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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 Form 10-K þ
    ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004
 ORo
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number 001-31468
 Montpelier Re Holdings Ltd. (Exact Name of Registrant as Specified in Its Charter)
 Bermuda(State or Other Jurisdiction of
Incorporation or Organization)
    
    98-0428969(I.R.S. Employer
Identification No.)
 Mintflower Place
8 Par-La-Ville Road
Hamilton HM 08
Bermuda(Address of Principal Executive Offices)Registrants telephone number, including area code:
(441) 296-5550 Securities registered pursuant to Section 12(b) of the Act:
Common Shares, par value 1/6 cent per share
Name of exchange on which registered:
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ      No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ      No o As of March 1, 2005, the Registrant had 62,231,232 common voting shares outstanding, with a
par value of 1/6 cent per share. The aggregate market value of the voting and non-voting common shares held by non-affiliates
of the Registrant on June 30, 2004 was $1,528,041,925 based on the closing sale price of the common shares on
the New York Stock Exchange on that date. Documents Incorporated by Reference Portions of the Registrants definitive proxy statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended (the Exchange Act), relating to the Registrants Annual General Meeting of Shareholders
scheduled to be held May 20, 2005 are incorporated by reference into Part III of this Form 10-K.
With the exception of the portions of the Proxy Statement specifically incorporated herein by
reference, the Proxy Statement is not deemed to be filed as part of this Form 10-K.




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MONTPELIER RE HOLDINGS LTD.
INDEX TO FORM 10-K PagePART IItem 1.
    
    Business
    3Item 2.
    
    Properties
    28Item 3.
    
    Legal Proceedings
    28Item 4.
    
    Submission of Matters to a Vote of Security Holders
    28PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    29Item 6.
    
    Selected Financial Data
    33Item 7.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    34Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    56Item 8.
    
    Financial Statements and Supplementary Data
    57Item 9.
    
    Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
    57Item 9A.
    
    Controls and Procedures
    57Item 9B.
    
    Other Information
    58PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    59Item 11.
    
    Executive Compensation
    59Item 12.
    
    Security Ownership of Certain Beneficial Owners and
Management
    59Item 13.
    
    Certain Relationships and Related Transactions
    59Item 14.
    
    Principal Accounting Fees and Services
    59PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    60EX-10.21 NET SHARE SETTLEMENT AGREEMENTEX-10.22 NET SHARE SETTLEMENT AGREEMENTEX-10.23 NET SHARE SETTLEMENT AGREEMENTEX-10.24 NET SHARE SETTLEMENT AGREEMENTEX-10.25 AMENDED & RESTATED DEFERRED COMPENSATION PLANEX-21.1 SUBSIDIARIESEX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLPEX-31.1 CERTIFICATIONSEX-32.1 CERTIFICATIONS
  - 2 -




