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 model ECR.  The new capital requirements require Class 4insurers to hold available statutory capital and surplus equal to, or exceedingECR and set TCL at 120% of ECR.  Incircumstances where an insurer has failed to comply with an ECR given by theBMA, such insurer is prohibited from declaring or paying any dividends until thefailure 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.

 

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*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.

 

*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 U.K. Financial ServicesAuthority (the “FSA”) and the Council of Lloyd’s. The FSA is responsible underthe Financial Services and Markets Act 2000 for regulating U.K. insurers. Itregulates the Society of Lloyd’s as well as individual Lloyd’s managing agents.The Council of Lloyd’s regulates Lloyd’s members and Lloyd’s managing agents.

 

MCL, the Syndicate’s sole corporate member of Lloyd’s, provides 100% ofthe stamp capacity of Syndicate 5151. Stamp capacity for 2007 and 2008 was £47 million and £143 million,respectively, and is expected to remain at £143 million for 2009, subject tomarket conditions. Stamp capacity is a measure of the amount of premium asyndicate is authorized to write by Lloyd’s.

 

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.

 

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Syndicate 5151 is currently managed by MUA 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 and MUI as part of itsstatutory role in managing and supervising the Lloyd’s market. This supervisionis carried out through the approval process and then through Lloyd’s ongoingsupervision of all approved Coverholders. Local regulators may require Lloyd’s to demonstrate that it has controlover, and responsibility for, the business carried out by Coverholders underthe terms of Lloyd’s authorization in that jurisdiction.  Nonetheless, the primary responsibility tosupervise Coverholders and binding authorities on a day-to-day basis rests withLloyd’s managing agents, which in our case is currently MUA or, through December 31,2008, was Spectrum.

 

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’“Funds at 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 asyndicate’s Economic Capital Assessment (“ECA”). Lloyd’s uses the ECA tocalculate each syndicate’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 onecalendar year (an underwriting year of account), which will remain open for afurther two calendar years before being closed by means of “reinsurance toclose”. An underwriting year may be reinsured to close by the next underwritingyear of the same syndicate or by an underwriting year of a different syndicate.Lloyd’s moved to annual accounting on January 1, 2005. Previously, themarket operated according to a three-year accounting cycle, so that memberswere not able to take profits made in an underwriting year until it had beenreinsured to close, usually at the end of three years. Now, provided thatcertain solvency requirements are met, underwriting profits may effectively betaken in part before the year has been reinsured to close. Once an underwritingyear has been reinsured to close, Lloyd’s will release the Funds at Lloyd’sprovided that these are not required to support the members’ other underwritingyears or to meet a loss made on the

 

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closed underwriting year. If reinsurance to close cannot be obtained atthe end of an underwriting year’s third open year (either at all, or on termsthat the managing agent considers to be acceptable on behalf of the membersparticipating on that underwriting year), then the managing agent of thesyndicate must determine that the underwriting year will remain open. If themanaging agent determines to keep the underwriting year open, then theunderwriting year of account will be considered to be in run-off, and the Fundsat Lloyd’s of the participating members will continue to be held by Lloyd’s tosupport their continuing liabilities unless the members can show that theirFunds at Lloyd’s are in excess of the amount required to be held in respect oftheir liabilities in relation to that year.

 

The reinsurance to close of an underwriting year does not discharge participatingmembers from the insurance liabilities they incurred during that year. Rather,it provides them with a full indemnity from the members participating in thereinsuring underwriting year in respect of those liabilities. Therefore, evenafter all the underwriting years in which a member has participated have beenreinsured to close, the member is required to stay in existence and to remain anon-underwriting member of Lloyd’s. Accordingly, although Lloyd’s will releasemembers’ Funds at Lloyd’s, there nevertheless continues to be an administrativeand financial burden for corporate members between the time of the reinsuranceto close of the underwriting years on which they participated and the time thattheir insurance obligations are entirely extinguished. This includes thecompletion of financial accounts in accordance with the Companies Act 1985 andthe submission of an annual compliance declaration to Lloyd’s.

 

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 as being 2% of Syndicate 5151’s underwriting capacitywith respect to 2007 and 2% of Syndicate 5151’s written premiums with respectto 2008.  In addition, the Council ofLloyd’s has power to call on members to make an additional contribution to theCentral Fund of up to 3% of their underwriting capacity each year should itdecide that such additional contributions are necessary.

 

Lloyd’s also makes other charges to its members and the syndicates onwhich they participate, including an annual subscription charge (0.5% ofunderwriting capacity with respect to 2007, 0.5% of written premiums withrespect to 2008) and an overseas business charge, levied as a percentage ofgross international premiums (that is premiums on business outside the U.K. andthe 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.

 

**U.S. Regulation**

 

MUSIC is domiciled in Oklahoma and is eligible to write surplus linesprimary insurance in 38 additional jurisdictions of the U.S.  MUSIC is subject to the laws of Oklahoma andthe surplus lines regulation and reporting requirements of the jurisdictions inwhich it is eligible to write surplus lines insurance. In accordance withcertain provisions of the National Association of Insurance Commissioners(“NAIC”) Non-Admitted Insurance Model Act, which provisions have been adoptedby a number of states, MUSIC has established, and is required to maintain,specified amounts on deposit as a condition 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, which conductsbusiness on a surplus lines basis in a particular state, are generally exemptfrom that state’s guaranty fund laws.

 

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*Non-Admitted Reinsurers.* 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, most states in the U.S. do notconfer full credit for outwards reinsurance protections for liabilities cededto non-admitted or unlicensed reinsurers, such as Montpelier Re, unless suchreinsurers collateralize all ceded liabilities. Under applicable statutory provisions,permissible security arrangements include letters of credit, reinsurance trustsmaintained by third-party trustees and funds withheld arrangements.

 

*Holding Company Regulation.*   We,and MUSIC, are subject to regulation under the insurance holding company lawsof various jurisdictions. The insurance holding company laws and regulationsvary from jurisdiction to jurisdiction, but generally require an insuranceholding company, and insurers that are subsidiaries of insurance holdingcompanies, to register with state regulatory authorities and to file with thoseauthorities certain reports, including information concerning their capitalstructure, ownership, financial condition, certain intercompany transactionsand 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 ofdomicile, currently requires that dividends be paid only out of earnedstatutory surplus and also limits the annual amount of dividends payablewithout the prior approval of the Oklahoma Insurance Department to the greaterof 10% of statutory capital and surplus at the end of the previous calendaryear or 100% of statutory net income from operations for the previous calendaryear.  These insurance holding companylaws also impose prior approval requirements for certain transactions withaffiliates. In addition, as a result of our ownership of MUSIC under the termsof applicable state statutes, any person or entity desiring to purchase morethan 10% of our outstanding voting securities is required to obtain priorregulatory approval for the purchase.

 

*NAIC Ratios.* The NAIC has established 13 financial ratiosto assist state insurance departments in their oversight of the financialcondition of licensed U.S. insurance companies operating in their respectivestates. The NAIC’s Insurance Regulatory Information System (“IRIS”) calculatesthese ratios based on information submitted by insurers on an annual basis andshares the information with the applicable state insurance departments. Eachratio has an established “usual range” of results and assists state insurancedepartments in executing their statutory mandate to oversee the financialcondition of insurance companies. A ratio result falling outside the usualrange of IRIS ratios is not considered a failing result; rather unusual valuesare viewed as part of the regulatory early monitoring system. Furthermore, insome years, it may not be unusual for financially sound companies to haveseveral ratios with results outside the usual ranges. An insurance company mayfall out of the usual range for one or more ratios because of specifictransactions that are in themselves immaterial. Generally, an insurance companywill be subject to regulatory scrutiny if it falls outside the usual rangeswith respect to four or more of the ratios.

 

*Risk-Based Capital.*  TheNAIC has implemented a risk-based capital (“RBC”) formula and model lawapplicable to all licensed U.S. property/casualty insurance companies. The RBCformula is designed to measure the adequacy of an insurer’s statutory surplusin relation to the risks inherent in its business. Such analysis permits regulatorsto identify inadequately capitalized insurers. The RBC formula develops arisk-adjusted target level of statutory capital by applying certain factors toinsurers’ business risks such as asset risk, underwriting risk, credit risk andoff-balance sheet risk. The target level of statutory surplus varies not onlyas a result of the insurer’s size, but also on the risk profile of theinsurer’s operations. Insurers that have less statutory capital than the RBCcalculation requires are considered to have inadequate capital and are subjectto varying degrees of regulatory action depending upon the level of capitalinadequacy. The RBC formulas have not been designed to differentiate amongadequately capitalized companies that operate with higher levels of capital.Therefore, it is inappropriate and ineffective to use the formulas to rate orto rank such companies. MUSIC currently satisfies the RBC formula and exceedsall recognized industry solvency standards.

 

*Legislative and Regulatory Proposals.* Government intervention in the insurance and reinsurance markets, bothin the U.S. and worldwide, continues to evolve. For example, Florida hasenacted recent insurance reforms that have caused a decline in our propertycatastrophe gross premiums written in recent years. See *“Risk Factors”* contained in Item 1Aherein.  Federal and state legislatorshave also considered numerous government initiatives. While we cannot predictthe exact nature, timing, or scope of other such proposals, if adopted they couldadversely 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 June 2007 and has been introduced in the U.S. Senate.If enacted in its current form, the NRRA would, among other things, (i) grantsole regulatory authority with respect to the placement of non-admittedinsurance to the policyholder’s home state, (ii) limit states to uniformstandards for surplus lines eligibility in conformity with the NAICNon-Admitted Insurance Model Act, (iii) establish a streamlined insuranceprocurement process for exempt commercial purchasers by eliminating therequirement that brokers conduct a due diligence search to determine whetherthe insurance is available from admitted insurers, (iv) establish thedomicile state of the ceding insurer as the sole regulatory authority withrespect to credit for reinsurance and solvency determinations if such state isan NAIC-accredited state or has financial solvency requirements substantiallysimilar to those required for such accreditation and (v) require thatpremium taxes related to non-admitted insurance only be paid to thepolicyholder’s home state, although the states may enter into a compact orestablish procedures to allocate such premium 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 ofRepresentatives. The IICA, if enacted in its current form, would remove theinsurance industry’s antitrust exemption created by the McCarran-Ferguson Act,which provides that insurance companies are exempted from federal antitrust lawso long as they are regulated by state law, absent boycott, coercion orintimidation. If enacted in its current form, the IICA would, among otherthings, (i) effect a different judicial standard providing that jointconduct by insurance companies, such as price sharing, would be subject toscrutiny by the U.S. Department of Justice unless the conduct was undertakenpursuant to a clearly articulated state policy that is actively supervised bythe state and (ii) delegate authority to the Federal Trade Commission toidentify insurance industry practices 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 also 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, 2008, we had 169 full-time employees worldwide.None of our employees are subject to collective bargaining agreements, and weknow of no current efforts to implement such agreements.  Blue Ocean has no employees.

 

Many of our employees, including some of our executive officers, areemployed in Bermuda pursuant to work permits granted by Bermuda authorities.These permits expire at various times over the next several years. We have noassurance that these permits would be extended at expiration upon request. TheBermuda government currently has a policy that limits the duration of workpermits to six years, subject to certain exemptions for key employees.

 

**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 Securities and Exchange Commission(the “SEC”).  These documents areelectronically 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*.  Our website is not part of this report andnothing from our website shall be deemed to be incorporated into this report.

 

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We will provide to any shareholder, upon request and without charge,copies of these documents (excluding any applicable exhibits unlessspecifically requested).  Requests shouldbe directed to Investor Relations, Montpelier Re Holdings Ltd., PO Box HM 2079,Hamilton, Bermuda HM HX, telephone number (441) 297-9570 or info@montpelierre.bm.  Additionally, all such documents arephysically available at our principal office at 94 Pitts Bay Road, Pembroke,Bermuda HM 08.

 

**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 reinsurance andinsurance 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 largely believed to have increased.

 

The extent of losses from a catastrophe is a function of the frequency ofloss events, the total amount of insured exposure in the area affected by eachevent 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 reinsurance andinsurance 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 our financial condition andresults 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 agencies. Some of thecriteria relate to general economic conditions and other circumstances outsidethe rated company’s control. Financial strength ratings are used bypolicyholders, agents and brokers as an important means of assessing thesuitability of insurers as business counterparties and have become anincreasingly important factor in establishing the competitive position ofreinsurance and insurance 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 severely limit or prevent us from writing new insuranceor reinsurance 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 reduce our financial flexibility.

 

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**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 risk withrespect 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 (which includesBenfield Group Limited), Marsh & McLennan Companies, Inc. andWillis Group Holdings Limited providing a total of 74% of our gross premiumswritten for the year ended December 31, 2008.  Affiliates of some of these brokers have alsoco-sponsored the formation of reinsurance companies that directly compete withus, and these brokers may favor those reinsurers over us. A loss of all or asubstantial portion of the business provided by one or more of these brokerscould have a material adverse effect on our financial condition and results ofoperations.

 

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 fromthird-parties in order to manage our exposures. The availability and cost of reinsuranceprotection is subject to market conditions, which are outside of ourcontrol.  As a result, we may not be ableto successfully alleviate risk through these arrangements, which could have amaterial adverse effect on our financial condition and results of operations.

 

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 a dispute 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, most states in the U.S. do notconfer full credit for outwards reinsurance protections for liabilities cededto non-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 are affectedby the changes. In addition, we are unable to predict the extent to which thecourts may expand the theory of liability under a casualty insurance contract,such as the range of occupational hazards causing losses under employers’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 our reinsurancecontracts may not be known for many years after a contract is issued.

 

**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 actuarial and statistical projections of whatwe believe the settlement and administration of claims will cost based on factsand circumstances then known to us. Because of the uncertainties that surround estimating loss and LAEreserves, we cannot be certain that our reserves are adequate and actual claimsand claim expenses paid might exceed our reserves due to the uncertainties thatsurround estimating loss and LAE reserves.

 

If we determine in the future that our reserves are insufficient tocover our actual loss and LAE, we would have to strengthen our reserves, whichcould have a material adverse effect on our financial condition and results ofoperations.

 

**New lines of business that we are developing throughMUI and MUSIC will change the composition of our overall book of business inways which could adversely impact our financial results.**

 

One of the lines of business being pursued by MUI and MUSIC is excessand surplus lines insurance. Excess and surplus lines insurance covers risksthat are typically more complex and unusual than standard risks and requires ahigh degree of specialized underwriting. As such, excess and surplus lines risks do not often fit theunderwriting criteria of standard insurance 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 ourunderwriting staff inadequately judges and prices the risks associated with thebusiness 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 toinsurers), standard insurance carriers tend to loosen underwriting standardsand seek to expand market share by moving into business lines traditionallycharacterized as excess and surplus lines, exacerbating the effect of ratesdecreases.  If we fail to manage thecyclical nature and volatility of the revenues and profit we generate in theexcess and surplus lines market, our financial condition and results ofoperations could be adversely 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, limitedpartnerships and derivative contracts. Our primary investment focus is tomaximize risk-adjusted total returns while maintaining adequate liquidity.  Since investing entails substantial risks, wecannot assure you that we will achieve our investment objectives and ourinvestment 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.

 

Throughout 2008, the fair value and overall liquidity of our investmentportfolio was adversely affected by unfavorable and uncertain economic andmarket conditions experienced worldwide. These unfavorable and uncertainconditions originated, in large part, from difficulties encountered in themortgage and broader credit markets in the U.S. and elsewhere and resulted in asudden decrease in the availability of credit, a corresponding increase inborrowing costs and an increase in residential mortgage delinquencies andforeclosures. As a result, many issuers of such securities as well as thefinancial guarantors of such securities, experienced a sudden deterioration incredit quality which caused both a decline in liquidity and prices for thesetypes of securities.  These factorsresulted in broad and significant declines in the fair value of fixed incomeand equity securities worldwide, including the investment securities heldwithin our investment portfolio.  Wecannot predict how long these conditions will exist and how we might be furtheraffected.

 

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

 

Our success will depend in substantial part upon our ability to attractand retain our principal employees. As of December 31, 2008, we had 169full-time employees worldwide upon which we depend for the generation and servicingof our business. Our future success depends on our ability to hire and retainpersonnel.  Difficulty in hiring orretaining personnel could adversely affect our results of operations andfinancial condition.

 

In addition, many of our employees, including some of our 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 Bermuda authorities. These permits expire atvarious times over the next several years. We have no assurance that thesepermits would be extended at expiration upon request. The Bermuda governmentcurrently has a policy that limits the duration of work permits to six years,subject to certain exemptions for key employees.

 

**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.

 

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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 reinsurance and insurance 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 reinsurance and insurance subsidiaries and affiliates to pay ouroperating expenses, interest on our debt and dividends or distributions to ourshareholders. Our reinsurance and insurance operations are highly regulated byvarious authoritative bodies in Bermuda, the U.K., the U.S. andSwitzerland.  The various laws andregulations that we are subject to within these jurisdictions limit thedeclaration and payment of dividends or distributions from our reinsurance andinsurance 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 for believing that eachof them is, or would after the payment be, able to pay its respectiveliabilities as they become due and the realizable value of its assets would be morethan the aggregate of their liabilities, its issued share capital and itsadditional paid-in capital.

 

Accordingly, we cannot assure you that we will declare or pay dividendsor distributions in the future. Any determination to pay future dividends or distributionswill be at the discretion of our Board of Directors and will be dependent uponour results of operations and cash flows, our financial position and capitalrequirements, general business conditions, legal, tax, regulatory and anycontractual restrictions on the payment of dividends or distributions, and anyother factors our Board of Directors deems relevant. The inability of ourreinsurance and insurance operating subsidiaries and affiliates to paydividends or distributions in an amount sufficient to enable us to meet ourcash requirements at the holding company level could have a material adverseeffect on the 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 our 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,operating results and financial condition could be adversely affected.

 

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

 

Our functional currency is the U.S. dollar. The British pound is thefunctional currency for the operations of Syndicate 5151, MUA, MCL, MUSL andMMSL and the Swiss franc is the functional currency for the operations of MEAG.In addition, we write a portion of our business, receive premiums and paylosses in foreign currencies and may maintain a portion of our investmentportfolio in investments denominated in currencies other than U.S. dollars. We mayexperience foreign exchange losses to the extent our foreign currency exposureis not successfully managed or otherwise hedged, which in turn could adverselyaffect our results of operations and financial condition.

 

**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 theindustry evolves, competition for customers may become more intense and theimportance of acquiring and properly servicing each customer will grow. Wecould incur greater expenses relating to customer acquisition and retention,which could reduce our operating margins.

 

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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 some 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 write businessat premium rates sufficient to cover losses. If competition limits our abilityto write new business and renew existing business at adequate rates, our returnon capital may be adversely affected.

 

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

 

Our reinsurance and insurance 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 andregulations impose restrictions on the amount and type of investments,prescribe solvency standards that must be met and maintained and require themaintenance of reserves.

 

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 residential exposures.In addition, state and Federal legislation has been proposed to establishcatastrophe funds and underwriting in coastal areas which could adverselyimpact our business.

 

**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.

 

Similarly, following the 2005 storm 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:

 

·          Providing insurance and reinsurance capacity, in some cases atgovernment-subsidized rates, in markets and to consumers that we target;

 

·          Requiring our participation in industry pools and guarantyassociations;

 

·   Expandingthe scope of coverage under existing policies;

 

·   Regulatingthe terms of insurance and reinsurance policies; or

 

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

 

The insurance industry is also affected by political, judicial andlegal developments that may create new and expanded theories of liability. Suchchanges may result in delays or cancellations of products and services byinsurers and reinsurers, which could adversely affect our business.

 

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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 Our Common Shares***

 

**The market price and trading volume of our commonshares may be subject to significant volatility.**

 

The market price and trading volume of our common shares, as well asthe market prices of securities of our peers, may be subject to significantvolatility in response to a variety of events and factors, including:

 

·            catastrophes that may specifically impact usor are perceived by investors as impacting the insurance and reinsuranceindustries in general;

 

·            exposure to capital market risks related tochanges in interest rates, realized investment losses, credit spreads, equityprices and foreign exchange rates;

 

·            variations in our operating results;

 

·            changes in expectations about our futureoperating results;

 

·            changes in financial estimates andrecommendations by securities analysts concerning us or the insurance andreinsurance industries in general;

 

·            the overall performance of other companiesthat investors may deem to be our peers;

 

·            news reports relating to our business andtrends in the markets in which we operate; and,

 

·            acquisitions and financing activitiesundertaken 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 our common shares, regardless of our operating performance.

** **

**Provisions in our charter documents restrict thevoting rights of our common shares.**

 

Our bye-laws generally provide that, if any person owns, directly or byattribution, more than 9.5% of our common shares, the voting rights attached tosuch common shares will be reduced so that such person may not exercise and isnot attributed more than 9.5% of the total voting rights.

 

**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.

 

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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 thecompany’s affairs 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 areheadquartered in Bermuda. In addition, certain of our directors and officersreside outside the U.S. and a substantial portion of our assets, and the assetsof such persons, are located in jurisdictions outside the U.S.  As such, we have been advised that there isdoubt as to whether:

 

·          a holder of our common shares would be able to enforce, in the courtsof Bermuda, judgments of U.S. courts based upon the civil liability provisionsof the U.S. federal securities laws;

 

·   aholder of our common shares would be able to bring an original action in theBermuda courts to enforce liabilities against us or our directors and officers,as well as the experts named in this Form 10-K, who reside outside theU.S. based solely upon U.S. federal securities laws.

 

Further,we have been advised that there is no treaty in effect between the U.S. andBermuda providing for the enforcement of judgments of U.S. courts, and thereare grounds upon which Bermuda courts may not enforce judgments of U.S. courts.Because judgments of U.S. courts are not automatically enforceable in Bermuda,it may be difficult for a holder of common shares to recover against us basedupon 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 the 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.

 

***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 impact on us or our shareholders in the future.

 

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

 

Undercurrent U.S. law, non-corporate U.S. holders of our common shares generally aretaxed on dividends at a capital gains tax rate rather than ordinary income taxrates. Currently, there is proposed legislation before both Houses of Congressthat would exclude shareholders of foreign corporations from this advantageousincome tax treatment unless either (i) the corporation is organized orcreated under the laws of a country that has entered into a “comprehensiveincome tax treaty” with the U.S. or (ii) the stock of such corporation isreadily tradable on an established securities market in the U.S. and thecorporation is organized or created under the laws of a country that has a“comprehensive income tax system” that the U.S. Secretary of the Treasurydetermines is satisfactory for this purpose. We would likely not satisfy eitherof these tests and, accordingly, if this legislation became law, individualU.S. shareholders would no longer qualify for the capital gains tax rate ondividends 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 Tax ProtectionAct 1966, as amended, of Bermuda, has given us an assurance that if anylegislation is enacted in Bermuda that would impose tax on profits or income,or computed on any capital asset, gain or appreciation, or any tax in thenature of estate duty or inheritance tax, then the imposition of any such taxwill not be applicable to us or any of our operations or our shares, debenturesor other obligations until March 28, 2016. We cannot assure you that wewill not be subject to any Bermuda tax after that date.

 

**Item 1B.****       *****UnresolvedStaff 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 theCompany, Montpelier Re and Blue Ocean are located.  We also lease office space in London, U.K.where MUA, MCL, MMSL and MUSL are located; in Zug, Switzerland, where MEAG islocated; in Boston, MA, Chicago, IL, Hartford, CT, Overland Park, KS, andShelton, CT where MUI is located; in Scottsdale, AZ where MUSIC is located; andin Woburn, MA and Hanover, NH where MTR is located.

 

We believe our facilities are adequate for our current needs.

 

**Item 3.****          *****LegalProceedings***

 

We are subject to litigation and arbitration proceedings in the normalcourse of our business.  Such proceedingsgenerally involve reinsurance or insurance 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.

 

On October 17, 2007, following the failure ofcontractually-mandated mediation, we received a notice of arbitration fromManufacturers Property and Casualty Limited (“MPCL”), a subsidiary of ManulifeFinancial Corporation of Toronto, Canada (“Manulife”).  The notice involves two contracts pursuant towhich we 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.

 

Subject to purported reservation of rights, MPCL has to-date paid to us$25.5 million in respect of ceded claims under the Disputed Contracts, which isnet of deposit, reinstatement and additional premiums.

 

In the event that MPCL is awarded rescission of the Disputed Contracts,the reduction in our total losses expected to be ceded under the DisputedContracts, net of reinsurance premiums earned and accrued, would total $73.0million.

 

We believe that MPCL’s case is without merit and that the DisputedContracts are fully enforceable.  Inaddition, we intend to seek relief from MPCL for our attorney fees and interestcosts.  In the circumstances, we believethat the results of the arbitration will not have a materially adverse effecton our financial condition, results of operations or cash flows.

 

Pursuant to directions given in the arbitration, we do not expectsubstantive hearings to begin until early 2010.

 

Other than the contract dispute with MPCL described above, we had noother potentially material litigation or arbitration proceedings at December 31,2008.

 

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

 

There were no matters submitted to a vote of our shareholders duringthe fourth quarter of 2008.

 

**PART II**

 

**Item 5.    *Market for the Company’s Common Equity, RelatedShareholder Matters and Issuer Purchases of******EquitySecurities***

 

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

 

Our common shares are listed on the New York Stock Exchange (symbolMRH).  The quarterly range of the highand low sales price for our common shares during 2008 and 2007 is presentedbelow:

 

| ** **        | ** ** | **2008**  | ** ** | **2007**   | ** ** |
|-------------------|------------|-----------|------------|------------|------------|
| ** **        | ** ** | **High**  | ** ** | **Low**    | ** ** | **High** | ** ** | **Low** | ** ** |
| Quarter ended:    |       |      |       |       |       |   |   |   |   |
| December 31  | ** ** | **$**     | **17.00**  | ** ** | **$**      | **10.13** | ** ** | **$** | **18.23** | ** ** | **$** | **16.35** | ** ** |
| September 30 | ** ** | **17.94** | ** ** | **14.00**  | ** ** | **18.88** | ** ** | **15.44** | ** ** |
| June 30      | ** ** | **17.20** | ** ** | **14.75**  | ** ** | **19.35** | ** ** | **17.11** | ** ** |
| March 31     | ** ** | **17.64** | ** ** | **15.17**  | ** ** | **18.88** | ** ** | **16.80** | ** ** |
|                   |            |           |            |            |            |  |  |  |  |  |  |  |  |

 

As of February 25, 2009, we had 101 registered holders of ourcommon shares.

 

During 2008 and 2007 we declared and paid regular cash dividends on ourcommon shares and warrants to acquire common shares (during periods in whichthe warrants were outstanding) of $.075 per quarter.

 

**Issuer Purchases of Common Shares**

 

We did not purchase any of our common shares during the three monthsended December 31, 2008.

 

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**Securities Authorized for Issuance Under EquityCompensation Plans**

 

The following table provides information as of December 31, 2008with respect to our equity compensation plans.

 

| **Plan Category**                                                              | ** ** | **Number of Securities  to be Issued Upon  Exercise of  Outstanding  Options, Warrants  and Rights  (a)** | ** ** | **Weighted-Average  Exercise Price of  Outstanding  Options, Warrants  and Rights  (b)** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (Excluding  Securities Reflected in  Column (a))  (c)** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                |       |                                                                                                                                              |       |                                                                                                         |       |                                                                                                                                                                                                              |       |
| Equity compensation plans approved by  shareholders -***LTIP***                     |       | 1,606,619                                                                                                                                         | (1)        | —                                                                                                       |       | 4,257,736                                                                                                                                                                                                         | (3)        |
|                                                                                |       |                                                                                                                                              |       |                                                                                                         |       |                                                                                                                                                                                                              |       |
| Equity compensation plans not approved by  shareholders -***Directors Share Plan*** |       | 41,343                                                                                                                                            | (2)        | —                                                                                                       |       | 88,936                                                                                                                                                                                                            |       |
|                                                                                |       |                                                                                                                                              |       |                                                                                                         |       |                                                                                                                                                                                                              |       |
| Total                                                                               |       | 1,647,962                                                                                                                                         |       | —                                                                                                       |       | 4,346,672                                                                                                                                                                                                         |       |

 

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(1) The Montpelier Re Holdings Ltd. Long-Term Incentive Plan (the“LTIP”) is the Company’s primary long-term incentive plan and was last approvedby shareholders in May 2007. Incentive awards that may be granted underthe LTIP consist of share appreciation rights, restricted share units (“RSUs”)and performance shares.

 

At target payout, each performance share represents the fair value of acommon share. At the end of a performance period, which is generally thethree-year period following the date of grant, participants may receive aharvest of between zero and 200% of the performance shares granted depending onthe achievement of specific performance criteria relating to our operating andfinancial 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 inequal tranches, typically over three-to-five year periods, subject to theemployee remaining employed at the applicable vesting date.  RSUs are payable only in common shares or incommon shares net of applicable tax withholdings.

 

Neither performance shares nor RSUs require the payment of an exerciseprice.  Accordingly, there is no weightedaverage exercise price for either of these awards.

 

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, effective for periods after December 31,2008, Section 457A and guidance promulgated by the U.S. Internal RevenueService thereunder may cause certain LTIP participants (those who are U.S.taxpayers) to be taxed on the fair value of RSUs upon vesting rather than uponsubsequent receipt of the underlying common shares.

 

In order to alleviate this potential mismatch between taxation andreceipt of the common shares, the CN Committee resolved, on December 3,2008, to amend certain outstanding RSU awards to accelerate the distribution ofthe underlying common shares to coincide more closely with the vesting date.This amendment to the award agreements did not change the applicable vestingdate, but allowed participants to receive their common shares during the sameperiod in which they will be taxable. Prior to the EES Act, RSUs were payable in common shares only at the endof the RSU term.

 

(2) All non-management directors are eligible to participatevoluntarily in the Directors Share Plan. Participants receive, in lieu of a portion of their annual cashretainer, a number of Director Share Units (“DSUs”) of the same dollar valuebased on the value of common shares at that date.  DSUs comprise a contractual right to receivecommon shares, or an equivalent amount of cash, upon termination of service asa director. While the DSUs are outstanding, they are credited with common sharedividend equivalents.

 

In light of the EES Act, in November 2008 the CN Committee and theCompany’s Board of Directors resolved to permit directors who participate inthe Directors’ Share Plan to elect to receive payment prior to December 31,2017.

 

(3) On May 23,2007, the Company’s shareholders authorized an inventory of up to 6,200,000shares for issuance under the LTIP.  LTIPawards outstanding at December 31, 2008 consisted of 325,000 performance sharesat “target” and 1,281,619 RSUs.  Since May 23,2007, the Company has paid 335,645 RSUs under the LTIP in the form of commonshares.

 

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**Performance Graph**

 

The following graph shows the five-year cumulative total return for ashareholder who invested $100 in our common shares as of January 1, 2004,assuming reinvestment of dividends and distributions.  Cumulative returns for the five-year periodended December 31, 2008 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.

 

**Five-Year Cumulative Total Return**

(value of $100 invested January 1, 2004)

 

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| **Company/Index**                        | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| Montpelier Re Holdings Ltd. (symbol MRH) |       | $                                          | 100.00     |   | $ | 108.70 |   | $ | 64.15 |   | $ | 64.24 |   | $ | 59.72 |   | $ | 60.06 |   |
| S&P 500                              |       | 100.00                                     |       | 110.88 |   | 116.33 |   | 134.70 |   | 142.10 |   | 89.53 |   |
| S&P 500 P&C                      |       | 100.00                                     |       | 110.42 |   | 127.11 |   | 143.47 |   | 123.44 |   | 87.13 |   |
|                                          |            |                                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**Item 6.****                *****SelectedFinancial Data***

 

Selected consolidatedstatement of operations data, ending balance sheet data and share data for eachof the five years ended December 31, 2008, follows:

 

| ** **                                                                       | ** ** | **Year Ended December 31,** | ** **  |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| **(Millions, except share and per share amounts)** | ** ** | **2008**                                   | ** **  | **2007** | ** ** | **2006** | ** ** | **2005(a)** | ** ** | **2004** | ** ** |
| **Statement of Operations Data:**                                                |       |                                       |        |   |   |   |   |   |   |   |   |
| Revenues (b)                                                                     | ** ** | **$**                                      | **364.3**   | (c) | $ | 724.0 |   | $ | 722.0 |   | $ | 967.9 |   | $ | 870.8 |   |
| Expenses                                                                         | ** ** | **(507.8**                                 | **)**(d)    | (376.2 | ) | (379.7 | ) | (1,720.8 | )(d) | (630.4 | ) |
| Income (loss) before income taxes,  extraordinary item and minority interest     | ** ** | **(143.5**                                 | **)**       | 347.8 |   | 342.3 |   | (752.9 | ) | 240.4 |   |
| Income tax provision                                                             | ** ** | **(1.1**                                   | **)**       | (0.1 | ) | (0.1 | ) | — |   | (0.1 | ) |
| Minority interest expense - Blue Ocean (a)                                       | ** ** | **(1.9**                                   | **)**       | (31.9 | ) | (39.3 | ) | — |   | — |   |
| Excess of fair value of acquired net assets  over cost - Blue Ocean              | ** ** | **1.0**                                    | ** **  | — |   | — |   | — |   | — |   |
| Net income (loss)                                                                | ** ** | **$**                                      | **(145.5**  | **)** | $ | 315.8 |   | $ | 302.9 |   | $ | (752.9 | ) | $ | 240.3 |   |
| **Balance Sheet Data:**                                                          |       |                                       | ** **  |   |   |   |   |   |   |   |   |
| Total assets                                                                     | ** ** | **$**                                      | **2,797.6** | ** ** | $ | 3,525.2 |   | $ | 3,898.8 |   | $ | 4,059.7 |   | $ | 3,398.1 |   |
| Loss and LAE reserves                                                            | ** ** | **808.9**                                  |        | 860.7 |   | 1,089.2 |   | 1,781.9 |   | 549.5 |   |
| Debt                                                                             | ** ** | **352.5**                                  | (e)         | 427.4 |   | 427.3 | (e) | 249.1 |   | 249.0 |   |
| Minority interest - Blue Ocean common and  preferred equity (a)                  | ** ** | **—**                                 |        | 88.7 |   | 238.4 |   | 163.9 |   | — |   |
| Common shareholders’ equity                                                 | ** ** | **1,357.6**                                | (f)         | 1,653.1 | (g) | 1,492.9 | (h) | 1,057.7 | (i) | 1,751.9 |   |
| **Per Share Data:**                                                              |       |                                       |        |   |   |   |   |   |   |   |   |
| Fully converted book value per share (j)                                         | ** ** | **$**                                      | **15.94**   |   | $ | 17.88 |   | $ | 15.46 |   | $ | 11.86 |   | $ | 26.75 |   |
| Fully converted tangible book value per  share (j)                               | ** ** | **$**                                      | **15.88**   | ** ** | $ | 17.82 |   | $ | 15.46 |   | $ | 11.86 |   | $ | 26.75 |   |
| Earnings (loss) per share - Basic                                                | ** ** | **$**                                      | **(1.69**   | **)** | $ | 3.32 |   | $ | 3.23 |   | $ | (11.16 | ) | $ | 3.68 |   |
| Earnings (loss) per share - Diluted                                              | ** ** | **$**                                      | **(1.69**   | **)** | $ | 3.31 |   | $ | 3.22 |   | $ | (11.16 | ) | $ | 3.55 |   |
| Cash dividends declared per common share                                         | ** ** | **$**                                      | **.30**     | ** ** | $ | .30 |   | $ | .30 |   | $ | 6.655 | (k) | $ | 1.36 |   |
| Cash dividends declared per warrant                                              | ** ** | **—**                                 | ** **  | .075 |   | .30 |   | 6.655 | (k) | 1.36 |   |

 

----

(a)          From December 2005 to June 2008, the period prior to Blue Oceanbecoming a wholly-owned subsidiary, we fully consolidated Blue Ocean in ourfinancial statements in accordance with FIN 46R.

 

(b)         As of January 1,  2007, we adopted FAS 157 and FAS 159. As aresult, in all periods subsequent to adoption substantially all of ourinvestments are carried at fair value with changes in fair value being reportedas net realized and unrealized investment gains (losses) in our statement ofoperations. Prior to adoption, our available for sale investments were carriedat fair value with changes in fair value being reported as a separate componentof shareholders’ equity, with changes therein reported as a component of othercomprehensive income (loss).

 

(c)          During 2008, we incurred substantial netrealized and unrealized investment losses.

 

(d)         During 2008, we incurred substantialcatastrophe losses associated with hurricane Ike.  During 2005, we incurred substantialcatastrophe losses associated with hurricanes Katrina, Wilma and Rita.

 

(e)          During 2008, Blue Ocean repaid $75.0 millionin debt that it issued in 2006.  In 2006,we issued $103.1 million of junior subordinated debt securities.

 

(f)    During 2008, we repurchased 7,799,019 of our common shares for$125.7 million.

 

(g)         During 2007, we repurchased 939,039 commonshares and 7,172,375.5 warrants to acquire common shares from White MountainsInsurance Group, Ltd. (“White Mountains”), a former affiliate, for $65.0million.  We also repurchased 3,780,305common shares for $63.7 million from shareholders other than White Mountains.

 

(h)   During 2006, we privately sold 6,896,552 common shares for $100.0million.

 

(i)             During 2005, we publicly sold 25,850,926common shares for $600.0 million.

 

(j)             See *“Management’sDiscussion and Analysis of Financial Condition and Results of Operations”*contained in Item 7 herein for a description and computation of our fullyconverted book value per share and fully converted tangible book value pershare.

 

(k)          During 2005, we declared and paid a one-timespecial dividend of $5.50 per common share and warrant, in addition to regularquarterly dividends.

 

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**Item 7.****          *****Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

 

**General**

 

The following is adiscussion and analysis of our results of operations for the years ended December 31,2008, 2007 and 2006 and our financial condition as of December 31, 2008and 2007.  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, 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. The decrease in fully converted tangible bookvalue per share experienced 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 losses from hurricanes Gustav and Ike,partially offset by $104.1 million of prior year favorable lossdevelopment.  The Company’s financialimpact from hurricanes Gustav and Ike, net of reinsurance, reinstatements andreductions 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. The increase was largely the result of favorableunderwriting conditions resulting from satisfactory pricing and a low level ofcatastrophes experienced throughout the year, as well as solid investmentresults.  Our comprehensive income for2007 was $314.0 million and our GAAP combined ratio was 61.3%.

 

Our underwriting results for2007 included net losses totalling $88.6 million from windstorms Kyrill andGonu, floods in Australia and the U.K. and wildfires in California, partiallyoffset by $36.4 million of prior year favorable loss development.  Our investment results for 2007 included$26.5 million of net realized and unrealized investment gains which werecomprised of $19.9 million in net gains from fixed maturities, $7.5 million innet gains from equity securities and $0.9 million in net losses from otherinvestments.

 

YearEnded December 31, 2006

 

We ended 2006 with a fullyconverted tangible book value per share of $15.46, an increase of 33.2% for theyear inclusive of dividends. The increase was largely the result of favorableunderwriting conditions resulting from attractive pricing and a low level ofcatastrophes experienced throughout the year, as well as strong investmentresults.  Our comprehensive income for2006 was $361.5 million and our GAAP combined ratio was 60.3%.

 

Our underwriting results for2006 included no significant individual catastrophe losses and $23.8 million ofprior year favorable loss development. Our investment results for 2006 included $4.0 million of net realizedand unrealized investment gains which were comprised of $8.3 million in netlosses from fixed maturities and $12.3 million in net gains from equitysecurities.

 

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*Book Value Per Share*

 

The following table presents our computationof book value per share, fully converted book value per share and fullyconverted tangible book value per share:

 
| ** **                                                                    | ** ** | **December 31,** | ** **  |
|-------------------------------------------------------------------------------|------------|-----------------------|-------------|
| ** **                                                                    | ** ** | **2008**              | ** **  | **2007** | ** ** | **2006** | ** ** |
|                                                                          |       |                  |        |   |   |   |   |
| **Book value per share numerators (Millions):**                               |       |                  |        |   |   |   |   |
|                                                                          |       |                  |        |   |   |   |   |
| **[A]******Book value per share numerator (common shareholders’  equity) | ** ** | **$**                 | **1,357.6** | ** ** | $ | 1,653.1 |   | $ | 1,492.9 |   |
| Intangible asset (1)                                                          | ** ** | **(4.7**              | **)**       | (4.7 | ) | — |   |
| **[B]******Fully converted tangible book value per share numerator            | ** ** | **$**                 | **1,352.9** | ** ** | $ | 1,648.4 |   | $ | 1,492.9 |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| **Book value per share denominators (Millions  of shares):**                  |       |                  | ** **  |   |   |   |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| Common shares outstanding                                                     | ** ** | **91.8**              | ** **  | 99.3 |   | 111.8 |   |
| Common shares subject to the share issuance  agreement (2)                    | ** ** | **(7.9**              | **)**       | (7.9 | ) | (15.7 | ) |
| **[C]******Book value per share denominator                                   | ** ** | **83.9**              | ** **  | 91.4 |   | 96.1 |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| Common share obligations under benefit  plans                                 | ** ** | **1.3**               | ** **  | 1.1 |   | 0.5 |   |
| **[D]******Fully converted book value per share denominator                   | ** ** | **85.2**              | ** **  | 92.5 |   | 96.6 |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| **Book value per share [A] / [C]**                                            | ** ** | **$**                 | **16.18**   | ** ** | $ | 18.09 |   | $ | 15.54 |   |
| **Fully converted book value per share [A] /  [D]**                           | ** ** | **15.94**             | ** **  | 17.88 |   | 15.46 |   |
| **Fully converted tangible book value per  share [B] / [D]**                  | ** ** | **15.88**             | ** **  | 17.82 |   | 15.46 |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| Change in fully converted tangible book  value per share: (3)                 |       |                  | ** **  |   |   |   |   |
|                                                                          |       |                  | ** **  |   |   |   |   |
| From December 31, 2007                                                   | ** ** | **-9.2**              | **%**       |   |   |   |   |
| From December 31, 2006                                                   | ** ** | **6.6**               | **%**       |   |   |   |   |

 

----

(1) Representsthe value of MUSIC’s excess and surplus lines licenses and authorizationsacquired in 2007.

 

(2) Under theterms of the share issuance agreement, 7,920,000 common shares remain issuedand outstanding. In view of the contractual undertakings of the forwardcounterparty in the share issuance agreement, which have the effect ofsubstantially eliminating the economic dilution that would otherwise resultfrom the issuance such shares, we do not consider these shares outstanding forthe purposes of this computation.  SeeNote 7.

 

(3) Computedas the change in fully converted tangible book value per share, as adjusted fordividends 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 measurements which are important to ourinvestors, analysts and other interested parties who benefit from having anobjective and consistent basis for comparison with other companies within ourindustry.

 

*Outlook and Trends*

 

Pricing in most insurance and reinsurance markets is generally cyclicalin nature.  We assign a price indexpercentage to business which we renew. This index represents an internalsubjective measure which takes into account both changes in pricing and termsand conditions which we observe.  Thisindex does not reflect deteriorating pricing or terms of business we decline torenew.

 

During 2006, we saw significant price increases in U.S. peakproperty zones, particularly in the case of business exposed to hurricanes andearthquakes, resulting from significant hurricane losses experienced throughout2004 and 2005. These losses led to an increase in perceived catastrophe risk bymarket participants, catastrophe modeling firms and rating agencies whichdirectly and indirectly led to increased prices.

 

Outside of property business in U.S. peak zones, pricing during2006 was mixed and we observed instances of both upward price movement and,more frequently, price decreases.

 

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During 2007, pricing in virtually all insurance and reinsurance marketsdeclined, on average, by approximately 10% due to increasing competition fromthe private sector and, for catastrophe prone business, the impact ofevent-linked securities and certain governmental initiatives that occurred orwere anticipated to occur.

 

The most significant price decline in 2007 was related to writings ofcollateralized property catastrophe retrocessional business which, from January 1,2006 to June 30, 2007, was predominantly written by Blue Ocean Re. This wasthe first segment to show significant rate increases following the 2005catastrophes and, likewise, its pricing deteriorated most rapidly.  As a result, since the second half of 2007and throughout 2008, Blue Ocean Re wrote no new business.

 

During 2008, pricing throughout the insurance and reinsurance marketscontinued to decline with direct and facultative property business being theclass showing the single largest rate decline. We also observed strong incumbent market retention within existing positionson desirable programs, which means that our Montpelier Bermuda segment was ableto maintain and/or expand positions with its long-term target client base.  We also observed that aggregate demand waseither static or decreasing in most catastrophe markets.

 

During 2009 to date, we observed positive pricing trends in themajority of our business lines, ending twenty-two consecutive months of pricereductions.  The premium-weighted renewalprice index across the entire portfolio incepting in January was 107%.  Within our Property CatastropheExcess-of-loss line, our largest block of business to renew at that time, therenewal price index was 108% or 110% for our U.S. portfolio and 105% for ourInternational treaty portfolio.

 

Despite witnessing broad-based rate strengthening in our PropertyCatastrophe line we took deliberate steps to reduce our gross exposures at January 1,2009,  in anticipation of continuedmarket tightening for U.S. property business for the remainder of theyear.  Additionally, we were mindful ofthe widening disparity between pricing for inwards reinsurance and outwardsretrocession, which renders certain protections typically purchased in prioryears uneconomical.