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PART I Cautionary Statement under Safe Harbor Provision of the Private Securities Litigation Reform Act
of 1995. This Form 10-K contains, and Montpelier Re Holdings Ltd. (the Company) may from time to time
make, written or oral forward-looking statements within the meaning of the U.S. federal
securities laws. These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. All forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of uncertainties and other
factors, many of which are outside the Companys control that could cause actual results to differ
materially from such statements. In particular, statements using words such as may, should,
estimate, expect, anticipate, intend, believe, predict, potential, or words of
similar import generally involve forward-looking statements. Important events and uncertainties that could cause the actual results, future dividends or
future repurchases to differ include, but are not necessarily limited to: market conditions
affecting our common share price; our short operating and trading history; our dependence on
principal employees; the cyclical nature of the reinsurance business; the levels of new and renewal
business achieved; opportunities to increase writings in our core property and specialty
reinsurance and insurance lines of business and in specific areas of the casualty reinsurance
market; the estimates reported by syndicates under existing QQS contracts; the inherent
uncertainties of establishing reserves for loss and loss adjustment expenses, particularly on
longer-tail classes of business such as casualty; unanticipated
adjustments to premium estimates; the possibility of severe or unanticipated losses
from natural or man-made catastrophes; the impact of terrorist activities on the economy;
competition resulting from: growing capital levels in the reinsurance industry, in some cases,
declining demand due to, among other things, increased retentions by cedants, and other factors;
and rating agency policies and practices. The Companys forward-looking statements concerning
market fundamentals could be affected by changes in demand, pricing and policy term trends and
competition. These and other events that could cause actual results to differ are discussed in
detail in Risk Factors contained in Item 1 of this filing. The Company undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. 
 Item 1.Business General The Company was incorporated under the laws of Bermuda on November 14, 2001. The Company,
through its principal operating subsidiary Montpelier Reinsurance Ltd. (Montpelier Re), is a
provider of global property and casualty reinsurance and insurance products. On July 23, 2004, the
Company incorporated Montpelier Agency Ltd. (MAL), another wholly-owned subsidiary, to provide
insurance management services. MAL has not yet commenced operations. Montpelier Re has two
subsidiaries: Montpelier Marketing Services (UK) Limited (MMSL) and Montpelier Holdings
(Barbados) SRL (MHB). MMSL was incorporated on November 19, 2001 to provide business introduction
and other support services to Montpelier Re. MHB, a Barbados registered society with Restricted
Liability incorporated on July 25, 2002, is the registered holder of certain types of securities,
including United States equity securities. Montpelier Re has assembled a senior management team with significant industry expertise and
longstanding industry relationships. We seek to identify attractive reinsurance and insurance
opportunities by capitalizing on our managements significant underwriting experience, using
catastrophe modeling software and our proprietary risk pricing and capital allocation models. For
the year ended December 31, 2004, we underwrote $837.0 million in gross premiums, which was spread
between various classes of business and geographic areas. We have well-established market
relationships with insurance and reinsurance affiliates of the worlds top insurance brokers
including Marsh & McLennan Companies Inc. (Marsh), Aon Corporation (Aon), Benfield plc
(Benfield) and Willis Group Holdings Ltd. (Willis), among others. We write the following three lines of business: property specialty, property catastrophe and
other specialty. We also previously wrote qualifying quota share (QQS) business in 2002 and 2003
which was not renewed in 2004. These categories are described below:  
    The property specialty category includes risk excess of loss, property pro-rata
and direct insurance and facultative reinsurance business. - 3 -




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
    Property catastrophe reinsurance contracts are typically all risk in nature and
provide protection against losses from earthquakes and hurricanes, as well as other
natural or man-made catastrophes such as floods, tornadoes, fires and storms. The
property catastrophe category also includes retrocessional contracts, which are
reinsurance protections of other reinsurers, also called retrocedants. Coverage
generally provides catastrophe protection for the property portfolios of other
reinsurers.
    Our other specialty category includes aviation, marine,
personal accident catastrophe, workers compensation catastrophe, terrorism, other casualty and
other reinsurance business.
    We also participated in three QQS arrangements for the 2002 and 2003 underwriting
years that were whole account quota share reinsurance contracts of certain Lloyds
syndicates. We did not write this business in 2004. We will pursue other opportunities in the upcoming year as they arise. Corporate Strategy We aim to maximize sustainable long-term growth in shareholder value by pursuing the
following strategies: Manage Capital Prudently and Maintain a Disciplined Balance Sheet.We focus on generating
underwriting profits while maintaining a disciplined balance sheet. We aim to manage our capital
prudently relative to our risk exposure in an effort to maximize sustainable long-term growth in
shareholder value. Our capital management strategy emphasizes the appropriate use of leverage
(borrowings) to augment capital when it can be fully and profitably used to support our
underwriting. Also as part of our capital management strategy, if we have idle or excess capital,
we may reduce leverage and consider additional dividends and share repurchases to return capital to
our owners. On February 25, 2005 we declared a special dividend in the amount of $5.50 per common
voting share or approximately $390.0 million in aggregate, payable on March 31, 2005 to shareholders of record on March 15, 2005. In addition, we
may consider other capital initiatives during 2005. Enhance Our Lead Position With Brokers and Cedants.We often take a lead position in
underwriting treaties. Doing so enhances our access to superior business. Through the use of
sophisticated underwriting tools, our underwriters seek to identify those exposures which meet our
objectives in terms of return on capital and underwriting criteria. By leading reinsurance
programs, we believe our underwriters attract, and can selectively write, exposures from a broad
range of business in the marketplace which has allowed us to build a substantial book of
reinsurance business exhibiting superior performance. Combine Subjective Underwriting Methods With Objective Modeling Tools.We intend to exploit
pricing inefficiencies that may exist in the market from time to time. To achieve this, we
disseminate market information to our entire underwriting team and facilitate personal contact
among all underwriters. Generally, our underwriters use sophisticated property risk modeling tools,
both proprietary and third party, together with their market knowledge and judgment, to achieve the
highest available price per unit of risk assumed by our portfolio. Develop and Maintain a Balanced Portfolio of Reinsurance Risks.We aim to maintain a balanced
portfolio of primarily property related risks, diversified by class, product, geography and
marketing source. We actively seek to grow income in classes experiencing attractive conditions and
avoid classes suffering from intense price competition or poor fundamentals. Our approach to new
business is flexible and dynamic because we have a centralized underwriting team in Bermuda, as
opposed to a large decentralized structure that might encourage writings in particular geographic
areas or product classes in order to justify previous commitments. We underwrite a variety of
different products, and seek to avoid a focus on any particular region or class of business. We
employ risk management techniques to monitor correlation risk and seek to enhance underwriting
returns through careful risk selection using advanced capital allocation methodologies. We utilize
industry modeling tools to stress test the portfolio by simulating large loss events. We believe a
more balanced portfolio of risks reduces the volatility of returns and optimizes the growth of
shareholder value. Deliver Customized, Innovative and Timely Insurance and Reinsurance Solutions for Our Clients.
We have established ourselves as a premier provider of global property and casualty reinsurance and
insurance products and seek to provide superior customer service. Our objective is to solidify
long-term relationships with brokers and clients while developing an industry reputation for
innovative and timely quotes for difficult technical risks. - 4 -




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Reinsurance and Insurance Products General.The majority of the reinsurance products we seek to write are in the form of treaty
reinsurance contracts, which are contractual arrangements that provide for automatic reinsuring of
a type or category of risk underwritten by our clients. When we write treaty reinsurance contracts,
we do not evaluate separately each of the individual risks assumed under the contracts and are
largely dependent on the individual underwriting decisions made by the cedant. Accordingly, we
review and analyze the cedants risk management and underwriting practices in deciding whether to
provide treaty reinsurance and in appropriately pricing the treaty. We also write direct insurance
and facultative reinsurance contracts where we reinsure individual risks on a case-by-case basis. Our contracts can be written on either a quota share, also known as proportional or pro-rata
basis, or on an excess of loss basis. With respect to quota share reinsurance, we share the
premiums as well as the losses and expenses in an agreed proportion with the cedant. In the case of
reinsurance written on an excess of loss basis, we generally receive the premium for the risk
assumed and indemnify the cedant against all or a specified portion of losses and expenses in
excess of a specified dollar or percentage amount. In both types of contracts, we may provide a
ceding commission to the cedant. We seek to manage our risk by seeking profitable pricing, using contract terms,
diversification criteria, prudent underwriting, our proprietary modeling system, CATM, and special
conditions based on the nature and scope of coverage. Underwriting is primarily a matter of
judgment, involving important assumptions about matters that are inherently unpredictable and
beyond our control, and for which historical experience and probability analysis may not provide
sufficient guidance. Premiums are a function of the number and type of contracts we write, as well as prevailing
market prices. Renewal dates for reinsurance business tend to be concentrated at the beginning of
quarters, and the timing of premium written varies by line of business. Most property catastrophe
business is written in the January 1, April 1, June 1 and July 1 renewal periods, while the
property specialty and other specialty lines are written throughout the year. Written premiums are
generally lower during the fourth quarter of the year than other quarters. Gross premiums written
for pro-rata programs are initially booked as estimates and are adjusted as actual results are
reported by the cedants during the period. Earned premiums do not necessarily follow the written
premium pattern as certain premiums written are earned ratably over the contract term, which is
ordinarily twelve months, although many pro-rata contracts are written on a risks attaching basis
and are generally earned over a 24 month period which is the risk period of the underlying (12
month) policies. Premiums are generally due in installments. We believe our most significant opportunities are in the short-tail property exposed business
with higher levels of attachment, and in our specialty lines, particularly in the casualty area.
Details of gross premiums written by line of business are presented in Part II, Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations. Property Specialty.Contracts in this category include risk excess of loss, property pro-rata
and direct insurance and facultative reinsurance. Risk excess of loss reinsurance protects
insurance companies on their primary insurance risks and facultative reinsurance transactions on a
single risk basis. A risk in this context might mean the insurance coverage on one building or
a group of buildings or the insurance coverage under a single policy which the reinsured treats as
a single risk. Coverage is usually triggered by a large loss sustained by an individual risk rather
than by smaller losses which fall below the specified retention of the reinsurance contract. Such
property risk coverages are written on an excess of loss basis, which provides the reinsured
protection beyond a specified amount up to the limit set within the reinsurance contract. We also write direct insurance and facultative reinsurance coverage on commercial property
risks where we assume all or part of a risk under a single insurance contract. We generally write
such coverage on an excess of loss basis. Facultative reinsurance is normally purchased by clients
where individual risks are not covered by their reinsurance treaties, for amounts in excess of the
dollar limits of their reinsurance treaties, or for unusual risks. We also write property pro-rata reinsurance contracts which are reinsurances of individual
property risks written on a proportional basis rather than on an excess of loss basis. Property Catastrophe.Property catastrophe reinsurance contracts are typically all risk in
nature, providing protection against losses from earthquakes and hurricanes, as well as other
natural and man-made catastrophes such as floods, tornadoes, fires and storms. The predominant
exposures covered are losses stemming - 5 -