 

Looking ahead to future periods, it is difficult to predict the amountof annual premiums we will write and how attractive pricing will be.  However, we believe that the recentwidespread investment and catastrophe losses have weakened the balance sheetsof many insurance and reinsurance companies and have reduced the reinsurancecapacity provided by the capital markets. We see all of these factors asdirectly reducing the supply of capital which should, in turn, result in higherreturn hurdles.  Based on discussionswith a variety of ceding companies, we also expect to see increased demand forreinsurance driven by several sources, including weaker capital adequacypositions and shrinking risk tolerances.

 

During the fourth quarter of 2008, we announced that we had receivedapproval from Lloyd’s for the establishment of our own wholly-owned ManagingAgent, MUA.  MUA has assumed themanagement of Montpelier Syndicate 5151 for the 2009 underwriting year ofaccount, with effect from January 1, 2009.

 

The formation of MUA represents the latest step in a series ofstrategic initiatives we began in mid 2006. We now have operations in four countries employing three differentinsurance licenses.  As a result, we areoptimistic in our outlook for 2009 as we expect to see increasingly attractiveopportunities for all of our underwriting platforms.

* *

*Natural Catastrophe Risk Management*

 

As a predominantly short-tail property reinsurer, we have exposure tonatural 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 tracking exposedcontract 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.  As such, the followingdiscussion should be read in conjunction with our *“Risk Factors”* contained in Item 1A herein, in particularthe specific risk factor entitled *“Ourstated catastrophe and enterprise-wide risk management exposures are based onestimates and judgments which are subject to significant uncertainties.”*

 

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Exposure Management

 

We track gross reinsurance treaty contract limits which we deem exposedto a single natural perils occurrence within certain broadly defined majorcatastrophe zones.  The resulting measurerepresents the sum of all contract limits assumed through property reinsurancetreaties, other specialty reinsurance treaties and event-linked insurancederivatives, but excludes limits relating to individual risk insurance businessand the benefit of any reinsurance protections we have purchased.  As of December 31, 2008, our largestsingle zonal concentration was Northern European windstorm (the zone consistingof the U.K., Ireland, Germany, France, the Benelux countries, Switzerland,Denmark, Norway and Sweden).  For individualrisk business, including both direct insurance and facultative reinsuranceaccounts, we supplement our treaty approach by tracking contract limits to afiner geographic resolution.

 

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, casualty, and personalaccident insurance policies, reinsurance policies, and event-linked derivativesecurities offset by the net benefit of any reinsurance or derivativeprotections we purchase and the net benefit of reinstatement premiums. Thetable below details our estimated average net impact market share for selectednatural catastrophe events of various industry loss magnitudes:

 

| **Event / Resulting Market Loss** | ** ** | **Our Average Market Share** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|
|                                                  |       |                                        |       |
| U.S. Hurricane / $50 billion                          |       | 0.7                                         | %          |
|                                                  |       |                                        |       |
| U.S. Earthquake / $50 billion                         |       | 0.5                                         | %          |
|                                                  |       |                                        |       |
| Europe Windstorm / $20 billion                        |       | 1.4                                         | %          |

 

The market share estimates above represent an estimate of our averagemarket share across multiple event scenarios corresponding to industry lossesof a given size.  However, it isimportant to note that our average market share may vary considerably within aparticular territory depending on the specific characteristics of theevent.  This is particularly true for thedirect insurance and facultative reinsurance portfolio we underwrite. Otherfactors contributing to such variation may include our decision to beoverweight or underweight 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 geographic restrictionsor provide coverage for only a single occurrence within the policy period.  Lastly, these estimates represent snapshotsat a point in time.  The composition ofour in-force portfolio will fluctuate due to the acceptance of new policies,the expiration of existing policies, and changes in our reinsurance program.

 

Each industry-recognized catastrophe model contains its own assumptionsas to the frequency and severity of large events, and results may varysignificantly from model to model.  Giventhe relatively limited historical record, there is a great deal of uncertaintywith regard to the accuracy of any catastrophe model, especially at relativelyremote return periods.

 

There is no single standard methodology or set of assumptions utilizedindustry-wide in estimating property catastrophe losses.  As a consequence, it may be difficult tocompare estimates of risk exposure among different insurance and reinsurancecompanies, due to differences in modeling, portfolio composition andconcentrations, modeling assumptions, and selected event scenarios.

 

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Annual Operating Result

 

In addition to monitoring exposed contract limits and single eventaccumulation potential, we attempt to measure enterprise-wide risk using asimulated annual aggregate operating result approach. This approach estimatescomprehensive income over simulated annual return periods, includingcontributions from certain variables such as aggregate premiums, losses,expenses, and investment results.  Weview this approach as a supplement to our single event stress test as it allowsfor multiple losses from natural catastrophe and other sources and attempts totake into account certain risks from non-underwriting sources. Through ourmodeling we endeavor to take into account many risks that we face as anenterprise.  By the very nature of theinsurance and reinsurance business, and the limitations of models generally,our modeling does not cover every potential risk.  Examples include emerging risks, changes inliability awards, pandemic illnesses, asteroid strikes, climate change,bioterrorism, scientific accidents, and various imaginable and unimaginablepolitical and financial market catastrophes.

 

**I.   Results ofOperations**

 

Our consolidated financialresults for years ended December 31, 2008, 2007 and 2006 follow:

 

| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                                    | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| Gross premiums written                                                           | ** ** | **$**                                      | **620.1**  | ** ** | $ | 653.8 |   | $ | 727.5 |   |
| Reinsurance premiums ceded                                                       | ** ** | **(78.9**                                  | **)**      | (104.8 | ) | (148.9 | ) |
| Net premiums written                                                             | ** ** | **541.2**                                  | ** ** | 549.0 |   | 578.6 |   |
| Change in net unearned premiums                                                  | ** ** | **(12.7**                                  | **)**      | 8.2 |   | 4.4 |   |
| Net premiums earned                                                              | ** ** | **528.5**                                  | ** ** | 557.2 |   | 583.0 |   |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| Net investment income                                                            | ** ** | **86.4**                                   | ** ** | 132.5 |   | 125.8 |   |
| Net realized and unrealized gains (losses)                                       | ** ** | **(244.9**                                 | **)**      | 26.5 |   | 4.0 |   |
| Net foreign exchange gains                                                       | ** ** | **7.6**                                    | ** ** | 6.1 |   | 10.8 |   |
| Net expense from derivative instruments                                          | ** ** | **(14.3**                                  | **)**      | (0.3 | ) | (9.9 | ) |
| Other revenue                                                                    | ** ** | **1.0**                                    | ** ** | 2.0 |   | 8.3 |   |
| **Total revenues**                                                               | ** ** | **364.3**                                  | ** ** | 724.0 |   | 722.0 |   |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| Underwriting expenses:                                                           |       |                                       | ** ** |   |   |   |   |
| Loss and LAE — current year losses                                          | ** ** | **(399.2**                                 | **)**      | (213.9 | ) | (196.5 | ) |
| Loss and LAE — prior year losses                                            | ** ** | **104.1**                                  | ** ** | 36.4 |   | 23.8 |   |
| Acquisition costs                                                                | ** ** | **(83.9**                                  | **)**      | (78.3 | ) | (112.8 | ) |
| General and administrative expenses                                              | ** ** | **(102.0**                                 | **)**      | (85.9 | ) | (66.0 | ) |
| Non-underwriting expenses:                                                       |       |                                       | ** ** |   |   |   |   |
| Interest and other financing expenses                                            | ** ** | **(26.8**                                  | **)**      | (34.5 | ) | (28.2 | ) |
| **Total expenses**                                                               | ** ** | **(507.8**                                 | **)**      | (376.2 | ) | 379.7 |   |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| **Income (loss) before income taxes,  extraordinary item and minority interest** | ** ** | **(143.5**                                 | **)**      | 347.8 |   | 342.3 |   |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| Income tax provision                                                             | ** ** | **(1.1**                                   | **)**      | (0.1 | ) | (0.1 | ) |
| Minority interest expense — Blue Ocean                                      | ** ** | **(1.9**                                   | **)**      | (31.9 | ) | (39.3 | ) |
| Excess of fair value of acquired net assets  over cost - Blue Ocean              | ** ** | **1.0**                                    | ** ** | — |   | — |   |
| **Net income (loss)**                                                            | ** ** | **(145.5**                                 | **)**      | 315.8 |   | 302.9 |   |
| Other comprehensive income (loss)                                                | ** ** | **(5.4**                                   | **)**      | (1.8 | ) | 58.6 |   |
| **Comprehensive income (loss)**                                                  | ** ** | **$**                                      | **(150.9** | **)** | $ | 314.0 |   | $ | 361.5 |   |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| Loss and LAE ratio                                                               | ** ** | **55.8**                                   | **%**      | 31.8 | % | 29.6 | % |
| Acquisition cost ratio                                                           | ** ** | **15.9**                                   | **%**      | 14.1 | % | 19.4 | % |
| General and administrative expense ratio                                         | ** ** | **19.3**                                   | **%**      | 15.4 | % | 11.3 | % |
|                                                                             |       |                                       | ** ** |   |   |   |   |
| **GAAP combined ratio**                                                          | ** ** | **91.0**                                   | **%**      | 61.3 | % | 60.3 | % |

 

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

 

The Company operates through four operating segments, MontpelierBermuda, Montpelier Syndicate 5151, MUSIC and Blue Ocean.  Each operating segment is a separateunderwriting platform through which the Company writes reinsurance andinsurance business. The activities of the Company, certain of its intermediateholding and service companies and intercompany eliminations relating tointer-segment reinsurance and service charges, collectively referred to as“Corporate and Other,” are also presented.

 

**MONTPELIER BERMUDA**

 

Underwriting results for Montpelier Bermuda, our largest operatingsegment, for the years ended December 31, 2008, 2007 and 2006 were asfollows:

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                     |       |                                       | ** ** |   |   |   |   |
| Gross premiums written                   | ** ** | **$**                                      | **503.5**  | ** ** | $ | 595.7 |   | $ | 632.7 |   |
| Reinsurance premiums ceded               | ** ** | **(76.7**                                  | **)**      | (104.7 | ) | (148.9 | ) |
| Net premiums written                     | ** ** | **426.8**                                  | ** ** | 491.0 |   | 483.8 |   |
| Change in net unearned premiums          | ** ** | **32.9**                                   | ** ** | 0.3 |   | 26.3 |   |
| Net premiums earned                      | ** ** | **459.7**                                  | ** ** | 491.3 |   | 510.1 |   |
|                                     |       |                                       | ** ** |   |   |   |   |
| Loss and LAE                             | ** ** | **(245.9**                                 | **)**      | (173.3 | ) | (172.7 | ) |
| Acquisition costs                        | ** ** | **(72.8**                                  | **)**      | (72.9 | ) | (107.4 | ) |
| General and administrative expenses      | ** ** | **(43.3**                                  | **)**      | (53.6 | ) | (55.4 | ) |
| **Underwriting income**                  | ** ** | **$**                                      | **97.7**   | ** ** | $ | 191.5 |   | $ | 174.6 |   |
|                                     |       |                                       | ** ** |   |   |   |   |
| Loss and LAE ratio                       | ** ** | **53.5**                                   | **%**      | 35.3 | % | 33.9 | % |
| Acquisition costs ratio                  | ** ** | **15.8**                                   | **%**      | 14.8 | % | 21.1 | % |
| General and administrative expense ratio | ** ** | **9.4**                                    | **%**      | 10.9 | % | 10.9 | % |
|                                     |       |                                       | ** ** |   |   |   |   |
| **GAAP combined ratio**                  | ** ** | **78.7**                                   | **%**      | 61.0 | % | 65.9 | % |

 

 

***Gross and Net Premiums Written***

 

The following table summarizes Montpelier Bermuda’s gross premiums, byline of business, for the years ended December 31, 2008, 2007 and 2006:

 

| ** **                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                          |       |                                       | ** ** |   |   |   |   |   |   |   |   |   |   |
| Property Catastrophe          | ** ** | **$**                                      | **317.2**  | ** ** | **63** | **%** | $ | 348.2 |   | 58 | % | $ | 301.6 |   | 47 | % |
| Property Specialty            | ** ** | **106.6**                                  | ** ** | **21** | ** ** | 136.7 |   | 23 |   | 206.8 |   | 33 |   |
| Other Specialty               | ** ** | **74.4**                                   | ** ** | **15** | ** ** | 110.8 |   | 19 |   | 124.3 |   | 20 |   |
| Inter-segment reinsurance (1) | ** ** | **5.3**                                    | ** ** | **1** | ** ** | — |   | — |   | — |   | — |   |
|                          |       |                                       | ** ** |   | ** ** |   |   |   |   |   |   |   |   |
| Gross premiums written        | ** ** | **503.5**                                  | ** ** | **100** | **%** | 595.7 |   | 100 | % | 632.7 |   | 100 | % |
| Reinsurance premiums ceded    | ** ** | **(76.7**                                  | **)**      |   | ** ** | (104.7 | ) |   |   | (148.9 | ) |   |   |
| Net premiums written          | ** ** | **$**                                      | **426.8**  | ** ** |   | ** ** | $ | 491.0 |   |   |   | $ | 483.8 |   |   |   |

 

----

(1)    Represents an inter-segment reinsurance coverwith Montpelier Syndicate 5151.  Thisintercompany arrangement is eliminated in consolidation.

 

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Gross premiums writtenwithin our Montpelier Bermuda segment decreased by approximately 16% in 2008,as compared to 2007, as a result of the following:

 

·                  Property Catastrophe premiums written during2008 decreased by 9% over 2007, reflecting softening prices in the propertycatastrophe market as a whole experienced throughout most of 2008. Thisdeterioration in pricing had the dual effect of: (i) reducing the premiumwritten on many contract renewals, and (ii) causing Montpelier Bermuda notto renew other contracts. Additionally, approximately $30.0 million of PropertyCatastrophe premium that would have been written within this segment waswritten within our Montpelier Syndicate 5151 segment. These factors werepartially offset by an increase in reinstatement premiums, which totaled $21.2million and $8.4 million during 2008 and 2007, respectively. The reinstatementpremiums recognized during the 2008 period related primarily to hurricane Ike.The reinstatement premiums recognized during 2007 related primarily to Europeanwindstorm Kyrill and U.K. floods.

 

·                  Property Specialty premiums written during2008 decreased by 22% as compared to 2007. This decrease, which was largely concentrated within our direct andfacultative lines within Property Specialty, was mainly due to the impact ofsignificant rate reductions experienced during the periods as well asnon-renewals due to inadequate terms and pricing.

 

·                  Other Specialty premiums written during 2008decreased by 33% over 2007. This decrease was due mainly to: (i) thenon-renewal of several contracts due to inadequate terms and pricing and (ii) loss-sensitivepremium adjustments made during the year within some of Montpelier Bermuda’sretrospectively rated casualty contracts. Montpelier Bermuda reduced itsestimate of casualty losses incurred on some of these contracts, andconsequently reduced the associated premium written.

 

Our gross premiums written within our Montpelier Bermuda segmentdecreased by approximately 6% in 2007, as compared to 2006.  In addition, our mix of premiums written alsochanged significantly during the period. The premium decrease and change in mix resulted from the following:

 

·                        Property Catastrophe premiums written during2007 increased from a repositioning of the portfolio from proportional treaty(Property Specialty) business to excess-of-loss (Property Casualty) business.

 

·                         A further increase in Property Catastropheresulted from writings within areas of broader geographic diversity than ourhistorical book of business,

 

·                        An 11% decline in Other Specialty businesswritten, mainly casualty, as rates were declining and terms and conditions hadweakened.

 

In the normal course of its business, Montpelier Bermuda purchasesreinsurance in order to manage its exposures. The amount and type of reinsurance that it enters into 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.

 

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 incurred 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 2008, net premiums written within our Montpelier Bermuda segmentdecreased by approximately 13% and 12% as compared to 2007 and 2006,respectively.  Various factors willcontinue to affect Montpelier Bermuda’s appetite and capacity to write andretain risk. These include 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, increasedcompetition, and other considerations. The level of reinstatement premiums received in future periods is alsodependent upon the occurrence of catastrophic losses.

 

***Net Premiums Earned***

 

Net premiums earned during2008, 2007 and 2006 were $459.7 million, $491.3 million and $510.1 million,respectively, representing a decrease of 6% and 4% during 2008 and 2007,respectively.  Net premiums earned are afunction of the amount and timing of net premiums written.

 

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***Loss and LAE***

 

The following tables present Montpelier Bermuda’s gross unpaid loss andLAE reserves, by line of business, as of and for the years ended December 31,2008, 2007 and 2006:

 

**Gross Loss and LAE Reserves**

 

| **(Millions)**       | ** ** | **Gross  Reserves at  Dec. 31,  2007** | ** ** | **Change in  Prior Years’  Estimates  During  2008** | ** ** | **Gross  Losses  Paid  During  2008** | ** ** | **Estimated  Ultimate  Losses  During  2008** | ** ** | **Gross  Reserves  at Dec. 31,  2008** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                 |       |                                             |       |                                                                |       |                                  |       |                                          |       |                                             |       |
| Property Catastrophe |       | $                                                | 294.6      |                                                                | $          | (61.7                                 | )          | $                                             | (194.1     | )                                                | $          | 234.5 | ** ** | **$** | **273.3** | ** ** |
| Property Specialty   |       | 259.4                                            |       | (23.7                                                               | )          | (127.9                                | )          | 111.7                                         | ** ** | **219.5**                                        | ** ** |
| Other Specialty      |       | 285.8                                            |       | (30.2                                                               | )          | (49.7                                 | )          | 51.3                                          | ** ** | **257.2**                                        | ** ** |
| Total                |       | $                                                | 839.8      |                                                                | $          | (115.6                                | )          | $                                             | (371.7     | )                                                | $          | 397.5 | ** ** | **$** | **750.0** | ** ** |

 
| **(Millions)**       | ** ** | **Gross  IBNR at  Dec. 31,  2008** | ** ** | **Gross Case  Reserves at  Dec. 31,  2008** | ** ** | **Gross  Reserves at  Dec. 31,  2008** | ** ** |
|----------------------|------------|----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                 |       |                                         |       |                                                       |       |                                             |       |
| Property Catastrophe |       | $                                            | 122.9      |                                                       | $          | 150.4                                            | ** ** | **$** | **273.3** | ** ** |
| Property Specialty   |       | 88.4                                         |       | 131.1                                                      | ** ** | **219.5**                                        | ** ** |
| Other Specialty      |       | 174.5                                        |       | 82.7                                                       | ** ** | **257.2**                                        | ** ** |
| Total                |       | $                                            | 385.8      |                                                       | $          | 364.2                                            | ** ** | **$** | **750.0** | ** ** |

 

| **(Millions)**       | ** ** | **Gross  Reserves at  Dec. 31,  2006** | ** ** | **Change in**

**Prior Years’  Estimates  During  2007** | ** ** | **Gross  Losses  Paid  During  2007** | ** ** | **Estimated  Ultimate  Losses  During  2007** | ** ** | **Gross  Reserves  at Dec. 31,  2007** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                 |       |                                             |       |                                                                    |       |                                  |       |                                          |       |                                             |       |
| Property Catastrophe |       | $                                                | 388.6      |                                                                    | $          | (9.9                                  | )          | $                                             | (193.2     | )                                                | $          | 109.1 |   | $ | 294.6 |   |
| Property Specialty   |       | 372.9                                            |       | (27.0                                                                   | )          | (142.0                                | )          | 55.5                                          |       | 259.4                                            |       |
| Other Specialty      |       | 327.7                                            |       | (8.0                                                                    | )          | (94.4                                 | )          | 60.5                                          |       | 285.8                                            |       |
| Total                |       | $                                                | 1,089.2    |                                                                    | $          | (44.9                                 | )          | $                                             | (429.6     | )                                                | $          | 225.1 |   | $ | 839.8 |   |

 
| **(Millions)**       | ** ** | **Gross  IBNR at  Dec. 31,**

**2007** | ** ** | **Gross Case  Reserves at  Dec. 31,  2007** | ** ** | **Gross  Reserves at  Dec. 31,  2007** | ** ** |
|----------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                 |       |                                             |       |                                                       |       |                                             |       |
| Property Catastrophe |       | $                                                | 149.2      |                                                       | $          | 145.4                                            |       | $ | 294.6 |   |
| Property Specialty   |       | 107.6                                            |       | 151.8                                                      |       | 259.4                                            |       |
| Other Specialty      |       | 188.0                                            |       | 97.8                                                       |       | 285.8                                            |       |
| Total                |       | $                                                | 444.8      |                                                       | $          | 395.0                                            |       | $ | 839.8 |   |

 

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| **(Millions)**         | ** ** | **Gross  Reserves at  Dec. 31,  2005** | ** ** | **Change in  Prior Years’  Estimates  During  2006** | ** ** | **Gross  Losses  Paid  During  2006** | ** ** | **Estimated  Ultimate  Losses  During  2006** | ** ** | **Gross  Reserves  at Dec. 31,  2006** | ** ** |
|------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|--------------------------------------------------|------------|
|                   |       |                                             |       |                                                                |       |                                  |       |                                          |       |                                             |       |
| Property Catastrophe   |       | $                                                | 868.9      |                                                                | $          | 37.8                                  |       | $                                             | (538.4     | )                                                | $          | 20.3 |   | $ | 388.6 |   |
| Property Specialty     |       | 540.7                                            |       | (9.6                                                                | )          | (261.6                                | )          | 103.4                                         |       | 372.9                                            |       |
| Other Specialty        |       | 353.5                                            |       | (24.5                                                               | )          | (82.4                                 | )          | 81.1                                          |       | 327.7                                            |       |
| Qualifying Quota Share |       | 18.8                                             |       | (4.6                                                                | )          | (14.2                                 | )          | —                                        |       | —                                           |       |
| Total                  |       | $                                                | 1,781.9    |                                                                | $          | (0.9                                  | )          | $                                             | (896.6     | )                                                | $          | 204.8 |   | $ | 1,089.2 |   |

 

The following tables present Montpelier Bermuda’s net unpaid loss andLAE reserves, by line of business, as of and for the years ended December 31,2008, 2007 and 2006:

 

**Net Loss and LAE Reserves**

 
| **(Millions)**       | ** ** | **Net  Reserves at  Dec. 31,  2007** | ** ** | **Change in  Prior Years’  Estimates  During  2008** | ** ** | **Net  Losses**

**Paid  During  2008** | ** ** | **Estimated  Ultimate  Losses  During  2008** | ** ** | **Net  Reserves  at Dec. 31,  2008** | ** ** |
|----------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
| ** **           | ** ** | ** **                                     | ** ** | ** **                                                          | ** ** | ** **                              | ** ** | ** **                                    | ** ** | ** **                                     | ** ** |
| Property Catastrophe |       | $                                              | 236.1      |                                                                | $          | (54.9                                   | )          | $                                             | (171.2     | )                                              | $          | 201.6 | ** ** | **$** | **211.6** | ** ** |
| Property Specialty   |       | 195.2                                          |       | (26.6                                                               | )          | (94.0                                   | )          | 103.1                                         | ** ** | **177.7**                                      | ** ** |
| Other Specialty      |       | 272.7                                          |       | (23.3                                                               | )          | (48.8                                   | )          | 46.0                                          | ** ** | **246.6**                                      | ** ** |
| Total                |       | $                                              | 704.0      |                                                                | $          | (104.8                                  | )          | $                                             | (314.0     | )                                              | $          | 350.7 | ** ** | **$** | **635.9** | ** ** |

 
| **(Millions)**       | ** ** | **Net  Reserves at  Dec. 31,  2006** | ** ** | **Change in  Prior Years’  Estimates  During  2007** | ** ** | **Net  Losses  Paid  During  2007** | ** ** | **Estimated  Ultimate  Losses  During  2007** | ** ** | **Net  Reserves  at Dec. 31,  2007** | ** ** |
|----------------------|------------|------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
|                 |       |                                           |       |                                                                |       |                                |       |                                          |       |                                           |       |
| Property Catastrophe |       | $                                              | 302.9      |                                                                | $          | (4.0                                | )          | $                                             | (163.8     | )                                              | $          | 101.0 |   | $ | 236.1 |   |
| Property Specialty   |       | 271.6                                          |       | (26.6                                                               | )          | (102.7                              | )          | 52.9                                          |       | 195.2                                          |       |
| Other Specialty      |       | 317.4                                          |       | (5.8                                                                | )          | (94.7                               | )          | 55.8                                          |       | 272.7                                          |       |
| Total                |       | $                                              | 891.9      |                                                                | $          | (36.4                               | )          | $                                             | (361.2     | )                                              | $          | 209.7 |   | $ | 704.0 |   |

 
| **(Millions)**         | ** ** | **Net  Reserves at  Dec. 31,   2005** | ** ** | **Change in  Prior Years’  Estimates  During  2006** | ** ** | **Net  Losses  Paid  During  2006** | ** ** | **Estimated  Ultimate  Losses  During  2006** | ** ** | **Net  Reserves  at Dec. 31,  2006** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------------|------------|
|                   |       |                                                 |       |                                                                |       |                                |       |                                          |       |                                           |       |
| Property Catastrophe   |       | $                                                    | 719.8      |                                                                | $          | 30.2                                |       | $                                             | (465.6     | )                                              | $          | 18.5 |   | $ | 302.9 |   |
| Property Specialty     |       | 398.4                                                |       | (30.6                                                               | )          | (197.8                              | )          | 101.6                                         |       | 271.6                                          |       |
| Other Specialty        |       | 341.3                                                |       | (19.9                                                               | )          | (80.3                               | )          | 76.3                                          |       | 317.4                                          |       |
| Qualifying Quota Share |       | 16.7                                                 |       | (3.5                                                                | )          | (13.2                               | )          | —                                        |       | —                                         |       |
| Total                  |       | $                                                    | 1,476.2    |                                                                | $          | (23.8                               | )          | $                                             | (756.9     | )                                              | $          | 196.4 |   | $ | 891.9 |   |

 

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, 2008.

 

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Our best estimate for Montpelier Bermuda’s ending gross loss and LAEreserves at December 31, 2008 and 2007 was $750.0 million and $839.8million, respectively.  Our best estimatefor Montpelier Bermuda’s ending net loss and LAE reserves at December 31,2008 and 2007 was $635.9 million and $704.0 million, respectively.

 

As of December 31, 2008 and 2007, Montpelier Bermuda’s IBNRreserves represented 51% and 53% of its total gross loss and LAE reserves,respectively.

 

The following tables present Montpelier Bermuda’s net loss and LAE andnet loss and LAE ratios for the years ended December 31, 2008, 2007 and2006:

 

| ** **                                                 | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                       |       |                                       |       |   |   |   |   |
| Loss and LAE - current year losses                         | ** ** | **$**                                      | **350.7**  | ** ** | $ | 209.7 |   | $ | 196.5 |   |
| Loss and LAE - favorable development on  prior year losses | ** ** | **(104.8**                                 | **)**      | (36.4 | ) | (23.8 | ) |
|                                                       |       |                                       | ** ** |   |   |   |   |
| Net Loss and LAE                                           | ** ** | **$**                                      | **245.9**  | ** ** | $ | 173.3 |   | $ | 172.7 |   |

 

| ** **                                                       | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                             |       |                                       |       |   |   |   |   |
| Loss and LAE ratio - current year losses                         | ** ** | **76.3**                                   | **%**      | 42.7 | % | 38.6 | % |
| Loss and LAE ratio - favorable development  on prior year losses | ** ** | **(22.8**                                  | **)%**     | (7.4 | )% | (4.7 | )% |
|                                                             |       |                                       | ** ** |   |   |   |   |
| Net Loss and LAE ratio                                           | ** ** | **53.5**                                   | **%**      | 35.3 | % | 33.9 | % |

 

During 2008, Montpelier Bermuda incurred significant catastrophiclosses from European Windstorm Emma and hurricanes Ike and Gustav, representinga combined net 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 significant losses fromEuropean windstorms Kyrill and Gonu, California wildfires and floods in theU.K. and Australia. These events generated combined net losses of $88.6million.

 

During 2006, Montpelier Bermuda’s single largest catastrophe loss, aseries of U.S. tornadoes and hailstorms, amounted to less than $10.0 million.

 

Reinsurance recoveries of $35.4 million, $6.9 million and $31.2 millionwere netted against Montpelier Bermuda’s loss and LAE for the years ended 2008,2007 and 2006, 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.

 

***Loss and LAE development — 2008***

 

Net favorable loss and LAE development occurring in 2008 that relatedto prior year losses was $104.8 million. Summaries by line of business are asfollows:

 

·                  Net estimated ultimate Property Catastrophelosses for prior years decreased by $54.9 million due primarily to thereassessment of loss and LAE reserves relating to the 2007 loss events notedabove, as well as with hurricanes that occurred in 2004 and 2005.

 

·                  Net estimated ultimate Property Specialtylosses for prior years decreased by $26.6 million mainly as a result of areduction in losses reported to us in connection with several large,facultative claims.

 

·                  Net estimated ultimate Other Specialty lossesfor prior years decreased by $23.3 million largely as a result of thereassessment of loss and LAE reserves in our casualty class of business, aswell as in other classes.

 

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***Loss and LAE development — 2007***

 

Duringthe year ended December 31, 2007, Montpelier Bermuda experienced $36.4million in favorable development on net loss and LAE reserves relating to prioryear losses within the following lines of our business:

 

·                        Net estimated ultimate Property Catastrophelosses for prior years decreased by $4.0 million due to the re-assessment ofloss and LAE reserves relating to several small loss events within MontpelierBermuda’s Property Catastrophe lines.

 

·                        Net estimated ultimate Property Specialtylosses for prior years decreased by $26.6 million due primarily to claimsemergence on Montpelier Bermuda’s direct and facultative book of business beinglower than expected and lower than expected ultimate losses on proportionalbusiness.

 

·                        Netestimated ultimate Other Specialty losses for prior years decreased by $5.8million due to the re-assessment of loss and LAE reserves relating to severalclasses of business within Montpelier Bermuda’s Other Specialty line.

 

***Loss and LAE development — 2006***

 

Duringthe year ended December 31, 2006, Montpelier Bermuda experienced $23.8million in favorable development on net loss and LAE reserves relating to prioryear losses within the following lines of our business:

 

·                        Net estimated ultimate Property Catastrophelosses for prior years increased by $30.2 million due primarily to an increasein expected ultimate losses in Montpelier Bermuda’s retrocessional book ofbusiness relating to the 2005 hurricanes, mainly hurricane Wilma.

 

·                        Net estimated ultimate Property Specialtylosses for prior years decreased by $30.6 million due primarily to a decreasein expected ultimate losses for property risk excess claims.

 

·                        Net estimated ultimate Other Specialty lossesfor prior years decreased by $19.9 million due primarily to a decrease inMarine losses relating to hurricane Rita, decreases in expected losses onproportional contracts relating to the Aviation, Marine and Personal Accidentclasses of business and favorable commutations of a related group of OtherSpecialty contracts.

 

·                        Net estimated ultimate Qualifying Quota Sharelosses for prior years decreased by $3.5 million due to favorable commutationsof such contracts.

 

***Underwriting Expenses***

 

The following table presents Montpelier Bermuda’s underwriting expensesfor the years ended December 31, 2008, 2007 and 2006:

 

| ** **                                        | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                              |       |                                       | ** ** |   |   |   |   |
| Acquisition costs                                 | ** ** | **$**                                      | **72.8**   | ** ** | $ | 72.9 |   | $ | 107.4 |   |
| Profit commission component of acquisition  costs | ** ** | **$**                                      | **5.9**    | ** ** | $ | 6.8 |   | $ | 3.8 |   |
| Acquisition costs ratio                           | ** ** | **15.8**                                   | **%**      | 14.8 | % | 21.1 | % |
|                                              |       |                                       | ** ** |   |   |   |   |
| General and administrative expenses               | ** ** | **$**                                      | **43.3**   | ** ** | $ | 53.6 |   | $ | 55.4 |   |
| General and administrative expense ratio          | ** ** | **9.4**                                    | **%**      | 10.9 | % | 10.9 | % |

 

Acquisition costs (whichinclude brokerage costs, commissions and excise taxes, when applicable) aregenerally driven by contract terms and are normally a set percentage of grosspremiums written. Acquisition costs consist of the net of commission expensesincurred on assumed business and commission revenue earned on purchasedreinsurance covers. Commission revenue on purchased reinsurance covers isearned over the same period over which the corresponding premiums are expensed.

 

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Acquisition costs incurredby Montpelier Bermuda during 2008 were $72.8 million, essentially unchangedfrom those incurred in 2007.  Acquisitioncosts incurred by Montpelier Bermuda during 2007 were $72.9 million, a decreaseof 32% from those incurred in 2006. This decrease reflects a business shifttowards excess-of-loss business from pro rata business during the period, whichgenerally has lower acquisition costs per dollar of premium.

 

Profit commissions totaled$5.9 million, $6.8 million and $3.8 million for 2008, 2007 and 2006,respectively.  Profit commissions, whichare paid by assuming companies to ceding companies in the event of favorableloss experience, change as our estimates of loss and LAE fluctuate. Relativelyfew of our assumed reinsurance contracts contain profit commission clauses. Theterms of these commissions are specific to the individual contracts and vary asa percentage of the contract results. Profit commission is expensed based onthe estimated results of the subject contract.

 

The following tablesummarizes Montpelier Bermuda’s general and administrative expenses during theyears ended December 31, 2008, 2007 and 2006:

 

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                       |       |   |   |   |   |
| Fixed expenses                                | ** ** | **$**                                      | **39.2**   |   | $ | 42.5 |   | $ | 37.4 |   |
| Share based and other incentive  compensation | ** ** | **4.1**                                    |       | 11.1 |   | 18.0 |   |
| General and administrative expenses           | ** ** | **$**                                      | **43.3**   |   | $ | 53.6 |   | $ | 55.4 |   |

 

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 new operations gain significance and begin to bear a greaterproportion of such costs. In addition, during 2008 Montpelier Bermuda receiveda $1.2 million U.K. value-added tax refund. The increase from 2006 to 2007 is primarily the result of additionalcosts associated with upgrades to our information technology infrastructure andincreased rent, operating and maintenance costs related to our new premises inBermuda, which we moved into during the third quarter of 2006.

 

The significant decrease inincentive compensation during 2008, as compared to 2007, is due to a sharpreduction in incentive accruals resulting from the significant storm lossesincurred during 2008.  Additional reasonsfor the decreases are: (i) a decrease in performance share expense due toa lower share price in the 2008 periods versus 2007; and (ii) loweroverall RSU expense in 2008 due to the timing of Montpelier Bermuda’soutstanding awards (RSU awards are more heavily amortized in the early stagesof the award).  The significant increasein our incentive compensation from 2006 to 2007 was the mainly result of: (i) havingtwo cycles of performance shares outstanding versus only one cycle during 2006(all performance shares issued for the 2005 - 2007 performance period werecancelled without payment as there was no payout related to this tranche due tothe adverse financial effects of the 2005 hurricanes); and (ii) having twocycles of RSUs outstanding versus only one cycle outstanding during 2006.

 

**MONTPELIER SYNDICATE 5151**

 

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

 

| ** **                          | ** ** | **Year Ended  December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|
| **($ in millions)**       | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                          | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Gross premiums written              | ** ** | **$**                                  | **116.2**  | ** ** | $ | 15.3 |   |
| Reinsurance premiums ceded          | ** ** | **(7.5**                               | **)**      | (0.1 | ) |
| Net premiums written                | ** ** | **108.7**                              | ** ** | 15.2 |   |
| Change in net unearned premiums     | ** ** | **(45.1**                              | **)**      | (11.0 | ) |
| Net premiums earned                 | ** ** | **63.6**                               | ** ** | 4.2 |   |
|                                |       |                                   | ** ** |   |   |
| Loss and LAE                        | ** ** | **(47.4**                              | **)**      | (4.2 | ) |
| Acquisition costs                   | ** ** | **(10.4**                              | **)**      | (1.6 | ) |
| General and administrative expenses | ** ** | **(32.7**                              | **)**      | (10.8 | ) |
| **Underwriting loss**               | ** ** | **$**                                  | **(26.9**  | **)** | $ | (12.4 | ) |

 

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| Loss and LAE ratio                       | ** ** | **74.5**  | **%**      | 100.0  | %      |
|------------------------------------------|------------|-----------|------------|--------|--------|
| Acquisition costs ratio                  | ** ** | **16.4**  | **%**      | 38.1   | %      |
| General and administrative expense ratio | ** ** | **51.4**  | **%**      | n/m    |   |
|                                     |       |      | ** ** |   |   |
| **GAAP combined ratio**                  | ** ** | **142.3** | **%**      | n/m    |   |

 

n/m - not meaningful due to the start-up nature of these operations.

 

***Gross and Net Premiums Written***

 

The following tablesummarizes Montpelier Syndicate 5151’s gross premiums, by line of business, forthe years ended December 31, 2008 and 2007:

 

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** |
|                                          |       |                                       | ** ** |   | ** ** |   |   |   |   |
| Property Catastrophe                          | ** ** | **$**                                      | **30.6**   | ** ** | **26** | **%** | $ | 2.0 |   | 13 | % |
| Property Specialty                            | ** ** | **40.6**                                   | ** ** | **35** | ** ** | 5.8 |   | 38 |   |
| Other Specialty                               | ** ** | **45.0**                                   | ** ** | **39** | ** ** | 7.5 |   | 49 |   |
|                                          |       |                                       | ** ** |   | ** ** |   |   |   |   |
| Gross premiums written                        | ** ** | **116.2**                                  | ** ** | **100** | **%** | 15.3 |   | 100 | % |
| Reinsurance premiums ceded                    | ** ** | **(2.2**                                   | **)**      |   | ** ** | (0.1 | ) |   |   |
| Inter-segment reinsurance premiums ceded  (1) | ** ** | **(5.3**                                   | **)**      |   | ** ** | — |   |   |   |
| Net premiums written                          | ** ** | **$**                                      | **108.7**  | ** ** |   | ** ** | $ | 15.2 |   |   |   |

 

----

(1)    Represents an inter-segment reinsurance coverwith Montpelier Bermuda.  Thisintercompany arrangement is eliminated in consolidation.

 

During the year ended December 31,2008, Montpelier Syndicate 5151 wrote $116.2 million of gross premiums with itsU.S.-based underwriters producing $36.3 million and its U.K.-based underwritersproducing $79.9 million. Syndicate 5151 has experienced significant growthsince 2007, the predominance of which has been in its Property Specialty andOther Specialty lines.  Within theselines of business, Syndicate 5151 has produced new business in engineering,individual and treaty property coverage and U.S. casualty lines, written onboth a proportional and non-proportional basis. During 2007, the year in which Montpelier Syndicate 5151 wasestablished, it wrote $15.3 million of gross premiums.

 

Syndicate 5151’s currentfocus is primarily on short tail business that does not contain catastropheexposure. Virtually all of Syndicate 5151’s Property Catastrophe premiumrepresents business transferred from the Montpelier Bermuda and Blue Oceansegments, bringing Montpelier’s underwriting function closer to the localmarket generating the business.

 

To date, most ofMontpelier’s outward reinsurance has been purchased by the Montpelier Bermudasegment, which in turn provides inter-segment reinsurance to MontpelierSyndicate 5151. However, from time to time, Montpelier Syndicate 5151 purchasesa limited amount of reinsurance cover that protects exposures unique to thatsegment.

 

All of Montpelier Syndicate5151’s reinsurance purchases to date have represented prospective cover; thatis, ceded reinsurance purchased to protect it against the risk of future lossesas opposed to covering losses that it has already incurred but has not beenpaid.

 

Various factors will continue to affect this segment’s appetite andcapacity to write and retain risk. These include the impact of changes infrequency and severity assumptions used in our models and the correspondingpricing required to meet our return targets, evolving industry-wide capitalrequirements, increased competition, and other considerations.

 

***Net Premiums Earned***

 

Net premiums earned at Montpelier Syndicate 5151 during years ended December 31,2008 and 2007 were $63.6 million and $4.2 million, respectively.  Net premiums earned are a function of thetiming of net premiums written.

 

***Loss and LAE***

 

The following tables present Montpelier Syndicate 5151’s unpaid lossand LAE reserves, by line of business, as of and for the years ended December 31,2008 and 2007.  During each of theperiods presented, Montpelier Syndicate 5151’s gross reserves were equal totheir net reserves.

 

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**Gross and Net Loss and LAE Reserves**

 

| **(Millions)**       | ** ** | **Reserves at  Dec. 31,**

**2007** | ** ** | **Change in   Prior Years  Estimates  During  2008** | ** ** | **Currency**

**Movements  and Losses  Paid  During  2008** | ** ** | **Estimated  Ultimate  Losses  During  2008** | ** ** | **Reserves  at Dec. 31,  2008** | ** ** |
|----------------------|------------|-----------------------------------------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| ** **           | ** ** | ** **                                    | ** ** | ** **                                                          | ** ** | ** **                                                       | ** ** | ** **                                    | ** ** | ** **                                | ** ** |
| Property Catastrophe |       | $                                             | 0.5        |                                                                | $          | (0.1                                                             | )          | $                                             | —     |                                      | $          | 6.4 | ** ** | **$** | **6.8** | ** ** |
| Property Specialty   |       | 2.1                                           |       | 0.5                                                                 |       | (2.7                                                             | )          | 22.3                                          | ** ** | **22.2**                                  | ** ** |
| Other Specialty      |       | 1.6                                           |       | 0.3                                                                 |       | (0.1                                                             | )          | 18.0                                          | ** ** | **19.8**                                  | ** ** |
| Total                |       | $                                             | 4.2        |                                                                | $          | 0.7                                                              |       | $                                             | (2.8       | )                                         | $          | 46.7 | ** ** | **$** | **48.8** | ** ** |

 
| **(Millions)**       | ** ** | **IBNR at  Dec. 31,  2008** | ** ** | **Case  Reserves at  Dec. 31,   2008** | ** ** | **Reserves at  Dec. 31,  2008** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------------|------------|
|                 |       |                                  |       |                                                  |       |                                      |       |
| Property Catastrophe |       | $                                     | 6.7        |                                                  | $          | 0.1                                       | ** ** | **$** | **6.8** | ** ** |
| Property Specialty   |       | 11.2                                  |       | 11.0                                                  | ** ** | **22.2**                                  | ** ** |
| Other Specialty      |       | 18.5                                  |       | 1.3                                                   | ** ** | **19.8**                                  | ** ** |
| Total                |       | $                                     | 36.4       |                                                  | $          | 12.4                                      | ** ** | **$** | **48.8** | ** ** |

 
| **(Millions)**       | ** ** | **Reserves at  Dec. 31,  2006** | ** ** | **Change in  Prior Years  Estimates  During  2007** | ** ** | **Losses  Paid  During  2007** | ** ** | **Estimated  Ultimate  Losses  During  2007** | ** ** | **Reserves  at Dec. 31,  2007** | ** ** |
|----------------------|------------|-------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
|                 |       |                                      |       |                                                          |       |                           |       |                                          |       |                                      |       |
| Property Catastrophe |       | $                                         | —     |                                                          | $          | —                         |       | $                                             | —     |                                      | $          | 0.5 |   | $ | 0.5 |   |
| Property Specialty   |       | —                                    |       | —                                                        |       | —                         |       | 2.1                                           |       | 2.1                                       |       |
| Other Specialty      |       | —                                    |       | —                                                        |       | —                         |       | 1.6                                           |       | 1.6                                       |       |
| Total                |       | $                                         | —     |                                                          | $          | —                         |       | $                                             | —     |                                      | $          | 4.2 |   | $ | 4.2 |   |

 
| **(Millions)**       | ** ** | **IBNR at  Dec. 31,  2007** | ** ** | **Case  Reserves at  Dec. 31,  2007** | ** ** | **Reserves at  Dec. 31,  2007** | ** ** |
|----------------------|------------|---------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
|                 |       |                                  |       |                                            |       |                                      |       |
| Property Catastrophe |       | $                                     | 0.5        |                                            | $          | —                                    |       | $ | 0.5 |   |
| Property Specialty   |       | 1.0                                   |       | 1.1                                             |       | 2.1                                       |       |
| Other Specialty      |       | 1.6                                   |       | —                                          |       | 1.6                                       |       |
| Total                |       | $                                     | 3.1        |                                            | $          | 1.1                                       |       | $ | 4.2 |   |

 

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, 2008.  Our bestestimate for Montpelier Syndicate 5151’s ending loss and LAE reserves at December 31,2008 and 2007 was $48.8 million and $4.2 million, respectively, which includes$0.6 million in foreign currency movements.

 

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The following tables present Montpelier Syndicate 5151’s loss and LAEand net loss and LAE ratios for the years ended December 31, 2008 and2007:

 

| ** **                                                   | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Millions)**                                               | ** ** | **2008**                               | ** ** | **2007** | ** ** |
|                                                         |       |                                   |       |   |   |
| Loss and LAE - current year losses                           | ** ** | **$**                                  | **46.7**   |   | $ | 4.2 |   |
| Loss and LAE - unfavorable development on  prior year losses | ** ** | **0.7**                                |       | — |   |
|                                                         |       |                                   |       |   |   |
| Loss and LAE                                                 | ** ** | **$**                                  | **47.4**   |   | $ | 4.2 |   |

 

| ** **                                                         | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                         | ** ** | **2008**                               | ** ** | **2007** | ** ** |
|                                                               |       |                                   |       |   |   |
| Loss and LAE ratio - current year losses                           | ** ** | **73.4**                               | **%**      | 100.0 | % |
| Loss and LAE ratio - unfavorable  development on prior year losses | ** ** | **1.1**                                | **%**      | — | % |
|                                                               |       |                                   | ** ** |   |   |
| Loss and LAE ratio                                                 | ** ** | **74.5**                               | **%**      | 100.0 | % |

 

Loss and LAE relating to current year losses amounted to$46.7 million in 2008 and related to several individual risk losses, aswell as $6.8 million of losses relating to hurricanes Gustav and Ike. Of thetotal current year loss and LAE recorded by Montpelier Syndicate 5151 during2008, $23.7 million related to business underwritten by our U.S. underwritersand $23.0 million related to business underwritten by our U.K. underwriters.