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from property damage and business interruption coverage resulting from a covered peril.
Certain risks, such as war, nuclear contamination and terrorism, are almost always excluded,
partially or wholly, from our contracts. Property catastrophe reinsurance is generally written on an excess of loss basis, which
provides coverage to primary insurance companies when aggregate claims and claim expenses from a
single occurrence from a covered peril exceed a certain amount specified in a particular contract.
Under these contracts, we provide protection to an insurer for a portion of the total losses in
excess of a specified loss amount, up to a maximum amount per loss specified in the contract. In
the event of a loss, most contracts provide for coverage of a second occurrence following the
payment of a premium to reinstate the coverage under the contract, which is referred to as a
reinstatement premium. The coverage provided under excess of loss reinsurance contracts may be on a
worldwide basis or limited in scope to specific regions or geographical areas, while the underlying
risks covered might be located throughout the world. Coverage can also vary from all property
perils, which is the most expansive form of coverage, to more limited coverage of specified perils
such as windstorm only coverage. To a lesser extent we also write retrocessional coverage contracts, which provide reinsurance
protection to other reinsurers, also called retrocedants. Coverage generally provides catastrophe
protection for the property portfolios of other reinsurers. Retrocessional contracts typically
carry a higher degree of volatility than reinsurance contracts as they protect against
concentrations of exposures written by retrocedants, which in turn may experience an aggregation of
losses from a single catastrophic event. In addition, the information available to retrocessional
underwriters concerning the original primary risk can be less precise than the information received
directly from primary companies. Furthermore, exposures from retrocessional business can change
within a contract term as the underwriters of a retrocedant may alter their book of business after
retrocessional coverage has been bound. Other Specialty.We also write specialty risks such as aviation liability, aviation war,
marine, personal accident catastrophe, workers compensation
catastrophe, terrorism, other casualty and other
reinsurance business. We have entered into agreements with the Overseas Private Investment
Corporation (OPIC) to form an insurance facility to underwrite stand-alone terrorism insurance
products. We aim to control our risk by writing predominantly
short-tail lines of business. Aviation contracts are primarily
written on a retrocessional excess of loss basis. As respects
terrorism, a limited
number of direct risks, reinsurance treaties and national pools are written as well. Our casualty portfolio of risks focuses on selected classes, with an initial emphasis on
casualty clash excess of loss reinsurance business. Under a casualty clash reinsurance agreement,
the ceding insurer retains an amount which is generally higher than the limit on any one reinsured
policy. Thus, two or more coverages or policies issued by the ceding insurer generally must be
involved in a loss for coverage to apply under the reinsurance agreement. In addition, we also
write UK employers liability coverage and excess auto liability coverage in the U.S. In 2004, we
also wrote professional indemnity casualty reinsurance, predominantly medical malpractice and
errors and omissions business, on an excess of loss basis. Coverage for workers compensation and personal accident catastrophe contracts are generally
written to restrict recoveries by the cedant unless normally at least a minimum of ten insured
persons are involved in the same event. This business is generally written to provide coverage
worldwide. There has been more competition in these areas but less so on the upper layers which we
write as price levels remain favorable. A very high percentage of the reinsurance and insurance contracts that we write do not provide
coverage for losses arising from acts of terrorism caused by nuclear, biological or chemical
attack. With respect to personal lines risks, losses arising from acts of terrorism occasioned by
causes other than nuclear, biological or chemical attack are usually covered by our reinsurance
contracts. Such losses relating to commercial lines risks are generally covered on a limited basis,
for example, where the covered risks fall below a stated insured value or into classes or
categories we deem less likely to be targets of terrorism than others or where an act of terrorism
does not meet the definition of act of terrorism set forth in the Terrorism Risk Insurance Act of
2002. The Terrorism Risk Insurance Act of 2002 was enacted to ensure the availability of insurance
coverage for certain types of terrorist acts in the U.S. This law establishes a federal assistance
program that will continue through the end of 2005 to help the commercial insurers and reinsurers
in the property and casualty insurance industry cover claims related to future terrorism related
losses and regulates the terms of insurance relating to terrorism coverage. Although there has been
limited take-up from commercial policyholders to date there remains an uncertainty of the future of
terrorism coverage should the U.S. government not renew the program after December 31, 2005. We
have written a number of insurance and reinsurance contracts providing coverage solely for losses
arising from acts of terrorism. We have done so only in instances where we believe we are able to - 6 -