 

Montpelier Syndicate 5151 experienced $0.7 million in adverse developmenton its loss and LAE reserves relating to prior year losses during 2008.

 

***Underwriting Expenses***

 

The following table presents Montpelier Syndicate 5151’s underwritingexpenses for the years ended December 31, 2008 and 2007:

 

| ** **                                        | ** ** | **Year Ended  December 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------|------------|
| **($ in millions)**                     | ** ** | **2008**                               | ** ** | **2007** | ** ** |
|                                              |       |                                   |       |   |   |
| Acquisition costs                                 | ** ** | **$**                                  | **10.4**   | ** ** | $ | 1.6 |   |
| Profit commission component of acquisition  costs | ** ** | **$**                                  | **0.3**    | ** ** | $ | — |   |
| Acquisition costs ratio                           | ** ** | **16.4**                               | **%**      | 38.1 | % |
|                                              |       |                                   | ** ** |   |   |
| General and administrative expenses               | ** ** | **$**                                  | **32.7**   | ** ** | $ | 10.8 |   |
| General and administrative expense ratio          | ** ** | **51.4**                               | **%**      | n/m | % |

 

Acquisition costs (whichinclude brokerage costs, commissions and excise taxes, when applicable) aregenerally driven by contract terms and are normally a set percentage of grosspremiums written. Acquisition costs consist of the net of commission expensesincurred on assumed business and commission revenue earned on purchasedreinsurance covers. Commission revenue on purchased reinsurance covers isearned over the same period over which the corresponding premiums areexpensed.  Montpelier Syndicate 5151’sacquisition costs for 2008 and 2007 includedpremium deficiency charges of $0.1 millionand $0.9 million, respectively, with the 2007 charge representing 21 points tothat year’s acquisition costs ratio.

 

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The following tablesummarizes Montpelier Syndicate 5151’s general and administrative expensesduring the years ended December 31, 2008 and 2007:

 

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

 

Montpelier Syndicate 5151’sfixed expenses are driven mainly by salaries and premises costs associated withits underwriting and Coverholder operations located in the U.S., U.K. andSwitzerland and intercompany allocations of information technology and risk modelingexpenses. These fixed expenses increased significantly during 2008 asMontpelier Syndicate 5151 continued to expand its U.S. and U.K. operations.

 

Fixed expenses incurredduring 2008 and 2007 also included Lloyd’s fees of $7.6 million and $5.8million, respectively, and management fees paid to Spectrum of $4.6 million and$3.8 million, respectively.  These feesare largely tied to Montpelier Syndicate 5151’s underwriting capacity, whichincreased from £47 million in 2007 to £143 million in 2008.  With the establishment of the MUA, Syndicate5151 will begin to experience a reduction and eventual elimination of fees fromSpectrum as the operations will soon be managed through internal resources.

 

Share based and otherincentive compensation represents annual and long-term incentives forMontpelier Syndicate 5151 employees. The increase in such incentivecompensation costs from 2007 to 2008 was mainly due to staff increases withinthe U.S. and U.K. operations. This increase was partially offset by a decreasein incentive accruals made during the third quarter of 2008 resulting from thesignificant storm losses incurred during that period.

 

**MUSIC**

 

Underwriting results forMUSIC, which we acquired on November 1, 2007, were as follows for theyears ended December 31, 2008 and 2007:

 

| ** **                               | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|
| **($ in millions)**            | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                               | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Gross premiums written                   | ** ** | **$**                                  | **5.6**    | ** ** | $ | — |   |
| Reinsurance premiums ceded               | ** ** | **—**                             | ** ** | — |   |
| Net premiums written                     | ** ** | **5.6**                                | ** ** | — |   |
| Change in net unearned premiums          | ** ** | **(3.5**                               | **)**      | — |   |
| Net premiums earned                      | ** ** | **2.1**                                | ** ** | — |   |
|                                     |       |                                   | ** ** |   |   |
| Loss and LAE                             | ** ** | **(1.8**                               | **)**      | — |   |
| Acquisition costs                        | ** ** | **(0.5**                               | **)**      | — |   |
| General and administrative expenses      | ** ** | **(5.0**                               | **)**      | (1.2 | ) |
| **Underwriting loss**                    | ** ** | **$**                                  | **(5.2**   | **)** | $ | (1.2 | ) |
|                                     |       |                                   | ** ** |   |   |
| Loss and LAE ratio                       | ** ** | **85.7**                               | **%**      | — | % |
| Acquisition costs ratio                  | ** ** | **23.8**                               | **%**      | — | % |
| General and administrative expense ratio | ** ** | **n/m**                                | **%**      | — | % |
|                                     |       |                                   | ** ** |   |   |
| **GAAP combined ratio**                  | ** ** | **n/m**                                | **%**      | — | % |

 

n/m - not meaningful due to the start-up nature of these operations.

 

MUSIC wrote $5.6 million of Excess and Surplus Lines premium during2008, of which $2.1 million was earned during the year. MUSIC’s loss and LAEexpenses for 2008 of $1.8 million primarily represented IBNR.  MUSIC wrote a de minimis amount of premiumduring the period from November 1, 2007 to December 31, 2007.

 

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

 

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

 

MUSIC’s fixed expenses of $4.5 million for 2008 represent recurringexpenses associated with its operations whereas its fixed expenses of $1.1million for 2007 primarily represent costs associated with establishing itsoperating platform.  MUSIC’s variableexpenses of $0.5 million and $0.1 million for 2008 and 2007, respectively,consisted of annual and long-term incentive accruals.

 

**BLUE OCEAN**

 

Underwriting results for Blue Ocean for the years ended December 31,2008, 2007 and 2006 were as follows. Blue Ocean was formed in December 2005 and ceased writing newbusiness in June 2007.

 

| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                     |       |                                       | ** ** |   |   |   |   |
| Gross premiums written                   | ** ** | **$**                                      | **0.1**    | ** ** | $ | 42.8 |   | $ | 94.8 |   |
| Reinsurance premiums ceded               | ** ** | **—**                                 | ** ** | — |   | — |   |
| Net premiums written                     | ** ** | **0.1**                                    | ** ** | 42.8 |   | 94.8 |   |
| Change in net unearned premiums          | ** ** | **3.0**                                    | ** ** | 18.9 |   | (21.9 | ) |
| Net premiums earned                      | ** ** | **3.1**                                    | ** ** | 61.7 |   | 72.9 |   |
|                                     |       |                                       | ** ** |   |   |   |   |
| Loss and LAE                             | ** ** | **—**                                 | ** ** | — |   | — |   |
| Acquisition costs                        | ** ** | **(0.2**                                   | **)**      | (3.8 | ) | (5.4 | ) |
| General and administrative expenses      | ** ** | **(0.9**                                   | **)**      | (13.9 | ) | (16.1 | ) |
| **Underwriting income**                  | ** ** | **$**                                      | **2.0**    | ** ** | $ | 44.0 |   | $ | 51.4 |   |
|                                     |       |                                       | ** ** |   |   |   |   |
| Loss and LAE ratio                       | ** ** | **—**                                 | **%**      | — | % | — | % |
| Acquisition costs ratio                  | ** ** | **6.5**                                    | **%**      | 6.2 | % | 7.4 | % |
| General and administrative expense ratio | ** ** | **29.0**                                   | **%**      | 22.5 | % | 22.1 | % |
|                                     |       |                                       | ** ** |   |   |   |   |
| **GAAP combined ratio**                  | ** ** | **35.5**                                   | **%**      | 28.7 | % | 29.5 | % |

 

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.  As a result, during 2007, BlueOcean began returning capital to its shareholders and Blue Ocean Re ceasedwriting new business.

 

On June 5,2008, the Company acquired all the outstanding share capital of BlueOcean.  See Note 1.

 

Blue Ocean didnot incur any losses during the periods presented.

 

**CORPORATE AND OTHER**

 

Corporate and Other, which collectively represents the Company, certainintermediate holding and service companies and intercompany eliminationsrelating to inter-segment reinsurance and service charges, is not considered tobe an operating segment of our business. The results of Corporate and Otherprincipally reflect general and administrative expenses in support of its variousoperating companies.

 

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Our Corporate and Other results for the years ended December 31,2008, 2007 and 2006 were as follows:

 

| ** **                          | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                |       |                                       | ** ** |   |   |   |   |
| Gross premiums written (1)          | ** ** | **$**                                      | **(5.3**   | **)** | $ | — |   | $ | — |   |
| Reinsurance premiums ceded (1)      | ** ** | **5.3**                                    | ** ** | — |   | — |   |
| Net premiums written                | ** ** | **—**                                 | ** ** | — |   | — |   |
| Change in net unearned premiums     | ** ** | **—**                                 | ** ** | **—** | ** ** | **—** | ** ** |
| Net premiums earned                 | ** ** | **—**                                 | ** ** | **—** | ** ** | **—** | ** ** |
|                                |       |                                       | ** ** |   |   |   |   |
| Loss and LAE                        | ** ** | **—**                                 | ** ** | — |   | — |   |
| Acquisition costs                   | ** ** | **—**                                 | ** ** | **—** | ** ** | **—** | ** ** |
| General and administrative expenses | ** ** | **(20.1**                                  | **)**      | (6.4 | ) | 5.5 |   |
| **Income (loss)**                   | ** ** | **$**                                      | **(20.1**  | **)** | $ | (6.4 | ) | $ | 5.5 |   |

 

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(1)          Represents the elimination of an inter-segment reinsurance cover amongMontpelier Bermuda and Montpelier Syndicate 5151.

 

The following tablesummarizes the general and administrative expenses of Corporate and Otherduring the years ended December 31, 2008, 2007 and 2006:

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                       | ** ** |   |   |   |   |
| Fixed expenses                                | ** ** | **$**                                      | **15.2**   | ** ** | $ | 8.5 |   | $ | 6.6 |   |
| Share based and other incentive  compensation | ** ** | **5.3**                                    | ** ** | 10.5 |   | 2.8 |   |
| Management services                           | ** ** | **(0.4**                                   | **)**      | (12.6 | ) | (14.9 | ) |
| General and administrative expenses           | ** ** | **$**                                      | **20.1**   | ** ** | $ | 6.4 |   | $ | (5.5 | ) |

 

The significant increase infixed expenses 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 its new insuranceand reinsurance initiatives; (ii) the promotion of certain corporateofficers in connection with the Company’s 2008 succession planning actions; and(iii) increased inter-segment allocations from the Company’s servicecompanies; and (iv) upgrades made to the Company’s information andaccounting systems during 2008.  Theincrease in fixed expenses during 2007, as compared to 2006, is primarily theresult of start-up costs associated with its new insurance and reinsuranceinitiatives.  Other fixed expensesinclude director fees, corporate insurance, audit fees and fees associated withbeing a publicly traded company.

 

The significant decrease inincentive compensation during 2008, as compared to 2007, is due to a sharpreduction in incentive accruals resulting from hurricane losses incurred duringthe 2008 third quarter.  Additionalreasons for the decreases are: (i) a decrease in performance share expensedue to a lower share price in the 2008 periods versus 2007; and (ii) loweroverall RSU expense in 2008 due to the timing of outstanding awards (RSU awardsare more heavily amortized in the early stages of the award).  The significant increase in our incentivecompensation from 2006 to 2007 was mainly the result of: (i) having feweremployees within Corporate and Other in 2006 than in 2007; (ii) having twocycles of performance shares outstanding versus only one cycle during 2006 (allperformance shares issued for the 2005 - 2007 performance period were cancelledwithout payment as there was no expected payout related to this tranche due tothe adverse financial effects of the 2005 hurricanes); and (iii) havingtwo cycles of restricted share units (“RSUs”) outstanding versus only one cycleoutstanding during 2006.

 

Management servicesprincipally represent underwriting, risk management, claims management, cededretrocession agreement management, actuarial and accounting service feesprovided to Blue Ocean.  The decrease infees earned from 2006 to 2008 is due to the timing and extent of Blue Ocean’sunderwriting activities.

 

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**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, 2008, 2007 and 2006:

 

| ** **                                                         | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **($ in millions)**                                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                               |       |                                       | ** ** |   |   |   |   |
| Investment income                                                  | ** ** | **$**                                      | **94.2**   | ** ** | $ | 139.8 |   | $ | 131.2 |   |
| Investment expenses                                                | ** ** | **(7.8**                                   | **)**      | (7.3 | ) | (5.4 | ) |
| Net investment income                                              | ** ** | **86.4**                                   | ** ** | 132.5 |   | 125.8 |   |
| Net realized investment gains (losses)                             | ** ** | **(73.6**                                  | **)**      | 26.6 |   | 4.4 |   |
| Net unrealized investment losses                                   | ** ** | **(171.3**                                 | **)**      | (0.1 | ) | (0.4 | ) |
| Net foreign exchange transaction gains on  cash and investments    | ** ** | **9.5**                                    | ** ** | 7.9 |   | 7.5 |   |
| Net foreign exchange translation losses on  cash and investments   | ** ** | **(12.9**                                  | **)**      | — |   | — |   |
| Changes in fair value reflected in other  comprehensive income (1) | ** ** | **0.9**                                    | ** ** | (1.6 | ) | 58.5 |   |
| **Total return on investments ($)**                                | ** ** | **$**                                      | **(161.0** | **)** | $ | 165.3 |   | $ | 195.8 |   |
|                                                               |       |                                       | ** ** |   |   |   |   |
| Weighted average investment portfolio,  including cash             | ** ** | **$**                                      | **2,597**  | ** ** | $ | 2,986 |   | $ | 3,076 |   |
| **Total return on investments (%)**                                | ** ** | **(6.2**                                   | **)%**     | 5.5 | % | 6.4 | % |

 

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(1)    As of January 1, 2007, we adopted FAS 157and FAS 159, which resulted in substantially all of our investments beingcarried at fair value with changes in fair value being reported as net realizedand unrealized gains (losses) in our statement of operations. Prior to the adoptionof FAS 157 and FAS 159, our available for sale investments were carried at fairvalue with changes in fair value being reported as a separate component ofshareholders’ equity, with changes therein reported as a component of othercomprehensive income.

 

Our total investment returnfor 2008 was significantly lower than that of 2007 and 2006, due to sizable netrealized and unrealized investment losses and reductions in net investmentincome experienced during the year.

 

Our interest incomedecreased significantly in 2008 compared to 2007 as a result of having asmaller weighted average investment portfolio (including cash) coupled with asharp decrease in short-term interest rates. In addition, during 2008 we discontinued our participation in a securitieslending program (fees earned from our securities lending activities are acomponent of our investment income). Investment income increased in 2007 compared to 2006 due primarily to ashift in the portfolio away from U.S. government and U.S. government-sponsoredenterprise securities to asset-backed and corporate securities of a longeraverage duration.

 

Investment expenses werehigher during 2008, as compared to 2007, due mainly to an increase in thenumber of investment managers and consultants during the year.  Investment expenses were higher during 2007,as compared to 2006, due mainly to a change in investment managers made duringthe year.

 

During 2008, we experienced $73.6 million ofnet realized investment losses. The net realized investment losses recordedduring the year principally resulted from a $17.5 million loss within our fixedmaturity portfolio resulting from the bankruptcy of Lehman Brothers and $43.6million in losses within our other investment portfolio attributable to twoleveraged limited partnership funds which specialized in distressed loans.  During 2007 we experienced $6.0 million inrealized gains within our fixed maturity portfolio and $20.6 million inrealized gains from our equity securities. During 2006 we experienced $7.9 million in realized losses within ourfixed maturity portfolio and $12.3 million in realized gains from our equitysecurities.

 

During 2008, we experienced$171.3 million in net unrealized investment losses which were comprised of$59.2 million in losses from fixed maturities, $97.6 million in losses fromequity securities and $14.5 million in losses from other investments.  During 2007, we experienced $13.9 million innet unrealized investment gains from fixed maturities, $13.1 million in net lossesfrom equity securities and a loss of $0.9 million from other investments.  During 2006, our fixed maturity portfolioexperienced a $0.4 million unrealized loss, which was included in earnings.

 

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The net unrealized lossesexperienced during 2008 within our fixed maturity portfolio, namely ourmortgage and asset-backed securities, corporate bonds and government-sponsoredenterprise securities, were largely the result of widening credit spreadsbetween the yields on those securities versus that of U.S. treasuries.  The net unrealized losses we experiencedduring 2008 within our equity portfolio were consistent with the declines ofthe overall U.S. equity market during the period.

 

As of December 31,2008, our fixed maturity portfolio contained certain securities with exposureto the sub-prime mortgage market and the Alternative-A mortgage market whichhad a fair value of $25.4 million.  Ofthese securities, 88% were currently rated “AAA” (Extremely Strong) and 12%were rated “BB” (Marginal) by Standard & Poor’s.  These securities had an amortized cost of$27.0 million as of December 31, 2008.

 

During 2008, 2007 and 2006,we experienced net foreign exchange gains (losses) on cash and investments of$(3.4) million, $7.9 million and $7.5 million, respectively.  The foreign exchange gains (losses) duringthe periods are due to the weakening (strengthening) of the U.S. dollaragainst the various foreign currencies in which we transact, principally theBritish pound.

 

During 2008, 2007 and 2006,we recorded unrealized gains (losses) from our private placement investment inSymetra Financial Corporation (“Symetra”) of $0.9 million, $(1.6) million and$2.4 million respectively.  Symetraprovides retirement plans, employee benefits, life insurance and annuitiesthrough a national network of independent advisors and agents.

 

As of December 31,2008, 9.3% of our total invested assets measured at fair value were consideredto be Level 3 assets as defined in FAS 157. As of December 31, 2007, 12.6% of our total invested assetsmeasured at fair value were considered to be Level 3 assets. Our investmentsclassified as Level 3 at December 31, 2008 and 2007, primarily consistedof the following: (i) with respect to fixed maturity investments, certaincorporate bonds, convertible debt and asset-backed securities, many of whichare not publicly traded or are not actively traded; (ii) with respect toequity securities, warrants to acquire equity securities and certain non-U.S.equity securities; and (iii) with respect to other investments, ourinvestment in Symetra.

 

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

 

The following table summarizes the components of our consolidated netforeign exchange gains (losses) for years ended December 31, 2008, 2007and 2006:

 

| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                                                         | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                   |       |                                       | ** ** |   |   |   |   |
| Net foreign exchange transaction gains on  cash and investments        | ** ** | **$**                                      | **9.5**    | ** ** | $ | 7.9 |   | $ | 7.5 |   |
| Net foreign exchange transaction gains  (losses) on insurance balances | ** ** | **(1.9**                                   | **)**      | (1.8 | ) | 3.3 |   |
| Net foreign exchange gains                                             | ** ** | **$**                                      | **7.6**    | ** ** | $ | 6.1 |   | $ | 10.8 |   |

 

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 insurancebalances primarily represent realized gains and losses resulting from premiumsreceived and losses paid by Montpelier Bermuda in currencies other than theU.S. dollar. From time to time we have entered into foreign currency exchangeagreements in order to mitigate the financial effects of foreign exchange ratefluctuations.  See *“Net Expense from Derivative Instruments” below.*

 

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***Net Expense from DerivativeInstruments***

 

The following table presents our net expense (income) from derivativeinstruments during the years ended December 31, 2008, 2007 and 2006:

 

| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| **Millions**                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                       | ** ** |   |   |   |   |
| Hurricane Option                        | ** ** | **$**                                      | **1.0**    | ** ** | $ | — |   | $ | — |   |
| ILW Swap                                | ** ** | **0.7**                                    | ** ** | — |   | — |   |
| CAT Bond Protection                     | ** ** | **11.9**                                   | ** ** | 11.9 |   | 13.7 |   |
| Foreign Exchange Contracts              | ** ** | **4.1**                                    | ** ** | (3.2 | ) | (2.5 | ) |
| Investment Options and Futures          | ** ** | **(1.8**                                   | **)**      | — |   | — |   |
| CAT Bond Facility                       | ** ** | **(1.0**                                   | **)**      | (5.3 | ) | (1.3 | ) |
| ILW Contract                            | ** ** | **(0.6**                                   | **)**      | (3.1 | ) | — |   |
|                                    |       |                                       | ** ** |   |   |   |   |
| Net expense from derivative instruments | ** ** | **$**                                      | **14.3**   | ** ** | $ | 0.3 |   | $ | 9.9 |   |

 

Hurricane Option

 

In 2008, we purchased an option on hurricane seasonal futures (the“Hurricane Option”) for $1.0 million in order to provide protection against oureastern U.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.

 

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 fair value of the ILW Swap was zero at December 31, 2008.

 

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. The first$75.0 million tranche (“Class A”) covered earthquakes affecting Japanand/or the U.S. The remaining $15.0 million tranche (“Class B”),provided second event coverage for a U.S. hurricane or earthquake. 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 is accounted for as a derivative,rather than as a reinsurance transaction, and is 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 $11.9 million.  In addition, during 2006 we incurred $1.9million in one-time setup costs associated with the CAT Bond Protection.

 

The fair value of the CAT Bond Protection was zero at December 31,2008.

 

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 allow us to establish a rate of exchange at a future point intime. Our open foreign currency agreements at December 31, 2008 weredenominated in Swiss francs (CHF), euros (EUR), British pounds (GBP) andJapanese yen (JPY).

 

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At December 31, 2008 and December 31, 2007, we were a partyto outstanding foreign currency exchange agreements having a gross notionalexposure of $33.0 million and $86.9 million, respectively.  We recorded net expense (revenue) associatedwith our Foreign Exchange Contracts of $4.1 million, $(3.2) million and $(2.5)million during 2008, 2007 and 2006, respectively.

 

Investment Options and Futures

 

During 2008, we executed various exchange-traded investment options andfutures (the “Investment Options and Futures”) as part of our investingstrategy.  As of December 31, 2008,we had closed all of our investment futures and held open long options with afair value of $0.1 million.

 

We recorded a net revenues associated with our Investment Options andFutures of $1.8 million during 2008.

 

CAT Bond Facility

 

In 2006, we entered into a catastrophe bond facility (the “CAT BondFacility”) under which we are 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 is marked to marketover the terms of the bonds; the difference is 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.  As a result, the CAT Bonds arenow held on the Company’s consolidated balance sheets as other investments.

 

We recorded net revenues associated with our CAT Bond Facility of $1.0million, $5.3 million and $1.3 million during 2008, 2007 and 2006,respectively.

 

ILW Contract

 

In 2007, we sold ILW protection (the “ILW Contract”) to a third-partyfor $3.7 million under which qualifying loss payments are triggered exclusivelyby reference to the level of losses incurred by the insurance industry as awhole 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 on August 13, 2008 without any required paymentby us.

 

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

 

***Other Revenue***

 

Our other revenue is comprised of interest on funds advanced to cedingcompanies to cover losses in accordance with contract terms, fees earned by MCAfrom the Pioneer Diversified High Income Trust (the “Pioneer Fund”) and, for2006, ceding commissions and incentive fees relating to our investment inRockridge Reinsurance Ltd. (“Rockridge”), a former affiliate.  The following table summarizes ourconsolidated other revenue for the years ended December 31, 2008, 2007 and2006:

 

| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       |                                       |       |   |   |   |   |
| Interest on funds advanced                 | ** ** | **$**                                      | **0.7**    |   | $ | 1.8 |   | $ | 4.9 |   |
| Pioneer Fund sub-advisor fees              | ** ** | **0.3**                                    |       | 0.2 |   | — |   |
| Ceding commissions and fees from Rockridge | ** ** | **—**                                 |       | — |   | 3.4 |   |
|                                       |       |                                       |       |   |   |   |   |
| Other revenue                              | ** ** | **$**                                      | **1.0**    |   | $ | 2.0 |   | $ | 8.3 |   |

 

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.

 

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***Interest and Other FinancingExpenses***

 

The following tablesummarizes our consolidated interest and other financing expenses for the yearsended December 31, 2008, 2007 and 2006:

 

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| **(Millions)**                                          | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                    |       |                                       |       |   |   |   |   |
| Interest expense - Senior Notes                         | ** ** | **$**                                      | **15.3**   |   | $ | 15.3 |   | $ | 15.3 |   |
| Interest expense - Junior Subordinated Debt  Securities | ** ** | **8.7**                                    |       | 8.7 |   | 8.6 |   |
| Interest expense - Blue Ocean Debt                      | ** ** | **0.2**                                    |       | 5.3 |   | 0.5 |   |
| Letter of credit fees and other financing  expenses     | ** ** | **2.6**                                    |       | 5.2 |   | 3.8 |   |
|                                                    |       |                                       |       |   |   |   |   |
| Interest and other financing expenses                   | ** ** | **$**                                      | **26.8**   |   | $ | 34.5 |   | $ | 28.2 |   |

 

Interest and other financingexpenses decreased significantly during 2008, as compared to 2007, dueprimarily to the repayment of the Blue Ocean Debt and the cancellation of BlueOcean’s credit facilities, each of which occurred in January 2008.  Interest and other financing expensesincreased significantly during 2007, as compared to 2006, due to addition ofMCL’s Lloyd’s standby letter of credit facility in July 2007 and theissuance of the Blue Ocean debt in November 2006.

 

Senior Unsecured Debt(“Senior Notes”)

 

During 2003, we issued$250.0 million of senior unsecured debt. The Senior Notes bear interest at arate of 6.125% per annum, payable semi-annually in arrears on February 15and August 15 of each year. The Senior Notes are scheduled to mature on August 15,2013.  The unamortized carrying value ofthe Senior Notes at December 31, 2008 and December 31, 2007, was$249.4 million and $249.3 million, respectively.

 

Junior Subordinated DebtSecurities (“Junior Notes”)

 

In January 2006 we,through Montpelier Capital Trust III, participated in a private placement of$103.1 million of floating rate capital securities (the “Trust PreferredSecurities”). The Trust Preferred Securities mature on March 30, 2036, areredeemable at Montpelier Capital Trust III’s option at par beginning March 30,2011, and require quarterly distributions of interest to the holders of theTrust Preferred Securities. The Trust Preferred Securities bear interest at8.55% per annum through March 30, 2011, and thereafter at a floating rateof 3-month LIBOR plus 380 basis points, reset quarterly. Montpelier Capital TrustIII simultaneously issued all of its issued and outstanding share capital to usfor a purchase price of $3.1 million which is carried in other investments.

 

Montpelier Capital Trust IIIused the proceeds from the sale of the Trust Preferred Securities and theissuance of its share capital to purchase the Junior Notes, due March 30,2036, in the principal amount of $100.0 million issued by the Company. TheJunior Notes bear interest at the same rates as the Trust Preferred Securitiesdiscussed above.

 

Blue Ocean Debt

 

InNovember 2006, Blue Ocean obtained a secured loan of $75.0 million from asyndicate of lenders (the “Blue Ocean Debt”). The Blue Ocean Debt had an initial maturity date of February 28,2008.  The Blue Ocean Debt bore intereston the outstanding principal amount at a rate equal to a base rate plus amargin of 200 basis points.  The BlueOcean Debt was repaid in full on January 18, 2008.

 

Letter of Credit Fees andOther Financing Expenses

 

In the normal course ofbusiness, Montpelier Re and MCL provide letters of credit for the benefit oftheir clients. In addition, Blue Ocean Re establishes trust funds for thebenefit of ceding companies. See *“Liquidityand Capital Resources”* contained in Item 7.

 

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*** ***

***Income Tax Provision***

Ourincome tax provision (benefit) for the years ended December 31, 2008, 2007and 2006 consisted of the following:

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| **(Millions)**              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Current tax provision:**  | ** ** | ** **                                 | ** ** |   |   |   | ** ** |
| Federal                     | ** ** | **$**                                      | **—** | ** ** | $ | — |   | $ | — | ** ** |
| State                       | ** ** | **0.1**                                    | ** ** | — |   | — | ** ** |
| Non-U.S.                    | ** ** | **1.2**                                    |       | 0.1 |   | 0.1 |   |
| Total current tax provision | ** ** | **$**                                      | **1.3**    |   | $ | 0.1 |   | $ | 0.1 |   |
|                        |       |                                       |       |   |   |   |   |
| **Deferred tax benefit:**   |       |                                       |       |   |   |   |   |
| Federal                     | ** ** | **$**                                      | **—** | ** ** | $ | — |   | $ | — | ** ** |
| State                       | ** ** | **—**                                 | ** ** | — |   | — | ** ** |
| Non-U.S.                    | ** ** | **(0.2**                                   | **)**      | — |   | — | ** ** |
| Total deferred tax benefit  | ** ** | **(0.2**                                   | **)**      | — |   | — | ** ** |
| Income tax provision        | ** ** | **$**                                      | **1.1**    |   | $ | 0.1 |   | $ | 0.1 |   |

 

The Company is domiciled inBermuda and has subsidiaries domiciled in several countries, including the U.S.The Company and its Bermuda-domiciled affiliates, including Montpelier Re andBlue Ocean Re, have received an assurance from the Bermuda Minister of Financeexempting them from all Bermuda-imposed income, withholding and capital gainstaxes until March 2016.  At thepresent time, no such taxes are levied in Bermuda.

 

Our newly-established U.S.subsidiaries have not yet generated U.S. Federal taxable income.  Our non-U.S. subsidiaries generated Non-U.S.taxable income of $2.9 million, $(3.0) million and $0.2 million for the yearsended December 31, 2008, 2007 and 2006, respectively.

 

***Minority Interest Expense - BlueOcean***

 

Our minority interest expense for 2008, 2007and 2006 of $1.9 million, $31.9 million and $39.3 million, respectively,represents the portion of Blue Ocean’s net income attributable to its minorityshareholders.

 

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

 

In 2008, we acquired all theoutstanding share capital of Blue Ocean from its minority shareholders for$30.5 million in cash.  This transactionresulted in an extraordinary gain of $1.0 million representing the excess offair value of acquired net assets over our cost.

 

**III.  Liquidityand Capital Resources**

 

***Liquidity***

 

The Company has no operations of its own andrelies heavily on dividends and distributions from its subsidiaries to pay itsoperating expenses, interest on debt and dividends and to fund any sharerepurchase activities. There are restrictions on the payment of dividends tothe Company from its regulated operating companies as described under“Regulation” herein. We currently have in place a regular dividend of$.075 per common share per quarter. Any future determination to pay dividendsor distributions to our shareholders will be at the discretion of our Board ofDirectors and will be dependent upon many factors, including our results ofoperations, cash flows, financial position, capital requirements, generalbusiness opportunities, legal, tax, regulatory and contractual restrictions.

 

The primary sources of cashfor our regulated operating subsidiaries are premium collections, investmentincome and sales and maturities of investments. The primary uses of cash for our operating subsidiaries are payments ofloss and LAE, acquisition costs, operating expenses, investment purchases anddividends and distributions paid to the Company.

 

As a provider of short tailreinsurance and insurance, mainly from natural and man-made catastrophes, wecould become liable for significant losses on short notice. As a result, wehave structured our fixed maturity investment portfolio with high-qualitysecurities with a short average duration in order to reduce our sensitivity tointerest rate fluctuations and to provide adequate liquidity for the settlementof our expected liabilities.  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.  Nonetheless, if our calculations with respectto the timing of the payment of our liabilities are incorrect, or if weimproperly structure our investments, we could be forced to liquidateinvestments prior to maturity, potentially at a significant loss.

 

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As of December 31,2008, our sources of immediate liquidity consisted of: (i) $212.5 millionof unrestricted cash; (ii)  $328.3 million in cash equivalents andshort-term investments which currently trade at a very narrow bid/ask spreadand whose proceeds are available upon one days notice; (iii) $353.2million of investment securities which currently trade at a narrow bid-askspread and whose proceeds are available upon three days notice; and (iv) upto $89.1 million from our Forward Sale Agreement (as described below) which isavailable upon three to five days notice. Further, we believe that we have significant sources of additionalliquidity within our investment portfolio beyond these levels although thebid-ask spreads associated with such investment securities would be expected tobe broader, perhaps significantly, from sales of those securities previouslymentioned.

 

During the years ended December 31,2008, 2007 and 2006, we were able to meet all of our cash obligations.  We anticipate that our current cash and cashequivalent balances, sales and maturities of investments and our projectedfuture cash flows from operations should be sufficient to cover our cashobligations under most loss scenarios through the foreseeable future.

 

***Capital Resources***

 

The following tablesummarizes our capital structure as of December 31, 2008 and 2007:

 

| ** **                       | ** ** | **December 31,** | ** **  |
|----------------------------------|------------|-----------------------|-------------|
| **(Millions)**                   | ** ** | **2008**              | ** **  | **2007** | ** ** |
|                             |       |                  |        |   |   |
| Senior Notes                     | ** ** | **$**                 | **249.4**   |   | $ | 249.3 |   |
| Junior Subordinated Debt         | ** ** | **103.1**             |        | 103.1 |   |
| Blue Ocean Debt                  | ** ** | **—**            |        | 75 |   |
| Total Debt                       | ** ** | **$**                 | **352.5**   |   | $ | 427.4 |   |
|                             |       |                  |        |   |   |
| Minority Interest - Blue Ocean   | ** ** | **—**            |        | 88.7 |   |
| Common Shareholders’ Equity | ** ** | **1,357.6**           |        | 1,653.1 |   |
|                             |       |                  |        |   |   |
| Total Capital                    | ** ** | **$**                 | **1,710.1** |   | $ | 2,169.2 |   |

 

Our common shareholders’equity at December 31, 2008 was $1,357.6 million, which is net of anaccumulated retained deficit of $214.6 million. Our total capital decreased by$459.1 million during 2008 as we experienced a comprehensive loss of $150.9million, we repurchased $125.7 million of our common shares, we declared $25.5million in dividends to our common shareholders, we repaid the Blue Ocean Debt,we paid dividends and made capital distributions to Blue Ocean’s minorityshareholders and we acquired all of Blue Ocean’s outstanding share capital fromits minority shareholders.

 

Letter of Credit Facilities

 

In the normal course ofbusiness, Montpelier Re and MCL maintain letter of credit facilities and provideletters of credit to third-parties. These letter of credit facilities weresecured by collateral accounts containing cash and investments totaling $724.5million at December 31, 2008. The following table outlines thesefacilities as of December 31, 2008:

 

| **Secured operational Letter of Credit Facilities** | ** ** | **Credit  Line** | ** ** | **Amount  drawn** | ** ** | **Expiry  Date** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|
|                                                                         |       |             |       |              |       |             |       |
| Montpelier Re’s Syndicated facility:  Tranche B                         |       | $                | 225.0      |              | $          | 141.9            |       | Aug. 2010 |   |
| Montpelier Re’s Syndicated 5-Year facility                              |       | $                | 500.0      |              | $          | 40.7             |       | June 2011 |   |
| Montpelier Re’s Syndicated 5-Year facility                              |       | $                | 215.0      |              | $          | 149.7            |       | June 2012 |   |
| Montpelier Re’s Bilateral facility A                                    |       | $                | 100.0      |              | $          | 26.6             |       | None |   |
| MCL’s Lloyd’s standby facility                                     |       | £           | 110.0      |              | £     | 105.0            |       | Dec. 2013 |   |

 

Montpelier Re amended its$225.0 million 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$500.0 million syndicated secured facility in June 2006. The amendmentserved to revise this facility from a one-year $1.0 billion facility, whichexpired in June 2007, to a five-year $500.0 million facility.  This facility is subject to an annualcommitment fee of 0.325% on drawn balances and 0.075% on undrawn balances.

 

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Montpelier Re entered into afive-year syndicated secured $250.0 million letter of credit facility in June 2007.  During 2008, this facility was reduced to$215.0 million.  This facility is subjectto an annual commitment fee of 0.275% on drawn balances and 0.08% on undrawnbalances.

 

Montpelier Re entered into a$100.0 million secured letter of credit facility in November 2005. Thisfacility has no stated expiration date. This facility is subject to an annual commitment fee of 0.20% on drawnbalances only.

 

In June 2007, theCompany, Montpelier Re and MCL entered into a secured £74.0 million standbyletter of credit facility through December 31, 2012, which will be usedspecifically as Funds at Lloyd’s to support business to be underwritten bySyndicate 5151.  In October 2008,this facility was increased to £110.0 million with a revised expiry date of December 31,2013.  This facility is subject to anannual commitment fee of 0.45% on drawn balances and 0.158% on undrawnbalances.

 

The agreements governingthese facilities contain covenants that limit Montpelier’s ability, among otherthings, to grant liens on its assets, sell assets, merge or consolidate, incurdebt and enter into certain burdensome agreements.  In addition, the syndicated securedfacilities 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, 2008 and 2007, the Company and MontpelierRe were in compliance with all covenants.

 

In the event that our letterof credit facilities are cancelled, non-renewed or become prohibitivelyexpensive, we believe that we could alternatively collateralize our existingand future reinsurance obligations through the use of trust agreements, fundswithheld and/or Funds at Lloyd’s deposits.

 

Trust Agreements

 

In the normal course ofbusiness, Blue Ocean Re established trust funds for the benefit of cedingcompanies.  As of December 31, 2008,Blue Ocean Re had no in force reinsurance contracts and no longer required anyof its assets to be held in trust.  As ofDecember 31, 2007, Blue Ocean Re’s restricted assets held in trust fundsconsisted of cash and cash equivalents of $35.5 million and fixed maturityinvestments of $153.7 million.

 

Forward Sale Agreements andShare Issuance Agreement

 

In May 2006, we enteredinto two equity forward sale agreements (the “Forward Sale Agreements”), oneexpiring in March 2007 and one expiring in March 2008, under which weagreed to sell (subject to our right to cash settle or net share settle suchagreements) an aggregate of between 9,796,388 and 15,694,800 common shares to athird-party (the “forward counterparty”) in exchange for proceeds ofapproximately $180 million (subject to prior prepayment and assuming nosubsequent repayment pursuant to the terms of such agreements).  The forward counterparty subsequently sold atotal of 15,694,800 common shares in order to hedge its position under theForward Sale Agreements.

 

The number of common sharesto be sold in return for these proceeds is a function of the share price aswell as the terms of the contract.  Ifthe share price on a given settlement date falls at or between the contractualfloor and cap prices, the number of common shares sold to the forwardcounterparty will equal the number that would need to be sold on a publicexchange in order to generate the same proceeds, resulting in no economic gainor loss to us.  If the share price on agiven settlement date is above the cap price, the number of common shares soldto the forward counterparty will be more than the number that would need to besold on a public exchange in order to generate the same proceeds, resulting inan economic loss to us.  If the shareprice on a given settlement date is below the floor price, the number of commonshares sold to the forward counterparty will be less than the number that wouldneed to be sold on a public exchange in order to generate the same proceeds,resulting in an economic gain to us.

 

In March 2007, wenotified the forward counterparty of our election to settle the entire firstForward Sale Agreement which related to up to 7,774,800 common shares. In thecourse of that settlement, as the valuation price per common share for eachcomponent was greater than the $11.75 forward floor price and less than the$18.465 forward cap price, no payments or deliveries of common shares wererequired to be made by us or the forward counterparty.

 

In December 2007, theCompany and the forward counterparty amended the remaining Forward SaleAgreement, which relates to up to 7,920,000 common shares and proceeds of $89.1million. The primary results of the amendment were to bifurcate the remainingForward Sale Agreement into two tranches, extend the term of the remainingForward Sale Agreement and increase the forward cap price for each tranche.

 

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Pursuant to the terms of theamendment, the remaining Forward Sale Agreement was divided into two tranches,each relating to 3,960,000 common shares. Each tranche is comprised of twenty separate components, each relatingto 198,000 common shares.  Subject to ourright to elect cash or net share settlement with respect to all of or a portionof the components of either tranche, or to terminate early or otherwiseaccelerate settlement of any component of either tranche, we will issue commonshares to the forward counterparty: (i) in the case of the first tranche,over a twenty business day period beginning on October 8, 2009 based uponthe price of common shares over a twenty trading-day period beginning on October 5,2009; and (ii) in the case of the second tranche, over a twenty businessday period beginning on November 11, 2009 based upon the price of commonshares over a twenty trading-day period beginning on November 6, 2009.

 

Also pursuant to the termsof the amendment, the forward cap price of the remaining Forward Sale Agreementwas increased from $18.375 to $22.00 per common share in the case of the firsttranche, and from $18.375 to $23.00 per common share in the case of the secondtranche.  The amendment did not changethe forward floor price which remains at $11.25 per common share. As a result,upon full physical settlement of any component of the Forward Sale Agreement,if the relevant volume-weighted average per share price of common shares on thevaluation date for such component is greater than the increased forward capprice, we will issue to the forward counterparty a number of common sharesequal to 51.1364% of the number of common shares underlying such component inthe case of the first tranche, and 61.2245% of the number of common shares underlyingsuch component in the case of the second tranche.

 

We made a $3.9 million cashpayment to the forward counterparty for the amendment of the Forward SaleAgreement, which we recorded as a reduction of our additional paid-in capital.

 

In connection with theForward Sale Agreements described above, in May 2006 we entered into aShare Issuance Agreement with the forward counterparty. Under the terms of theShare Issuance Agreement, we issued 15,694,800 common shares during 2006 to theforward counterparty for payment equal to the par value of such common shares.As a result of the settlement of the first Forward Sale Agreement, in May 2007we repurchased and retired 7,774,800 of these common shares for payment of thepar value of such common shares.  As a result,we continue to have 7,920,000 common shares issued and outstanding under theShare Issuance Agreement at December 31, 2008.

 

We may terminate the ShareIssuance Agreement at any time. Upon any termination of the Share IssuanceAgreement, the common shares issued to the forward counterparty thereunder (orother common shares) must, subject to compliance with Bermuda law, berepurchased for cancellation for nominal consideration by us. The forwardcounterparty has agreed to post and maintain collateral with a third-party assecurity for certain of its obligations as required under the terms of theShare Issuance Agreement.

 

Any common shares issued tothe forward counterparty will be issued and outstanding for company lawpurposes, and accordingly, the holders of such shares will have all of therights of a holder of our issued and outstanding common shares, including theright to vote the shares on all matters submitted to a vote of our shareholdersand the right to receive any dividends or other distributions that we may payor make on our issued and outstanding common shares. However, under the ShareIssuance Agreement, the forward counterparty has agreed to pay to us an amountequal to any cash dividends or distributions that are paid on the issued sharesand to pay or deliver to the us any other distribution, in liquidation orotherwise, on the issued common shares.

 

At any time prior to thetermination of the Forward Sale Agreement, we have the right to borrow from thecounterparty up to $89.1 million (representing 7,920,000 common shares at thefloor price of $11.25 per common share) subject to an annual interest rateequal to the U.S. dollar LIBOR through the termination date. Upon thetermination of the Forward Share Agreement, we have the right to either repaythe counterparty in cash or to issue or otherwise deliver the requisite numberof common shares.

 

In view of the contractualundertakings of the forward counterparty under the Share Issuance Agreement,which have the effect of substantially eliminating the economic dilution thatotherwise would result from the issuance of the common shares, we believe that,under GAAP currently in effect, the common shares issued thereunder should notbe considered outstanding for the purposes of computing and reporting earningsper share or fully converted book value per share.

 

During periods in which ouraverage share price exceeds the forward cap price, the Forward Sale Agreementwill have a dilutive impact on diluted earnings per share and, during periods inwhich our fully converted tangible book value per share exceeds the forward capprice, the Forward Sale Agreement will have a dilutive impact on fullyconverted book value per share.

 

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***Contractual Obligations andCommitments***

 

Below is a schedule of ourmaterial contractual obligations and commitments as of December 31, 2008:

 

| **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                        |       | $                                            | 325.7      |                                           | $          | 326.0                                          |       | $                               | 108.3      |      | $          | 48.9 |   | $ | 808.9 |   |
| Debt                                |       | —                                       |       | —                                         |       | 250.0                                          |       | 103.1                           |       | 353.1     |       |
| Interest and other finance expenses |       | 26.1                                         |       | 47.7                                           |       | 42.0                                           |       | 190.2                           |       | 306.0     |       |
| Unfunded investment commitments     |       | 30.0                                         |       | —                                         |       | —                                         |       | —                          |       | 30.0      |       |
| Noncancellable operating leases     |       | 6.9                                          |       | 13.2                                           |       | 10.0                                           |       | 8.4                             |       | 38.5      |       |
| Total contractual obligations       |       | $                                            | 388.7      |                                           | $          | 386.9                                          |       | $                               | 410.3      |      | $          | 350.6 |   | $ | 1,536.5 |   |

 

Our loss and LAE reserves donot have contractual maturity dates. However, based on historical payment patterns, the preceding tableincludes an estimate of when we expect our loss reserves will be paid.  As a provider of short tail reinsurance andinsurance for losses resulting mainly from natural and man-made catastrophes,we could become liable for significant losses on short notice. As a result, wehave structured our fixed maturity investment portfolio with high-qualitysecurities with a short average duration in order to reduce our sensitivity tointerest rate fluctuations and to provide adequate liquidity for the settlementof our expected liabilities.

 

***Off-Balance Sheet Arrangements***

 

As of December 31,2008, we had entered into several derivative transactions as describedherein.  The ILW Swap, the CAT BondProtection, the Foreign Exchange Contracts, the Investment Options and Futuresand the Forward Sale Agreements and the Share Issuance Agreement eachconstitute off-balance sheet arrangements.

 

Excluding the off-balancesheet derivative transactions outlined above, we are not party to any otheroff-balance sheet transaction, agreement or other contractual arrangement towhich an entity unconsolidated with us is a party that management believes isreasonably likely to have a current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources that we believe is material to our investors.

 

***Cash Flows***

 

For the Year Ended December 31,2008

 

Our cash flows provided fromoperations totaled $71.5 million which resulted primarily from premiumsreceived, net of acquisition costs, exceeding net paid losses of $317.9million.

 

Our cash flows provided frominvesting activities totaled $221.0 million, resulting from the following:

 

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

 

·                  wemade $254.8 of net purchases of equity securities and other investments, ofwhich $71.6 million represented the purchase of CAT Bonds from our former CATBond Facility,

 

·                  wepaid $30.5 million to Blue Ocean’s minority shareholders pursuant to the BlueOcean Transaction,

 

·                  wehad $192.4 million in net dispositions of securities lending collateral,

 

·                  wehad a $27.2 million reduction in our restricted cash,

 

·                  wepurchased $14.9 million of capitalized assets.

 

Our cash flows used forfinancing activities totaled $485.7 million, resulting from the following:

 

·                  werepaid the $75.0 million Blue Ocean Debt, made $38.1 million in cash distributionsto Blue Ocean’s minority common shareholders and paid $21.0 million individends and redemptions to Blue Ocean’s minority preferred shareholders,

 

·                  wepaid $28.4 million in dividends to our common shareholders and repurchased$129.8 million of our common shares,

 

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

 

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For the Year Ended December 31,2007

 

Our cash flows provided fromoperations totaled $100.1 million which resulted primarily from premiumsreceived, net of acquisition costs, exceeding net paid losses of $361.2million.

 

Our cash flows provided from investing activitiestotaled $500.6 million resulting from the following:

 

·                  wereceived $451.3 million from net sales and maturities of fixed maturities,

 

·                  wemade $59.4 million of net purchases of equity securities and other investments,

 

·                  weacquired MUSIC for $9.8 million and acquired, as part of the acquisition, $3.1million of cash and cash equivalents,

 

·                  wehad a $122.3 million net dispositions of securities lending collateral,

 

·                  wepurchased $6.9 million of capitalized assets.

 

Our cash flows used for financingactivities totaled $462.4 million, resulting from the following:

 

·                  wepaid $29.9 million in cash dividends to our common shareholders and warrantholders and repurchased $124.7 million of our common shares and warrants,

 

·                  wepaid $3.9 million to the forward counterparty to amend the Forward SaleAgreement,

 

·                  wemade $135.2 million in cash distributions to Blue Ocean’s minority commonshareholders and paid $46.4 million in dividends and redemptions to BlueOcean’s minority preferred shareholders,

 

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

 

For the Year Ended December 31,2006

 

Our cash flows used foroperating activities totaled $191.3 million (excluding net purchases of tradingsecurities) which resulted primarily from net paid losses of $757.0 millionexceeding premiums received, net of acquisition costs.

 

Our cash flows used for investing activitiestotaled $263.1 million (including net purchases of trading securities)resulting from the following:

 

·                  wemade $178.7 million of net purchases of fixed maturities,

 

·                  wemade $38.5 million of net purchases of equity securities and other investments,

 

·                  wehad a $0.1 million in net acquisition of securities lending collateral,

 

·                  wehad a $35.5 million increase in our restricted cash,

 

·                  wepurchased $10.3 million of capitalized assets.

 

Our cash flows provided fromfinancing activities totaled $309.4 million resulting from the following:

 

·                  weissued the Junior Subordinated Debt and the Blue Ocean Debt and received cashproceeds of $173.3 million,

 

·                  weentered into a purchase agreement with WLR Recovery Fund, II, L.P. and WLRRecovery Fund III, L.P. for a private sale of 6,896,552 common shares andreceived net cash proceeds of $99.5 million,

 

·                  wereceived $66.5 million in cash proceeds from issuances of Blue Ocean’spreferred and common shares to minority holders,

 

·                  wepaid $30.0 million in cash dividends to our common shareholders and warrantholders,

 

·                  wehad a $0.1 million net increase in securities lending payable.

 

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**IV.  Summary ofCritical Accounting Estimates**

 

Our consolidated financialstatements have been prepared in accordance with GAAP. The preparation offinancial statements in accordance with GAAP requires us to make estimates andassumptions that affect the reported and disclosed amounts of our assets andliabilities as of the balance sheet dates (including disclosures of ourcontingent assets and liabilities) and the reported amounts of our revenues andexpenses during the reporting periods. We believe the items that require themost subjective and complex estimates are:

 

·      Lossand LAE reserves;

·      Writtenand earned premiums;

·      Cededreinsurance; and

·      Sharebased compensation.

 

The following discussionprovides detailed information regarding our use of estimates and assumptions asit relates to such items.

 

***Loss and LAE Reserves***

 

Loss and LAE reserves areestimates of amounts needed to pay losses and related expenses in the futurefor insured events that have already occurred. The process of estimating loss and LAE reserves involves a considerabledegree of judgement and is inherently uncertain.

 

Estimating loss reservesrequires us to make assumptions regarding reporting and development patterns,frequency and severity trends, claims settlement practices, potential changesin the legal environment and other factors such as inflation and demand surge.These estimates and judgments are based on numerous factors, and may be revisedas additional experience or other data becomes available and is reviewed, asnew or improved methodologies are developed, or as current laws change.

 

In general, loss and LAErelating to short-tail property risks are reported and settled more promptlythan those relating to long-tail risks, including the majority of casualtyrisks. However, the timeliness of loss reporting can be affected by suchfactors as the nature of the event causing the loss, the location of the loss,whether the losses are from policies in force with primary insurers or withreinsurers and where we fall within the cedant’s overall reinsurance program.

 

Our loss and LAE reservesinclude both a component for outstanding case reserves for claims which havebeen reported and a component for IBNR for claims that have not been reported.Our case reserve estimates are initially set on the basis of loss reportsreceived from third-parties. IBNR consists of a provision for additionaldevelopment in excess of the case reserves reported by ceding companies, aswell as a provision for claims which have occurred but which have not yet beenreported to us by ceding companies.

 

Our IBNR reserves aredetermined using various actuarial methods as well as a combination of our ownhistorical loss experience, historical insurance industry loss experience,estimates of pricing adequacy trends, and our professional judgment. In thecase of our reinsurance business, we also take into account ceding companyreports on IBNR reserves in making our estimates when such reports areprovided. The process we use to estimate our IBNR reserves involves projectingour estimated ultimate loss and LAE reserves and then subtracting paid claimsand case reserves as notified by the ceding company, to arrive at our IBNRreserve.

 

We utilize a reservingmethodology that calculates a point estimate for our ultimate losses. The pointestimate represents management’s best estimate of ultimate loss and LAE. Wereview our reserving assumptions and our methodologies on a quarterly basis.Our third quarter and year-end loss estimates are subject to a corroborativereview by independent actuaries using generally accepted actuarial principles.The Audit Committee of our Board of Directors also reviews our quarterly andannual reserve analysis.

 

Our primary focus is onshort-tail property treaty reinsurance, written on both an excess-of-loss andproportional basis. We also underwrite certain direct insurance and facultativereinsurance, as well as casualty specialty risks. The nature and extent ofmanagement judgment involved in the reserving process depends upon the type ofbusiness.

 

Most of our treatyreinsurance contracts comprise business which has both a low frequency ofclaims occurrence and a high potential severity of loss, such as claims arisingfrom natural catastrophes, terrorism, large individual property risks, andaviation risks. Given the high-severity, low-frequency nature of these events,the losses typically generated do not lend themselves to traditional actuarialreserving methods. Therefore, our reserving approach for these types ofcoverages is generally to estimate the ultimate cost associated with a single lossevent rather than analyzing the 

 

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historical 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.

 

The two primary bases for estimatingthe ultimate loss associated with a particular event and cedant are (a) actualand precautionary claims advices received from the cedant; and (b) thenature and extent of the impact the event is estimated to have on the industryas a whole. This reserving approach is generally applied to all large events.Immediately after the event, the estimated industry market loss, appliedagainst our book of business, is the primary driver of our ultimate loss fromsuch event. In order to estimate the nature and extent of the event, we rely onoutput provided by commercially available catastrophe models, as well asproprietary models developed in-house. The exposure of each cedant potentiallyaffected by the event is analyzed on the basis of this output. As the amount ofinformation received from cedants increases during the period following anevent, so does our reliance on this correspondence. The quality of the cedant’shistorical evaluation of losses and loss information received from othercedants in relation to the same event are considered as we shift weight fromindustry loss-based estimates to specific cedant information.

 

While the approach we use inreserving for large events is generally consistent for large events, at anypoint in time the particular reserving assumptions applied to an individualcontract may vary. 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.

 

Since our loss reserveestimate is based principally on assumptions made individually for each lossevent and contract, there is significant variability which cannot be quantifiedat any level of aggregation which is meaningful in the context of our financialreporting. Following a major catastrophic event, the possibility of futurelitigation or legislative change that may impact interpretation of policy termsfurther increases the degree of uncertainty in the reserving process.

 

For non-catastrophe losses,we often apply trend-based actuarial methodologies in setting reserves,including paid and incurred loss development, Bornheutter-Ferguson andfrequency and severity techniques. We also utilize industry loss ratio anddevelopment pattern information in conjunction with our own experience. Theweight given to a particular method will depend on many factors, including thehomogeneity within the class of business, the volume of losses, the maturity ofthe accident year and the length of the expected development tail. For example,development methods rely on reported losses, while expected loss ratio methodsare primarily based on expectations in place prior to a notification of loss.Therefore, as an accident year matures, we may shift weight from an expected lossratio method to an incurred development method.

 

To the extent we rely onindustry data to aid us in our reserve estimates there is a risk that the datamay not match our risk profile or that the industry’s reserving practicesoverall differ from our own and those of our cedants. In addition, reservingcan prove especially difficult should a significant loss take place near theend of a reporting period, particularly if the loss involves a catastrophicevent. These factors further contribute to the degree of uncertainty in ourreserving process.

 

As a predominantly brokermarket reinsurer for both excess-of-loss and proportional contracts, we mustrely on loss information reported to brokers by primary insurers who, in turn,must estimate their own losses at the policy level, often based on incompleteand changing information. The information we receive varies by cedant and mayinclude paid losses, estimated case reserves, and, infrequently, an estimatedprovision for IBNR reserves. Reserving practices and the quality of datareporting varies among ceding companies, which adds further uncertainty to theestimation of our ultimate losses. The nature and extent of informationreceived from ceding companies also varies widely depending on the type ofcoverage, the contractual reporting terms (which are affected by marketconditions and practices) and other factors. Due to the lack of standardizationof the terms and conditions of reinsurance contracts, the wide variability ofcoverage provided to individual clients and the tendency of those coverages tochange rapidly in response to market conditions, the ongoing economic impact ofsuch uncertainties and inconsistencies cannot be reliably measured. Additionalrisks to us involved in the reporting of retrocessional contracts includevarying reserving methodologies used by the original cedants and an additionalreporting lag due to the time required for the retrocedant to aggregate itsassumed losses before reporting them to us. Furthermore, the number of contractual intermediaries is generallygreater for retrocessional business than for direct business, therebyincreasing the time lag and imprecision associated with loss reporting.

 

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Time lags are inherent inreporting to the primary insurer then to the broker and then to the reinsurer,especially in the case of excess-of-loss reinsurance contracts. Also, thecombined characteristics of low claim frequency and high claim severity makethe available data more volatile and less useful for predicting ultimatelosses. In the case of proportional contracts, we rely on an analysis of acontract’s historical experience, industry information, and the professionaljudgment of underwriters in estimating reserves for these contracts. Inaddition, we utilize ultimate loss ratio forecasts when reported by cedants,which are normally subject to a quarterly or six month lag for proportionalbusiness. Because of the degree of reliance that we necessarily place on cedingcompanies for claims reporting, our reserve estimates are highly dependent onceding companies’ management judgment. Furthermore, during the loss settlementperiod, which may last several years, additional facts regarding individualclaims and trends often will become known, and current laws and case law maychange, all of which can affect ultimate expected losses.

 

The nature and extent ofloss information provided under many facultative and per occurrence excesscontracts, where company personnel work closely with the ceding company insettling individual claims, may not differ significantly from the informationreceived under a primary insurance contract. Loss information from aggregateexcess-of-loss contracts, including catastrophe losses and proportional sharetreaties, will often be less detailed. Occasionally, such information isreported in summary format rather than on an individual claim basis.

 

Since we rely on estimatesof paid losses, case reserves, and IBNR reserves provided by ceding companiesin order to assist us in estimating our own loss and LAE reserves, we maintaincertain procedures designed to mitigate the risk that such information isincomplete or inaccurate. These procedures include, for example, the comparisonof expected premiums to reported premiums to help us identify delinquent clientperiodic reports, ceding company audits to facilitate loss reporting andidentify inaccurate or incomplete claim reporting, and underwriting reviews toascertain that the losses ceded are covered as provided under the contractterms. We also use catastrophe model output and industry market shareinformation to evaluate the reasonableness of reported losses, which are alsocompared to loss reports received from other cedants. In addition, eachsubsequent year of loss experience with a given cedant provides additionalinsight into the accuracy and timeliness of previously reported information.These procedures are incorporated in our internal controls process on anongoing basis, and are regularly evaluated and amended as market conditions,risk factors, and unanticipated areas of exposure develop. Since our follow upactions form part of our normal due diligence process in claims handlingmatters, we do not capture data which records the extent to which cedingcompany claims are subsequently adjusted as a result of these activities alone,nor is it possible to determine the extent to which our actions influence theaccuracy of subsequent cedant reporting. However, unreliable reporting is afactor which influences our underwriters’ willingness to offer terms topotential cedants. We believe that our diligence in these matters promotesbetter reporting by brokers and cedants over the long term. In our relativelyshort history, disputes with ceding companies have been rare and those whichhave not been resolved in negotiation have been resolved through arbitration inaccordance with contractual provisions.

 

The development of ourprior-year losses is monitored during the course of subsequent calendar yearsby comparing the actual reported losses against expected losses. The analysisof this loss development is an important factor in our ongoing refinement ofthe 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 IBNRwould vary greatly depending on the number, nature and timing of lossesthroughout the year. However, we would expect that by the end of the yearsubsequent to the year in which the loss occurred, the majority of these shorttail property losses would be reported to us, and by the end of the followingyear the majority would be paid.

 

Estimating loss reserves forour small book of longer-tail casualty reinsurance business, which can beeither on an excess-of-loss or proportional basis, involves furtheruncertainties. In addition to the uncertainties inherent in the reservingprocess described above, casualty business can be subject to longer reportinglags than property business, and claims often take many years to settle. Duringthis period, additional factors and trends will be revealed and as thesefactors become apparent we will adjust our reserves. There is also thepotential for the emergence of new types of losses within our casualty book.Any factors that extend the time until claims are settled add uncertainty tothe reserving process. At December 31, 2008 and 2007, we recorded grossloss and LAE reserves related to our casualty business of $182.5 million and$191.9 million, respectively.

 

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We do not typicallyexperience significant claims processing backlogs, although such backlogs mayoccur following a major catastrophic event. At December 31, 2008 and 2007,we did not have a significant backlog in either our insurance or reinsuranceclaims processing.

 

The uncertainties inherentin the reserving process, together with the potential for unforeseendevelopments, including changes in laws and the prevailing interpretation ofpolicy terms, may result in loss and LAE significantly greater or less than thereserves initially established. Changes to our prior year loss reserves willimpact our current underwriting results by improving our results if the prioryear reserves prove to be redundant or reducing our results if the prior yearreserves prove to be insufficient. We expect volatility in our results inperiods that significant loss events occur because U.S. GAAP does not permitinsurers or reinsurers to reserve for loss events until they have occurred andare expected to give rise to a claim. As a result, we are not allowed to recordcontingency reserves to account for expected future losses. We anticipate thatclaims arising from future events will require the establishment of substantialreserves from time to time.

 

We believe that our reservesfor loss and LAE are sufficient to cover losses that fall within the terms ofour policies and agreements with our insured and reinsured customers on thebasis of the methodologies used to estimate those reserves. However, there canbe no assurance that our actual losses will not exceed our total reserves. Anyadjustments for reserves are reflected in our loss and LAE during the period inwhich they are determined.

 

The following tables providethe details of our gross case reserves and IBNR, by line of business, at December 31,2008 and 2007:

 

| **(Millions)**       | ** ** | **Gross  IBNR at  Dec. 31,  2008** | ** ** | **Gross Case  Reserves at  Dec. 31,  2008** | ** ** | **Gross  Reserves at  Dec. 31,  2008** | ** ** |
|----------------------|------------|----------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|
|                 |       |                                         |       |                                                       |       |                                             |       |
| Property Catastrophe |       | $                                            | 129.6      |                                                       | $          | 150.5                                            | ** ** | **$** | **280.1** | ** ** |
| Property Specialty   |       | 99.6                                         |       | 142.1                                                      | ** ** | **241.7**                                        | ** ** |
| Other Specialty      |       | 200.8                                        |       | 86.3                                                       | ** ** | **287.1**                                        | ** ** |
| Total                |       | $                                            | 430.0      |                                                       | $          | 378.9                                            | ** ** | **$** | **808.9** | ** ** |

 
| **(Millions)**       | ** ** | **Gross  IBNR at  Dec. 31,  2007** | ** ** | **Gross  Case  Reserves at  Dec. 31,  2007** | ** ** | **Gross  Reserves at  Dec. 31,  2007** | ** ** |
|----------------------|------------|-----------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|
|                 |       |                                    |       |                                              |       |                                        |       |
| Property Catastrophe |       | $                                       | 149.7      |                                              | $          | 145.4                                       |       | $ | 295.1 |   |
| Property Specialty   |       | 108.5                                   |       | 152.9                                             |       | 261.4                                       |       |
| Other Specialty      |       | 200.5                                   |       | 103.7                                             |       | 304.2                                       |       |
| Total                |       | $                                       | 458.7      |                                              | $          | 402.0                                       |       | $ | 860.7 |   |

 

We have determined that ourbest estimates for gross loss and LAE reserves at December 31, 2008 and2007 were $808.9 million and $860.7 million, respectively. Of this estimate, atDecember 31, 2008 and 2007,  $51.6million and $66.6 million related to our insurance business, respectively, and$757.3 and $794.1 million related to our reinsurance business, respectively.

 

We have determined that ourbest estimate for loss and LAE reserves net of reinsurance ceded (as discussedbelow), at December 31, 2008 and 2007, was $686.0 million and $708.2million, respectively.

 

Our reserving methodologydoes not lend itself well to a statistical calculation of a range of estimatessurrounding the best point estimate of our loss and LAE reserves. As discussedabove, due to the low frequency and high severity nature of our business, ourreserving methodology involves arriving at a point estimate for the ultimateexpected loss on a contract by contract basis with our aggregate loss reservesbeing the sum of the individual reserves established per contract.

 

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Favorable development ofprior period net losses experienced as a percentage of our opening net lossreserves across all underwriting years were 14.7%, 4.1% and 1.6% for the yearsended December 31, 2008, 2007 and 2006, respectively. Based on thisexperience and the current makeup of our loss reserves, we believe it isreasonably likely that our net loss and LAE reserves could increase or decreaseby 10% from current amounts.  As such, asof December 31, 2008, we estimate that a 10% change in our net loss andLAE reserves would result in an increase or decrease of our net income andshareholders’ equity by $68.6 million. The net income and shareholders’ equityimpact of the change in net reserves may be partially offset by adjustments toitems such as reinstatement premium, profit commission expense, incentivecompensation and other corporate expenses.

 

***Written and Earned Premiums***

 

Though we are principally aprovider of reinsurance, we write both reinsurance and insurance contracts.Insurance and facultative reinsurance contracts are written based on agreedupon terms and conditions which include a stated premium for coveragesprovided.  The stated premium within theunderlying contract is then recorded as written premium at the effective dateof the policy.  In general, if the termsand conditions change during the policy period, either through policyholderrequest or underwriting audit, the policy would be endorsed to reflect thechange in coverage. This endorsement usually generates a change to the policypremium which is then recorded as an adjustment to written premium for thepolicy term.

 

Our assumed treatyreinsurance premium is written on an excess-of-loss or on a pro rata basis.Reinsurance contracts are generally written prior to the time the underlyingdirect policies are written by cedants and accordingly they must estimate suchpremiums when purchasing reinsurance coverage. For the majority ofexcess-of-loss contracts, including insurance contracts, a deposit or minimumpremium is defined in the contract wording. The deposit or minimum premium isbased on the ceding companies’ estimated premiums, and this estimate isrecorded as written premium in the period the underlying risks incept. In themajority of cases, this premium is adjustable at the end of the contract periodto reflect the changes in underlying risks in force during the contract period.Subsequent adjustments, based on reports by the ceding companies of actualpremium, are recorded in the period they are determined, which is normallywithin six months to one year subsequent to the expiration of the policy. Todate these adjustments have not been significant.

 

Generally, on pro ratacontracts and certain excess-of-loss contracts in which a deposit or minimumpremium is not specified in the contract, an estimate of written premium isrecorded in the period in which the underlying insurance policies incept. Thepremium estimate is based on information provided by ceding companies at theinception of the contract.  When theactual premium is reported by the ceding company, generally on a quarterly orsix month lag, it may be significantly higher or lower than the estimate.

 

We regularly evaluate theappropriateness of these premium estimates based on the latest informationavailable, which includes actual reported premium to date, the latest premiumestimates as provided by cedants and brokers, historical experience,management’s professional judgment, information obtained during theunderwriting renewal process, and a continuing assessment of relevant economicconditions. Any adjustments to premium estimates are recorded in the period inwhich they become known. Adjustments to original premium estimates could bematerial and may significantly impact earnings in the period they aredetermined.

 

Excess-of-loss contractsoften include contract terms that require an automatic reinstatement ofcoverage in the event of a loss. The associated reinstatement premium isgenerally calculated on the basis of (a) a fixed percentage (normally100%) of the deposit or minimum premium and (b) the proportion of theoriginal limit exhausted.  In a year oflarge loss events, reinstatement premiums will be higher than in a year inwhich there are no such events. Reinstatement premiums are fully earned orexpensed as applicable when a triggering loss event occurs and losses arerecorded. We accrue reinstatement premiums on a basis consistent with ourestimates of loss and LAE.  Generally prorata contracts do not contain provisions for the reinstatement of coverage.

 

Management includes anassessment of the creditworthiness of cedants in the review process above,primarily based on market knowledge, the timeliness of cedants’ past paymentsand the status of current balances owing. In addition, management may alsoreview the financial statements of ceding companies. Based on this assessment,management established an allowance of $0.8 million for uncollectible premiumsreceivable as of December 31, 2008 and 2007.

 

Premiums from excess-of-losscontracts are earned ratably over the contract term, which is ordinarily twelvemonths.  However, most pro-rata contractsare written on a risks attaching basis, which means that we assume a statedpercent share of each policy that the ceding company writes. As a result, weearn these contracts over the risk period of the underlying insurance policies.

 

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*** ***

***Ceded Reinsurance***

 

In the normalcourse of business, we purchase reinsurance from third-parties in order tomanage our exposures.  All of ourreinsurance purchases to date have represented prospective cover, meaning thatthe coverage has been purchased to protect us against the risk of future lossesas opposed to covering losses that have already occurred but have not yet paid.The majority of our reinsurance contracts are excess-of-loss contracts coveringone or more lines of business. To a lesser extent, we have also purchased quotashare reinsurance with respect to specific lines of our business. We alsopurchase industry loss warranty policies which provide us with coverage forcertain losses we incur provided they are triggered by events exceeding aspecified industry loss size. In addition, for certain pro-rata contracts thatwe enter into, the associated direct insurance contracts carry underlyingreinsurance protection from third-party reinsurers, known as inuringreinsurance, which we net against our gross premiums written.

 

The cost of reinsurancepurchased is subject to variability based on a number of factors.Excess-of-loss reinsurance contracts are generally purchased prior to the timeour assumed risks are written and accordingly we must estimate our premiumswhen purchasing reinsurance coverage. For these contracts, the deposit orminimum premium is defined in the contract wording which is based on our estimatedassumed premiums and this is the amount we record as ceded premium in theperiod the coverage incepts. In the majority of cases, the deposit or minimumpremium paid under these contracts is adjusted at the end of the contractperiod in order to reflect any change in the premium actually payable inrespect of the underlying risks assumed during the contract period. Subsequentadjustments, based on the calculation of our gross premiums written, arerecorded in the period they are determined. To date these adjustments have notbeen significant. In addition, a loss which pierces the reinsurance cover maygenerate reinstatement premium ceded, depending on the terms of the contract.This reinstatement premium ceded is recognized 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. As we write gross premiums during the period of coverage,reinsurance premiums ceded are adjusted similarly according to the terms of thequota share agreement.

 

Reinsurance recoverable on paid and unpaid loss and LAE representsamounts due to us from reinsurance companies for paid and unpaid loss and LAE. Forexcess-of-loss reinsurance, the attachment point and limit of these contractsare based on the amount of our actual losses incurred from an event or events.In some cases, our recovery is also contingent upon the associated industryloss reaching a sufficient level.

 

The recognition of reinsurance recoverable requires two key judgments.The first involves our estimation of the amount of gross IBNR to be ceded toreinsurers. Ceded IBNR is generally developed as part of our loss reservingprocess and consequently, its estimation is subject to similar risks anduncertainties as the estimation of gross IBNR. The second relates to the amount of the reinsurance recoverable balancethat we will ultimately be unable to recover from reinsurers due to insolvency orother reasons. As of December 31, 2008 and 2007, we recorded $36.4 millionand $16.8 million in reinsurance recoverable on paid losses, respectively, and$122.9 million and $152.5 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, 2008 and2007.

 

In addition to the ceded reinsurance described above, we have alsoentered into various derivative instruments, namely the ILW Swap and the CATBond Protection that provide similar coverage against the risk of losses.  Amounts recoverable under these derivative instrumentsare determined solely on the basis of modeled or industry losses, rather thanby actual losses incurred by us.  Forthat reason, we account for these instruments as derivatives, rather thanreinsurance transactions.

 

***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.

 

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Performance Shares

 

At target payout, each performance share represents the fair value of acommon share. At the end of a performance period, which is generally the three-yearperiod following the date of grant, the value of each performance share isadjusted to represent a harvest of between zero and 200% of target depending onthe achievement of specific performance criteria relating to our operating andfinancial performance over the period. At the discretion of the CN Committee,any final payment in respect of such performance shares may take the form ofcash, common shares or a combination of both.

 

Since performance shares are contingently payable, we initially accrue theprojected performance share expense based on: (i)  the number ofperformance shares granted; (ii) the closing price of our common shares atthe date of grant; and (iii) an assumed 100% harvest ratio. Beginning atthe mid-point of the performance cycle, and every subsequent quarterthereafter, we re-assess the projected results for each outstanding performanceshare cycle and adjust our performance share accrual as necessary based on: (i) thenumber of performance shares granted; (ii) the current price of our commonshares as of the balance sheet date; and (iii) our current estimate of theultimate harvest ratio.  As a result, inthe latter half of any performance share period, our performance share expensemay fluctuate significantly as the harvest ratio and the market price of ourcommon shares is adjusted.

 

The primary performance target (that resulting in a 100% harvest) forall participants with respect to performance shares granted for the 2005-2007,2006-2008 and 2007-2009 performance periods is the achievement of anunderwriting return on an internally generated risk-based capital measure of16% over the period. Additionally, at the sole discretion of the CN Committee,the performance of certain members of senior management may be further measuredby reference to the ratio of the actual return on equity to the return onrisk-based capital and may result in an adjustment to the harvest of + / - 25%.

 

With respect to the 2005-2007 performance period, 400,000 performanceshares were granted to employees. Due to the impact of severe hurricane losseson our 2005 results, the estimated harvest ratio for this performance periodwas reduced to 0% during the 2005 third quarter.  This action resulted in an immediate performanceshare liability reversal of $2.8 million during 2005.  We also reversed other pre-existing long-termincentive liabilities of $18.8 million at that time.

 

With respect to the 2006-2008 performance period, 167,000 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 share tranchewas subsequently adjusted to a more current harvest estimate and the referenceprice of our common shares was reduced from $19.23 (the closing price on thedate of grant) to $16.23 (the average of the last five trading days in2008).  The Company recognizedperformance share (income) expense for grants made under this performance sharecycle of $(1.3) million during 2008 and $2.6 million during 2007.

 

With respect to the 2007-2009 performance period, 180,000 performanceshares were originally granted to employees of which 172,000 remainedoutstanding at December 31, 2008. In accordance with our accounting policy,the expected ultimate harvest ratio for this performance share tranche wassubsequently adjusted to a more current harvest estimate and the referenceprice of our common shares was reduced from $18.92 (the closing price on thedate of grant) to $16.23  (the average ofthe last five trading days in 2008).  TheCompany recognized performance share expense for grants made under thisperformance share cycle of $0.4 million during 2008 and $1.1 million during2007.

 

No awards of performance shares were made during 2008.

 

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

 

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 the applicable vesting date.  Holders of RSUs are not entitled to votingrights but are entitled to receive cash dividends and distributions.

 

Throughout 2006 and 2007, RSU awards consisted solely of: (i) grantsmade to induce individuals to join us; (ii) grants made to retain certainof our key employees; (iii) grants made to reward those employeesexhibiting outstanding individual performance; and (iv) grants made tonon-management members of our Board of Directors as part of their totalremuneration.  In each of these cases,the number of RSUs granted to recipients were fixed and determinable on thegrant date (“Fixed RSUs”).

 

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During 2008 we also 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”). Variable RSUs are contingentawards in which the actual number of RSUs to be awarded is dependent on Companyperformance during the initial year (the “Initial RSU Period”) of the four yearaward cycle. The actual number of Variable RSUs is not fixed and determinableuntil the completion of the Initial RSU Period and, during that period, thenumber of RSUs expected to be awarded for that cycle may fluctuate, perhapssignificantly.  For the RSU award cyclefrom 2008 to 2011, the actual number of Variable RSUs projected to be awardedhas been determined based on a 2008 target ROE of 11.2%, assuming astandardized investment return.  Withrespect to the 2008 to 2011 award cycle, at an achieved ROE of 11.2% weprojected a grant of approximately 600,000 Variable RSUs to participants, at anROE of 5.2% we would not expect to grant any Variable RSUs to participants andat an ROE of 21.2% we projected a grant of approximately 1,200,000 VariableRSUs to participants.  Based on anestimated ROE achieved for 2008 of 8.2%, we projected the number of VariableRSUs to be granted for the 2008-2011 award cycle to be 316,036.

 

In determining the grant date fair value of RSUs, a zero to fivepercent discount to the then market value of the shares is applied as salerestrictions may remain after RSUs are vested, depending on the date and termof the award. We also assume a 3% to 9% forfeiture rate. Actual forfeitures areperiodically compared to assumed forfeitures for reasonableness.

 

The unamortized grant date fair value of the 965,583 Fixed RSUsoutstanding as of December 31, 2008 was $5.0 million. The fair value ofthese Fixed RSUs was $16.6 million on the date of grant.

 

The unamortized grant date fair value of the 316,036 Variable RSUsoutstanding as of December 31, 2008 was $2.4 million.  The fair value of these Variable RSUs was$5.1 million on the date of grant.

 

For the years ended December 31, 2008, 2007 and 2006, werecognized $8.3 million, $8.2 million and $4.8 million of RSU expense.

 

As of December 31, 2008, 457,288 of our total outstanding RSUswere vested and are payable during the first quarter of 2009.

 

**Item 7A.****       *****Qualitativeand Quantitative Disclosures About Market Risk***

 

We believe that our balance sheet is principally exposed to four typesof market risk: interest rate risk, foreign currency risk, equity risk andcredit price risk.  In addition, webelieve that our balance sheet is also exposed to risk from naturalcatastrophes, derivative instruments and inflation.

 

**Market Risk**

 

Interest Rate Risk

 

***Fixed Maturity Investments.***  As aprovider of short tail reinsurance and insurance for losses resulting mainlyfrom natural and man-made catastrophes, we could become liable for significantlosses on short notice.  As a result, wehave structured our fixed maturity investment portfolio with high-qualitysecurities with a short average duration in order to reduce our sensitivity tointerest rate fluctuations and to provide adequate liquidity for the settlementof 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, 2008, ourfixed maturities had an average credit quality of “AA+” (Very Strong) byStandard & Poor’s and an average duration of 2.3 years. As of December 31,2007, our fixed maturities had an average credit quality of “AA+” and anaverage duration of 1.9 years.

 

Changes in market interest rates generally translate into fluctuationsin the fair value of our fixed maturity investments.  The table below summarizes the estimatedhypothetical effects of increases and decreases in market interest rates on ourfixed maturity investments as of December 31, 2008 and 2007.

 

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| **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, 2008**                                    | ** ** | **$**               | **1,706.6** |                                                          | 100 bp decrease |                                      | $          | 1,737.8                                                      |       | $ | 31.2 |   |
|                                                                |       |                |        | 100 bp increase                                               |            | 1,675.4                                   |       | (31.2                                                        | )          |
|                                                                |       |                |        |                                                          |            |                                      |       |                                                         |       |
| As of December 31, 2007                                        |       | $                   | 2,061.5     |                                                          | 100 bp decrease |                                      | $          | 2,097.6                                                      |       | $ | 36.1 |   |
|                                                                |       |                |        | 100 bp  increase                                              |            | 2,016.8                                   |       | (44.7                                                        | )          |

 

***Debt.***  Ourfixed-rate, long-term debt obligations consist of the Senior Notes and theJunior Notes. At December 31, 2008 and 2007, the fair value of our SeniorNotes was $193.2 million and $238.4 million, respectively, which compared to acarrying value of $249.4 million and $249.3 million, respectively.  At December 31, 2007 and 2006, the fairvalue of our Junior Notes was $61.9 million and $100.3 million, respectively,which compared to a carrying value of $103.1 million and $103.1 million,respectively.

 

As of December 31, 2007, we also had Blue Ocean Debt outstandingof $75.0 million.  The Blue Ocean Debtwas repaid in full on January 18, 2008.

 

Foreign Currency Risk

 

We are often required to receive premiums and pay losses in foreigncurrencies. We also maintain a portion of our investment portfolio ininvestments in foreign currencies. Accordingly, we are exposed to fluctuationsin the exchange rates of these currencies.

 

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 agreements do not eliminate fluctuations in the value of our assets andliabilities denominated in foreign currencies; rather, they allow us toestablish a rate of exchange at a future point in time.

 

Our reporting currency is the U.S. dollar.  The British pound is the functional currencyfor the operations of Syndicate 5151, MUA, MCL, MUSL and MMSL and the Swissfranc is the functional currency for the operations of MEAG. The U.S. dollar isthe functional currency for all of our other operations.  The assets and liabilities of these foreignoperations are converted to U.S. dollars at exchange rates in effect at thebalance sheet date, and the related revenues and expenses are converted usingaverage exchange rates for the period. Net foreign exchange gains and lossesarising from translating these foreign operations into U.S. dollars arereported as a separate component of shareholders’ equity, with changes thereinreported as a component of other comprehensive income.

 

Syndicate 5151, our most significant foreign operation, had netliabilities denominated in British pounds of approximately $10.2 million at December 31,2008.  Assuming a hypothetical 10%increase or decrease in the rate of exchange from British pounds to U.S.dollars as of December 31, 2008, the carrying value of Syndicate 5151’snet liabilities denominated in British pounds would be expected to haverespectively increased or decreased by $1.0 million.

 

At December 31, 2008 and December 31, 2007, we were a partyto outstanding foreign currency exchange agreements having a gross notionalexposure of $33.0 million and $86.9 million, respectively.  We recorded net expense (revenue) associatedwith our Foreign Exchange Contracts of $4.1 million, $(3.2) million and $(2.5)million during 2008, 2007 and 2006, respectively.

 

During 2008, 2007 and 2006, we recorded net foreign exchangetransaction gains in our statements of operations of $7.6 million, $6.1 millionand $10.8 million, respectively. As of December 31, 2008 and 2007, werecorded net foreign exchange translation losses in our balance sheets of $6.3million and zero, respectively.

 

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 thecurrent carrying value.  Thesefluctuations may result from perceived changes in the underlying economiccharacteristics of the investee, the relative price of alternative investments,general market conditions and supply and demand imbalances for a particularsecurity or instrument.

 

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Credit Risk

 

Our financial instruments, which potentially subject us toconcentrations of credit risk, consist principally of our fixed maturityinvestments, our insurance and reinsurance balances receivable and ourreinsurance recoverables.

 

***Fixed Maturity Investments.***   Webelieve that we have no significant concentrations of credit risk from a singleissue or issuer within our investment portfolio other than concentrations inU.S. government and U.S. government-sponsored enterprises. We did not own anaggregate investment in a single entity, other than U.S. government and U.S.government-sponsored enterprises, in excess of 10% of our common shareholders’equity at December 31, 2008 and 2007.

 

Certain U.S. government-sponsored enterprises do not have the full andcomplete support of the U.S. government. We face credit risk in respect ofthese holdings.

 

Our portfolio of corporate and structured investments, such as assetand mortgage-backed securities, are subject to individual and aggregate creditrisk.  We monitor the credit quality ofour fixed maturity investments with exposure to the subprime and Alternative Amarkets as well as those fixed maturity investments that benefit from creditenhancements provided by third-party financial guarantors.

 

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 participation in bank loans

 

Certain of our derivative securities are subject to counterpartyrisk.  We routinely monitor this risk

 

As of December 31, 2008 and 2007, our fixed maturity portfoliocontained certain securities with exposure to the sub-prime mortgage market(“Subprime Securities”) and securities with exposure to the Alternative-Amortgage market (“Alternative-A Securities”).

 

The following table outlines our Subprime Securities and Alternative-ASecurities at December 31, 2008:

 

| **($ in millions)** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Current  Rating** | ** ** | **Weighted  Average  Life  in Years** | ** ** |
|-------------------------------|------------|---------------------|------------|-----------------|------------|---------------------|------------|--------------------------------------------|------------|
|                          |       |                |       |            |       |                |       |                                       |       |
| Subprime Securities           |       | $                   | 8.7        |            | $          | 8.2                 |       | AAA                                        |       | 0.9 |   |
| Alternative-A Securities      |       | 15.0                |       | 14.2            |       | AAA                 |       | 2.6                                        |       |
| Alternative-A Securities      |       | 3.3                 |       | 3.0             |       | BB                  |       | 1.6                                        |       |
|                               |            |                     |            |                 |            |                     |            |                                            |            |  |  |

 

As of December 31, 2007, we held $18.9 million of SubprimeSecurities with an amortized cost of $19.2 million and $29.5 million ofAlternative-A Securities with an amortized cost of $29.6 million.  Each of these investment securities wererated “AAA” (Extremely Strong) by Standard & Poor’s at that time.

 

We believe that the risk of default on our Subprime Securities andAlternative-A Securities is not significant at this time.

 

***Insurance and Reinsurance BalancesReceivable.***  We underwrite the majority of our businessthrough brokers.  Credit risk existsshould any of these brokers be unable to fulfill their contractual obligationsto us.  For example, we are frequentlyrequired to pay amounts owed on claims under our 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 the premiums.

 

 ***Reinsurance Recoverable.***  We remain liable to the extent that anythird-party reinsurer or other obligor fails to meet its obligations and, withrespect to certain contracts that carry underlying reinsurance protection, wewould be liable in the event that the ceding companies are unable to collectamounts due from underlying third-party reinsurers.

 

Under our reinsurance security policy, reinsurers are generallyrequired to be rated “A-” (Excellent) or better by A.M. Best at the timethe policy is written. We consider reinsurers that are not rated or do not fallwithin the above rating threshold on a case-by-case basis when collateralizedup to policy limits, net of any premiums owed. We monitors the financialcondition and ratings of its reinsurers on an ongoing basis.

 

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As of December 31, 2008 and 2007, we did not have any reinsurancerecoverables from reinsurers rated less than “A-”, except in those instanceswhere 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 the use of our derivativeinstruments are underwriting risk and foreign exchange risk.  Derivative instruments designed to manage ourunderwriting risk include: (i) the Hurricane Option;  (ii) the ILW Swap; and (iii) theCAT Bond Protection. These derivative instruments provide us with reinsurance-likeprotection for specific loss events associated with certain lines of ourbusiness.  Additionally, we have enteredinto the Forward Sale Agreements and the Share Issuance Agreement in order tomanage the risk associated with a significant loss of capital, which could mostlikely occur as a result of significant underwriting and/or investment losses.Foreign exchange risk, specifically the risk associated with us collectingpremiums or making claim payments in foreign currencies, is managed through theuse of the Foreign Exchange Contracts.

 

As an extension of our investing activities, we have entered into theInvestment Options and Futures.

 

As an extension of our underwriting activities, we have entered intothe ILW Contract and have participated in the CAT Bond Facility. Thesederivative instruments provide reinsurance-like protection to third-parties forspecific loss events associated with certain lines of business.

 

**Effects of Inflation**

 

Our investment returns may also be impacted by changing rates ofinflation and other economic conditions. In addition, the potential exists, after a catastrophe loss, for thedevelopment of inflationary pressures in a local economy. These pressures arecommonly referred to as “demand surge”. We take demand surge into account in our catastrophe loss models. Theeffects of inflation are also considered in pricing and in estimating reservesfor loss and loss adjustment expenses.

 

**Item 8.****          *****FinancialStatements 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 84 of this report.

 

**Item 9.****          *****Changes inand Disagreements With Accountants on Accounting and Financial Disclosure***

 

None.

 

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

 

Our Principal ExecutiveOfficer (“PEO”) and Principal Financial Officer (“PFO”) have evaluated theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Exchange Act) as of December 31, 2008 and 2007.  Based on that evaluation, our PEO and PFOhave concluded that our disclosure controls and procedures are effective.

 

Our PEO and PFO have alsoevaluated the effectiveness of our internal control over financial reporting asof December 31, 2008 and 2007. Based on that evaluation, our PEO and PFO have concluded that ourinternal controls over financial reporting are effective.  Management’s annual report on internalcontrol over financial reporting is included on page F-42 of this report.The report of independent registered public accounting firm ofPricewaterhouseCoopers is included on page F-43 of this report.

 

There has been no change inour internal controls over financial reporting during the fourth quarter of2008 that has materially affected, or is reasonably likely to materially affectour internal control over financial reporting.

 

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**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”*and *“TheBoard and Committees”* in the Company’s 2009 Proxy Statement, hereinincorporated by reference.

 

The Company’s Code of Conduct and Ethics, which applies to all directors,officers and employees in carrying out their responsibilities to and on behalfof the Company, is available at www.montpelierre.bm and is included as Exhibit 14to this report.  The Company’s Code ofConduct and Ethics is also available in print free of charge to any shareholderupon request.

 

There have been no material changes to the procedures by whichshareholders may recommend nominees to the Company’s Board of Directors. Theprocedures for shareholders to nominate directors are reported under thecaption*“The Board and Committees -Shareholder Recommendations”* in the Company’s 2009 Proxy Statement,herein incorporated by reference.

 

**Item 11.****         *****ExecutiveCompensation***

 

Reported under the caption *“ExecutiveCompensation”* in the Company’s 2009 Proxy Statement, hereinincorporated by reference.

 

**Item 12.****         *****SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters***

 

Reported under the captions *“SecurityOwnership of Certain Beneficial Owners and Management”* in the Company’s2009 Proxy Statement, herein incorporated by reference and *“Securities Authorized for Issuance Under EquityCompensation Plans”* 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 theCompany’s 2009 Proxy Statement, herein incorporated by reference.

 

**Item 14.**   ***Principal Accounting Fees and Services***

 

Reported under the caption *“Appointmentof Independent Auditor”* in the Company’s 2009 Proxy Statement,herein incorporated by reference.

 

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**PART IV**

 

**Item 15.****             *****Exhibitsand Financial Statement Schedules***

 

**(a)****         ****Documents Filed as Part ofthe 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 84of this report.  A listing of exhibitsfiled as part of the report appear on pages 79 through 82 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.