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obtain pricing that adequately covers our exposure. These contracts nearly always exclude
coverage protecting against nuclear, biological or chemical attack. We pursue specialty reinsurance on a disciplined and opportunistic basis. We target short-tail
lines of business, often with low frequency, high severity profiles similar to catastrophe
business. We also seek to manage the correlations of this business with property catastrophe
through the use of CATM, our proprietary modeling system. Qualifying Quota Share.We provided whole account quota share reinsurance, or QQS reinsurance,
to three Lloyds syndicates for the 2002 and 2003 underwriting years. We have not written any QQS
contracts in 2004 and we do not anticipate doing so in 2005. We do not have exposure to
underwriting in years prior to inception of the QQS contracts and such contracts are expected to be
commuted after 36 months, the point at which the underwriting year is closed. We expect to commute
the 2002 contracts during the first or second quarter of 2005. Under QQS contracts, we assume a specified portion of the risk on a specified coverage in
exchange for an equal proportion of the premiums. The ceding syndicate receives a commission, based
on the amount of the premiums ceded, which is intended to reimburse the insurer for costs of
writing and administering the business. The reinsurer is dependent on the ceding syndicates
ability in underwriting, pricing and claims administration. Business assumed under QQS contracts
usually benefits from all reinsurance purchased by the syndicate, including individual risk and
excess of loss portfolio contracts. Ratings Ratings have become an increasingly important factor in establishing the competitive position
of reinsurance companies. A.M. Best has assigned Montpelier Re a financial strength rating of A
(Excellent), which is the third highest of fifteen rating levels. The objective of A.M. Bests
rating system is to provide an opinion of an insurers financial strength and ability to meet
ongoing obligations to its policyholders. Our rating reflects A.M. Bests opinion of our results of
operations, capitalization and management. Montpelier Re has been assigned an A3 (Good) rating by Moodys Investor Service, the seventh
highest rating of twenty-one rating levels. This rating reflects Moodys opinion of the ability of
Montpelier Re to punctually repay senior policyholder claims and obligations. Montpelier Re has been assigned an A- (Strong) financial strength rating by Standard &
Poors, which is the seventh highest of twenty-one rating levels. The rating reflects Standard &
Poors opinion of Montpelier Res ability to pay under its insurance policies and contracts in
accordance with their terms. These ratings are not evaluations directed to investors in our securities or a recommendation
to buy, sell or hold our securities. Our ratings are subject to periodic review by, and may be
revised upward or downward or revoked at the sole discretion of the rating agencies and we cannot
assure you that we will be able to retain these ratings. Geographic Breakdown Since inception we have sought to diversify our exposure across geographic zones around the
world in order to obtain the optimum spread of risk. The spread of these exposures is also a
function of market conditions and opportunities. The following table sets forth a breakdown of our
gross premiums written by geographic area of risks insured ($ in millions): - 7 -




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Gross Premiums Written by Geographic Area of Risks Insured Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (3)USA and Canada
    
    $
    375.6
    
    
    
    44.9
    %
    
    $
    381.8
    
    
    
    47.1
    %
    
    $
    204.1
    
    
    
    33.6
    %Worldwide (1)
    
    
    249.7
    
    
    
    29.8
    
    
    
    227.6
    
    
    
    28.1
    
    
    