 

| **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 (incorporated herein by reference  to Exhibit 4.1 to the Company’s Registration Statement on Form S-1  (Registration No. 333-89408)).                                                                                                                                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 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 Montpelier Marketing Services (UK) Limited (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. *                                                                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8               |       | 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).                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.9               |       | 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).                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.10              |       | 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).                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                                                                                                                                 |
| 10.11              |       | 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).                                                                                                         |

 

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| **Exhibit Number** | ** ** | **Description  of Document**                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.12              |       | 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)).                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.13              |       | 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).                                                                                                                                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.14              |       | Separation Agreement, dated as of October 1, 2006, between  Russell Fletcher III, and Montpelier Reinsurance Ltd., (incorporated herein  by reference to Exhibit 10.37 to the Company’s Quarterly Report on  Form 10-Q filed November 8, 2006).                                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.15              |       | 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).                                                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.16              |       | 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).                                                                                                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.17              |       | 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).                                                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.18              |       | 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).                                                                                                                                                                                                                      |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.19              |       | 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).                                                                                                                                                                                                     |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.20              |       | 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).                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.21              |       | 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).                                                                                                                                                                       |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.22              |       | 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).                                                                                                                                                   |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.23              |       | 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).                                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.24              |       | Form of Annual Restricted Share Unit Award Agreement under the  Montpelier Re Holdings Ltd. Long-Term Incentive Plan. *                                                                                                                                                                                                                                                                                             |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.25              |       | Form of Restricted Share Unit Award Agreement under the  Montpelier Re Holdings Ltd. Long-Term Incentive Plan. *                                                                                                                                                                                                                                                                                                    |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.26              |       | 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).                                                                                                                                                                  |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.27              |       | 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).                                                                                                                                                                                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.28              |       | Montpelier Re Holdings Ltd. 2009 Annual Bonus Plan. *                                                                                                                                                                                                                                                                                                                                                                    |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.29              |       | 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).                                                                   |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.30              |       | 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). |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.31              |       | 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).                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.32              |       | 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**                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.33              |       | 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).                                                                                                                                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.34              |       | 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).                                                                                                                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.35              |       | 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).                                                                                                                                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.36              |       | 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).                                                                                                                                                                                                                                           |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.37              |       | 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).                                                                                                                                                                                                                                                                |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.38              |       | Amendment to the 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  December 10, 2007).                                                                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.39              |       | 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).                                                                                                                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.40              |       | 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).                                                                                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.41              |       | 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).                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.42              |       | 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).                                                                                                                 |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.43              |       | 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).                                                                                                            |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.44              |       | 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).                                                        |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.45              |       | Amended and Restated Letter of Credit Facility Agreement dated  October 27, 2008 among Montpelier Reinsurance Ltd. (as Company),  Montpelier Re Holdings Ltd. (as Parent), Montpelier Capital Limited (as Account  Party) The Royal Bank of Scotland plc (as Mandated Lead Arranger and as Agent  and Security Trustee), and ING Bank N.V. (as an Original Lender)(incorporated  herein by reference to Exhibit 99.1 to the Company’s Form 8-K filed  October 27, 2008). |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.46              |       | 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).                                                                                                                                                                       |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.47              |       | 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).                                                       |
|               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.48              |       | 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).                                                                                                                                                                                                                                             |

 

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| **Exhibit Number** | ** ** | **Description  of Document**                                                                                                                                                                                     |
|--------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                             |
| 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 (incorporated herein by reference to Exhibit 14  to the Company’s Annual Report on Form 10-K filed February 28,  2008).                                                       |
|               |       |                                                                                                                                                                                                             |
| 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. * |
|               |       |                                                                                                                                                                                                             |
|               | **(c**     | **)   Financial Statement 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 84 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 27, 2009 | By:                             | /s/ MICHAEL S. PAQUETTE |
|                         |                            | Executive Vice President and |
|                         |                            | Chief Financial Officer |
|                              |                                 |  |  |

 

 

**Power of Attorney**

 

**KNOW ALL MEN** by these presents, that the undersigned does hereby make, constituteand appoint Anthony Taylor, Thomas G.S. Busher, Christopher L. Harris,  Michael S. Paquette, Jonathan B. Kim, andAllison D. Kiene and each of them, as true and lawful attorney-in-fact andagent of the undersigned, with full power of substitution, resubstitution andrevocation, for and in the name, place and stead of the undersigned, to executeand deliver the Annual Report on Form 10-K for the fiscal year ended December 31,2008, 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 the undersignedmight or could do if personally present, hereby ratifying and confirming allthat said attorney or such substitute shall lawfully do or cause to be done byvirtue hereof.

 

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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 27th day of February, 2009.

 

| **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         |       | Executive 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/ K. THOMAS KEMP         |       |                                                            |
| K. Thomas Kemp             |       | 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                                                        |

 

83

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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, 2008 and 2007                                                                   | F-1                             |
|                                                                                                                              |                            |
| Consolidated Statements of Operations and  Comprehensive Income for each of the years ended December 31, 2008, 2007 and 2006 | F-2                             |
|                                                                                                                              |                            |
| Consolidated  Statements of Shareholders’ Equity for each of the years ended December 31, 2008, 2007 and  2006          | F-3                             |
|                                                                                                                              |                            |
| Consolidated  Statements of Cash Flows for each of the years ended December 31, 2008, 2007 and 2006                          | 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-42                            |
|                                                                                                                              |                            |
| Report of Independent Registered Public Accounting  Firm                                                                          | F-43                            |
|                                                                                                                              |                            |
| Selected Quarterly Financial Data (unaudited)                                                                                     | F-44                            |
|                                                                                                                              |                            |
| **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                            |

 

84

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** **

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                 | ** ** | **December 31,** | ** **  |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **(In millions of U.S. dollars, except share and per share amounts)**    | ** ** | **2008**              | ** **  | **2007** | ** ** |
| **Assets**                                                                                                                 |       |                  | ** **  |   |   |
| Investment securities, at fair value:                                                                                      |       |                  | ** **  |   |   |
| Fixed maturity investments - trading  (amortized cost: $1,755.8 and $2,044.3)                                              | ** ** | **$**                 | **1,706.6** | ** ** | $ | 2,061.5 |   |
| Equity securities - trading (cost: $310.0  and $184.4)                                                                     | ** ** | **242.3**             | ** **  | 220.2 |   |
| Other investments (cost: $159.9 and $76.4)                                                                                 | ** ** | **148.3**             | ** **  | 77.7 |   |
| Total investments                                                                                                          | ** ** | **2,097.2**           | ** **  | 2,359.4 |   |
| Cash and cash equivalents                                                                                                  | ** ** | **260.9**             | ** **  | 453.2 |   |
| Restricted cash                                                                                                            | ** ** | **7.1**               | ** **  | 35.5 |   |
| Securities lending collateral                                                                                              | ** ** | **—**            | ** **  | 192.0 |   |
| Reinsurance recoverable on unpaid losses                                                                                   | ** ** | **122.9**             | ** **  | 152.5 |   |
| Reinsurance recoverable on paid losses                                                                                     | ** ** | **36.4**              | ** **  | 16.8 |   |
| Premiums receivable                                                                                                        | ** ** | **168.5**             | ** **  | 160.5 |   |
| Unearned premium ceded                                                                                                     | ** ** | **20.8**              | ** **  | 21.1 |   |
| Deferred acquisition costs                                                                                                 | ** ** | **28.4**              | ** **  | 27.7 |   |
| Accrued investment income                                                                                                  | ** ** | **14.0**              | ** **  | 19.4 |   |
| Unsettled sales of investments                                                                                             | ** ** | **1.4**               | ** **  | 56.0 |   |
| Other assets                                                                                                               | ** ** | **40.0**              | ** **  | 31.1 |   |
| **Total Assets**                                                                                                           | ** ** | **$**                 | **2,797.6** | ** ** | $ | 3,525.2 |   |
| ** **                                                                                                                 | ** ** | ** **            | ** **  |   |   |
| **Liabilities**                                                                                                            |       |                  | ** **  |   |   |
| Loss and loss adjustment expense reserves                                                                                  | ** ** | **$**                 | **808.9**   | ** ** | $ | 860.7 |   |
| Debt                                                                                                                       | ** ** | **352.5**             | ** **  | 427.4 |   |
| Securities lending payable                                                                                                 | ** ** | **—**            | ** **  | 193.4 |   |
| Unearned premium                                                                                                           | ** ** | **185.2**             | ** **  | 187.4 |   |
| Insurance and reinsurance balances payable                                                                                 | ** ** | **43.8**              | ** **  | 40.7 |   |
| Unsettled purchases of investments                                                                                         | ** ** | **3.1**               | ** **  | 23.8 |   |
| Accounts payable, accrued expenses and  other liabilities                                                                  | ** ** | **46.5**              | ** **  | 50.0 |   |
| Total Liabilities                                                                                                          | ** ** | **1,440.0**           | ** **  | 1,783.4 |   |
|                                                                                                                       |       |                  | ** **  |   |   |
| Commitments and contingent liabilities (see  Note 16)                                                                      | ** ** | **—**            | ** **  | — |   |
|                                                                                                                       |       |                  | ** **  |   |   |
| **Minority Interest**                                                                                                      |       |                  | ** **  |   |   |
| Blue Ocean - preferred equity                                                                                              | ** ** | **—**            | ** **  | 20.6 |   |
| Blue Ocean - common equity                                                                                                 | ** ** | **—**            | ** **  | 68.1 |   |
| Total Minority Interest                                                                                                    | ** ** | **—**            | ** **  | 88.7 |   |
|                                                                                                                       |       |                  | ** **  |   |   |
| **Common Shareholders’ Equity**                                                                                       |       |                  | ** **  |   |   |
| Common shares at 1/6 cent par value per  share - authorized 1,200,000,000 shares; issued 93,368,434 and 99,290,078  shares |       | **0.2**               | ** **  | 0.2 |   |
| Additional paid-in capital                                                                                                 | ** ** | **1,599.0**           | ** **  | 1,694.3 |   |
| Treasury shares at cost: 1,541,730 and 0  shares                                                                           | ** ** | **(23.8**             | **)**       | — |   |
| Retained deficit                                                                                                           | ** ** | **(214.6**            | **)**       | (43.6 | ) |
| Accumulated other comprehensive income  (loss)                                                                             | ** ** | **(3.2**              | **)**       | 2.2 |   |
| Total Common Shareholders’ Equity                                                                                     | ** ** | **1,357.6**           | ** **  | 1,653.1 |   |
| **Total Liabilities, Minority Interest and  Common Shareholders’ Equity**                                             | ** ** | **$**                 | **2,797.6** | ** ** | $ | 3,525.2 |   |

 

See Notes toConsolidated Financial Statements

 

F-1

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Table of Contents

** **

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OF OPERATIONS ANDCOMPREHENSIVE INCOME**

 
| ** **                                                                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In millions of U.S. dollars, except per share and per warrant amounts)** | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenues**                                                                                                                       |       |                                       | ** ** |   |   |   |   |
| Gross premiums written                                                                                                             | ** ** | **$**                                      | **620.1**  | ** ** | $ | 653.8 |   | $ | 727.5 |   |
| Reinsurance premiums ceded                                                                                                         | ** ** | **(78.9**                                  | **)**      | (104.8 | ) | (148.9 | ) |
| Net premiums written                                                                                                               | ** ** | **541.2**                                  | ** ** | 549.0 |   | 578.6 |   |
| Change in net unearned premiums                                                                                                    | ** ** | **(12.7**                                  | **)**      | 8.2 |   | 4.4 |   |
| Net premiums earned                                                                                                                | ** ** | **528.5**                                  | ** ** | 557.2 |   | 583.0 |   |
| Net investment income                                                                                                              | ** ** | **86.4**                                   | ** ** | 132.5 |   | 125.8 |   |
| Net realized and unrealized investment  gains (losses)                                                                             | ** ** | **(244.9**                                 | **)**      | 26.5 |   | 4.0 |   |
| Net foreign exchange gains                                                                                                         | ** ** | **7.6**                                    | ** ** | 6.1 |   | 10.8 |   |
| Net expense from derivative instruments                                                                                            | ** ** | **(14.3**                                  | **)**      | (0.3 | ) | (9.9 | ) |
| Other revenue                                                                                                                      | ** ** | **1.0**                                    | ** ** | 2.0 |   | 8.3 |   |
| Total revenues                                                                                                                     | ** ** | **364.3**                                  | ** ** | 724.0 |   | 722.0 |   |
|                                                                                                                               | ** ** | ** **                                 | ** ** |   |   |   |   |
| **Expenses**                                                                                                                       |       |                                       | ** ** |   |   |   |   |
| Underwriting expenses:                                                                                                             |       |                                       | ** ** |   |   |   |   |
| Loss and loss adjustment expenses                                                                                                  | ** ** | **295.1**                                  | ** ** | 177.5 |   | 172.7 |   |
| Acquisition costs                                                                                                                  | ** ** | **83.9**                                   | ** ** | 78.3 |   | 112.8 |   |
| General and administrative expenses                                                                                                | ** ** | **102.0**                                  | ** ** | 85.9 |   | 66.0 |   |
| Non-underwriting expenses:                                                                                                         |       |                                       | ** ** |   |   |   |   |
| Interest and other financing expenses                                                                                              | ** ** | **26.8**                                   | ** ** | 34.5 |   | 28.2 |   |
| Total expenses                                                                                                                     | ** ** | **507.8**                                  | ** ** | 376.2 |   | 379.7 |   |
|                                                                                                                               |       |                                       | ** ** |   |   |   |   |
| **Income (loss) before income taxes,  extraordinary item and minority interest**                                                   | ** ** | **(143.5**                                 | **)**      | 347.8 |   | 342.3 |   |
| Income tax provision                                                                                                               | ** ** | **(1.1**                                   | **)**      | (0.1 | ) | (0.1 | ) |
| **Income (loss) before extraordinary item and  minority interest**                                                                 | ** ** | **(144.6**                                 | **)**      | 347.7 |   | 342.2 |   |
| Minority interest expense - Blue Ocean                                                                                             | ** ** | **(1.9**                                   | **)**      | (31.9 | ) | (39.3 | ) |
| Excess of fair value of acquired net assets  over cost - Blue Ocean                                                                | ** ** | **1.0**                                    | ** ** | — |   | — |   |
| **Net income (loss)**                                                                                                              | ** ** | **(145.5**                                 | **)**      | 315.8 |   | 302.9 |   |
|                                                                                                                               |       |                                       | ** ** |   |   |   |   |
| Change in net unrealized gains and losses  on available for sale investments held                                                  | ** ** | **0.9**                                    | ** ** | (1.6 | ) | 64.6 |   |
| Change in foreign currency translation                                                                                             | ** ** | **(6.3**                                   | **)**      | (0.2 | ) | 0.1 |   |
| Recognition of net unrealized gains and  losses on available for sale investments sold                                             | ** ** | **—**                                 | ** ** | — |   | (6.1 | ) |
| **Comprehensive income (loss)**                                                                                                    | ** ** | **$**                                      | **(150.9** | **)** | $ | 314.0 |   | $ | 361.5 |   |
|                                                                                                                               |       |                                       | ** ** |   |   |   |   |
| **Basic earnings (loss) per share**                                                                                                | ** ** | **$**                                      | **(1.69**  | **)** | $ | 3.29 |   | $ | 3.21 |   |
| **Diluted earnings (loss) per share**                                                                                              | ** ** | **(1.69**                                  | **)**      | 3.29 |   | 3.21 |   |
|                                                                                                                               |       |                                       | ** ** |   |   |   |   |
| **Dividends declared per common share**                                                                                            | ** ** | **$**                                      | **0.300**  | ** ** | $ | 0.300 |   | $ | 0.300 |   |
| **Dividends declared per warrant**                                                                                                 | ** ** | **—**                                 | ** ** | 0.075 |   | 0.300 |   |

 

See Notes toConsolidated Financial Statements

 

F-2

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Table of Contents

** **

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

 
| **(In millions of U.S. dollars)**                   | ** ** | **Total  common  shareholders’  equity** | ** **  | **Common  shares** | ** ** | **Additional  paid-in  capital** | ** ** | **Treasury  shares** | ** **  | **Retained  deficit** | ** ** | **Accumulated  other  comprehensive  income** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------------------------|-------------|--------------------|------------|----------------------------------|------------|----------------------|-------------|-----------------------|------------|-----------------------------------------------|------------|
| Balances at January 1, 2006                                        |       | $                                             | 1,057.7     |               | $          | 0.2                              |       | $                    | 1,714.9     |                  | $          | —                                        |       | $ | (648.3 | ) | $ | (9.1 | ) |
|                                                                    |       |                                          |        |               |       |                             |       |                 |        |                  |       |                                          |       |
| Net income                                                              |       | 302.9                                         |        | —             |       | —                           |       | —               |        | 302.9                 |       | —                                        |       |
| Issuances of common shares                                              |       | 100.0                                         |        | —             |       | 100.0                            |       | —               |        | —                |       | —                                        |       |
| Other comprehensive income                                              |       | 58.6                                          |        | —             |       | —                           |       | —               |        | —                |       | 58.6                                          |       |
| Expense recognized for Restricted Share  Units and Director Share Units |       | 5.1                                           |        | —             |       | 5.1                              |       | —               |        | —                |       | —                                        |       |
| Direct equity offering expenses                                         |       | (0.8                                          | )           | —             |       | (0.8                             | )          | —               |        | —                |       | —                                        |       |
| Dividends declared on common shares                                     |       | (28.4                                         | )           | —             |       | —                           |       | —               |        | (28.4                 | )          | —                                        |       |
| Dividends declared on warrants                                          |       | (2.2                                          | )           | —             |       | —                           |       | —               |        | (2.2                  | )          | —                                        |       |
| Balances at December 31, 2006                                      |       | $                                             | 1,492.9     |               | $          | 0.2                              |       | $                    | 1,819.2     |                  | $          | —                                        |       | $ | (376.0 | ) | $ | 49.5 |   |
|                                                                    |       |                                          |        |               |       |                             |       |                 |        |                  |       |                                          |       |
| Net income                                                              |       | 315.8                                         |        | —             |       | —                           |       | —               |        | 315.8                 |       | —                                        |       |
| Common shares and warrants repurchased                                  |       | (128.7                                        | )           | —             |       | (128.7                           | )          | —               |        | —                |       | —                                        |       |
| Cumulative effect of adopting FAS 157 and  159                          |       | —                                        |        | —             |       | —                           |       | —               |        | 45.5                  |       | (45.5                                         | )          |
| Director Share Plan amendment                                           |       | (0.5                                          | )           | —             |       | (0.5                             | )          | —               |        | —                |       | —                                        |       |
| Other comprehensive loss                                                |       | (1.8                                          | )           | —             |       | —                           |       | —               |        | —                |       | (1.8                                          | )          |
| Amendment of forward sale agreement                                     |       | (3.9                                          | )           | —             |       | (3.9                             | )          | —               |        | —                |       | —                                        |       |
| Expense recognized for Restricted Share  Units and Director Share Units |       | 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                                      |       | $                                             | 1,653.1     |               | $          | 0.2                              |       | $                    | 1,694.3     |                  | $          | —                                        |       | $ | (43.6 | ) | $ | 2.2 |   |
|                                                                    |       |                                          |        |               |       |                             |       |                 |        |                  |       |                                          |       |
| Net loss                                                                |       | (145.5                                        | )           | —             |       | —                           |       | —               |        | (145.5                | )          | —                                        |       |
| Common shares repurchased                                               |       | (125.7                                        | )           | —             |       | (97.0                            | )          | (28.7                | )           | —                |       | —                                        |       |
| Issuances of common shares from treasury                                |       | —                                        |        | —             |       | (4.9                             | )          | 4.9                  |        | —                |       | —                                        |       |
| Restricted Share Units withheld for income  taxes                       |       | (1.7                                          | )           | —             |       | (1.7                             | )          | —               |        | —                |       | —                                        |       |
| Other comprehensive loss                                                |       | (5.4                                          | )           | —             |       | —                           |       | —               |        | —                |       | (5.4                                          | )          |
| Expense recognized for Restricted Share  Units                          |       | 8.3                                           |        | —             |       | 8.3                              |       | —               |        | —                |       | —                                        |       |
| 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** | **)** |

 

See Notes toConsolidated Financial Statements

 

F-3

----

Table of Contents

** **

 

**MONTPELIERRE HOLDINGS LTD.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In millions of U.S. dollars)**                                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows from operations:**                                                        |       |                                       | ** ** |   |   |   |   |
| Net income (loss)                                                                      | ** ** | **$**                                      | **(145.5** | **)** | $ | 315.8 |   | $ | 302.9 |   |
| Charges (credits) to reconcile net income  (loss) to net cash from operations:         |       |                                       | ** ** |   |   |   |   |
| Minority interest expense - Blue Ocean                                                 | ** ** | **1.9**                                    | ** ** | 31.9 |   | 39.3 |   |
| Excess of fair value of acquired net assets  over cost - Blue Ocean                    | ** ** | **(1.0**                                   | **)**      | — |   | — |   |
| Net realized and unrealized investment  (gains) losses                                 | ** ** | **244.9**                                  | ** ** | (26.5 | ) | (4.0 | ) |
| Expense recognized for Restricted Share  Units and Director Share Units                | ** ** | **8.3**                                    | ** ** | 8.2 |   | 5.1 |   |
| Net (accretion), amortization and  depreciation of assets and liabilities              | ** ** | **(0.1**                                   | **)**      | (7.0 | ) | 5.2 |   |
| Net change in:                                                                         |       |                                       | ** ** |   |   |   |   |
| Loss and loss adjustment expense reserves,  net of amounts acquired                    | ** ** | **(39.9**                                  | **)**      | (248.7 | ) | (692.7 | ) |
| Reinsurance recoverable on paid and unpaid  losses, net of amounts acquired            | ** ** | **4.6**                                    | ** ** | 56.0 |   | 156.2 |   |
| Unearned premium                                                                       | ** ** | **13.4**                                   | ** ** | (31.8 | ) | (43.7 | ) |
| Insurance and reinsurance balances payable                                             | ** ** | **4.0**                                    | ** ** | (36.5 | ) | (127.9 | ) |
| Unearned premium ceded                                                                 | ** ** | **(0.4**                                   | **)**      | 23.4 |   | 39.3 |   |
| Deferred acquisition costs                                                             | ** ** | **(3.7**                                   | **)**      | 2.6 |   | 23.1 |   |
| Premiums receivable                                                                    | ** ** | **(19.0**                                  | **)**      | 11.2 |   | 99.2 |   |
| Accounts payable, accrued expenses and  other liabilities                              | ** ** | **(4.1**                                   | **)**      | 4.7 |   | 13.5 |   |
| Purchases of fixed maturities - trading (1)                                            | ** ** | **—**                                 | ** ** | — |   | (746.7 | ) |
| Sales, maturities, calls and paydowns of  fixed maturity investments - trading (1)     | ** ** | **—**                                 | ** ** | — |   | 405.0 |   |
| Other                                                                                  | ** ** | **8.1**                                    | ** ** | (3.2 | ) | (6.8 | ) |
| **Net cash provided from (used for)  operations**                                      | ** ** | **71.5**                                   | ** ** | 100.1 |   | (533.0 | ) |
|                                                                                   |       |                                       | ** ** |   |   |   |   |
| **Cash flows from investing activities:**                                              |       |                                       | ** ** |   |   |   |   |
| Purchases of fixed maturities                                                          | ** ** | **(1,773.8**                               | **)**      | (1,399.7 | ) | (1,739.2 | ) |
| Purchases of equity securities                                                         | ** ** | **(474.3**                                 | **)**      | (72.5 | ) | (102.9 | ) |
| Purchases of other investments                                                         | ** ** | **(150.9**                                 | **)**      | (53.4 | ) | (1.3 | ) |
| Sales, maturities, calls and pay downs of  fixed maturity investments                  | ** ** | **2,075.4**                                | ** ** | 1,851.0 |   | 1,902.2 |   |
| Sales and redemptions of equity securities                                             | ** ** | **350.4**                                  | ** ** | 66.5 |   | 65.7 |   |
| Sales and redemptions of other investments                                             | ** ** | **20.0**                                   | ** ** | — |   | — |   |
| Purchase of MUSIC, net of cash acquired                                                |       | —                                     | ** ** | (6.7 | ) | — |   |
| Purchase of Blue Ocean minority interest                                               | ** ** | **(30.5**                                  | **)**      | — |   | — |   |
| Change in securities lending collateral  invested                                      | ** ** | **192.4**                                  | ** ** | 122.3 |   | (0.1 | ) |
| Net change in restricted cash                                                          | ** ** | **27.2**                                   | ** ** | — |   | (35.5 | ) |
| Net acquisitions of capitalized assets                                                 | ** ** | **(14.9**                                  | **)**      | (6.9 | ) | (10.3 | ) |
| **Net cash provided from investing activities**                                        | ** ** | **221.0**                                  | ** ** | 500.6 |   | 78.6 |   |
|                                                                                   |       |                                       | ** ** |   |   |   |   |
| **Cash flows from financing activities:**                                              |       |                                       | ** ** |   |   |   |   |
| Issuances of debt                                                                      |       | —                                     | ** ** | — |   | 173.3 |   |
| Repayments of debt                                                                     | ** ** | **(75.0**                                  | **)**      | — |   | — |   |
| Proceeds from issuances of the Company’s  common shares                           | ** ** | **—**                                 | ** ** | — |   | 100.3 |   |
| Repurchases of the Company’s common shares  and warrants                          | ** ** | **(129.8**                                 | **)**      | (124.7 | ) | — |   |
| Direct equity offering expenses                                                        | ** ** | **—**                                 | ** ** | — |   | (0.8 | ) |
| Proceeds from issuances of Blue Ocean  capital to minority shareholders                | ** ** | **—**                                 | ** ** | — |   | 66.5 |   |
| Amendment of Forward Sale Agreement                                                    | ** ** | **—**                                 | ** ** | (3.9 | ) | — |   |
| Dividends paid to holders of the Company’s  common shares and warrants            | ** ** | **(28.4**                                  | **)**      | (29.9 | ) | (30.0 | ) |
| Dividends and distributions paid to Blue  Ocean’s minority common shareholders    | ** ** | **(38.1**                                  | **)**      | (135.2 | ) | — |   |
| Dividends to, and repurchases from, Blue  Ocean’s minority preferred shareholders | ** ** | **(21.0**                                  | **)**      | (46.4 | ) | — |   |
| Change in securities lending payable                                                   | ** ** | **(193.4**                                 | **)**      | (122.3 | ) | 0.1 |   |
| **Net cash (used for) provided from financing  activities**                            | ** ** | **(485.7**                                 | **)**      | (462.4 | ) | 309.4 |   |
|                                                                                   |       |                                       | ** ** |   |   |   |   |
| **Effect of exchange rate changes on cash and  cash equivalents**                      | ** ** | **0.9**                                    | ** ** | 1.8 |   | 8.0 |   |
|                                                                                   |       |                                       | ** ** |   |   |   |   |
| **Net (decrease) increase in cash and cash  equivalents during the year**              | ** ** | **(192.3**                                 | **)**      | 140.1 |   | (137.0 | ) |
| Cash and cash equivalents - beginning of  year                                         | ** ** | **453.2**                                  | ** ** | 313.1 |   | 450.1 |   |
| **Cash and cash equivalents - end of year**                                            | ** ** | **$**                                      | **260.9**  | ** ** | $ | 453.2 |   | $ | 313.1 |   |

 

----

(1) Prior to the Company’s adoption ofFAS 159 on January 1, 2007, all trading securities activities wererequired to be presented as operating activities and all available for salesecurities activities were required to be presented as investing activities.

 

See Notes toConsolidated Financial Statements

 

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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 of SignificantAccounting 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 reinsurance and insurance 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 four operating segmentsconsisting of Montpelier Bermuda, Montpelier Syndicate 5151, MUSIC and BlueOcean.  Each operating segment is aseparate underwriting platform through which the Company writes reinsurance andinsurance business.

 

Detailed financial information about each of the Company’s operatingsegments for the three years ended December 31, 2008 is presented in Note13.  The activities of the Company andcertain of its intermediate holding and service companies, collectivelyreferred to as “Corporate and Other,” are also presented. During 2008, the Companychanged the composition of its operating segments. All prior periods presentedhave been re-segmented to conform with the current presentation.

 

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

 

*Montpelier Bermuda*

 

The Montpelier Bermuda segment consists of the collective operations ofMontpelier Reinsurance Ltd. (“Montpelier Re”) and Montpelier Marketing ServicesLimited (“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 reinsurance and insurance opportunities by utilizingproprietary risk pricing and capital allocation models and catastrophe modelingtools.

 

MMSL, the Company’s wholly-owned U.K. company based in London, providesmarketing services to Montpelier Re.

* *

*Montpelier Syndicate 5151*

 

The Montpelier Syndicate 5151 segment consists of the collectiveoperations of Montpelier Syndicate 5151 (“Syndicate 5151”), Montpelier CapitalLimited (“MCL”),  Montpelier UnderwritingAgencies Limited (“MUA”), Montpelier Underwriting Services Limited (“MUSL”),Montpelier Underwriting Inc. (“MUI”) and Montpelier Europa AG (“MEAG”).

 

Syndicate 5151, the Company’s wholly-owned Lloyd’s of London(“Lloyd’s”) syndicate based in London, was established on July 1, 2007.Syndicate 5151 underwrites primarily short-tail lines, mainly propertyinsurance and reinsurance, engineering and a limited amount of specialtycasualty classes sourced from the London, U.S. and European markets.

 

MCL, the Company’s wholly-owned subsidiary based in London, serves asSyndicate 5151’s sole corporate member.

 

MUA, the Company’s recently-established, wholly-owned Lloyd’s ManagingAgent based in London, manages Syndicate 5151. 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 MUA.

 

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MUI and MEAG serve as the Company’s wholly-owned Lloyd’s Coverholders,meaning that they are each authorized to enter into contracts of reinsuranceand insurance and/or issue documentation on behalf of Syndicate 5151. MUI,based in Hartford, Connecticut, underwrites reinsurance and insurance businessthrough managing general agents and intermediaries with a focus on programbusiness.  MEAG, based in Zug,Switzerland, focuses on reinsurance and insurance markets in Continental Europeand the Middle East.  MEAG also providesmarketing services to Syndicate 5151 and, to a lesser extent, Montpelier Re.

 

*MUSIC*

 

The MUSIC segment consists solely of the operations of Montpelier U.S.Insurance Company (“MUSIC”), the Company’s wholly-owned subsidiary based inScottsdale, 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”) on November 1, 2007.  MUSIC is an admitted insurer in Oklahoma andis authorized as an excess and surplus lines insurer in 43 additional statesand the District of Columbia.  At thetime 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 consists of the collective operations of BlueOcean Re Holdings Ltd. (“Blue Ocean”) and Blue Ocean Reinsurance Ltd. (“BlueOcean Re”).

 

Blue Ocean, the Company’s wholly-owned Bermuda company based in Pembroke,Bermuda,  is a holding company that ownsBlue Ocean Re which is 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 wasderegistered as a Bermuda insurer in 2008.

 

The Company acquired all the outstanding share capital of Blue Ocean inJune 2008 (the “Blue Ocean Transaction”). Prior to the Blue Ocean Transaction, the Company owned 42.2% of BlueOcean’s outstanding common shares. Prior to Blue Ocean’s repurchase of all itsoutstanding preferred shares on January 11, 2008, the Company owned 33.6%of such preferred shares.

 

Prior to Blue Ocean becoming a wholly-owned subsidiary, it wasconsidered a “variable interest entity” as defined under Financial AccountingStandards Board (“FASB”) Interpretation (“FIN”) No. 46R, entitled“Consolidation of Variable Interest Entities - an interpretation of AccountingResearch Bulletin No. 51 as amended” and was consolidated into theCompany’s financial statements.

 

*Corporate and Other*

 

The Company’s Corporate and Other activities consist of the operationsof the Company and certain of its intermediate holding and service companiesincluding Montpelier Technical Resources Ltd. (“MTR”) and Montpelier AgencyLtd. (“MAL”).

 

MTR, the Company’s wholly-owned subsidiary based in Woburn,Massachusetts, provides accounting, finance, risk management, advisory andinformation technology services to many of its subsidiaries.

 

MAL, the Company’s wholly-owned subsidiary based in Pembroke, Bermuda,provided Blue Ocean with underwriting, risk management, claims management,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 intercompanytransactions and balances have been eliminated on consolidation. Thepreparation of financial statements in accordance with GAAP requires managementto make estimates and assumptions that affect reported and disclosed amounts ofassets and liabilities, as well as disclosure of contingent assets andliabilities as of the balance sheet date and the reported amounts of revenuesand expenses during the reporting period. Estimates also affect the reportedamounts of income and expenses for the reporting period. Actual results coulddiffer materially from those estimates. The major estimates reflected in theCompany’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***

 

Montpelier accounts for insurance and reinsurance policies andcontracts that it writes in accordance with Statement of Financial AccountingStandard (“FAS”) No. 60, “Accounting and Reporting by InsuranceEnterprises”, and FAS 113, “Accounting and Reporting for Reinsurance ofShort-Duration and Long-Duration Contracts”. Premiums written are recognized as revenues, net of any applicableunderlying reinsurance coverage, and are earned ratably over the term of therelated policy or contract.  For themajority of Montpelier’s excess of loss contracts, written premium is based onthe deposit or minimum premium as defined in the contract. Subsequentadjustments, based on reports of actual premium or revisions in estimates byceding companies, are recorded in the period in which they are determined.  For Montpelier’s pro rata contracts andexcess-of-loss contracts where no deposit or minimum premium is specified inthe contract, written premium is recognized based on estimates of ultimatepremiums provided by the ceding companies. Initial estimates of written premiumare recognized in the period in which the underlying risks incept. Subsequentadjustments, based on reports of actual premium by the ceding companies, orrevisions in estimates, are recorded in the period in which they aredetermined.  Unearned premiums representthe portion of premiums written that are applicable to future insurance orreinsurance coverage provided by policies or contracts in force.

 

Premiums receivable are recorded at amounts due less any provision fordoubtful accounts.

 

When a reinsurance contract provides for a reinstatement of coveragefollowing a covered loss, the associated reinstatement premium is recorded asboth written and earned premium when Montpelier determines that the loss eventhas occurred.

 

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 contracts’ expected losses and LAE, anddeferred acquisition costs exceeds related unearned premiums, a premiumdeficiency is determined to exist. In this event, deferred acquisition costsare immediately expensed to the extent necessary to eliminate the premiumdeficiency.  If the premium deficiencyexceeds deferred acquisition costs then a liability is accrued for the excessdeficiency.  During the years ended December 31,2008 and 2007, Montpelier recorded premium deficiencies of $0.1 million and$0.9 million, respectively, related to the operations of Syndicate 5151. Duringthe year ended December 31, 2006, Montpelier did not record a premiumdeficiency.

 

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 class of businessand other classes with high attachment points of coverage. As a result,reserving for losses relating to such programs can be imprecise. Montpelier’sexposures are also highly leveraged, meaning that the impact of any change inthe estimate of total loss incurred by the cedent is magnified in the layers atwhich Montpelier’s coverage attaches. Additionally, the high-severity, low-frequency nature of the exposureslimits the volume of claims experience available from which to reliably predictultimate losses following a loss event, and renders certain traditional lossestimation techniques inapplicable.

 

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,  underwriters’experience and management’s professional judgment. Montpelier’s internalactuaries review the reserving assumptions and methodologies on a quarterlybasis and its loss estimates are subject to an annual corroborative review byindependent actuaries using generally accepted actuarial principles.

 

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The uncertainties inherent in the reserving process, delays in cedingcompanies reporting losses, together with the potential for unforeseen adversedevelopments, may result in loss and LAE reserves being significantly greateror less than the reserve provided at the time of the loss event. The degree ofuncertainty is further increased when a significant loss event takes place nearthe end of a reporting period. Loss and loss adjustment expense reserveestimates are regularly reviewed and updated as new information becomes known.Any resulting adjustments are reflected in income in the period in which theybecome 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,availability and cost. Reinsurance premiums ceded are accounted for on a basisconsistent with those used in accounting for the underlying premiums assumed,and are reported as a reduction of net premiums written. Certain ofMontpelier’s assumed pro-rata contracts incorporate reinsurance protectionprovided by third-party reinsurers that inures to Montpelier’s benefit. Thesereinsurance premiums are reported as a reduction in gross premiums written.

 

Montpelier remains liable for losses incurred to the extent that anythird-party reinsurer is unable or unwilling to make timely payments under reinsuranceagreements.

 

All of Montpelier’s reinsurance purchases to date have representedprospective cover, meaning that the coverage has been purchased to protect usagainst the risk of future losses as opposed to covering losses that havealready been incurred but have not yet been paid.  The majority of these reinsurance contractsprovide excess-of-loss coverage for one or more lines of business. To a lesserextent, Montpelier has also purchased quota share reinsurance with respect tospecific lines of business. Montpelier also purchases Industry Loss WarrantyPolicies (“ILWs”) which provide coverage for certain losses provided they aretriggered by events exceeding a specified industry loss size as well asMontpelier’s own incurred losses.  Fornon-ILW excess-of-loss reinsurance contracts, the attachment point andexhaustion of these contracts are based solely on the amount of Montpelier’sactual losses incurred from an event or events.

 

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 usually 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 they are determined, and to date have not beensignificant. In addition, losses which pierce excess-of-loss reinsurance covermay generate reinstatement premium ceded, depending on the terms of the contract.This reinstatement premium ceded is recognized as written and expensed at thetime 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 FAS 157, “Fair Value Measurements” andFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” As a result, all of Montpelier’s fixed maturity investments andequity securities are carried at fair value, with the net unrealizedappreciation or depreciation on such securities reported within net realizedand unrealized gains (losses) in the Company’s statement of operations. Priorto the adoption of FAS 157 and FAS 159, a significant portion of Montpelier’sfixed maturity investments and equity securities were carried at fair value andclassified as available-for-sale. As a result, net unrealized appreciation ordepreciation on such securities were reported as a separate component ofshareholders’ equity, with changes therein reported as a component of othercomprehensive income.

 

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Investments are recorded on a trade date basis.  The fair value of the investment portfolio isdetermined based on bid prices (as opposed to ask prices) which are notadjusted for transaction costs.  Gainsand losses on sales of investments are determined on the first-in, first-outbasis and are included in income when realized. Realized gains and lossesgenerally result from the sale of securities. Unrealized gains and lossesrepresent the gain or loss that would result from a hypothetical sale ofsecurities on the reporting date. In instances where the Company becomes awareof a significant unrealized loss with little or no likelihood of recovery, itwrites down the cost basis of the investment and recognizes the loss as arealized loss.

 

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.

 

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.

 

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 $7.1 million at December 31, 2008 consistedof $6.8 million of collateral supporting open short sale investment positionsand $0.3 million of overseas deposit accounts held at Lloyd’s.  Restricted cash of $35.5 million at December 31,2007 consisted of funds used to collateralize Blue Ocean Re’s trust funds.

 

Montpelier’s letter of credit facilities are secured by investments andcash. See Note 6. MUSIC is required to maintain deposits with certain insuranceregulatory agencies in the U.S. See Note 5.

 

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. Montpelier had $189.3 million in securities on loan at December 31,2007.

 

Montpelier maintained control over the securities it lent, retained theearnings and cash flows associated with the loaned securities and received afee from the borrower for the temporary use of the securities. Collateral inthe form of cash, government securities and letters of credit was required at arate of 102% of the market value of the loaned securities and was monitored andmaintained by the lending agent.

 

Montpelier reinvested some or all of the collateral received from theborrower in an attempt to achieve a greater investment return.  In so doing, Montpelier retained theinvestment risk associated with the reinvested collateral. As of December 31,2007, Montpelier’s securities on loan were supported by collateral, held by athird-party in the form of cash, government securities and letters of credit,totaling $192.0 million and $193.4 million was owed back to the counterparties.

 

***Common shares held in treasury***

 

On May 21, 2008, shareholders approved the adoption of theCompany’s Second Amended and Restated Bye-laws (the “Amended Bye-laws”). TheAmended Bye-laws incorporated various provisions of The Bermuda CompaniesAmendment Act of 2006 which, among other things, enabled the Company to holdits 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-out basis.  As of December 31, 2008, the Company’shad a $1.2 million inception to date gain from issuances of its treasury shareswhich has been recorded as additional common surplus. 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, 2008 and2007, funds withheld balances of $2.4 million and $3.3 million, respectively,were recorded within other assets on the consolidated balance sheet.

 

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***Earnings per share***

* *

The Company’s basic and diluted earnings per share calculations arebased on the average number of common shares outstanding, less weighted averagecommon shares issued under the Share Issuance Agreement (see Note 7), plusaverage vested Restricted Share Units (“RSUs”) and Director Share Unit (“DSUs”)outstanding.

 

In calculating earnings per share, the Company’s outstanding RSUs andDSUs are considered to be participating securities.  See Note 10. For purposes of determining earnings per share for the periodspresented, the Company’s earnings per share numerators are reduced by theportion of its current earnings allocated to unvested RSUs as well as anydividends declared on outstanding warrants to acquire common shares.

 

The following table outlines the Company’s computation of earnings pershare for the years ended December 31, 2008, 2007 and 2006:

 
| ** **                                                             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Earnings per share numerators:**                                     |       |                                       |       |   |   |   |   |
| Net income (loss) before extraordinary item                            | ** ** | **$**                                      | **(146.5** | **)** | $ | 315.8 |   | $ | 302.9 |   |
| Excess of fair value of acquired net assets  over cost - Blue Ocean    | ** ** | **1.0**                                    |       | — |   | — |   |
| Net income (loss)                                                      | ** ** | **$**                                      | **(145.5** | **)** | $ | 315.8 |   | $ | 302.9 |   |
| Less: earnings allocated to unvested RSUs                              | ** ** | **—**                                 |       | (2.7 | ) | (1.3 | ) |
| Less: dividends declared on outstanding  warrants                      | ** ** | **—**                                 |       | (0.5 | ) | (2.2 | ) |
| Net income (loss) available for common  shareholders                   | ** ** | **$**                                      | **(145.5** | **)** | $ | 312.6 |   | $ | 299.4 |   |
|                                                                   | ** ** | ** **                                 |       |   |   |   |   |
| **Earnings per share denominators (Millions  of shares):**             |       |                                       |       |   |   |   |   |
| Average common shares outstanding                                      | ** ** | **93.6**                                   |       | 105.3 |   | 102.0 |   |
| Less: average common shares issued under  the share issuance agreement | ** ** | **(7.9**                                   | **)**      | (10.5 | ) | (8.8 | ) |
| Average vested RSUs and DSUs                                           | ** ** | **0.4**                                    |       | 0.1 |   | — |   |
| Diluted earnings per share denominator                                 | ** ** | **86.1**                                   |       | 94.9 |   | 93.2 |   |
|                                                                   | ** ** | ** **                                 |       |   |   |   |   |
| **Basic earnings (loss) per share:**                                   |       |                                       |       |   |   |   |   |
| Net income (loss) before extraordinary item                            | ** ** | **$**                                      | **(1.70**  | **)** | $ | 3.29 |   | $ | 3.21 |   |
| Excess of fair value of acquired net assets  over cost - Blue Ocean    | ** ** | **.01**                                    | ** ** | — |   | — |   |
| Net income (loss)                                                      | ** ** | **$**                                      | **(1.69**  | **)** | $ | 3.29 |   | $ | 3.21 |   |
|                                                                   | ** ** | ** **                                 |       |   |   |   |   |
| **Diluted earnings (loss) per share:**                                 |       |                                       |       |   |   |   |   |
| Net income (loss) before extraordinary item                            | ** ** | **$**                                      | **(1.70**  | **)** | $ | 3.29 |   | $ | 3.21 |   |
| Excess of fair value of acquired net assets  over cost - Blue Ocean    | ** ** | **.01**                                    | ** ** | — |   | — |   |
| Net income (loss)                                                      | ** ** | **$**                                      | **(1.69**  | **)** | $ | 3.29 |   | $ | 3.21 |   |

 

***Minority interest***

** **

Prior to Blue Ocean becoming a wholly-owned subsidiary of the Companyin June 2008, the portion of Blue Ocean’s equity not owned by the Companywas considered to be owned by Blue Ocean’s minority shareholders. The minorityinterest liability in the Company’s consolidated balance sheets represents theequity of the minority shareholders of Blue Ocean and the minority interestexpense in the Company’s consolidated statements of operation represents theportion of income attributable to such minority shareholders.

*** ***

***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, MUA, MCL, MUSL and MMSL and the Swissfranc is the functional currency for the operations of MEAG. The U.S. dollar isthe functional currency for all other operations. The assets and liabilities ofthese foreign operations are converted to U.S. dollars at exchange rates ineffect at the balance sheet date, and the related revenues and expenses areconverted using average exchange rates for the period. Net foreign exchangegains and losses arising from translating these foreign operations into U.S.dollars are reported as a separate component of shareholders’ equity, withchanges therein reported as a component of other comprehensive income.

 

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The following rates of exchange to the U.S. dollar were used totranslate the results of the Company’s U.K. and Swiss operations, whichcommenced business on July 1, 2007:

 
| **Currency**        | ** ** | **Opening Rate  July 1, 2007** | ** ** | **Closing Rate  December 31, 2007** | ** ** | **Closing Rate  December 31, 2008** | ** ** |
|---------------------|------------|-----------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| British pound (GBP) |       | 2.0063                                        |       | 1.9843                                             |       | 1.4592                                             |       |
| Swiss franc (CHF)   |       | 0.8170                                        |       | 0.8827                                             |       | 0.9357                                             |       |

*** ***

Other transactions involving certain monetaryassets and liabilities denominated in foreign currencies have been translatedinto U.S. dollars at exchange rates in effect at the balance sheet date, andthe related revenues and expenses are converted using either specific oraverage exchange rates for the period, as appropriate.  Net foreign exchange gains and losses arisingfrom these activities are reported as a component of net income in the periodin which they arise.

 

***Changes in accounting principles***

** **

On October 10, 2008, the FASB issued Staff Position FAS 157-3(“FSP FAS 157-3”), entitled “*Determining theFair Value of a Financial Asset When the Market for That Asset Is Not Active*”.  FSP FAS 157-3 was effective immediately andapplies to prior periods for which financial statements have not been issued,including interim or annual periods ending on or before September 30,2008.  FSP FAS 157-3 clarifies theapplication of FASB Statement No. 157, entitled *“Fair Value Measurements*”, in a market that is not activeand provides an example to illustrate key considerations in determining thefair value of a financial asset when the market for that financial asset is notactive.  The requirements of FSB FAS157-3 did not materially impact the Company’s operations or financialcondition.

*** ***

During 2007 the Company adopted FAS 157, entitled *“Fair Value Measurements”*.  FAS 157 defines fair value as the pricereceived to transfer an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date reflecting thehighest and best use valuation concepts. FAS 157 also establishes a framework for measuring fair value in GAAP bycreating a hierarchy of fair value measurements that distinguishes market databetween observable independent market inputs and unobservable marketassumptions by the reporting entity. FAS 157 further expands disclosures aboutsuch fair value measurements. FAS 157 applies broadly to most existingaccounting pronouncements that require or permit fair value measurements(including both financial and non-financial assets and liabilities) but doesnot require any new fair value measurements. The Company elected to early adoptthis Statement effective January 1, 2007.

 

During 2007 the Company adopted FAS 159, entitled *“The Fair Value Option for Financial Assets andFinancial Liabilities”*. FAS 159 permits entities to choose tomeasure many financial instruments and certain other items at fair value. FAS159 also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. FAS 159 amends FAS 115,*“Accounting for Certain Investments in Debtand Equity Securities,”* and applies to all entities withavailable-for-sale and trading securities effective January 1, 2008. Thefair value option established by this Statement permits all entities to chooseto measure eligible items at fair value at specified election dates. TheCompany elected to adopt this Statement effective January 1, 2007.  As a result, the Company now reportsunrealized gains and losses associated with all its fixed maturity investmentsand equity securities on its statement of operations. With the exception oftrading securities held by Blue Ocean, the Company previously reportedunrealized gains and losses associated with its fixed maturity investments andequity securities as changes in other comprehensive income. In connection withthe January 1, 2007 adoption of FAS 157 and 159, the Company recorded acumulative-effect adjustment of $45.5 million between its retained deficit andaccumulated other comprehensive income on the consolidated balance sheet.  This adjustment consisted of gross unrealizedgains of $59.8 million and gross unrealized losses of $14.3 million.

 

During 2007 the Company adopted FAS 155, “Accounting for Certain HybridInstruments, an amendment to FAS 133 and FAS 140”.  FAS 155 eliminated the requirement to bifurcatefinancial instruments with embedded derivatives if the holder of the instrumentelects to account for the entire instrument at fair value, with the netunrealized appreciation or depreciation on such securities being reported asnet realized and unrealized gains (losses) on the statement of operations. Inconnection with the Company’s adoption of FAS 159 on January 1, 2007, itelected to account for all of its fixed maturity investments and equitysecurities, including its hybrid instruments, in this manner.  Therefore, the adoption of FAS 155 on January 1,2007, had no impact on the Company’s results of operations or financialcondition.

 

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During 2007 the Company adopted FIN 48, entitled *“Accounting for Uncertainty in Income Taxes”*.FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. It also provides detailed guidance forthe financial statement recognition, measurement and disclosure of uncertaintax positions recognized in an enterprise’s financial statements in accordancewith FAS 109, *“Accounting for Income Taxes.”*The Company did not report any changes to its reported results as a result ofits adoption of FIN 48 on January 1, 2007. The Company has taken anuncertain tax position in its determination that certain of its non-U.S.operations are not subject to U.S. income tax. See Note 11.

 

During 2006 the Company adopted FAS 123R,*“Share-Based Payment (revised 2004)”*, using the modifiedprospective transition method. Under the modified prospective transitionmethod, compensation cost recognized for the year ended December 31, 2008,2007 and 2006 includes compensation cost for all share-based payments grantedsubsequent to January 1, 2006, the effective date of adoption, based onthe grant date fair value estimated in accordance with the provisions of FAS123R. The adoption of FAS 123R did not have a material impact on the Company’sresults of operations or financial condition.

 

***Recent accounting pronouncements***

 

On December 4, 2007, the FASB issued FAS 141(R), entitled *“Business Combinations (revised 2007)”*,and FAS 160, entitled *“NoncontrollingInterests in Consolidated Financial Statements”*. These statementsare effective for fiscal years beginning after December 15, 2008.

 

FAS 141(R) requires the acquiring entity in a business combinationto recognize all (and only) the assets acquired and liabilities assumed in thetransaction; establishes the acquisition-date fair value as the measurementobjective for all assets acquired and liabilities assumed; and requires theacquirer to disclose to investors and other users all of the information theyneed to evaluate and understand the nature and financial effect of the businesscombination.

 

FAS 160 requires all entities to report noncontrolling (minority)interests in subsidiaries as equity in their consolidated financial statements.In addition, FAS 160 eliminates the diversity that currently exists inaccounting for transactions between an entity and noncontrolling interests byrequiring they be treated as equity transactions.

 

Neither the adoption of FAS 141(R) nor the adoption of FAS 160 isexpected to have a significant impact on the Company’s results of currentoperations or financial condition.

 

On March 19, 2008, the FASB issued FAS 161, entitled “*Disclosures about Derivative Instruments and HedgingActivities an amendment of FASB Statement No. 133.”* The statement is effective for fiscal yearsbeginning after November 15, 2008. FAS 161 amends and enhances the disclosure requirements for derivativeinstruments and hedging activities. Entities are required to provide enhanceddisclosures about: (i) how and why the entity uses derivative instruments;(ii) how derivative instruments and related hedged items are accountedfor; and (iii) how derivative instruments and related hedged items affectthe entity’s financial position, financial performance, and cash flows. Theadoption of FAS 161 will have no impact on the Company’s operations orfinancial condition but is expected to expand the Company’s current disclosuresregarding its derivative instruments.

 

On June 16, 2008, the FASB issued Staff Position EITF 03-6-1 (“FSPEITF 03-6-1”), entitled *“Determining WhetherInstruments Granted in Share-Based Payment Transactions Are ParticipatingSecurities*.” FSP EITF 03-6-1 is effective for fiscal years beginningafter December 15, 2008 and addresses whether instruments granted inshare-based payment transactions are participating securities prior to vestingand, therefore, need to be included in the earnings allocation in computingearnings per share under the two-class method described in FAS 128, entitled *“Earnings per Share.*”  The requirements of FSP EITF 03-6-1 will notmaterially impact the Company’s determination of earnings per share.

 

**NOTE 2.****            ****Acquisition of 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.

 

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In connection with the MUSIC Acquisition and in accordance with FAS141, entitled *“Business Combinations”*,Montpelier recorded a $4.8 million intangible asset representing the fair valueof MUSIC’s excess and surplus lines authorizations acquired.  This intangible asset is considered byMontpelier to have an indefinite useful life. As such, the intangible asset will not be amortized but will be testedno less than annually for impairment in accordance with FAS 142, entitled “*Goodwill and Other Intangible Assets”*.  If the carrying amount of the intangibleasset is greater than the fair values established during impairment testing, thecarrying value will be immediately written-down to the fair value with acorresponding impairment loss recognized in the Company’s consolidatedstatement of operations.

 

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, 2008, MUSIC had remaining gross loss and LAEreserves relating to business underwritten prior to the MUSIC Acquisition of$8.8 million (the “Acquired Reserves”). In support of the Acquired Reserves, at December 31, 2008, 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 $8.8 million. The fair value of the trust deposit was$11.6 million as of December 31, 2008. In addition, the Company hasreceived a full indemnification from GAINSCO covering any adverse developmentfrom its past business.  If the AcquiredReserves were to develop unfavorably during future periods and the variousprotective arrangements, including GAINSCO’s indemnification, ultimately provedto be insufficient, these liabilities would become our responsibility.

 

**NOTE 3.****            ****Unpaid Loss and LAE Reserves**

 

The following table summarizes Montpelier’s unpaid loss and LAE reserveactivities for the years ended December 31, 2008, 2007 and 2006:

 
| ** **                                            | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Gross loss and LAE reserves - beginning               | ** ** | **$**                                      | **860.7**  | ** ** | $ | 1,089.2 |   | $ | 1,781.9 |   |
| Reinsurance recoverable on unpaid losses -  beginning | ** ** | **(152.5**                                 | **)**      | (197.3 | ) | (305.7 | ) |
| Net loss and LAE reserves - beginning                 | ** ** | **708.2**                                  | ** ** | 891.9 |   | 1,476.2 |   |
|                                                  |       |                                       | ** ** |   |   |   |   |
| Losses and LAE incurred relating to:                  |       |                                       | ** ** |   |   |   |   |
| Current year losses                                   | ** ** | **399.2**                                  | ** ** | 213.9 |   | 196.5 |   |
| Prior year losses                                     | ** ** | **(104.1**                                 | **)**      | (36.4 | ) | (23.8 | ) |
| Total incurred losses and LAE                         | ** ** | **295.1**                                  | ** ** | 177.5 |   | 172.7 |   |
|                                                  |       |                                       | ** ** |   |   |   |   |
| Net impact of foreign currency movements              | ** ** | **0.6**                                    | ** ** | — |   | — |   |
|                                                  |       |                                       | ** ** |   |   |   |   |
| Loss and LAE paid:                                    |       |                                       | ** ** |   |   |   |   |
| Current year losses                                   | ** ** | **(125.4**                                 | **)**      | (26.0 | ) | (40.8 | ) |
| Prior year losses                                     | ** ** | **(192.5**                                 | **)**      | (335.2 | ) | (716.2 | ) |
| Total loss and LAE paid                               | ** ** | **(317.9**                                 | **)**      | (361.2 | ) | (757.0 | ) |
|                                                  |       |                                       | ** ** |   |   |   |   |
| Net loss and LAE reserves - ending                    | ** ** | **686.0**                                  | ** ** | 708.2 |   | 891.9 |   |
| Reinsurance recoverable on unpaid losses -  ending    | ** ** | **122.9**                                  | ** ** | 152.5 |   | 197.3 |   |
| Gross loss and LAE reserves - ending                  | ** ** | **$**                                      | **808.9**  | ** ** | $ | 860.7 |   | $ | 1,089.2 |   |

 

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***Loss and LAE development — 2008***

 

During the year ended December 31, 2008, Montpelier experienced$104.1 million in favorable development on net loss and LAE reserves relatingto prior year losses within the following lines of its business:

 

·             Netestimated ultimate Property Catastrophe losses for prior years decreased by$55.0 million due primarily to reassessments of loss and LAE reserves relatedto 2004 and 2005 hurricane losses, 2007 European storm losses and theCalifornia wildfires of 2007.  Ultimatelosses also decreased from an $8.0 million subrogation recovery from a claimpreviously paid, of which $5.0 million was recorded within the PropertyCatastrophe line and $3.0 million was recorded within the Property Specialtyline.

 

·             Netestimated ultimate Property Specialty losses for prior years decreased by $26.1million due to a decrease in expected ultimate losses related to several largeindividual losses as well as the $3.0 million subrogation recovery previouslymentioned.

 

·             Netestimated ultimate Other Specialty losses for prior years decreased by $23.0million due to favorable development related to several losses spanning manyclasses of business within the Other Specialty lines.  The favorable development experiencedspecifically included a $9.8 million reduction in reserves related toMontpelier’s medical malpractice line which was made in response tocedant-specific reported loss information received during the period.

 

***Loss and LAE development — 2007***

 

During the year ended December 31, 2007, Montpelier experienced$36.4 million in favorable development on net loss and LAE reserves relating toprior year losses within the following lines of its business:

 

·             Netestimated ultimate Property Catastrophe losses for prior years decreased by$4.0 million due to the re-assessment of loss and LAE reserves relating toseveral small loss events within Property Catastrophe lines.

 

·             Net estimated ultimate Property Specialtylosses for prior years decreased by $26.6 million due primarily to claimsemergence on the direct and facultative book of business being lower thanexpected and lower than expected ultimate losses on proportional business.

 

·             Net estimated ultimate Other Specialty lossesfor prior years decreased by $5.8 million due to the re-assessment of loss andLAE reserves relating to several classes of business within Other Specialtylines.

 

***Loss and LAE development — 2006***

 

During the year ended December 31, 2006, Montpelier experienced$23.8 million in favorable development on net loss and LAE reserves relating toprior year losses within the following lines of its business:

 

·             Net estimated ultimate Property Catastrophelosses for prior years increased by $30.2 million due primarily to an increasein expected ultimate losses in Montpelier’s retrocessional book of businessrelating to the 2005 hurricanes, mainly Hurricane Wilma.

 

·             Net estimated ultimate Property Specialtylosses for prior years decreased by $30.6 million due primarily to a decreasein expected ultimate losses for property risk excess claims.

 

·             Net estimated ultimate Other Specialty lossesfor prior years decreased by $19.9 million due primarily to a decrease inMarine losses relating to Hurricane Rita, decreases in expected losses onproportional contracts relating to the Aviation, Marine and Personal Accidentclasses of business and favorable commutations of a related group of Other Specialtycontracts.

 

·             Net estimated ultimate Qualifying Quota Sharelosses for prior years decreased by $3.5 million due to favorable commutationsof such contracts.

 

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The following table outlines Montpelier’s composition of its grossending loss and LAE reserves as of December 31, 2008 and 2007:

 
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-----------------------|------------|
| ** **                                        | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Component of ending gross loss and LAE  reserves: |       |                  |       |   |   |
| Case reserves                                     | ** ** | **$**                 | **378.9**  |   | $ | 402.0 |   |
| IBNR reserves                                     | ** ** | **430.0**             |       | 458.7 |   |
| Loss and LAE reserves                             | ** ** | **$**                 | **808.9**  |   | $ | 860.7 |   |

 

**NOTE 4.****            ****Ceded Reinsurance WithThird-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. In addition, for certain pro-ratacontracts that Montpelier enters into, the associated direct insurancecontracts carry underlying reinsurance protection from third-party reinsurers,known as inuring reinsurance, which Montpelier nets against its gross premiumswritten.

 

Montpelier remains liable for losses it incurs to the extent that anythird-party reinsurer is unable or unwilling to make timely payments underreinsurance agreements.  The effects ofreinsurance on Montpelier’s written and earned premiums and on losses and LAEwere as follows:

 
| ** **              | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------|------------|--------------------------------------------|------------|
|                    |       | **2008**                                   | ** ** | **2007** | ** ** | **2006** |   |
| Gross written premiums: |       | ** **                                 | ** ** | ** ** | ** ** | ** ** |   |
| Direct                  | ** ** | **$**                                      | **51.7**   | ** ** | $ | 42.3 |   | $ | 63.4 |   |
| Assumed                 | ** ** | **568.4**                                  | ** ** | 611.5 |   | 664.1 |   |
| Ceded                   | ** ** | **(78.9**                                  | **)**      | (104.8 | ) | (148.9 | ) |
| Net premiums written    | ** ** | **$**                                      | **541.2**  | ** ** | $ | 549.0 |   | $ | 578.6 |   |
|                    | ** ** | ** **                                 | ** ** |   |   |   |   |
| Gross earned premiums:  |       |                                       | ** ** |   |   |   |   |
| Direct                  | ** ** | **$**                                      | **43.9**   | ** ** | $ | 48.4 |   | $ | 53.4 |   |
| Assumed                 | ** ** | **563.1**                                  | ** ** | 636.9 |   | 717.7 |   |
| Ceded                   | ** ** | **(78.5**                                  | **)**      | (128.1 | ) | (188.1 | ) |
| Net premiums earned     | ** ** | **$**                                      | **528.5**  | ** ** | $ | 557.2 |   | $ | 583.0 |   |
|                    | ** ** | ** **                                 | ** ** |   |   |   |   |
| Gross loss and LAE:     |       |                                       | ** ** |   |   |   |   |
| Direct                  | ** ** | **$**                                      | **28.7**   | ** ** | $ | (1.2 | ) | $ | 31.7 |   |
| Assumed                 | ** ** | **295.7**                                  | ** ** | 185.6 |   | 172.2 |   |
| Ceded                   | ** ** | **(29.3**                                  | **)**      | (6.9 | ) | (31.2 | ) |
| Net loss and LAE        | ** ** | **$**                                      | **295.1**  | ** ** | $ | 177.5 |   | $ | 172.7 |   |

*** ***

Under Montpelier’s reinsurance security policy, reinsurers aregenerally required to be rated “A-” (Excellent) or better by A.M. Best atthe time the policy is written. Montpelier also considers reinsurers that arenot rated or do not fall within the above threshold on a case-by-case basiswhen collateralized 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.

 

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Earned reinsurance premiums ceded were $78.5 million, $128.1 millionand $188.3 million for the years ended 2008, 2007 and 2006, respectively.  Reinsurance recoveries of $35.4 million, $6.9million and $31.2 million were netted against Montpelier’s loss and LAE for theyears ended 2008, 2007 and 2006, respectively. In addition to loss recoveries, certain of Montpelier’s cededreinsurance contracts provide for recoveries of additional premiums,reinstatement premiums and for lost no-claims bonuses, which are incurred whenlosses are ceded to these reinsurance contracts.

 

The A.M. Best ratings of Montpelier’s reinsurers related toreinsurance recoverable on paid losses at December 31, 2008 and 2007, areas follows:

 
| ** **                                    | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Rating**                                    | ** ** | **Amount**                      | ** ** | **% of Total**        | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| A++                                           | ** ** | **$**                           | **29.3**   | ** **                      | **81**     | **%** | $ | 9.8 |   | 58 | % |
| A+                                            | ** ** | **0.5**                         | ** ** | **1**                           | ** ** | 0.9 |   | 6 |   |
| A                                             | ** ** | **0.8**                         | ** ** | **2**                           | ** ** | 2.7 |   | 16 |   |
| A-                                            | ** ** | **5.8**                         | ** ** | **16**                          | ** ** | 3.4 |   | 20 |   |
| Total reinsurance recoverable on paid  losses | ** ** | **$**                           | **36.4**   | ** **                      | **100**    | **%** | $ | 16.8 |   | 100 | % |

 

The A.M. Best ratings of Montpelier’s reinsurers related toreinsurance recoverable on unpaid losses at December 31, 2008 and 2007,are as follows:

 
| ** **                                      | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Rating**                                      | ** ** | **Amount**                      | ** ** | **% of Total**        | ** ** | **Amount** | ** ** | **% of Total** | ** ** |
| A++                                             | ** ** | **$**                           | **27.9**   | ** **                      | **23**     | **%** | $ | 53.5 |   | 35 | % |
| A+                                              | ** ** | **17.9**                        | ** ** | **15**                          | ** ** | 16.2 |   | 11 |   |
| A                                               | ** ** | **38.6**                        | ** ** | **31**                          | ** ** | 53.6 |   | 35 |   |
| A-                                              | ** ** | **8.1**                         | ** ** | **7**                           | ** ** | 12.5 |   | 8 |   |
| Unrated (fully collateralized)                  | ** ** | **21.6**                        | ** ** | **17**                          | ** ** | — |   | — |   |
| Recoverable under MUSIC guarantee (See Note  2) | ** ** | **8.8**                         | ** ** | **7**                           | ** ** | 16.7 |   | 11 |   |
| Total reinsurance recoverable on unpaid  losses | ** ** | **$**                           | **122.9**  | ** **                      | **100**    | **%** | $ | 152.5 |   | 100 | % |

 

Montpelier is subject to litigation and arbitration proceedings in thenormal course of its business.  Suchproceedings generally involve reinsurance or insurance 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 received a notice of arbitrationfrom Manufacturers Property and Casualty Limited (“MPCL”), a subsidiary ofManulife Financial Corporation of Toronto, Canada (“Manulife”).  The notice involves two contracts pursuant towhich Montpelier 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.

 

Subject to purported reservation of rights, MPCL has to date paid toMontpelier $25.5 million in respect of ceded claims under the DisputedContracts, which is net of deposit, reinstatement and additional premiums.

 

In the event that MPCL is awarded rescission of the Disputed Contracts,the reduction in total losses expected to be ceded under the DisputedContracts, net of reinsurance premiums earned and accrued, would total $73.0million.

 

Montpelier believes that MPCL’s case is without merit and that theDisputed Contracts are fully enforceable. In addition, we intend to seek relieffrom MPCL for attorney fees and interest costs. In the circumstances, Montpelier believes that the results of thearbitration will not have a materially adverse effect on its financialcondition, results of operations or cash flows.

 

Pursuant to directions given in the arbitration, we do not expectsubstantive hearings to begin until early 2010.

** **

**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:

 

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| ** **                                      | ** ** | **December 31, 2008**   | ** **  | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------------|-------------|---------------------------------|------------|
| ** **                                      | ** ** | **Cost or  Amortized  Cost** | ** **  | **Fair  Value**                 | ** ** | **Cost or  Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| Fixed maturity investments:           |       |                              |        |                            |       |   |   |   |   |
|                                            |       |                              |        |                            |       |   |   |   |   |
| Mortgage-backed and asset-backed securities     | ** ** | **$**                             | **631.3**   | ** **                      | **$**      | **599.2** |   | $ | 787.6 |   | $ | 790.2 |   |
| Corporate debt securities                       | ** ** | **483.5**                         | ** **  | **460.4**                       |       | 593.3 |   | 600.9 |   |
| U.S. government securities                      | ** ** | **362.5**                         | ** **  | **364.2**                       |       | 248.2 |   | 251.4 |   |
| U.S. government-sponsored enterprise securities | ** ** | **188.4**                         | ** **  | **190.6**                       |       | 403.6 |   | 406.7 |   |
| Other fixed maturity securities                 | ** ** | **90.1**                          | ** **  | **92.2**                        |       | 11.6 |   | 12.3 |   |
| Total fixed maturity investments                | ** ** | **$**                             | **1,755.8** | ** **                      | **$**      | **1,706.6** |   | $ | 2,044.3 |   | $ | 2,061.5 |   |
|                                            |       |                              |        |                            |       |   |   |   |   |
| Equity securities                               | ** ** | **$**                             | **310.0**   | ** **                      | **$**      | **242.3** |   | $ | 184.4 |   | $ | 220.2 |   |

 

As of December 31, 2008, 89% 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, 9% were rated “BBB” (Good) or below by Standard & Poor’sand 2% were unrated and primarily represented participation in bank loans.

 

In addition to the equity securities presented above, Montpelier alsohad open short equity positions recorded within its other liabilities at December 31,2008, with a basis of $6.8 million and a fair value of $5.9 million.  Montpelier had no open short positions at December 31,2007.

 

The contractual maturity of Montpelier’s fixed maturity investments at December 31,2008 and 2007 is presented below:

 
| ** **                                  | ** ** | **December 31, 2008** | ** **  | **December 31, 2007** | ** ** |
|---------------------------------------------|------------|---------------------------------|-------------|---------------------------------|------------|
| ** **                                  | ** ** | **Amortized  Cost**             | ** **  | **Fair  Value**                 | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| Fixed maturity investments:       |       |                            |        |                            |       |   |   |   |   |
| Due in one year or less                     | ** ** | **$**                           | **386.4**   | ** **                      | **$**      | **387.1** |   | $ | 310.6 |   | $ | 310.9 |   |
| Due after one year through five years       | ** ** | **503.4**                       | ** **  | **491.9**                       |       | 778.8 |   | 792.8 |   |
| Due after five years through ten years      | ** ** | **152.1**                       | ** **  | **147.2**                       |       | 93.6 |   | 96.1 |   |
| Due after ten years                         | ** ** | **82.6**                        | ** **  | **81.2**                        |       | 73.7 |   | 71.5 |   |
| Mortgage-backed and asset-backed securities | ** ** | **631.3**                       | ** **  | **599.2**                       |       | 787.6 |   | 790.2 |   |
| Total fixed maturity investments            | ** ** | **$**                           | **1,755.8** | ** **                      | **$**      | **1,706.6** |   | $ | 2,044.3 |   | $ | 2,061.5 |   |

 

***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, 2008** | ** ** | **December 31, 2007** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **Cost**                        | ** ** | **Carrying  Value**             | ** ** | **Cost** | ** ** | **Carrying  Value** | ** ** |
| Other investments carried at net asset value: |       |                            |       |                            |       |   |   |   |   |
| Limited partnership interests and other                                     | ** ** | **$**                           | **50.1**   | ** **                      | **$**      | **46.3** |   | $ | 56.4 |   | $ | 55.5 |   |
|                                                                        |       |                            |       |                            |       |   |   |   |   |
| Other investments carried at fair value:                                    |       |                            |       |                            |       |   |   |   |   |
| CAT Bonds                                                                   | ** ** | **$**                           | **66.3**   | ** **                      | **$**      | **60.9** |   | $ | — |   | $ | — |   |
| Limited partnership interests                                               | ** ** | **23.2**                        | ** ** | **17.1**                        |       | — |   | — |   |
| Private placement                                                           | ** ** | **20.0**                        | ** ** | **23.2**                        |       | 20.0 |   | 22.3 |   |
| Derivative instruments                                                      | ** ** | **0.3**                         | ** ** | **0.8**                         |       | — |   | (0.1 | ) |
| Total other investments carried at fair  value                              | ** ** | **$**                           | **109.8**  | ** **                      | **$**      | **102.0** |   | $ | 20.0 |   | $ | 22.2 |   |
|                                                                        |       |                            |       |                            |       |   |   |   |   |
| Other investments                                                           | ** ** | **$**                           | **159.9**  | ** **                      | **$**      | **148.3** |   | $ | 76.4 |   | $ | 77.7 |   |

 

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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 statements of operations. Thenet appreciation or depreciation on Montpelier’s derivative instruments isreported as net revenue (expense) from derivative instruments in the Company’sstatements of operations.

 

Montpelier’s investment in the common stock of Symetra FinancialCorporation (“Symetra”) represents a private placement investment acquired in2004. The net appreciation or depreciation on Symetra is reported as a separatecomponent of shareholders’ equity, with changes therein reported as a componentof other comprehensive income.  Symetrais routinely reviewed to determine if it has sustained an impairment in valuethat is considered to be other than temporary. Montpelier did not recognize anyimpairment on its investment in Symetra during the periods presented herein.

 

In May 2008, Montpelier purchased the CAT Bonds underlying itsformer CAT Bond Facility for $71.6 million. CAT Bonds are debt instrumentswhose principal and interest are forgiven if specified trigger events occur.**** SeeNote 7.

** **

Montpelier also entered into various investment option and futurescontracts during 2008.  See Note 7.

** **

***Fair Value Hierarchy***

** **

FAS 157 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.

 

·          Level1 inputs - unadjusted, quoted prices in active markets for identical assets orliabilities.

 

·          Level2 inputs - information other than quoted prices included within Level 1 that isobservable for the asset or liability, either directly or indirectly. Level 2inputs include quoted prices for similar assets or liabilities in activemarkets, quoted prices for identical or similar assets or liabilities inmarkets that are not active, and observable inputs other than quoted prices,such as interest rates and yield curves.

 

·          Level3 inputs — unobservable inputs.

 

In accordance with FAS 157, the valuation techniques used by theCompany 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. Values for U.S. Treasury and publicly tradedequity securities are generally based on Level 1 inputs which use the marketapproach valuation technique. The values for other fixed maturity investments,including mortgage-backed and asset-backed securities, corporate debtsecurities and U.S. government-sponsored enterprise securities, generallyincorporate significant Level 2 inputs, and in some cases, Level 3 inputs,using the market approach and income approach valuation techniques, asspecified within FAS 157.  There havebeen no changes in the Company’s use of valuation techniques since its adoptionof FAS 157.

 

The following tables present Montpelier’s investment securities andsecurities lending collateral carried at fair value, categorized by the levelwithin the FAS 157 hierarchy in which the fair value measurements fall, at December 31,2008 and 2007.  Montpelier terminated itssecurities lending program in August 2008.

 

| ** **                    | ** ** | **December 31, 2008** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair  Value** | ** ** |
| Fixed maturity investments    |       | $                               | 218.4      |   | $ | 1,329.3 |   | $ | 158.9 | ** ** | **$** | **1,706.6** | ** ** |
| Equity securities             |       | 236.6                           |       | 4.3 |   | 1.4 | ** ** | **242.3** | ** ** |
| Other investments             |       | —                          |       | 71.0 |   | 31.0 | ** ** | **102.0** | ** ** |
| Securities lending collateral |       | —                          |       | — |   | — | ** ** | **—** | ** ** |
| Total investments             |       | $                               | 455.0      |   | $ | 1,404.6 |   | $ | 191.3 | ** ** | **$** | **2,050.9** | ** ** |

 

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| ** **                    | ** ** | **December 31, 2007** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Level 1**                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total Fair  Value** | ** ** |
| Fixed maturity investments    |       | $                               | 240.2      |   | $ | 1,628.3 |   | $ | 193.0 |   | $ | 2,061.5 |   |
| Equity securities             |       | 220.2                           |       | — |   | — |   | 220.2 |   |
| Other investments             |       | —                          |       | (0.1 | ) | 22.3 |   | 22.2 |   |
| Securities lending collateral |       | 61.9                            |       | 30.4 |   | 99.7 |   | 192.0 |   |
| Total investments             |       | $                               | 522.3      |   | $ | 1,658.6 |   | $ | 315.0 |   | $ | 2,495.9 |   |

 

Investments classified as Level 3 at such dates primarily consisted ofthe following: (i) with respect to fixed maturity investments, certaincorporate bonds, convertible debt and asset-backed securities, many of whichare not publicly traded or are not actively traded; (ii) with respect toequity securities, warrants to acquire equity securities and certain non-U.S.equity securities; (iii) with respect to other investments, Montpelier’s investmentin Symetra; and (iv) with respect to securities lending collateral, debtinstruments, including certificates of deposit and commercial paper.

 

As of December 31, 2008 and 2007, the Company’s total Level 3assets represented 9.3% and 12.6% of its total assets measured at fair value,respectively.

* *

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, 2008 and 2007:

 

| ** **                                        | ** ** | **Year Ended December 31, 2008** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **Fixed  Maturity  Investments**                     | ** ** | **Equity  Securities** | ** ** | **Other  Investments** | ** ** | **Securities  Lending  Collateral** | ** ** | **Total Fair  Value** | ** ** |
| Level 3 investments as of January 1,  2008   |       | $                                                    | 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** | **)** |
| Level 3 investments as of December 31,  2008 |       | $                                                    | 158.9      |   | $ | 1.4 |   | $ | 31.0 |   | $ | — |   | **$** | **191.3** | ** ** |

 

In the course of changing investment managers during 2008, Montpelierwas provided with additional information concerning the pricing transparency ofcertain of its fixed maturities historically classified as Level 3. As aresult, the Company transferred securities with a fair value of $105.0 millionfrom Level 3 into Level 2 during the year.

 

| ** **                                        | ** ** | **Year Ended December 31, 2007** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **Fixed  Maturity  Investments**                     | ** ** | **Equity  Securities** | ** ** | **Other  Investments** | ** ** | **Securities  Lending  Collateral** | ** ** | **Total Fair  Value** | ** ** |
| Level 3 investments as of January 1,  2007   |       | $                                                    | —     |   | $ | — |   | $ | — |   | $ | — | ** ** | **$** | **—** | ** ** |
| Net transfers in (out)                            |       | 193.0                                                |       | — |   | 22.3 |   | 99.7 | ** ** | **315.0** | ** ** |
| Level 3 investments as of December 31,  2007 |       | $                                                    | 193.0      |   | $ | — |   | $ | 22.3 |   | $ | 99.7 | ** ** | **$** | **315.0** | ** ** |

 

As of January 1, 2007, the Company believed that all of itsinvestment securities and securities lending collateral were valued on thebasis of Level 1 and Level 2 inputs. However, this view changed during the latterpart of the year, due to illiquidity issues experienced by capital markets atthat time, and an increased understanding of the valuation processes undertakenby the Company’s investment managers and their associated pricing services.  As a result, we believed that we had no Level3 securities throughout most of 2007 and, towards the end of the year, wereclassified a sizable amount of investment securities to Level 3.

 

***Changes in Carrying Value***

** **

Changes in the carrying value of Montpelier’s investment portfolio forthe years ended December 31, 2008, 2007 and 2006, consisted of thefollowing:

 

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| ** **                             | ** ** | **Net Realized  Gains (Losses)  on Investments** | ** ** | **Net Unrealized  Gains (Losses)  on Investments** | ** ** | **Net Foreign  Exchange Gains  (Losses) and  Derivative  Revenue From  Investments (1)** | ** ** | **Total Changes  in Carrying  Value Reflected  in Earnings** | ** ** | **Changes in  Carrying Value  Reflected in  Other  Comprehensive  Income** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| **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                                                                             | )          | —                                                                                    |       |
| Year Ended December 31, 2006:     |       |                                                            |       |                                                              |       |                                                                                                              |       |                                                                             |       |                                                                                      |       |
| Fixed maturity investments             |       | $                                                               | (7.9       | )                                                                 | $          | (0.4                                                                                                              | )          | $                                                                                | 2.0        |                                                                                      | $          | (6.3 | ) | $ | 27.1 |   |
| Equity securities                      |       | 12.3                                                            |       | —                                                            |       | 0.1                                                                                                               |       | 12.4                                                                             |       | 29.0                                                                                      |       |
| Other investments                      |       | —                                                          |       | —                                                            |       | 2.5                                                                                                               |       | 2.5                                                                              |       | 2.4                                                                                       |       |
| Securities lending                     |       | —                                                          |       | —                                                            |       | —                                                                                                            |       | —                                                                           |       | —                                                                                    |       |

 

----

| (1) | Represents  realized and unrealized foreign exchange gains from investments and revenue  derived from the Company’s investments in the CAT Bond Facility, Foreign  Exchange Contracts and Investment Options and Futures (See Note 7). These  derivatives are carried at fair value as other investments in the Company’s  consolidated balance sheets. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Net Investment Income***

** **

Montpelier’s net investment income for 2008, 2007 and 2006 consisted ofthe following:

 

| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Fixed maturity investments | ** ** | **$**                                      | **80.0**   |   | $ | 123.8 |   | $ | 118.9 |   |
| Cash and cash equivalents  | ** ** | **3.7**                                    |       | 10.5 |   | 6.4 |   |
| Equity securities          | ** ** | **5.4**                                    |       | 5.1 |   | 5.4 |   |
| Other investments          | ** ** | **4.7**                                    |       | — |   | — |   |
| Securities lending income  | ** ** | **0.4**                                    |       | 0.4 |   | 0.5 |   |
| Total investment income    | ** ** | **94.2**                                   |       | 139.8 |   | 131.2 |   |
| Less investment expenses   | ** ** | **(7.8**                                   | **)**      | (7.3 | ) | (5.4 | ) |
| Net investment income      | ** ** | **$**                                      | **86.4**   |   | $ | 132.5 |   | $ | 125.8 |   |

 

Investment income from other investments during 2008 consistedprimarily of interest earned on CAT Bonds. In May 2008, Montpelier purchased the CAT Bonds underlying itsformer CAT Bond Facility.**** See Note 7.

 

Sales of investments totaled $1,774.0 million, $1,271.1 million and$1,567.3 million for the years ended December 31, 2008, 2007 and 2006,respectively.  Maturities, calls andpaydowns of investments totaled $672.1 million, $646.4 million and $400.6million for the years ended December 31, 2008, 2007 and 2006,respectively. There were no non-cash exchanges or involuntary sales of investmentsecurities during 2008, 2007 or 2006.

 

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 $4.5 million and $4.8 million at December 31, 2008 and2007, respectively.

 

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**NOTE 6.    Debtand Financing Arrangements**

*** ***

***Senior Debt (“Senior Notes”)***

*** ***

During 2003, the Company issued $250.0 million of senior unsecureddebt. The Senior Notes bear interest at a rate of 6.125% per annum, payablesemi-annually in arrears on February 15 and August 15 of each year.The Senior Notes are scheduled to mature on August 15, 2013.  The Company may redeem the Senior Notes atany time at a “make-whole” redemption price; however, the Company has nocurrent intention of doing so. The Senior Notes do not contain any covenantsregarding financial ratios or specified levels of net worth or liquidity towhich the Company or any of its subsidiaries must adhere.  The unamortized carrying value of the SeniorNotes at December 31, 2008 and December 31, 2007, was $249.4 millionand $249.3 million, respectively.

 

The Company incurred and paid interest expense of $15.3 million on theSenior Notes during each of the years ended December 31, 2008, 2007 and2006.

*** ***

***Junior Subordinated Debt Securities(“Junior Notes”)***

*** ***

In January 2006, the Company, through Montpelier Capital TrustIII, participated in a private placement of $100.0 million of floating ratecapital securities (the “Trust Preferred Securities”). The Trust PreferredSecurities mature on March 30, 2036, are redeemable at Montpelier CapitalTrust III’s option 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 the 3-month LIBOR plus 380 basispoints, reset quarterly. Montpelier Capital Trust III simultaneously issued allof its issued and outstanding share capital to the Company for a purchase priceof $3.1 million. The Junior Notes 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.  TheCompany’s investment of $3.1 million in the common shares of Montpelier CapitalTrust III is recorded in other investments.

 

Montpelier Capital Trust III used the proceeds from the sale of theTrust Preferred Securities and the issuance of its share capital to purchasejunior subordinated debt securities, due March 30, 2036, in the principalamount of $103.1 million issued by the Company. The junior subordinated debtsecurities bear interest at the same rates as the Trust Preferred Securitiesdiscussed above.

 

The Company incurred and paid interestexpense of $8.7 million, $8.7 million and $8.6 million on the Junior Notesduring the years ended December 31, 2008, 2007 and 2006, respectively.

 

***Blue Ocean Debt***

 

In November 2006, Blue Ocean obtained asecured a loan of $75.0 million from a syndicate of lenders (the “Blue OceanDebt”).  The Blue Ocean Debt had aninitial maturity date of February 28, 2008. Costs related to this facility of $1.7 million were amortized over theexpected period to maturity.  The BlueOcean Debt bore interest on the outstanding principal amount at a rate equal toa base rate plusa margin of 200 basis points.  The BlueOcean Debt was repaid in full on January 18, 2008.

 

During the years ended December 31, 2008, 2007 and 2006, BlueOcean incurred interest expense on the Blue Ocean Debt of $0.2 million, $5.6million and $0.5 million, respectively, and paid interest of $0.5 million, $5.3million and $0.5 million, respectively.

 

***Letter of Credit Facilities***

 

In the normal course of business, Montpelier Re and MCL maintain letterof credit facilities and provide letters of credit to third-parties. Theseletter of credit facilities were secured by collateral accounts containing cashand investments totaling $724.5 million at December 31, 2008. Thefollowing table outlines these facilities as of December 31, 2008:

 

| **Secured operational Letter of Credit Facilities** | ** ** | **Credit  Line** | ** ** | **Amount  drawn** | ** ** | **Expiry  Date** | ** ** |
|------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|------------------|------------|
|                                                                         |       |             |       |              |       |             |       |
| Montpelier Re’s Syndicated facility:  Tranche B                         |       | $                | 225.0      |              | $          | 141.9            |       | Aug. 2010 |   |
| Montpelier Re’s Syndicated 5-Year facility                              |       | $                | 500.0      |              | $          | 40.7             |       | June 2011 |   |
| Montpelier Re’s Syndicated 5-Year facility                              |       | $                | 215.0      |              | $          | 149.7            |       | June 2012 |   |
| Montpelier Re’s Bilateral facility A                                    |       | $                | 100.0      |              | $          | 26.6             |       | None |   |
| MCL’s Lloyd’s standby facility                                     |       | £           | 110.0      |              | £     | 105.0            |       | Dec. 2013 |   |

 

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Montpelier Re amended its $225.0 million syndicated secured facility inAugust 2005.  The amendment servedto revise this facility from a $250.0 million three-year facility to a $225.0million five-year facility with a revised expiry date of August 2010. Thisfacility is subject to an annual commitment fee of 0.275% on drawn balances and0.075% on undrawn balances.

 

Montpelier Re amended its $500.0 million syndicated secured facility inJune 2006. The amendment served to revise this facility from a one-year$1.0 billion facility, which expired in June 2007, to a five-year $500.0million facility.  This facility issubject to an annual commitment fee of 0.325% on drawn balances and 0.075% onundrawn balances.

 

Montpelier Re entered into a five-year syndicated secured $250.0million letter of credit facility in June 2007.  During 2008, this facility was reduced to$215.0 million.  This facility is subjectto an annual commitment fee of 0.275% on drawn balances and 0.08% on undrawnbalances.

 

Montpelier Re entered into a $100.0 million secured letter of creditfacility in November 2005. This facility has no stated expirationdate.  This facility is subject to anannual commitment fee of 0.20% on drawn balances only.

 

In June 2007, the Company, Montpelier Re and MCL entered into asecured £74.0 million standby letter of credit facility through December 31,2012, which will be used specifically as Funds at Lloyd’s to support businessto be underwritten by Syndicate 5151.  InOctober 2008, this facility was increased to £110.0 million with a revisedexpiry date of December 31, 2013. This facility is subject to an annual commitment fee of 0.45% on drawnbalances and 0.158% 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, 2008 and 2007, the Company and MontpelierRe were in compliance with all covenants.

 

***Trust Agreements***

*** ***

In the normal course of business, Blue Ocean Re established trust fundsfor the benefit of ceding companies.  Asof December 31, 2008, Blue Ocean Re had no in force reinsurance contractsand no longer required any of its assets to be held in trust.  As of December 31, 2007, Blue Ocean Re’srestricted assets held in trust funds consisted of cash and cash equivalents of$35.5 million and fixed maturity investments of $153.7 million.

 

**NOTE 7.****            ****Derivative Contracts**

** **

Montpelier enters into derivative contracts from time to time in orderto manage certain of its business risks and to supplement its investing andunderwriting activities.

 

The primary risks Montpelier seeks to manage through its use ofderivative instruments are underwriting risk and foreign exchange risk.  Derivative instruments utilized in order tomanage Montpelier’s underwriting risk during the periods presented belowinclude: (i) an option on hurricane seasonal futures (the “HurricaneOption”),  (ii) an Industry LossWarranty swap contract (the “ILW Swap”) and (iii) catastrophe bondprotection (the “CAT Bond Protection”). These derivative instruments providereinsurance-like protection to Montpelier for specific loss events associatedwith certain lines of its business. Additionally, the Company has entered into two equity forward saleagreements and a related share issuance agreement (the “Forward Sale Agreementsand Share Issuance Agreement”) in order to manage the risk associated with asignificant loss of capital, which could most likely occur as a result ofsignificant underwriting and/or investment losses. Foreign exchange risk,specifically Montpelier’s risk associated with making claim payments in foreigncurrencies, is managed through the use of foreign currency exchange agreements(the “Foreign Exchange Contracts”).

 

As an extension of its investing activities, Montpelier has enteredinto investment option and futures contracts (“Investment Options andFutures”).

 

As an extension of its underwriting activities, Montpelier has sold ILWprotection (the “ILW Contract”) and has participated in a CAT bond facility(the “CAT Bond Facility”).  Thesederivative instruments provide reinsurance-like protection to third-parties forspecific loss events associated with certain lines of business.

 

None of Montpelier’s derivatives is designated as a hedging instrumentunder FAS 133, entitled “*Accounting forDerivative Instruments and Hedging Activities.*”

 

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The following table presents the fair values of Montpelier’s derivativeinstruments at December 31, 2008 and December 31, 2007:

 

| ** **                                                | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Derivative contracts recorded as other  investments:      |       |                        |       |                        |       |
| Foreign Exchange Contracts                                | ** ** | **$**                       | **0.7**    |                        | $          | (1.9 | ) |
| Investment Options and Futures                            | ** ** | **0.1**                     |       | —                      |       |
| CAT Bond Facility                                         | ** ** | **—**                  |       | 1.8                         |       |
|                                                      |       |                        |       |                        |       |
| Total derivative contracts recorded as  other investments | ** ** | **$**                       | **0.8**    |                        | $          | (0.1 | ) |
|                                                      | ** ** | ** **                  |       |                        |       |
| Derivative contracts recorded as other  liabilities:      |       |                        |       |                        |       |
| ILW Contract                                              | ** ** | **$**                       | **—** |                        | $          | 0.6 |   |

 

The following table presents the net expense (income) from Montpelier’sderivative instruments during the years ended December 31, 2008, 2007 and2006:

 

| ** **                              | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                       |       |   |   |   |   |
| Hurricane Option                        | ** ** | **$**                                      | **1.0**    |   | $ | — |   | $ | — |   |
| ILW Swap                                | ** ** | **0.7**                                    |       | — |   | — |   |
| CAT Bond Protection                     | ** ** | **11.9**                                   |       | 11.9 |   | 13.7 |   |
| Foreign Exchange Contracts              | ** ** | **4.1**                                    |       | (3.2 | ) | (2.5 | ) |
| Investment Options and Futures          | ** ** | **(1.8**                                   | **)**      | — |   | — |   |
| CAT Bond Facility                       | ** ** | **(1.0**                                   | **)**      | (5.3 | ) | (1.3 | ) |
| ILW Contract                            | ** ** | **(0.6**                                   | **)**      | (3.1 | ) | — |   |
|                                    |       |                                       |       |   |   |   |   |
| Net expense from derivative instruments | ** ** | **$**                                      | **14.3**   |   | $ | 0.3 |   | $ | 9.9 |   |

 

The Forward Sale Agreements and Share Issuance Agreement currently haveno impact on the Company’s statements of operations or balance sheets. TheHurricane Option, ILW Swap, CAT Bond Protection and the ILW Contract hadbalances of zero at December 31, 2008.