    309.9
    
    
    
    51.0United Kingdom and Ireland
    
    
    58.9
    
    
    
    7.0
    
    
    
    50.4
    
    
    
    6.2
    
    
    
    13.1
    
    
    
    2.2Japan
    
    
    36.5
    
    
    
    4.4
    
    
    
    32.8
    
    
    
    4.1
    
    
    
    20.6
    
    
    
    3.4Western Europe, excluding
the United Kingdom and
Ireland
    
    
    36.1
    
    
    
    4.3
    
    
    
    35.3
    
    
    
    4.4
    
    
    
    20.9
    
    
    
    3.4Worldwide, excluding USA
and Canada (2)
    
    
    29.9
    
    
    
    3.6
    
    
    
    35.8
    
    
    
    4.4
    
    
    
    11.9
    
    
    
    1.9Others (1.5% or less)
    
    
    50.3
    
    
    
    6.0
    
    
    
    46.0
    
    
    
    5.7
    
    
    
    27.2
    
    
    
    4.5Total
    
    $
    837.0
    
    
    
    100.0
    %
    
    $
    809.7
    
    
    
    100.0
    %
    
    $
    607.7
    
    
    
    100.0
    %
   (1)
    
    Worldwide comprises insurance and reinsurance contracts that insure or reinsure risks in
more than one geographic area.(2)
    
    Worldwide, excluding USA and Canada comprises insurance and reinsurance contracts that
insure or reinsure risks in more than one geographic area but specifically exclude the USA and
Canada.(3)
    
    During 2003, the Company refined the classification of gross premiums written between
geographic areas. There was no effect on total gross premiums written. The Qualifying Quota Share contracts are worldwide in nature, with the majority of business
related to North America and Europe. No such contracts were written in 2004. Retrocessions For the years ended December 31, 2004 and 2003, we purchased retrocessional excess of loss
protection against large risk losses on the direct insurance and facultative book and against small
to medium-size catastrophes on the Companys overall property writings. In addition, in 2004 we
purchased retrocessional stop-loss protection against losses on our casualty writings. For certain
pro-rata contracts, including some quota share contracts, the subject direct insurance contracts
carry underlying reinsurance protection from third party reinsurers. We record our pro-rata share
of gross premiums from the direct insurance contracts as gross written premiums and record our
proportionate share of amounts incurred by the ceding company for the underlying third party
reinsurance coverage as reinsurance premiums ceded. For the year ended December 31, 2002, we
recorded reinsurance premiums on qualifying quota share contracts only. Underwriting and Risk Management Since our inception in 2001 we believe we have created a balanced portfolio of risks,
diversified by class, product, geography and marketing source. We attempt to limit the amount of
potential loss that may arise from a single catastrophic event. We also attempt to manage our
exposure against clash and correlation among risks. Our underwriting team is led by our President and Chief Executive Officer, Anthony Taylor and
Montpelier Res Chief Underwriting Officer, C. Russell Fletcher III. We underwrite to specific
disciplines as set out by the Chief Underwriting Officer and approved by the Underwriting Committee
of the Board of Directors, with the aim of maintaining the following principles:  
    Only accept risks with an acceptable return on allocated capital;
    Generally assume excess of loss business with an attachment point above the expected level
of attritional losses, thereby covering infrequent large losses;
    Limit the scope of coverage on regular property classes to traditional perils and
generally exclude perils or causes of loss that are difficult to measure such as cyber
risks, pollution and nuclear, biological and chemical acts of terrorism;
    Entertain difficult risks such as terrorism but only on a specific basis whereby
exposures are carefully controlled through limits, terms and conditions and are
appropriately priced;
    Generally exclude single risk exposure from catastrophe and retrocessional business; and
    Use risk assessment models from providers such as AIR Worldwide Corporation (AIR), EQECAT,   - 8 -