 

A description of each of Montpelier’s derivative instruments follows:

*** ***

***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 during the period from June 1, 2008 to November 30, 2008.  The maximum possible recovery to Montpelierunder the Hurricane Option was $5.0 million. The Hurricane Option expired without value.

 

While outstanding, the fair value of the Hurricane Option was derivedbased on other observable inputs (Level 2 inputs as defined in FAS 157).

*** ***

***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 receives a floating-rate payment which istriggered on the basis of losses incurred by the insurance industry as a wholethrough April 30, 2009. The maximum recovery to Montpelier under the ILWSwap is $5.0 million.

 

The fair value of the ILW Swap (which was zero at December 31,2008) was derived based on unobservable inputs (Level 3 inputs as defined inFAS 157).   Through December 31,2008, no industry loss event occurred which would have triggered a recoveryunder the ILW Swap by Montpelier.

 

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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 twoseparate bond tranches, each of which matured on January 7, 2009. Thefirst $75.0 million tranche (“Class A”) covered earthquakes affectingJapan and/or the U.S. The remaining $15.0 million tranche (“Class B”),provided second event coverage for a U.S. hurricane or earthquake. 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 Montpelier.  For that reason, this transaction isaccounted for as a derivative, rather than as a reinsurance transaction, and iscarried at fair value in accordance with FAS 133 and EITF 99-2.

 

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.  In addition,during 2006 Montpelier incurred $1.9 million in one-time setup costs associatedwith the CAT Bond Protection.

 

The fair value of the CAT Bond Protection (which was zero at December 31,2008) was derived based on unobservable inputs. Through December 31, 2008,no industry loss event occurred which would have triggered a recovery under theCAT Bond Protection 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 allowMontpelier to establish a rate of exchange at a future point in time.Montpelier’s open foreign currency agreements at December 31, 2008 weredenominated in Swiss francs (CHF), euros (EUR), British pounds (GBP) andJapanese yen (JPY).

 

The fair value of the Foreign Exchange Contracts is derived based onother observable inputs (Level 2 inputs as defined in FAS 157).  At December 31, 2008 and December 31,2007, Montpelier was party to outstanding foreign currency exchange agreementshaving a gross notional exposure of $33.0 million and $86.9 million,respectively.

*** ***

***Investment Options and Futures***

 

During 2008, Montpelier executed various exchange-traded investmentoptions and futures as part of its investing strategy.  As of December 31, 2008, Montpelier hadclosed all of its investment futures and held open long options with a fairvalue of $0.1 million.

 

The fair value of the open options is derived based on other observableinputs (Level 2 inputs as defined in FAS 157).

*** ***

***CAT Bond Facility***

 

In June 2006, Montpelier entered into the CAT Bond Facility underwhich Montpelier is entitled to receive contract payments from a third-party inreturn 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 is marked to market over the terms ofthe bonds; the difference is settled on a monthly basis. These marked-to-marketadjustments, in addition to any interest earned on the bonds, are included as acomponent of net revenue (expense) from derivative instruments in the Company’sstatement of operations.

 

During the second quarter of 2008, the CAT Bond Facility was terminatedand Montpelier purchased the underlying CAT Bonds from the counterparty attheir fair value.  As a result, the CATBonds are now held on the Company’s consolidated balance sheets as otherinvestments. See Note 5.

 

The fair value of the CAT Bond Facility was derived based on otherobservable inputs (Level 2 inputs as defined in FAS 157). As of December 31,2007, Montpelier had entered into several CAT Bond Facility transactions havinga combined notional capital amount of $70.7 million.

 

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***ILW Contract***

 

In August 2007, Montpelier entered into the ILW Contract with athird-party under which qualifying loss payments are 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 on August 13,2008 without any required payment by Montpelier.

 

The ILW Contract covered losses resulting from all natural perilswithin the U.S. and was carried at fair value in accordance with EITF 99-2 andFAS 133.  The fair value of the ILWContract was derived based on unobservable inputs (Level 3 inputs as defined inFAS 157).The ILW Contract had a fair value of zero at December 31, 2008.

 

***Forward Sale Agreements and ShareIssuance Agreement***

 

In 2006, the Company entered into two equity Forward Sale Agreements,one expiring in March 2007 and one expiring in March 2008, underwhich the Company agreed to sell (subject to the Company’s right to cash settleor net share settle such agreements) an aggregate of between 9,796,388 and15,694,800 common shares to a third-party (the “forward counterparty”) inexchange for proceeds of approximately $180.0 million (subject to priorprepayment and assuming no subsequent repayment pursuant to the terms of suchagreements).  The forward counterpartysubsequently sold a total of 15,694,800 common shares in order to hedge itsposition under the Forward Sale Agreements.

 

The number of common shares to be sold in return for these proceeds isa function of the Company’s share price as well as the terms of thecontract.  If the share price on a givensettlement date falls at or between the contractual floor and cap prices, thenumber of common shares sold to the forward counterparty will equal the numberthat would need to be sold on a public exchange in order to generate the sameproceeds, resulting in no economic gain or loss to the Company.  If the share price on a given settlement dateis above the cap price, the number of common shares sold to the forwardcounterparty will be more than the number that would need to be sold on apublic exchange in order to generate the same proceeds, resulting in aneconomic loss to the Company.  If theshare price on a given settlement date is below the floor price, the number ofcommon shares sold to the forward counterparty will be less than the number thatwould need to be sold on a public exchange in order to generate the sameproceeds, resulting in an economic gain to the Company.

 

In March 2007, the Company notified the forward counterparty ofits election to settle the entire first Forward Sale Agreement which related toup to 7,774,800 common shares. In the course of that settlement, as thevaluation price per common share for each component was greater than the $11.75forward floor price and less than the $18.465 forward cap price, no payments ordeliveries of common shares were required to be made by the Company or theforward counterparty.

 

In December 2007, the Company and the forward counterparty amendedits existing Forward Sale Agreement, which relates to up to 7,920,000 commonshares and proceeds of $89.1 million. The primary result of the amendment wasto bifurcate the remaining Forward Sale Agreement into two tranches, extend theterm of the remaining Forward Sale Agreement and increase the forward cap pricefor each tranche.

 

Pursuant to the terms of the amendment, the remaining Forward SaleAgreement was divided into two tranches, each relating to 3,960,000 commonshares.  Each tranche is comprised oftwenty separate components, each relating to 198,000 common shares.  Subject to the Company’s right to elect cashor net share settlement with respect to all of or a portion of the componentsof either tranche, or to terminate early or otherwise accelerate settlement ofany component of either tranche, the Company will issue common shares to theforward counterparty: (i) in the case of the first tranche, over a twentybusiness day period beginning on October 8, 2009 based upon the price ofcommon shares over a twenty trading-day period beginning on October 5,2009; and (ii) in the case of the second tranche, over a twenty businessday period beginning on November 11, 2009 based upon the price of commonshares over a twenty trading-day period beginning on November 6, 2009.

 

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Also pursuant to the terms of the amendment, the forward cap price ofthe remaining Forward Sale Agreement was increased from $18.375 to $22.00 percommon share in the case of the first tranche, and from $18.375 to $23.00 percommon share in the case of the second tranche. The amendment did not change the forward floor price which remains at$11.25 per common share. As a result, upon full physical settlement of anycomponent of the Forward Sale Agreement, if the relevant volume-weightedaverage per share price of common shares on the valuation date for suchcomponent is greater than the increased forward cap price, the Company willissue to the forward counterparty a number of common shares equal to 51.1364%of the number of common shares underlying such component in the case of thefirst tranche, and 61.2245% of the number of common shares underlying suchcomponent in the case of the second tranche.

 

In December 2007, the Company made a $3.9 million cash payment tothe forward counterparty for the amendment of the Forward Sale Agreement, whichwas recorded as a reduction of its additional paid-in capital.

 

In connection with the Forward Sale Agreements described above, in May 2006the Company entered into a Share Issuance Agreement with the forwardcounterparty. Under the terms of the Share Issuance Agreement, the Companyissued 15,694,800 common shares during 2006 to the forward counterparty forpayment equal to the par value of such common shares. As a result of thesettlement of the first Forward Sale Agreement, in May 2007 the Companyrepurchased and retired 7,774,800 of these common shares for payment of the parvalue of such common shares.  As aresult, the Company continues to have 7,920,000 common shares issued andoutstanding under the Share Issuance Agreement at December 31, 2008.

 

The Company may terminate the Share Issuance Agreement at any time.Upon any termination of the Share Issuance Agreement, the common shares issuedto the forward counterparty thereunder (or other common shares) must, subjectto compliance with Bermuda law, be repurchased for nominal consideration by theCompany. The forward counterparty has agreed to post and maintain collateral witha third-party as security for certain of its obligations as required under theterms of the Share Issuance Agreement.

 

Any common shares issued to the forward counterparty will be issued andoutstanding for company law purposes, and accordingly, the holders of suchshares will have all of the rights of a holder of our issued and outstandingcommon shares, including the right to vote the shares on all matters submittedto a vote of our shareholders and the right to receive any dividends or otherdistributions that we may pay or make on our issued and outstanding commonshares. However, under the Share Issuance Agreement, the forward counterpartyhas agreed to pay to us an amount equal to any cash dividends or distributionsthat are paid on the issued shares and to pay or deliver to us any otherdistribution, in liquidation or otherwise, on the issued common shares.

 

In view of the contractual undertakings of the forward counterpartyunder the Share Issuance Agreement, which have the effect of substantially eliminatingthe economic dilution that otherwise would result from the issuance of thecommon shares, the Company believes that, under GAAP currently in effect, thecommon shares issued thereunder should not be considered outstanding for thepurposes of computing and reporting earnings per share or fully convertedtangible book value per share.

 

During periods in which the Company’s average share price exceeds theforward cap price, the Forward Sale Agreement will have a dilutive impact ondiluted earnings per share and, during periods in which the Company’s fullyconverted book value per share and fully converted tangible book value pershare exceeds the forward cap price, the Forward Sale Agreement will have adilutive impact on fully converted book value per share and fully convertedtangible book value per share.

 

**NOTE 8.****            ****Minority Interest**

 

The Company acquired all the outstanding share capital of Blue Ocean inJune 2008 pursuant to the Blue Ocean Transaction.  Prior to the Blue Ocean Transaction, the Companyowned 42.2% of Blue Ocean’s outstanding common shares and, prior to BlueOcean’s repurchase of all its outstanding preferred shares in January 2008,the Company owned 33.6% of Blue Ocean’s preferred shares.  During the periods in which the Company ownedless than 100% of the share capital of Blue Ocean, the Company consolidatedBlue Ocean into its financial statements in accordance with FIN 46 and theportion of Blue Ocean’s equity not owned by the Company was reported asminority interest.

 

The following tables present the composition of the minority interestin Blue Ocean’s common and preferred equity as of December 31, 2008 and2007:

 

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** **

 

** **                              | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Minority interest - Blue Ocean common equity** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Beginning balance                                                              | ** ** | **$**                 | **68.1**   |   | $ | 176.8 |   |
| Offering expenses                                                              | ** ** | **—**            |       | (0.8 | ) |
| Distributions and dividends                                                    | ** ** | **(38.1**             | **)**      | (135.2 | ) |
| Change in retained earnings attributable to  common shareholders               | ** ** | **0.5**               | ** ** | 27.3 |   |
| Blue Ocean Transaction                                                         | ** ** | **(30.5**             | **)**      | — |   |
| Ending balance                                                                 | ** ** | **$**                 | **—** | ** ** | $ | 68.1 | ** ** |
|                                                                                |            |                       |            |  |  |  |  |  |  |

 
| ** **                                                                        | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------|------------|
| **Minority interest - Blue Ocean preferred equity** | ** ** | **2008**              | ** ** | **2007** | ** ** |
| Beginning balance                                                                 | ** ** | **$**                 | **20.6**   |   | $ | 61.6 |   |
| Offering expenses                                                                 | ** ** | **—**            |       | 0.8 |   |
| Redemptions                                                                       | ** ** | **(18.8**             | **)**      | (36.5 | ) |
| Change in dividends payable                                                       | ** ** | **(1.8**              | **)**      | (5.3 | ) |
| Ending balance                                                                    | ** ** | **$**                 | **—** |   | $ | 20.6 |   |

 

**NOTE 9.    CommonShareholders’ Equity**

 

The following table summarizes the Company’s common share activityduring the years ending December 31, 2008, 2007  and 2006:

 

| ** **                                          | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------|------------|
| **(in shares)**                                | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Common shares outstanding - beginning               | ** ** | **99,290,078**                             |       | 111,775,682 |   | 89,178,490 |   |
| Acquisitions of common shares:                      |       |                                       |       |   |   |   |   |
| Common shares purchased and retired                 | ** ** | **(5,921,644**                             | **)**      | (4,719,344 | ) | — |   |
| Common shares purchased and placed in  treasury     | ** ** | **(1,877,375**                             | **)**      | — |   | — |   |
| Share Issuance Agreement                            | ** ** | **—**                                 | ** ** | (7,774,800 | ) | — |   |
| Issuances of common shares:                         |       |                                       |       |   |   |   |   |
| Private sales                                       | ** ** | **—**                                 |       | — |   | 6,896,552 |   |
| Issuances in satisfaction of vested RSU obligations | ** ** | **335,645**                                |       | — |   | — |   |
| Issuances in satisfaction of DSU  obligations       | ** ** | **—**                                 |       | 8,540 |   | 5,840 |   |
| Share Issuance Agreement                            | ** ** | **—**                                 | ** ** | **—** |   | 15,694,800 |   |
| Common shares outstanding — ending             | ** ** | **91,826,704**                             |       | 99,290,078 |   | 111,775,682 |   |

 

As of December 31, 2008, the Company had 91,826,704 common sharesoutstanding, consisting of 93,368,434 common shares issued less 1,541,730common shares held in treasury.  As of December 31,2007 and 2006, the Company’s common shares issued were equal to its commonshares outstanding as it held no shares in its treasury at those times.

*** ***

On February 26, 2008, the Company’s Board of Directors authorizedthe purchase of up to $200.0 million in common shares from time-to-time. Commonshares may be purchased in the open market or through privately negotiatedtransactions.  As of December 31,2008, the Company had remaining authorization of $110.6 million. There is nostated expiration date associated with this authorization.

*** ***

*2008 common share activity*

 

The Company purchased 5,921,644 common shares at an average price of$16.38 per share from January 1, 2008 to May 21, 2008.  These common shares were promptly retired.

 

The Company purchased a further 1,877,375 common shares at an averageprice of $15.31 per share from May 22, 2008 to July 15, 2008.  These common shares were placed in theCompany’s treasury and are expected to be re-issued to employees and directorsin satisfaction of certain existing and future share-based obligations. SeeNote 10.

 

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On December 31, 2008, the Company issued 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*

 

On May 1, 2007, the Company purchased 939,039 common shares and7,172,375.5 outstanding warrants from White Mountains Insurance Group, Ltd. fora total purchase price of $65.0 million. The Company purchased a further 3,780,305 common shares at an averageprice of $16.86 per share from June 30, 2007 to December 31,2007.  All common shares and warrantspurchased during 2007 were promptly retired.

 

In May 2007, the Company retired 7,774,800 common shares under theShare Issuance Agreement. See Note 7.

 

During 2007 the Company issued 8,540 common shares resulting from theconversion of DSUs to common shares.

 

*2006 common share activity*

 

In May 2006, the Company entered into a Purchase Agreement withWLR Recovery Fund, II, L.P. and WLR Recovery Fund III, L.P. for aprivate sale of 6,896,552 common shares at a price of $14.50 per commonshare which closed in June 2006. The Company’s net proceeds, afterdeducting estimated offering expenses of $0.8 million, was approximately$99.5 million.  See Note 15.

 

During 2006 the Company issued 5,840 common shares resulting from theconversion of DSUs to common shares.

 

In May 2006, the Company issued 15,694,800 common shares under theShare Issuance Agreement. See Note 7.

 

***Dividends and Distributions***

 

The Company declared, on a quarterly basis,regular cash dividends per common share totaling $.30 in 2008, 2007 and2006.  The Company also declared cashdividends on warrants, during the periods in which they were outstanding, onthe same basis as that of common shares.

 

The total amount of dividends paid to holders of the Company’s commonshares and warrants during the years ended December 31, 2008, 2007 and2006, was $28.4 million, $29.9 million and $30.0 million, respectively.  As of December 31, 2008 and 2007, theCompany had $6.9 million and $7.4 million in dividends that were declared, butnot yet paid, to holders of common shares and warrants.

 

**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 the Company’s common shares, may be madeto plan participants. Currently, Montpelier’s share-based incentive awardsunder the LTIP consist of awards of performance shares and restricted shareunits (“RSUs”).

 

As of December 31, 2008, the Company had remaining authority toissue up to 4,257,736 common share awards under the LTIP.

 

*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 Committee, any final payment inrespect of such a grant may take the form of cash, common shares or acombination of both.

 

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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, 2008, 2007 and 2006:

 

| ** **                           | ** ** | **Year Ended December 31,**   | ** ** |
|--------------------------------------|------------|----------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **Target  Performance  Shares  Outstanding** | ** ** | **Accrued  Expense** | ** ** | **Target  Performance  Shares  Outstanding** | ** ** | **Accrued  Expense** | ** ** | **Target  Performance  Shares  Outstanding** | ** ** | **Accrued  Expense** | ** ** |
| Beginning of period                  | ** ** | **335,000**                                  | ** ** | **$** | **4.9** |   | 561,000 |   | $ | 1.2 |   | 400,000 |   | $ | — |   |
| Payments                             | ** ** | **—**                                   | ** ** | **—** |   | — |   | — |   | — |   | — |   |
| New awards                           | ** ** | **—**                                   | ** ** | **—** |   | 180,000 |   | — |   | 164,000 |   | — |   |
| Forfeitures & Cancellations | ** ** | **(10,000**                                  | **)**      | **—** |   | (406,000 | ) | (0.1 | ) | (3,000 | ) | — |   |
| Expense recognized                   | ** ** | **—**                                   | ** ** | **(0.9** | **)** | — |   | 3.8 |   | — |   | 1.2 |   |
| End of period                        | ** ** | **325,000**                                  | ** ** | **$** | **4.0** |   | 335,000 |   | $ | 4.9 |   | 561,000 |   | $ | 1.2 |   |

 

In April 2007, 400,000 performance shares shown as outstanding at January 1,2007, which were issued for the 2005-2007 performance cycle, were cancelledwithout payment as there was no expected payout due to the adverse financialeffects of the severe hurricanes that occurred during 2005.

 

The following table summarizes performance shares outstanding at targetand the accrued performance share expense at December 31, 2008, for eachoutstanding performance cycle:

 

| ** **                          | ** ** | **Target  Performance  Shares  Outstanding** | ** ** | **Accrued  expense** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|
| **Performance cycle:**              |       |                                         |       |                 |       |
| 2006—2008                      |       | 153,000                                      |       | $                    | 2.6        |   |
| 2007—2009                      |       | 172,000                                      |       | 1.4                  |       |
| **Total at December 31, 2008** | ** ** | **325,000**                                  | ** ** | **$**                | **4.0**    | ** ** |

 

If 100% of the outstanding performance shares had been vested on December 31,2008, the total additional compensation cost to be recognized would have been$0.7 million based on current accrual factors (share price and payoutassumptions).

 

*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 Montpelier (either asan employee,  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, effective for periods after December 31,2008, Section 457A and guidance promulgated by the U.S. Internal RevenueService thereunder may cause certain LTIP participants (those who are U.S.taxpayers) to be taxed on the fair value of RSUs upon vesting rather than uponsubsequent receipt of the underlying common shares.

 

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In order to alleviate this potential mismatch between taxation andreceipt of the common shares, the Company’s CN Committee resolved, on December 3,2008, to amend certain outstanding RSU awards to accelerate the distribution ofthe underlying common shares to coincide more closely with the vesting date.This amendment to the award agreements did not change the applicable vestingdate, but allowed participants to receive their common shares during the sameperiod in which they will be taxable. Prior to the EES Act, RSUs were payable in common shares only at the endof the RSU term.

 

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 as part of their total remuneration.  In each of these cases, the number of RSUsgranted to the recipient were fixed and determinable on the grant date (“FixedRSUs”).

 

During 2008 the Company also began using a new form of RSU award, inaddition to Fixed RSUs, as the principal component of its ongoing long-termincentive compensation for employees (“Variable RSUs”). Variable RSUs arecontingent awards in which the actual number of RSUs to be awarded is dependenton Company performance during the initial year (the “Initial RSU Period”) ofthe four year award cycle. The actual number of Variable RSUs is not fixed anddeterminable until the completion of the Initial RSU Period and, during thatperiod, the number of RSUs expected to be awarded for that cycle may fluctuate,perhaps significantly.  For the RSU awardcycle from 2008 to 2011, the actual number of Variable RSUs projected to beawarded has been determined based on a 2008 target ROE of 11.2%, assuming astandardized investment return.  Withrespect to the 2008 to 2011 award cycle, at an achieved ROE of 11.2% theCompany projects a grant of approximately 600,000 Variable RSUs toparticipants, at an ROE of 5.2% the Company would not expect to grant anyVariable RSUs to participants and at an ROE of 21.2% the Company projects agrant of approximately 1,200,000 Variable RSUs to participants.  Based on an estimated ROE achieved for 2008of 8.2%,the Company projects the number of its Variable RSUs to be granted forthe 2008-2011 award cycle to be 316,036.

 

The following table summarizes Montpelier’s RSU activity for the yearsended December 31, 2008, 2007 and 2006:

 

| ** **                                             | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | **RSUs  Outstanding**                      | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** | **RSUs  Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** | **RSUs  Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** |
| Beginning of period                                    | ** ** | **1,109,083**                              | ** ** | **$** | **7.3** |   | 456,000 |   | $ | 3.1 |   | — |   | $ | — |   |
| Fixed RSUs Awarded                                     | ** ** | **252,000**                                | ** ** | **3.6** |   | 720,750 |   | 12.4 |   | 473,000 |   | 7.9 |   |
| Variable RSUs projected to be awarded                  | ** ** | **316,036**                                | ** ** | **5.1** |   | — |   | — |   | — |   | — |   |
| Change in assumptions, including expected  forfeitures | ** ** | **—**                                 | ** ** | **(0.3** | **)** | — |   | — |   | — |   | — |   |
| Payments                                               | ** ** | **(379,835**                               | **)**      | **—** | ** ** | — |   | — |   | — |   | — |   |
| Actual forfeitures                                     | ** ** | **(15,665**                                | **)**      | **—** | ** ** | (67,667 | ) | — |   | (17,000 | ) | — |   |
| Expense recognized                                     | ** ** | **—**                                 | ** ** | **(8.3** | **)** | — |   | (8.2 | ) | — |   | (4.8 | ) |
| End of period                                          | ** ** | **1,281,619**                              | ** ** | **$** | **7.4** |   | 1,109,083 |   | $ | 7.3 |   | 456,000 |   | $ | 3.1 |   |

 

In determining the initial grant date fair value of RSUs, a zero tofive percent discount to the then market value of the shares is applied as salerestrictions may remain after RSUs are vested, depending on the date and termof the award.

 

The Company also assumes a 3% to 9% forfeiture rate.  Actual forfeitures are periodically comparedto assumed forfeitures for reasonableness.

 

During 2008, the Company revised its expected RSU forfeitureassumptions and, in light of the changes made to certain outstanding RSU awardsin 2008 resulting from the EES Act, eliminated or reduced its sale restrictiondiscount. The net impact of these revisions was a $0.3 million reduction in RSUexpense for 2008.

 

On December 31, 2008, the Company paid out 379,835 vested RSUsrelating to the 2006 - 2008 award cycle and withheld, at the recipient’selection, 44,190 RSUs for the payment of income taxes.  As a result, the Company issued 335,645 netshares from its treasury on December 31, 2008 resulting in a $1.2 milliongain on the issuance of treasury shares. See Note 1 and Note 9.  The fairvalue of the 379,835 vested RSUs paid out during 2008 was $6.2 million.

 

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As of December 31, 2008, 457,288 of the total outstanding RSUswere vested and are payable during the first quarter of 2009.

 

The following table summarizes RSUs outstanding and the unamortizedgrant date fair value of such RSUs at December 31, 2008, for each awardcycle:

 

| **Award Date and Cycle**                          | ** ** | **RSUs  Outstanding** | ** ** | **Unamortized  Grant Date  Fair Value** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|---------------------------------------------------|------------|
|                                                             |       |                  |       |                                              |       |
| Three year RSU awards granted in 2007                            | ** ** | **493,833**           | ** ** | **$**                                             | **1.2**    | ** ** |
| Five year RSU awards granted in 2007                             | ** ** | **219,750**           | ** ** | **1.6**                                           | ** ** |
| Four year RSU awards granted or projected  to be granted in 2008 | ** ** | **376,036**           | ** ** | **2.9**                                           | ** ** |
| Five year RSU awards granted in 2008                             | ** ** | **192,000**           | ** ** | **1.7**                                           | ** ** |
| **Total at December 31, 2008**                              | ** ** | **1,281,619**         | ** ** | **$**                                             | **7.4**    | ** ** |

 

The Company expects to incur future RSU expense of $4.3 million, $1.9million, $0.9  million and $0.3  million associated with its outstanding RSUsat December 31, 2008, during 2009, 2010, 2011 and 2012, 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, effectiveJuly 2007, an equivalent amount of cash upon termination of service as adirector. In addition, while the DSUs are outstanding, they are credited withcommon share dividend equivalents.

 

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 the 2007 third quarter the Company reclassed its existing$0.5 million obligation for outstanding DSUs at June 30, 2007, fromadditional paid-in capital to other liabilities and will record all futurechanges in its DSU obligations as a change in other liabilities.

 

In light of the EES Act, in November 2008 the Company’s CNCommittee and the Company’s Board of Directors resolved to permit directors whoparticipate in the Directors’ Share Plan to elect to receive payment prior to December 31,2017.

 

As of December 31, 2008 and 2007, the Company’s liability foroutstanding DSUs was $0.7 million and $0.4 million, respectively.

*** ***

**NOTE 11.****     ****Income Taxes**

 

The Company is domiciled in Bermuda and has subsidiaries domiciled inseveral countries, including the U.S. The Company and its Bermuda-domiciledaffiliates, including Montpelier Re and Blue Ocean, have received an assurancefrom the Bermuda Minister of Finance exempting them from all Bermuda-imposedincome, 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 federalincome taxes has been determined under the principles of the consolidated taxprovision of the U.S. Internal Revenue Code and Regulations. The Company alsohas subsidiaries domiciled in the U.K. and Switzerland which are subject to therespective income taxes in those jurisdictions. To the best of the Company’s knowledge, there are no tax examinationspending in the U.S., U.K. and Switzerland. The tax years open to examination by the U.S. Internal Revenue Servicefor our U.S. subsidiaries are from 2007, their year of inception, to present.The tax years open to examination by HM Revenue & Customs in the U.K.for MMSL, which is subject to de minimis income taxes, are from 2007 to thepresent, and the remainder of our subsidiaries in the U.K. and Switzerland aresubject to examination from 2007, their year of inception, to present.

 

On January 1, 2007 the Company adopted FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes*(“FIN 48”). FIN 48 prescribes when the benefit of a given tax position shouldbe recognized and how it should be measured. The implementation of FIN 48 did not result in any unrecognized taxbenefits or expenses for the years ended December 31, 2008, 2007 and2006.  Management believes that allmaterial tax provisions have a greater than 50% likelihood of being sustainedon technical merits if challenged.

 

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Thetotal income tax provision (benefit) for the years ended December 31,2008, 2007 and 2006 consisted of the following:

 
| ** **                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------------|------------|
| ** **                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Current tax provision:**  |       | ** **                                 | ** ** |   |   |   |   |
| Federal                     |       | **$**                                      | **—** | ** ** | $ | — |   | $ | — |   |
| State                       |       | **0.1**                                    | ** ** | — |   | — |   |
| Non-U.S.                    |       | **1.2**                                    | ** ** | 0.1 |   | 0.1 |   |
| Total current tax provision |       | **$**                                      | **1.3**    | ** ** | $ | 0.1 |   | $ | 0.1 |   |
|                        |       | ** **                                 | ** ** |   |   |   |   |
| **Deferred tax benefit:**   |       | ** **                                 | ** ** |   |   |   |   |
| Federal                     |       | **$**                                      | **—** | ** ** | $ | — |   | $ | — |   |
| State                       |       | **—**                                 | ** ** | — |   | — |   |
| Non-U.S.                    |       | **(0.2**                                   | **)**      | — |   | — |   |
| Total deferred tax benefit  |       | **(0.2**                                   | **)**      | — |   | — |   |
| Income tax provision        |       | **$**                                      | **1.1**    | ** ** | $ | 0.1 |   | $ | 0.1 |   |

 

Asof December 31, 2008 and 2007, Montpelier had current taxes payable of$1.1 million and zero, 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,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Deferred tax assets relating to:**             |       |                  |       |   |   |
| Net unearned insurance and reinsurance  premiums | ** ** | **$**                 | **0.2**    | ** ** | **$** | **—** | ** ** |
| U.S. net operating loss carryforwards            | ** ** | **6.5**               |       | 1.8 |   |
| Non-U.S. net operating loss carryforwards        | ** ** | **1.1**               |       | 0.8 |   |
| Share-based compensation                         | ** ** | **0.9**               | ** ** | **—** | ** ** |
| Other items                                      | ** ** | **1.7**               | ** ** | **—** | ** ** |
| Total gross deferred income tax assets           | ** ** | **$**                 | **10.4**   |   | $ | 2.6 |   |
|                                             | ** ** | ** **            |       |   |   |
| **Deferred income tax liabilities related to:**  |       |                  |       |   |   |
| Deferred acquisition costs                       | ** ** | **0.1**               | ** ** | **—** | ** ** |
| Total gross deferred income tax liabilities      | ** ** | **$**                 | **0.1**    | ** ** | **$** | **—** | ** ** |
| Net deferred tax asset                           | ** ** | **$**                 | **10.3**   |   | $ | 2.6 |   |
| Less: deferred income tax valuation  allowance   | ** ** | **(10.1**             | **)**      | (2.6 | ) |
| Net deferred tax asset                           | ** ** | **$**                 | **0.2**    |   | $ | — |   |

 

TheCompany carried a valuation allowance for 2008 and 2007 of $10.1 million and $2.6million, respectively, due to the startup nature of the operations in the U.S.and the U.K., and the uncertainty at this time of whether such operations willgenerate sufficient taxable income in future periods to utilize the deferredassets. The net operating losses may be carried forward to offset futuretaxable income in the jurisdiction to which they relate. The U.S. losses willbegin to expire in 2027, while the non-U.S. losses may be carried forwardindefinitely.

 

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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,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income (loss) before income taxes,  extraordinary item and minority interest | ** ** | **$**                                      | **(143.5** | **)** | $ | 347.8 |   | $ | 342.3 |   |
|                                                                         | ** ** | ** **                                 | ** ** |   |   |   |   |
| Income taxes at expected income tax rate                                     | ** ** | **$**                                      | **—** | ** ** | $ | — |   | $ | — | ** ** |
|                                                                         | ** ** | ** **                                 | ** ** |   |   |   | ** ** |
| Foreign taxes at actual rates:                                               |       |                                       | ** ** |   |   |   |   |
| U.S.                                                                         | ** ** | **$**                                      | **—** | ** ** | $ | — |   | $ | — | ** ** |
| Non-U.S.                                                                     | ** ** | **1.1**                                    | ** ** | 0.1 |   | 0.1 |   |
|                                                                         | ** ** | ** **                                 | ** ** |   |   |   |   |
| Total income tax provision                                                   | ** ** | **$**                                      | **1.1**    | ** ** | $ | 0.1 |   | $ | 0.1 |   |
|                                                                         | ** ** | ** **                                 | ** ** |   |   |   |   |
| Effective tax rate                                                           | ** ** | **(.77**                                   | **)%**     | .03 | % | .03 | % |

 

Thenon-U.S. component of income (loss) before income taxes, extraordinary item andminority interest was $2.9 million, $(3.0) million and $0.2 million for theyears ended December 31, 2008, 2007 and 2006, respectively.

 

Duringeach of the years ended December 31, 2008, 2007 and 2006, Montpelier paidtotal income taxes of $0.2 million.

 

**NOTE 12. Fair Value of Financial Instruments**

 

FASNo. 107, “Disclosure about Fair Value of Financial Instruments”, requiresdisclosure of fair value information for certain financial instruments. Forthose financial instruments in which quoted market prices are not available,fair values are estimated by discounting future cash flows using current marketrates for similar obligations or using quoted market prices. Becauseconsiderable judgment is used, these estimates are not necessarily indicativeof amounts that could be realized in a current market exchange. Montpeliercarries its financial instruments, as defined in FAS 107, on its consolidatedbalance sheets at fair value with the exception of its fixed-rate, long-termindebtedness.

 

TheCompany’s fixed-rate, long-term indebtedness consists of the Senior Notes andthe Junior Notes. At December 31, 2008 and 2007, the fair value of theSenior Notes was $193.2 million and $238.4 million, respectively, whichcompared to a carrying value of $249.4 million and $249.3 million,respectively. At December 31, 2008 and 2007, the fair value of the JuniorNotes was $61.9 million and $100.3 million, respectively, which compared to acarrying value of $103.1 million and $103.1 million, respectively.

 

**NOTE 13. Segment Reporting**

 

TheCompany has determined that its reportable operating segments are MontpelierBermuda, Montpelier Syndicate 5151, MUSIC and Blue Ocean. The MontpelierBermuda segment includes the operations of Montpelier Re and MMSL; the MontpelierSyndicate 5151 segment includes the operations of MCL, Syndicate 5151, MUA,MUSL, MEAG and MUI; the MUSIC segment includes the operations of MUSIC; and theBlue Ocean segment includes the operations of Blue Ocean and Blue Ocean Re. TheCompany has made its segment determination based on consideration of thefollowing criteria: (i) the nature of the business activities of each ofthe Company’s subsidiaries and affiliates; (ii) the manner in which theCompany’s subsidiaries and affiliates are organized; and (iii) theorganization of information provided to the Company’s Board of Directors andsenior management.

 

TheCompany, certain intermediate holding and service companies and intercompanyeliminations relating to inter-segment reinsurance and service charges arecollectively referred to “Corporate and Other.”

 

During2008, the Company changed the composition of its operating segments. All priorperiods presented have been re-segmented to conform with the currentpresentation. Prior to 2008, the Company’s segments consisted of its RatedReinsurance and Insurance segment (which included the Company and itsreinsurance and insurance operating subsidiaries Montpelier Re, Syndicate 5151and MUSIC) and its Collateralized Property Catastrophe Retrocessional segment(which consisted solely of the operations of Blue Ocean).

 

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Thefollowing table summarizes Montpelier’s identifiable assets by segment as of December 31,2008 and 2007:

 
| ** **                | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                | ** ** | **2008**              | ** **  | **2007**              | ** ** |
|                      | ** ** | ** **            |        |                  |       |
| Montpelier Bermuda        | ** ** | **$**                 | **2,584.7** |                  | $          | 3,168.9 |   |
| Montpelier Syndicate 5151 | ** ** | **96.3**              |        | 21.4                  |       |
| MUSIC                     | ** ** | **68.8**              |        | 72.9                  |       |
| Blue Ocean                | ** ** | **1.2**               |        | 240.4                 |       |
| Corporate and Other       | ** ** | **46.6**              |        | 21.6                  |       |
|                      |       |                  |        |                  |       |
| Total assets              | ** ** | **$**                 | **2,797.6** |                  | $          | 3,525.2 |   |

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2008 follows:

 
| **Year Ended December 31, 2008**                         | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Corporate  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 (loss)                                                   |       | 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**    | ** ** |
| Net investment and foreign exchange gains  (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**  | **)**      |
|                                                                         |       |                    |       |                            |       |      |       |                |       |                          |       | ** ** | ** ** |
| Income (loss) before income taxes,  extraordinary item and minority interest |       | $                       | (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:

 
| **Year Ended December 31, 2008** | ** ** | **U.S.** | ** ** | **U.K.** | ** ** | **Montpelier  Syndicate  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-34

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Tableof Contents

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2007 follows:

 
| **Year Ended December 31, 2007**                         | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Corporate  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 (loss)                                                   |       | 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 (loss) before income taxes,  extraordinary item and minority interest |       | $                       | 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:

 
| **Year Ended December 31, 2007** | ** ** | **U.S.** | ** ** | **U.K.** | ** ** | **Montpelier  Syndicate  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 | ) |

 

F-35

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Tableof Contents

 

Asummary of Montpelier’s statements of operations by segment for the year ended December 31,2006 follows:

 
| **Year Ended December 31, 2006**                         | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Corporate  and Other** | ** ** | **Total**  | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|---------------------|------------|-------------------------------|------------|------------|------------|
|                                                                         |       |                    |       |                            |       |      |       |                |       |                          | ** ** | ** ** | ** ** |
| Gross premiums written                                                       |       | $                       | 632.7      |                            | $          | —    |       | $                   | —     |                          | $          | 94.8       |       | $ | — |   | $ | 727.5 |   |
| Reinsurance premiums ceded                                                   |       | (148.9                  | )          | —                          |       | —    |       | —              |       | —                        |       | (148.9     | )          |
| Net premiums written                                                         |       | 483.8                   |       | —                          |       | —    |       | 94.8                |       | —                        |       | 578.6      |       |
| Change in unearned premiums                                                  |       | 26.3                    |       | —                          |       | —    |       | (21.9               | )          | —                        |       | 4.4        |       |
| Net premiums earned                                                          |       | 510.1                   |       | —                          |       | —    |       | 72.9                |       | —                        |       | 583.0      |       |
|                                                                         |       |                    |       |                            |       |      |       |                |       |                          |       |       |       |
| Loss and LAE                                                                 |       | (172.7                  | )          | —                          |       | —    |       | —              |       | —                        |       | (172.7     | )          |
| Acquisition costs                                                            |       | (107.4                  | )          | —                          |       | —    |       | (5.4                | )          | —                        |       | (112.8     | )          |
| General and administrative expenses                                          |       | (55.4                   | )          | —                          |       | —    |       | (16.1               | )          | 5.5                           |       | (66.0      | )          |
| Underwriting income                                                          |       | 174.6                   |       | —                          |       | —    |       | 51.4                |       | 5.5                           |       | 231.5      |       |
| Net investment income                                                        |       | 108.7                   |       | —                          |       | —    |       | 16.6                |       | 0.5                           |       | 125.8      |       |
| Other revenue                                                                |       | 8.0                     |       | —                          |       | —    |       | —              |       | 0.3                           |       | 8.3        |       |
| Net investment and foreign exchange gains  (losses)                          |       | 16.2                    |       | —                          |       | —    |       | (1.4                | )          | —                        |       | 14.8       |       |
| Net expense from derivative instruments                                      |       | (9.9                    | )          | —                          |       | —    |       | —              |       | —                        |       | (9.9       | )          |
| Interest and other financing expenses                                        |       | (3.0                    | )          | —                          |       | —    |       | (0.6                | )          | (24.6                         | )          | (28.2      | )          |
|                                                                         |       |                    |       |                            |       |      |       |                |       |                          |       |       |       |
| Income (loss) before income taxes,  extraordinary item and minority interest |       | $                       | 294.6      |                            | $          | —    |       | $                   | —     |                          | $          | 66.0       |       | $ | (18.3 | ) | $ | 342.3 |   |

 

**Gross Written Premiums By Line of Business andGeography**

 

Thefollowing tables present our gross premiums written, by line of business,within each of our operating segments during the years ended December 31,2008, 2007 and 2006:

 
| **Year Ended December 31, 2008** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean** | ** ** | **Corporate  and Other** | ** ** | **Total**  | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|---------------------|------------|-------------------------------|------------|------------|------------|
|                                                 | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **          | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Property Catastrophe                                 | ** ** | **$**                   | **317.2**  | ** **                      | **$**      | **30.6**   | ** ** | **$**               | **—** | ** **                    | **$**      | **0.1**    | ** ** | **$** | **—** | ** ** | **$** | **347.9** | ** ** |
| Property Specialty                                   | ** ** | **106.6**               | ** ** | **40.6**                        | ** ** | **—** | ** ** | **—**          | ** ** | **—**                    | ** ** | **147.2**  | ** ** |
| Other Specialty                                      | ** ** | **74.4**                | ** ** | **45.0**                        | ** ** | **—** | ** ** | **—**          | ** ** | **—**                    | ** ** | **119.4**  | ** ** |
| Excess and Surplus Lines                             | ** ** | **—**              | ** ** | **—**                      | ** ** | **5.6**    | ** ** | **—**          | ** ** | **—**                    | ** ** | **5.6**    | ** ** |
| 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** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|----------------|------------|-----------|------------|
|                                   |       |                    |       |                            |       |      |       |           |       |      |       |   |   |
| Property Catastrophe                   |       |                    |       | $                               | 348.2      |      | $          | 2.0            |       | $         | —     |   | $ | 42.8 |   | $ | 393.0 |   |
| Property Specialty                     |       |                    |       | 136.7                           |       | 5.8       |       | —         |       | —    |       | 142.5 |   |
| Other Specialty                        |       |                    |       | 110.8                           |       | 7.5       |       | —         |       | —    |       | 118.3 |   |
| Excess and Surplus Lines               |       |                    |       | —                          |       | —    |       | —         |       | —    |       | — |   |
| Total gross premiums written           |       |                    |       | $                               | 595.7      |      | $          | 15.3           |       | $         | —     |   | $ | 42.8 |   | $ | 653.8 |   |

 
| **Year Ended December 31,  2006** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|----------------|------------|-----------|------------|
|                                   |       |                    |       |                            |       |      |       |           |       |      |       |   |   |
| Property Catastrophe                   |       |                    |       | $                               | 301.6      |      | $          | —         |       | $         | —     |   | $ | 94.8 |   | $ | 396.4 |   |
| Property Specialty                     |       |                    |       | 206.8                           |       | —    |       | —         |       | —    |       | 206.8 |   |
| Other Specialty                        |       |                    |       | 124.3                           |       | —    |       | —         |       | —    |       | 124.3 |   |
| Excess and Surplus Lines               |       |                    |       | —                          |       | —    |       | —         |       | —    |       | — |   |
| Total gross premiums written           |       |                    |       | $                               | 632.7      |      | $          | —         |       | $         | —     |   | $ | 94.8 |   | $ | 727.5 |   |

 

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(1) Represents an inter-segment reinsurance cover among Montpelier Bermudaand Montpelier Syndicate 5151 which is eliminated in consolidation.

 

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Weseek to diversify our exposure 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.

 

Wemonitor our geographic exposures on a Company-wide basis, rather than byindividual operating segment. The following table sets forth a breakdown of ourgross premiums written by geographic area of risks insured:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                            | ** ** | ** **                                 | ** ** | ** ** |   |   |   |   |   |   |   |   |   |
| U.S. and Canada                                 | ** ** | **$**                                      | **314.2**  | ** ** | **50** | **%** | $ | 338.5 |   | 52 | % | $ | 399.1 |   | 54 | % |
| Worldwide (1)                                   | ** ** | **121.2**                                  | ** ** | **19** | ** ** | 133.5 |   | 20 |   | 176.1 |   | 24 |   |
| Western Europe, excluding the U.K. and  Ireland | ** ** | **59.7**                                   | ** ** | **10** | ** ** | 51.6 |   | 8 |   | 25.6 |   | 4 |   |
| Worldwide, excluding U.S. and Canada (2)        | ** ** | **41.5**                                   | ** ** | **7** | ** ** | 33.8 |   | 5 |   | 33.7 |   | 5 |   |
| U.K. and Ireland                                | ** ** | **24.4**                                   | ** ** | **4** | ** ** | 34.2 |   | 5 |   | 11.9 |   | 2 |   |
| Japan                                           | ** ** | **23.1**                                   | ** ** | **4** | ** ** | 25.0 |   | 4 |   | 30.1 |   | 4 |   |
| Other                                           | ** ** | **36.0**                                   | ** ** | **6** | ** ** | 37.2 |   | 6 |   | 51.0 |   | 7 |   |
| Total gross premiums written                    | ** ** | **$**                                      | **620.1**  | ** ** | **100.0** | **%** | $ | 653.8 |   | 100.0 | % | $ | 727.5 |   | 100.0 | % |

 

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(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.

 

**Net Earned Premiums By Line of Business and Geography**

 

Thefollowing tables present our net earned premiums, by line of business, withineach of our operating segments during the years ended December 31, 2008,2007 and 2006:

 
| **Year Ended December 31, 2008** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC**  | ** ** | **Blue Ocean** | ** ** | **Total**  | ** ** |
|------------------------------------------------------|------------|-------------------------|------------|---------------------------------|------------|------------|------------|---------------------|------------|------------|------------|
|                                                 | ** ** | ** **              | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **          | ** ** | ** ** | ** ** |
| Property Catastrophe                                 | ** ** | **$**                   | **278.9**  | ** **                      | **$**      | **22.4**   | ** ** | **$**               | **—** | ** ** | **$**      | **3.1** | ** ** | **$** | **304.4** | ** ** |
| Property Specialty                                   | ** ** | **105.0**               | ** ** | **20.5**                        | ** ** | **—** | ** ** | **—**          | ** ** | **125.5**  | ** ** |
| Other Specialty                                      | ** ** | **75.8**                | ** ** | **20.7**                        | ** ** | **—** | ** ** | **—**          | ** ** | **96.5**   | ** ** |
| Excess and Surplus Lines                             | ** ** | **—**              | ** ** | **—**                      | ** ** | **2.1**    | ** ** | **—**          | ** ** | **2.1**    | ** ** |
| Total net earned premiums                            | ** ** | **$**                   | **459.7**  | ** **                      | **$**      | **63.6**   | ** ** | **$**               | **2.1**    | ** ** | **$**      | **3.1** | ** ** | **$** | **528.5** | ** ** |

 
| **Year Ended December 31,  2007** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|----------------|------------|-----------|------------|
|                                   |       |                    |       |                            |       |      |       |           |       |      |       |
| Property Catastrophe                   |       | $                       | 262.0      |                            | $          | 1.9       |       | $              | —     |      | $          | 61.7 |   | $ | 325.6 |   |
| Property Specialty                     |       | 122.8                   |       | .6                              |       | —    |       | —         |       | 123.4     |       |
| Other Specialty                        |       | 106.5                   |       | 1.7                             |       | —    |       | —         |       | 108.2     |       |
| Excess and Surplus Lines               |       | —                  |       | —                          |       | —    |       | —         |       | —    |       |
| Total net earned premiums              |       | $                       | 491.3      |                            | $          | 4.2       |       | $              | —     |      | $          | 61.7 |   | $ | 557.2 |   |

 
| **Year Ended December 31,  2006** | ** ** | **Montpelier  Bermuda** | ** ** | **Montpelier  Syndicate  5151** | ** ** | **MUSIC** | ** ** | **Blue Ocean** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|-------------------------|------------|---------------------------------|------------|-----------|------------|----------------|------------|-----------|------------|
|                                   |       |                    |       |                            |       |      |       |           |       |      |       |
| Property Catastrophe                   |       | $                       | 165.6      |                            | $          | —    |       | $              | —     |      | $          | 72.9 |   | $ | 238.5 |   |
| Property Specialty                     |       | 220.4                   |       | —                          |       | —    |       | —         |       | 220.4     |       |
| Other Specialty                        |       | 124.1                   |       | —                          |       | —    |       | —         |       | 124.1     |       |
| Excess and Surplus Lines               |       | —                  |       | —                          |       | —    |       | —         |       | —    |       |
| Total net earned premiums              |       | $                       | 510.1      |                            | $          | —    |       | $              | —     |      | $          | 72.9 |   | $ | 583.0 |   |

 

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Wemonitor our geographic exposures on a Company-wide basis, rather than byindividual operating segment. The following table sets forth a breakdown of ournet earned premiums by geographic area of risks insured:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S. and Canada                                 | ** ** | **$**                                      | **276.8**  | ** ** | **52** | **%** | $ | 336.5 |   | 60 | % | $ | 382.0 |   | 66 | % |
| Worldwide (1)                                   | ** ** | **94.7**                                   | ** ** | **18** | ** ** | 54.5 |   | 10 |   | 62.2 |   | 11 |   |
| Western Europe, excluding the U.K. and  Ireland | ** ** | **56.3**                                   | ** ** | **11** | ** ** | 51.9 |   | 9 |   | 25.8 |   | 4 |   |
| Worldwide, excluding U.S. and Canada (2)        | ** ** | **38.6**                                   | ** ** | **7** | ** ** | 37.5 |   | 7 |   | 36.9 |   | 6 |   |
| U.K. and Ireland                                | ** ** | **29.0**                                   | ** ** | **5** | ** ** | 26.5 |   | 5 |   | 18.2 |   | 5 |   |
| Japan                                           | ** ** | **23.4**                                   | ** ** | **4** | ** ** | 25.7 |   | 5 |   | 29.5 |   | 3 |   |
| Other                                           | ** ** | **9.7**                                    | ** ** | **2** | ** ** | 24.6 |   | 4 |   | 28.4 |   | 5 |   |
| Total net earned premiums                       | ** ** | **$**                                      | **528.5**  | ** ** | **100.0** | **%** | $ | 557.2 |   | 100.0 | % | $ | 583.0 |   | 100.0 | % |

 

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(1)     “Worldwide” comprises insurance and reinsurance contracts that insureor reinsure risks in more than one geographic area and do not specificallyexclude the U.S. and Canada.

 

(2)     “Worldwide, excluding U.S. and Canada” comprises insurance andreinsurance contracts that insure or reinsure risks in more than one geographicarea but specifically exclude the U.S. and Canada.

 

**NOTE 14. Regulatory Requirements**

 

***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 financialstatements and a statutory financial return. The Act also currently requiresMontpelier Re to maintain minimum share capital of $1.0 million and to meet aminimum solvency margin equal to the greater of $100.0 million, 50% of netpremiums written or 15% of the loss and LAE reserves. For all periods presentedherein, Montpelier Re satisfied these requirements.

 

EffectiveDecember 31, 2008, the Bermuda Monetary Authority (“BMA”) introduced arisk-based capital model, the Bermuda Statutory Capital Requirement (“BSCR”) asa tool to measure risk and to determine an enhanced capital requirement andtarget capital level (defined as 120% of the enhanced capital requirement) for Class 4insurers. While the required statutory capital and surplus has increased underthe BSCR, Montpelier Re has capital and surplus in excess of the target capitallevel.

 

BlueOcean Re was formerly registered under the Act as a Class 3 insurer. Underthe Act, Blue Ocean Re is required to annually prepare and file statutoryfinancial statements and a statutory financial return. The Act also currentlyrequires Blue Ocean Re to meet minimum capital and surplus requirements equalto the greater of $1.0 million, 20% of the first $6.0 million of net premiumswritten and 15% of the net premiums written in excess of $6.0 million or 15% ofthe reserve for loss and LAE. For all periods presented herein, Blue Ocean Resatisfied these requirements.

 

MontpelierRe and Blue Ocean Re are also required to maintain minimum liquidity ratios,which were met by Montpelier Re and Blue Ocean Re for all periods presentedherein.

 

TheAct limits the maximum amount of annual dividends and distributions that may bepaid by Montpelier Re. Montpelier Re shall not pay dividends to the Company inany year which would exceed 25% of its prior year statutory capital and surplusor reduce its prior year statutory capital by 15% or more, without the priornotification to, and in certain cases the approval of, the BMA. In addition,Montpelier Re shall not declare or pay a dividend, or make a distribution outof contributed surplus, if the realisable value of its assets would be lessthan the aggregate of its liabilities, issued share capital and share premiumaccounts.

 

InJuly 2008, the Bermuda House of Assembly passed the Insurance AmendmentBill 2008 (the “2008 Bill”) which created a new supervisory framework forBermuda insurers. The 2008 Bill established new regulatory capital and solvencyrequirements for all Bermuda insurers and requires, as of December 31,2008, that all Class 4 Bermuda insurers prepare and file with the BMAaudited financial statements, prepared either in accordance with U.S. GAAP orInternational Financial Reporting Standards.

 

TheBermuda Companies Act 1981 (the “Companies Act”) limits the Company’s abilityto pay dividends and distributions to shareholders.

 

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***U.K. Regulation***

 

Syndicate5151 is currently managed by MUA but, through December 31, 2008, wasmanaged by Spectrum. Syndicate 5151, Spectrum and MUA are subject to regulationby the U.K. Financial Services Authority (“FSA”) under the Financial Servicesand Markets Act 2000, and by the Council of Lloyd’s.

 

MUA,as a Lloyd’s Managing Agent, is subject to minimum solvency tests establishedby Lloyd’s. On October 22, 2008, MUA was capitalized with cash totaling£0.5 million, an amount which exceeds Lloyd’s current requirement.

 

MCLis a corporate member of Lloyd’s. As a corporate member of Lloyd’s, MCL isbound by the rules of the Society of Lloyd’s, which are prescribed byByelaws and Requirements made by the Council of Lloyd’s under powers conferredby the Lloyd’s Act 1982. These rules (among other matters) prescribe MCL’smembership subscription, the level of its contribution to the Lloyd’s CentralFund and the assets it must deposit with Lloyd’s in support of itsunderwriting. The Council of Lloyd’s has broad powers to sanction breaches ofits rules, including the power to restrict or prohibit a member’s participationon Lloyd’s syndicates.

 

MCLis required by Lloyd’s to maintain capital requirements based on the premiumcapacity and net liabilities of Syndicate 5151. The net capital requirement, asof December 31, 2008, was £100.0 million (approximately $145.9 million at December 31,2008) which was fulfilled through a secured letter of credit facility of £110.0million (approximately $160.5 million at December 31, 2008).

 

Premiumsreceived by Syndicate 5151 are received into the Lloyd’s Premiums Trust Funds(the “Trust Funds”). Under the Trust Funds’ deeds, those monies 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 monies 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 31,2008, Syndicate 5151 held $37.0 million within the Trust Funds.

 

***U.S. Regulation***

 

MUSICis domiciled in Oklahoma and is eligible to write surplus lines primaryinsurance in 38 additional jurisdictions of the U.S. MUSIC is subject to thelaws of Oklahoma and the surplus lines regulation and reporting requirements ofthe jurisdictions in which it is eligible to write surplus lines insurance. Inaccordance with certain provisions of the National Association of InsuranceCommissioners Non-Admitted Insurance Model Act, which provisions have beenadopted by a number of states, MUSIC has established, and is required tomaintain, 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 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.

 

*Holding Company Regulation.* MUSIC and certain of our holding companiesare subject to regulation under the insurance holding company laws of variousU.S. jurisdictions. The insurance holding company laws and regulations varyfrom jurisdiction to jurisdiction, but generally require an insurance holdingcompany, and insurers that are subsidiaries of insurance holding companies, toregister with state regulatory authorities and to file with those authoritiescertain reports, including information concerning their capital structure,ownership, financial condition, certain intercompany transactions and generalbusiness operations.

 

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Further, in order to protectinsurance company solvency, state insurance statutes typically placelimitations on the amount of dividends or other distributions payable byinsurance companies. Oklahoma, MUSIC’s state of domicile, currently requiresthat dividends be paid only out of earned statutory surplus and limits theannual amount of dividends payable without the prior approval of the OklahomaInsurance Department to the greater of 10% of statutory capital and surplus atthe end of the previous calendar year or 100% of statutory net income fromoperations for the previous calendar year. These insurance holding company lawsalso impose prior approval requirements for certain transactions withaffiliates. In addition, as a result of our ownership of MUSIC under the termsof applicable state statutes, any person or entity desiring to purchase morethan 10% of our outstanding voting securities is required to obtain priorregulatory approval for the purchase.

 

***Swiss Regulation***

 

MEAG is subject toregistration and supervision by the Swiss Financial Market SupervisoryAuthority as an insurance intermediary.

 

**NOTE 15.Related Party Transactions**

 

On April 1, 2008, theCompany entered into a Letter Agreement with Kernan V. Oberting, the Company’sformer Chief Financial Officer, setting forth the terms of his departure as afull-time employee, effective May 1, 2008, in order to establish aninvestment advisory company, KVO Capital Management, LLC (“KVO”). Among otherthings, the Letter Agreement provided that Mr. Oberting will continue tovest in all in force awards previously granted to him under the Company’sLong-Term Incentive Plan prior to 2008 and he will be entitled 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).

 

Pursuant to the ConsultingAgreement, KVO will provide capital management and consulting services to theCompany and, pursuant to the IMA, KVO will provide the Company withdiscretionary investment management services, in each case for an initial termbeginning May 1, 2008 and ending December 31, 2010, subject toautomatic renewal for additional successive one-year periods.

 

Pursuant to the ConsultingAgreement, the Company pays KVO a monthly consulting fee equal to 0.25 basispoints of the Company’s asset base at the end of each month. In addition, ifcertain performance criteria are satisfied, the Company will pay KVO a one-timefee of $250,000 after the end of its term.

 

Pursuant to the IMA, theCompany pays KVO a monthly management fee equal to 8.333 basis points of thenet asset value of the Company’s investment account, which initially consistedof cash and securities in an aggregate amount equal to $100.0 million, and anannual incentive fee equal to 15% of the Net Profits (as defined in theConsulting Agreement) of the Company’s investment account. AfterDecember 31, 2010, the Company will pay KVO a monthly management fee thatmay be reduced based upon the percentage of KVO’s aggregate net assets undermanagement that the Company’s investment account constitutes.

 

For 2008, the Company paidKVO an aggregate of $1.0 million for services provided under the ConsultingAgreement and the IMA and, at December 31, 2008, owed KVO an additional$0.1 million for such services provided.

 

Wilbur L. Ross, Jr., aDirector of the Company and a former director of Blue Ocean, is Chairman andCEO of WL Ross & Co. LLC. Investment funds managed by WLRoss & Co. LLC collectively owned 7.5% of the Company’s common sharesat December 31, 2008.

 

Pursuant to the Blue OceanTransaction described in Note 1, the Company acquired all of the outstandingcommon shares of Blue Ocean in June 2008 for a total of $30.5 million. Aspart of the Blue Ocean Transaction, the Company purchased 248,756 Blue Oceancommon shares (representing 9.8% of the total common shares outstanding at thatdate) from funds managed by WL Ross & Co. LLC for $5.1 million andMr. Ross resigned as a director of Blue Ocean. The Blue Ocean Transactionreceived the unanimous approval of Blue Ocean’s minority shareholders,including Mr. Ross.

 

In anticipation of the BlueOcean Transaction, Montpelier cancelled its underwriting agreement with BlueOcean Re (the “Underwriting Agreement”). During the years endedDecember 31, 2008, 2007 and 2006, Blue Ocean Re incurred $0.4 million.$12.6 million and $14.9 million in total fees (consisting of underwriting andperformance fees) related to the Underwriting Agreement.

 

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The Company cededreinsurance premiums of $7.5 million to Rockridge Reinsurance, Ltd.(“Rockridge”), an 11% owned, non-consolidated affiliate during the year endedDecember 31, 2006. The premiums ceded by the Company represented 100% ofthe gross premiums written by Rockridge in 2006. In December 2006,Rockridge ceased its operations and has since returned its capital to investorsand its unearned premium to Montpelier.

 

**NOTE 16.Commitments and Contingent Liabilities**

** **

***Commitments***

 

As of December 31,2008, Montpelier had unfunded commitments to invest $30.0 million into threeseparate private investment funds.

 

Montpelier leases officespace and computer equipment under noncancellable operating leases that expireon various dates. Montpelier also has various other operating lease obligationsthat are immaterial in the aggregate.

 

Future annual minimumcommitments under existing noncancellable leases for office space are $4.7million, $4.7 million, $4.6 million, $4.6 million and $12.0 million for 2009,2010, 2011, 2012 and 2013 and thereafter.

 

Future annual minimumcommitments under existing noncancellable leases for computer equipment are$2.2 million, $2.2 million, $1.7 million, $1.3 million and $0.5 million for2009, 2010, 2011, 2012 and 2013 and thereafter.

 

***Lloyd’s Central Fund (the “Central Fund”)***

 

The Central Fund isavailable to satisfy claims if a member of Lloyd’s is unable to meet itsobligations to policyholders. The Central Fund is funded by an annual levyimposed on members which is determined annually by Lloyd’s as a percentage ofeach member’s written premiums (2.0% with respect to 2009). 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 2009 obligation to the Central Fund will beapproximately $3.2 million.

 

Lloyd’s also imposes othercharges on its members and the syndicates on which they participate, includingan annual subscription charge (0.5% of written premiums with respect to 2009)and an overseas business charge, levied as a percentage of gross internationalpremiums (that is, premiums on business outside the U.K. and the ChannelIslands), with the percentage depending on the type of business written.Lloyd’s also has power to impose additional charges under Lloyd’s Powers ofCharging Byelaw. Montpelier estimates that its 2009 obligation to Lloyd’s forsuch charges will be approximately $1.3 million.

 

***Litigation***

 

Montpelier is subject tolitigation and arbitration proceedings in the normal course of its business.Such proceedings generally involve reinsurance contract disputes which aretypical for the property and casualty insurance and reinsurance industry ingeneral and are considered in connection with the Company’s net loss and lossexpense reserves. See Note 4 for a description of the Company’s pendinglitigation.

 

***Concentrations of Credit and Counterparty Risk***

 

Financial instruments, whichpotentially subject Montpelier to concentrations of credit risk, consistprincipally of investment securities, insurance and reinsurance balancesreceivable and reinsurance recoverables (see Note 4).

 

Montpelier believes thatthere are no significant concentrations of credit risk from a single issue orissuer within its investment portfolio other than concentrations in U.S.government and U.S. government-sponsored enterprises. Montpelier did not own anaggregate investment in a single entity, other than U.S. government and U.S.government- sponsored enterprises, in excess of 10% of the Company’s commonshareholders’ equity at December 31, 2008.

 

Montpelier’s portfolio ofcorporate and structured investments, such as asset and mortgage-backedsecurities, are subject to individual and aggregate credit risk. Montpeliermonitors the credit quality of its fixed maturity investments with exposure tosubprime and Alternative A markets as well as those fixed maturity investmentsthat benefit from credit enhancements provided by third-party financialguarantors.

 

Certain of Montpelier’sderivative securities are subject to counterparty risk. Montpelier routinelymonitors this risk

 

Montpelier underwrites themajority of its business through brokers and credit risk exists should any ofthese brokers be unable to fulfill their contractual obligations with respectto payments of balances owed to the Company.

 

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**MANAGEMENT’S RESPONSIBILITY FORFINANCIAL STATEMENTS**

 

Management is responsiblefor the preparation and fair presentation of the financial statements includedin this report. The financial statements have been prepared in conformity withGAAP. The preparation of financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities as of the date of the financial statements and thereported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates.

 

The Audit Committee of theBoard, which is comprised entirely of independent, qualified directors, isresponsible for the oversight of our accounting policies, financial reportingand internal control including the appointment and compensation of ourindependent registered public accounting firm. The Audit Committee meetsperiodically with management, our independent registered public accounting firmand 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 ONINTERNAL CONTROL OVER FINANCIAL REPORTING**

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities 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.

 

We assessed theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2008. In making our assessment, we used the criteria setforth by the Committee of Sponsoring Organizations of the Treadway Commission(COSO) in Internal Control-Integrated Framework. Based on this assessment, wehave concluded that the Company maintained effective internal control overfinancial reporting as of December 31, 2008. Management has reviewed theresults of its assessment with the Audit Committee.

 

PricewaterhouseCoopers, theCompany’s independent registered public accounting firm, has audited theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2008 as stated in their report which appears onpage F-43.

 

 

February 27, 2009

 

 
| /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) |

 

F-42

----

Table of Contents

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

To The Board of Directors and Shareholders ofMontpelier Re Holdings Ltd:

 

In our opinion, the consolidated financialstatements listed in the index appearing under Item 15(a) present fairly,in all material respects, the financial position of Montpelier Re Holdings Ltd.and its subsidiaries at December 31, 2008 and December 31, 2007, andthe results of their operations and their cash flows for each of the threeyears in the period ended December 31, 2008 in conformity with accountingprinciples generally accepted in the United States of America. In addition, inour opinion, the financial statement schedules listed in the index appearingunder Item 15(a) present fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements. Also in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as ofDecember 31, 2008, based on criteria established in Internal Control -Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). The Company’s management is responsible for thesefinancial 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.

 

As discussed in Note 1 to the consolidatedfinancial statements, with effect from January 1, 2007, the Companyprospectively reclassified as trading, marketable securities previouslydesignated as available-for-sale and changed the manner in which movements inunrealized gains and losses on these securities gets recognized.

 

A company’s internal control over financialreporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with generally accepted accountingprinciples. A company’s internal control over financial reporting includes thosepolicies and procedures that (i) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections 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.

 

 

/s/ PRICEWATERHOUSECOOPERS

 

Hamilton, Bermuda

February 27, 2009

 

F-43

----

Table of Contents

 

**SELECTED QUARTERLY FINANCIAL DATA**

**(Unaudited)**

 

Selected quarterly financialdata for 2008 and 2007 is shown in the following table. The quarterly financialdata includes, in the opinion of management, all recurring adjustmentsnecessary for a fair presentation of the results of operations for the interimperiods.

 
| ** **                                                                    | ** ** | **2008 Three Months Ended** | ** ** | **2007 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                                                          | ** ** | **$**                                      | **134.8**  | ** **                                 | **$**      | **134.2** | ** ** | **$** | **119.2** | ** ** | **$** | **140.3** | ** ** | $ | 147.0 |   | $ | 138.4 |   | $ | 129.1 |   | $ | 142.7 |   |
| Net investment  income                                                        | ** ** | **18.6**                                   | ** ** | **21.4**                                   | ** ** | **21.9** | ** ** | **24.5** | ** ** | 33.1 |   | 31.9 |   | 34.4 |   | 33.1 |   |
| Net investment  gains (losses)                                                | ** ** | **(108.6**                                 | **)**      | **(80.1**                                  | **)**      | **(16.5** | **)** | **(39.7** | **)** | 2.4 |   | 14.0 |   | (5.2 | ) | 15.3 |   |
| Net foreign  exchange gains (losses)                                          | ** ** | **10.3**                                   | ** ** | **(7.7**                                   | **)**      | **(3.9** | **)** | **8.9** | ** ** | 0.5 |   | 6.9 |   | 1.4 |   | (2.7 | ) |
| Net income  (expense) from derivatives                                        | ** ** | **(9.9**                                   | **)**      | **(3.0**                                   | **)**      | **(2.3** | **)** | **0.9** | ** ** | (0.8 | ) | 3.3 |   | (1.8 | ) | (1.0 | ) |
| Other revenue                                                                 | ** ** | **0.2**                                    | ** ** | **0.2**                                    | ** ** | **0.2** | ** ** | **0.4** | ** ** | 0.3 |   | 0.5 |   | 0.6 |   | 0.6 |   |
| Total revenues                                                                | ** ** | **45.4**                                   | ** ** | **65.0**                                   | ** ** | **118.6** | ** ** | **135.3** | ** ** | 182.5 |   | 195.0 |   | 158.5 |   | 188.0 |   |
|                                                                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Underwriting  expenses                                                        | ** ** | **85.5**                                   | ** ** | **200.8**                                  | ** ** | **68.8** | ** ** | **125.9** | ** ** | 77.7 |   | 80.1 |   | 90.4 |   | 93.5 |   |
| Non-underwriting  expenses                                                    | ** ** | **6.6**                                    | ** ** | **6.4**                                    | ** ** | **6.6** | ** ** | **7.2** | ** ** | 9.2 |   | 8.6 |   | 8.2 |   | 8.5 |   |
| Total expenses                                                                | ** ** | **92.1**                                   | ** ** | **207.2**                                  | ** ** | **75.4** | ** ** | **133.1** | ** ** | 86.9 |   | 88.7 |   | 98.6 |   | 102.0 |   |
|                                                                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Income (loss)  before income taxes, extraordinary items and minority interest | ** ** | **(46.7**                                  | **)**      | **(142.2**                                 | **)**      | **43.2** | ** ** | **2.2** | ** ** | 95.6 |   | 106.3 |   | 59.9 |   | 86.0 |   |
| Income tax  provision                                                         | ** ** | **(1.0**                                   | **)**      | **—**                                 | ** ** | **(0.1** | **)** | **—** | ** ** | — |   | (0.1 | ) | — |   | — |   |
| Minority interest  expense - Blue Ocean                                       | ** ** | **—**                                 | ** ** | **—**                                 | ** ** | **—** | ** ** | **(1.9** | **)** | (5.1 | ) | (4.9 | ) | (9.2 | ) | (12.7 | ) |
| Net income (loss)  before extraordinary item                                  | ** ** | **$**                                      | **(47.7**  | **)**                                      | **$**      | **142.2** | ** ** | **$** | **43.1** | ** ** | **$** | **0.3** | ** ** | $ | 90.5 |   | $ | 101.3 |   | $ | 50.7 |   | $ | 73.3 |   |
|                                                                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Net income (loss)  before extraordinary item per share:                       |       |                                       |       |                                       |       |   |   |   | ** ** |   |   |   |   |   |   |   |   |
| Basic                                                                         | ** ** | **$**                                      | **(.57**   | **)**                                      | **$**      | **(1.69** | **)** | **$** | **.50** | ** ** | **$** | **—** | ** ** | $ | .96 |   | $ | 1.06 |   | $ | .53 |   | $ | .75 |   |
| Diluted                                                                       | ** ** | **(.57**                                   | **)**      | **(1.69**                                  | **)**      | **.50** | ** ** | **—** | ** ** | .96 |   | 1.06 |   | .53 |   | .75 |   |
|                                                                          | ** ** | ** **                                 | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |   |
| Fully converted  book value per share                                         | ** ** | **$**                                      | **15.94**  | ** **                                 | **$**      | **16.61** | ** ** | **$** | **18.24** | ** ** | **$** | **17.76** | ** ** | $ | 17.88 |   | $ | 17.03 |   | $ | 16.04 |   | $ | 16.08 |   |
| Fully converted  tangible book value per share                                | ** ** | **$**                                      | **15.88**  | ** **                                 | **$**      | **16.56** | ** ** | **$** | **18.19** | ** ** | **$** | **17.71** | ** ** | $ | 17.82 |   | $ | 17.03 |   | $ | 16.04 |   | $ | 16.08 |   |

 

F-44

----

Table of Contents

 

**SCHEDULE I**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUMMARY OF INVESTMENTS — OTHER THANINVESTMENTS IN RELATED PARTIESAt December 31, 2008**

 
| **Millions**                                                 | ** ** | **Cost** | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|---------------------|------------|-----------------|------------|
| Fixed maturity investments:                                  |       |     |       |                |       |            |       |
| Bonds:                                                       |       |     |       |                |       |            |       |
| U.S. Government and government agencies and  authorities (1) |       | $        | 648.2      | ** **          | **$**      | **655.6**       |       | $ | 655.6 |   |
| Corporate bonds and asset-backed securities                  |       | 970.4    | ** ** | **915.2**           |       | 915.2           |       |
| Foreign governments                                          |       | 90.1     | ** ** | **92.2**            |       | 92.2            |       |
| Public utilities                                             |       | 8.5      | ** ** | **8.5**             |       | 8.5             |       |
| Convertibles and bonds with warrants  attached               |       | 38.6     | ** ** | **35.1**            |       | 35.1            |       |
| Total fixed maturities                                       |       | 1,755.8  | ** ** | **1,706.6**         |       | 1,706.6         |       |
|                                                         |       |     | ** ** | ** **          |       |            |       |
| Equity securities:                                           |       |     |       |                |       |            |       |
| Public utilities                                             |       | 19.2     | ** ** | **16.2**            |       | 16.2            |       |
| Banks, trust and insurance companies                         |       | 28.5     | ** ** | **23.4**            |       | 23.4            |       |
| Industrial, miscellaneous and other                          |       | 262.3    | ** ** | **202.7**           |       | 202.7           |       |
| Total equity securities                                      |       | 310.0    | ** ** | **242.3**           |       | 242.3           |       |
|                                                         |       |     | ** ** | ** **          |       |            |       |
| Other investments                                            |       | 159.9    | ** ** | **148.3**           |       | 148.3           |       |
| Total investments                                            |       | $        | 2,225.7    | ** **          | **$**      | **2,097.2**     |       | $ | 2,097.2 |   |

 

----

(1) Includes mortgage-backed securities issued by GNMA, FNMA and FHLMC.

 

FS-1

----

Tableof Contents

 

**SCHEDULEII**

 

**MONTPELIER RE HOLDINGS LTD.**

**(Parent Only)**

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                      | ** ** | **December 31,** | ** **  |
|---------------------------------------------------------------------------------|------------|-----------------------|-------------|
| **Millions**                                                                    | ** ** | **2008**              | ** **  | **2007** | ** ** |
| Assets:                                                                         |       |                  |        |   |   |
| Cash and cash equivalents                                                       | ** ** | **$**                 | **20.0**    |   | $ | 7.2 |   |
| Other investments                                                               | ** ** | **3.1**               |        | 3.1 |   |
| Intercompany receivables                                                        | ** ** | **13.9**              |        | 17.5 |   |
| Other assets                                                                    | ** ** | **3.4**               |        | 3.9 |   |
| Investments in subsidiaries and affiliates,  on the equity method of accounting | ** ** | **1,701.7**           |        | 2,021.9 |   |
| Total assets                                                                    | ** ** | **$**                 | **1,742.1** |   | $ | 2,053.6 |   |
|                                                                            | ** ** | ** **            |        |   |   |
| Liabilities:                                                                    |       |                  |        |   |   |
| Debt                                                                            | ** ** | **$**                 | **352.5**   |   | $ | 352.4 |   |
| Intercompany payables                                                           | ** ** | **14.4**              |        | 29.8 |   |
| Accounts payable and other liabilities                                          | ** ** | **17.6**              |        | 18.3 |   |
| Total liabilities                                                               | ** ** | **384.5**             |        | 400.5 |   |
| Common shareholders’ equity                                                | ** ** | **1,357.6**           |        | 1,653.1 |   |
| Total liabilities and common shareholders’  equity                         | ** ** | **$**                 | **1,742.1** |   | $ | 2,053.6 |   |

 

**CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**

 
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Millions**                                                        | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                                            | ** ** | **$**                                      | **0.5**    | ** ** | $ | 3.1 |   | $ | 4.1 |   |
| Expenses                                                            | ** ** | **51.9**                                   | ** ** | 32.6 |   | 31.0 |   |
| Net loss                                                            | ** ** | **(51.4**                                  | **)**      | (29.5 | ) | (26.9 | ) |
| Excess of fair value of acquired net assets  over cost - Blue Ocean | ** ** | **1.0**                                    | ** ** | — |   | — |   |
| Equity in earnings (losses) of subsidiaries  and affiliates         | ** ** | **(95.1**                                  | **)**      | 345.3 |   | 329.8 |   |
| Consolidated net income (loss)                                      | ** ** | **(145.5**                                 | **)**      | 315.8 |   | 302.9 |   |
| Other comprehensive income(loss) items, after-tax                   | ** ** | **(5.4**                                   | **)**      | (1.8 | ) | 58.6 |   |
| Consolidated comprehensive income (loss)                            | ** ** | **$**                                      | **(150.9** | **)** | $ | 314.0 |   | $ | 361.5 |   |

 

FS-2

----

Table of Contents

 

**SCHEDULE II(continued)**

 

**MONTPELIER RE HOLDINGS LTD.**

**(Parent Only)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

 
| ** **                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **Millions**                                                                  | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Cash flows from operations:**                                               |       |                                       | ** ** |   |   |   |   |
| Net income (loss)                                                             | ** ** | **$**                                      | **(145.5** | **)** | $ | 315.8 |   | $ | 302.9 |   |
| 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**                                   | **)**      | — |   | — |   |
| Undistributed current loss (earnings) from  subsidiaries and affiliates       | ** ** | **137.3**                                  | ** ** | (257.5 | ) | (329.8 | ) |
| Expense recognized for RSUs and DSUs                                          | ** ** | **8.3**                                    | ** ** | 8.2 |   | 5.1 |   |
| Net amortization and depreciation of assets  and liabilities                  | ** ** | **0.7**                                    | ** ** | 0.1 |   | 0.1 |   |
| Net change in other assets and other  liabilities                             | ** ** | **(5.0**                                   | **)**      | (114.2 | ) | 105.9 |   |
| **Net cash (used for) provided from  operations**                             | ** ** | **(5.2**                                   | **)**      | (47.6 | ) | 84.2 |   |
| ** **                                                                    | ** ** | ** **                                 | ** ** |   |   |   |   |
| **Cash flows from investing activities:**                                     |       |                                       | ** ** |   |   |   |   |
| Contributions of capital to subsidiaries                                      | ** ** | **(27.5**                                  | **)**      | (85.4 | ) | (288.3 | ) |
| Returns of capital from subsidiaries and  affiliates                          | ** ** | **236.5**                                  | ** ** | 294.1 |   | 34.2 |   |
| Purchase of Blue Ocean minority interest                                      | ** ** | **(30.5**                                  | **)**      | — |   | — |   |
| Net acquisitions of capitalized assets                                        | ** ** | **(2.3**                                   | **)**      | — |   | — |   |
| **Net cash provided from (used for) investing  activities**                   | ** ** | **176.2**                                  | ** ** | 208.7 |   | (254.1 | ) |
| ** **                                                                    | ** ** | ** **                                 | ** ** |   |   |   |   |
| **Cash flows from financing activities:**                                     |       |                                       | ** ** |   |   |   |   |
| Proceeds from issuances of common shares                                      |       | —                                     | ** ** | — |   | 100.3 |   |
| Direct equity offering expenses                                               |       | —                                     | ** ** | — |   | (0.8 | ) |
| Repurchases of common shares and warrants                                     | ** ** | **(129.8**                                 | **)**      | (124.7 | ) | — |   |
| Issuance of debt                                                              |       | —                                     | ** ** | — |   | 100.0 |   |
| Amendment of Forward Sale Agreement                                           |       | —                                     | ** ** | (3.9 | ) | — |   |
| Dividends paid on common shares and  warrants                                 | ** ** | **(28.4**                                  | **)**      | (29.9 | ) | (30.0 | ) |
| **Net cash (used for) provided from financing  activities**                   | ** ** | **(158.2**                                 | **)**      | (158.5 | ) | 169.5 |   |
| ** **                                                                    | ** ** | ** **                                 | ** ** |   |   |   |   |
| **Net increase (decrease) in cash and cash  equivalents during the year**     | ** ** | **12.8**                                   | ** ** | 2.6 |   | (0.4 | ) |
| Cash and cash equivalents - beginning of  year                                | ** ** | **7.2**                                    | ** ** | 4.6 |   | 5.0 |   |
| **Cash and cash equivalents - end of year**                                   | ** ** | **$**                                      | **20.0**   | ** ** | $ | 7.2 |   | $ | 4.6 |   |

 

FS-3

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Table of Contents

** **

**SCHEDULE III**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUPPLEMENTARYINSURANCE INFORMATION(Millions)**

 
| **Column A**           | ** ** | **Column B**                                     | ** ** | **Column C**                                                               | ** ** | **Column D**                   | ** ** | **Column E**                                         | ** ** | **Column F**         | ** ** | **Column G**                        | ** ** | **Column H**                                 | ** ** | **Column I**                                    | ** ** | **Column J**                              | ** ** | **Column F**          | ** ** |
|-----------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------|------------|------------------------------------------|------------|---------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **Deferred  policy  acquisition  costs ****(1)** | ** ** | **Reserves for  unpaid claims  and claim  adjustment  expenses** | ** ** | **Unearned  premiums ****(1)** | ** ** | **Other policy  claims and  benefits  payable** | ** ** | **Net  premiums  earned** | ** ** | **Net  investment  income ****(2)** | ** ** | **Claims and  claims  adjustment  expenses** | ** ** | **Amortization  of policy  acquisition  costs** | ** ** | **Other  underwriting  expenses ****(3)** | ** ** | **Net  premiums  written** | ** ** |
|                        |       |                                                  |       |                                                                            |       |                                |       |                                                      |       |                      |       |                                     |       |                                              |       |                                                 |       |                                           |       |                       |       |
| **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   | ** ** | **8.4**                                               | ** ** | **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                       |       |
|                        |       |                                                  |       |                                                                            |       |                                |       |                                                      |       |                      |       |                                     |       |                                              |       |                                                 |       |                                           |       |                       |       |
| December 31, 2006:     |       |                                                  |       |                                                                            |       |                                |       |                                                      |       |                      |       |                                     |       |                                              |       |                                                 |       |                                           |       |                       |       |
| Montpelier Bermuda          |       |                                                  |       |                                                                            |       |                                |       |                                                      |       | $                         | 510.1      |                                     | $          | 108.7                                             |       | $                                                    | 172.7      |                                           | $          | 107.4                      |       | $ | 55.4 |   | $ | 483.8 |   |
| Montpelier Syndicate 5151   |       |                                                  |       |                                                                            |       |                                |       |                                                      |       | —                    |       | —                                   |       | —                                            |       | —                                               |       | —                                         |       | —                     |       |
| MUSIC                       |       |                                                  |       |                                                                            |       |                                |       |                                                      |       | —                    |       | —                                   |       | —                                            |       | —                                               |       | —                                         |       | —                     |       |
| Blue Ocean                  |       |                                                  |       |                                                                            |       |                                |       |                                                      |       | 72.9                      |       | 16.6                                     |       | —                                            |       | 5.4                                                  |       | 16.1                                           |       | 94.8                       |       |

 

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(1)          Excludes inter-segmenteliminations relating to deferred policy acquisition costs of $0.2 million andunearned premiums of $1.2 million for the year ended December 31, 2008.

(2)          Excludes $0.2 million,$0.8 million and $0.5 million of net investment income earned within ourCorporate and Other operations for the years ended December 31, 2008, 2007and 2006, respectively.

(3)          Excludes $20.1million, $6.4 million and $(5.5) million of other underwriting expenses incurredwithin our Corporate and Other operations for the years ended December 31,2008, 2007 and 2006, respectively.

 

FS-4

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Table of Contents

** **

**SCHEDULE IV**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**REINSURANCE($ in millions)**

 
| **Column A**                                       | ** ** | **Column B**  | ** ** | **Column C**                   | ** ** | **Column D**                       | ** ** | **Column E** | ** ** | **Column F**                                        | ** ** |
|---------------------------------------------------------|------------|--------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|-------------------|------------|----------------------------------------------------------|------------|
| **Net premiums written by segment** | ** ** | **Direct  amount** | ** ** | **Ceded to  other  companies** | ** ** | **Assumed  from other  companies** | ** ** | **Net  amount**   | ** ** | **Percentage of  amount  assumed to net** | ** ** |
|                                                    |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| **December 31, 2008:**                                  |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| Montpelier Bermuda                                      |       | $                  | 19.6       |                                | $          | (76.6                                   | )          | $                 | 478.5      |                                                     | $          | 421.5 |   | 114 | % |
| Montpelier Syndicate 5151                               |       | 26.5               |       | (2.3                                | )          | 89.8                                    |       | 114.0             |       | 78                                                       | %          |
| MUSIC                                                   |       | 5.6                |       | —                              |       | —                                  |       | 5.6               |       | —                                                   | %          |
| Blue Ocean                                              |       | —             |       | —                              |       | 0.1                                     |       | 0.1               |       | 100                                                      | %          |
|                                                    |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| December 31, 2007:                                      |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| Montpelier Bermuda                                      |       | $                  | 34.4       |                                | $          | (104.6                                  | )          | $                 | 561.3      |                                                     | $          | 491.1 |   | 114 | % |
| Montpelier Syndicate 5151                               |       | 7.9                |       | (0.2                                | )          | 7.4                                     |       | 15.1              |       | 49                                                       | %          |
| MUSIC                                                   |       | —             |       | —                              |       | —                                  |       | —            |       | —                                                   | %          |
| Blue Ocean                                              |       | —             |       | —                              |       | 42.8                                    |       | 42.8              |       | 100                                                      | %          |
|                                                    |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| December 31, 2006:                                      |       |               |       |                                |       |                                    |       |              |       |                                                     |       |
| Montpelier Bermuda                                      |       | $                  | 63.4       |                                | $          | (148.9                                  | )          | $                 | 569.3      |                                                     | $          | 483.8 |   | 118 | % |
| Montpelier Syndicate 5151                               |       | —             |       | —                              |       | —                                  |       | —            |       | —                                                   | %          |
| MUSIC                                                   |       | —             |       | —                              |       | —                                  |       | —            |       | —                                                   | %          |
| Blue Ocean                                              |       | —             |       | —                              |       | 94.8                                    |       | 94.8              |       | 100                                                      | %          |

 

FS-5

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Table of Contents

** **

**SCHEDULE VI**

 

**MONTPELIER RE HOLDINGS LTD.**

 

**SUPPLEMENTALINFORMATION FOR PROPERTY AND CASUALTY INSURANCE UNDERWRITERS(Millions)**

 
| **Column A**          | ** ** | ** ** | ** ** | **Column B**      | ** ** | **Column C**      | ** ** | **Column D**     | ** ** | **Column E**         | ** ** | **Column F** | ** ** | **Column G**       | ** ** | **Column H**                 | ** ** | **Column I** | ** ** | **Column J**    | ** ** | **Column K**   | ** ** |
|----------------------------|------------|------------|------------|------------------------|------------|------------------------|------------|-----------------------|------------|---------------------------|------------|-------------------|------------|-------------------------|------------|-----------------------------------|------------|-------------------|------------|----------------------|------------|---------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** **             | ** ** | ** **             | ** ** | ** **            | ** ** | ** **                | ** ** | ** **        | ** ** | ** **              | ** ** | **Claims and claims**   | ** ** | ** **        | ** ** | ** **           | ** ** | ** **          | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** **             | ** ** | **Reserves for**  | ** ** | ** **            | ** ** | ** **                | ** ** | ** **        | ** ** | ** **              | ** ** | **adjustment expenses**      | ** ** | ** **        | ** ** | ** **           | ** ** | ** **          | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **Deferred**           | ** ** | **unpaid claims** | ** ** | **Discount, if** | ** ** | ** **                | ** ** | ** **        | ** ** | ** **              | ** ** | **incurred related to** | ** ** | **Amortization**  | ** ** | **Paid claims** | ** ** | ** **          | ** ** |
| ** **                 | ** ** | ** ** | ** ** | **policy**             | ** ** | **and claims**    | ** ** | **any,**              | ** ** | ** **                | ** ** | **Net**           | ** ** | **Net**                 | ** ** | **(1)**                           | ** ** | **(2)**           | ** ** | **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:        |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| ** **                 | ** ** | **2008**   | ** ** | **$**                  | **19.5**   | ** **             | **$**      | **750.0**             | ** ** | **$**                     | **—** | ** **        | **$**      | **140.7**               | ** ** | **$**                             | **459.7**  | ** **        | **$**      | **82.0**             | ** ** | **$**               | **350.7**  | ** ** | **$** | **(104.8** | **)** | **$** | **72.8** | ** ** | **$** | **314.0** | ** ** | **$** | **426.8** | ** ** |
|                       |       | 2007       |       | 26.6                   |       | 839.8                  |       | —                |       | 173.6                     |       | 491.3             |       | 114.2                   |       | 209.7                             |       | (36.4             | )          | 72.9                 |       | 361.2               |       | 491.0 |   |
|                       |       | 2006       |       |                   |       |                   |       |                  |       |                      |       | 510.1             |       | 108.7                   |       | 196.5                             |       | (23.8             | )          | 107.4                |       | 757.0               |       | 483.8 |   |
|                       |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| Montpelier Syndicate 5151: |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| ** **                 | ** ** | **2008**   | ** ** | **$**                  | **8.4**    | ** **             | **$**      | **48.8**              | ** ** | **$**                     | **—** | ** **        | **$**      | **42.2**                | ** ** | **$**                             | **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 |   |
|                       |       | 2006       |       |                   |       |                   |       |                  |       |                      |       | —            |       | —                  |       | —                            |       | —            |       | —               |       | —              |       | — |   |
|                       |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| MUSIC:                     |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| ** **                 | ** ** | **2008**   | ** ** | **$**                  | **0.7**    | ** **             | **$**      | **10.1**              | ** ** | **$**                     | **—** | ** **        | **$**      | **3.5**                 | ** ** | **$**                             | **2.1**    | ** **        | **$**      | **2.1**              | ** ** | **$**               | **1.8**    | ** ** | **$** | **—** | ** ** | **$** | **0.5** | ** ** | **$** | **0.5** | ** ** | **$** | **5.6** | ** ** |
|                       |       | 2007       |       | —                 |       | 16.7                   |       | —                |       | —                    |       | —            |       | 0.1                     |       | —                            |       | —            |       | —               |       | —              |       | — |   |
|                       |       | 2006       |       |                   |       |                   |       |                  |       |                      |       | —            |       | —                  |       | —                            |       | —            |       | —               |       | —              |       | — |   |
|                       |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| Blue Ocean:                |       |       |       |                   |       |                   |       |                  |       |                      |       |              |       |                    |       |                              |       |              |       |                 |       |                |       |   |   |
| ** **                 | ** ** | **2008**   | ** ** | **$**                  | **—** | ** **             | **$**      | **—**            | ** ** | **$**                     | **—** | ** **        | **$**      | **—**              | ** ** | **$**                             | **3.1**    | ** **        | **$**      | **1.3**              | ** ** | **$**               | **—** | ** ** | **$** | **—** | ** ** | **$** | **0.2** | ** ** | **$** | **—** | ** ** | **$** | **0.1** | ** ** |
|                       |       | 2007       |       | 0.2                    |       | —                 |       | —                |       | 3.0                       |       | 61.7              |       | 17.2                    |       | —                            |       | —            |       | 3.8                  |       | —              |       | 42.8 |   |
|                       |       | 2006       |       |                   |       |                   |       |                  |       |                      |       | 72.9              |       | 16.6                    |       | —                            |       | —            |       | 5.4                  |       | —              |       | 94.8 |   |

 

----

(1)          Excludes inter-segmenteliminations relating to deferred policy acquisition costs of $0.2 million andunearned premiums of $1.2 million for the year ended December 31, 2008.

(2)          Excludes $0.2 million,$0.8 million and $0.5 million of net investment income earned within ourCorporate and Other operations for the years ended December 31, 2008, 2007and 2006, respectively.

 

FS-6

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