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Inc. (EQE) and Risk Management Solutions, Inc. (RMS) as well as our proprietary
technology, CATM, to assist in the underwriting process and the quantification of our
catastrophe aggregate exposures. We have implemented underwriting guidelines that are designed to limit our exposure to loss
from any one contract. As part of our pricing and underwriting process, we also assess a variety of
other factors, including, but not limited to:  
    The reputation of the proposed cedant and the likelihood of establishing a
long-term relationship with the cedant;
    The geographical location of the cedants original risks;
    Historical loss data of the cedant and, where available, of the industry as a whole
in the relevant regions, in order to compare the cedants historical catastrophe loss
experience to industry averages; and
    The perceived financial strength of the cedant. Our principal underwriting objective is to create a balanced portfolio of risks, diversified
by class, product, geography and marketing source. To help us achieve this objective we have
developed a sophisticated modeling tool to analyze and manage the reinsurance exposures we assume
from cedants, called CATM. This proprietary computer-based underwriting system, the technical
components of which incorporate the fundamentals of modern portfolio theory, is designed to measure
the amount of capital required to support individual contracts based on the degree of correlation
between contracts that we underwrite as well as other factors. CATM comprises risk assessment
tools, exposure databases and intelligent systems, and assists us to price contracts according to
actual exposures and estimate the amount of loss and volatility associated with the contracts we
assume. CATM is designed to use output from models developed by our actuarial team as well as from
those of commercial vendors such as AIR, EQE and RMS. In addition,
CATM serves as an important component of our dynamic financial
analysis model which we use as a guide in managing our
exposure to liability, asset and business risk. Historically, one reinsurer acted as the lead underwriter in negotiating principal policy
terms and pricing of reinsurance contracts with a reinsurance broker. In the current environment, a
consensus of price and terms is produced from a limited group of reinsurers, of which we are very
frequently a part. We believe that our financial strength and the experience and reputation of our
underwriters permits us to be a part of this limited group of reinsurers in underwriting many of
our reinsurance contracts. We believe that being a part of this group will be an important factor
in achieving longer-term success because we believe that this limited group of underwriters
generally has greater influence in negotiation of policy terms, attachment points and premium rates
than following reinsurers. In addition, we believe that reinsurers that are a part of this limited
group are generally solicited for a broader range of business than other reinsurers and have
greater access to preferred risks. Marketing Business
is produced through brokers and reinsurance intermediaries and, to a
lesser extent, directly with cedants. We seek to establish an
identity with brokers and ceding companies by providing: (1) prompt and responsive service on
underwriting submissions; (2) innovative and customized insurance and reinsurance solutions to
clients; and (3) timely payment of claims. Our objective is to build long-term relationships with
brokers and ceding companies and provide financial strength and security. We expect to support the
existing market as we build our reputation and brand. All brokerage transactions are entered into
on an arms length basis. We target prospects that are capable of supplying detailed and accurate
underwriting data and that potentially add further diversification to our book of business. - 9 -




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The following table sets forth a breakdown of the Companys gross premiums written by broker
for the periods indicated ($ in millions): Gross Premiums Written by Broker Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (2)Marsh
    
    $
    188.7
    
    
    
    24.8
    %
    
    $
    204.7
    
    
    
    28.1
    %
    
    $
    143.6
    
    
    
    23.8
    %Aon
    
    
    166.9
    
    
    
    21.9
    
    
    
    145.9
    
    
    
    20.0
    
    
    
    92.7
    
    
    
    15.4Benfield (1)
    
    
    133.9
    
    
    
    17.6
    
    
    
    147.1
    
    
    
    20.2
    
    
    
    163.1
    
    
    
    27.0Willis Group (1)
    
    
    104.1
    
    
    
    13.7
    
    
    
    120.9
    
    
    
    16.6
    
    
    
    148.1
    
    
    
    24.5Other brokers
    
    
    167.2
    
    
    
    22.0
    
    
    
    110.1
    
    
    
    15.1
    
    
    
    56.2
    
    
    
    9.3Total brokers
    
    
    760.8
    
    
    
    100.0
    %
    
    
    728.7
    
    
    
    100.0
    %
    
    
    603.7
    
    
    
    100.0
    %Direct (no broker)
    
    
    76.2
    
    
    
    
    
    
    
    81.0
    
    
    
    
    
    
    
    4.0Total
    
    $
    837.0
    
    
    
    
    
    
    $
    809.7
    
    
    
    
    
    
    $
    607.7
   (1)
    
    Includes QQS gross premiums written.(2)
    
    During 2002, we refined the broker classifications. There was no effect on total gross
premium written. Montpelier Marketing Services (UK) Limited (MMSL), our marketing subsidiary in London, meets
with brokers who are seeking new markets into which to channel their business or who desire
a personal dialogue prior to rating and acceptance by our Bermuda underwriters. MMSL regularly
conducts meetings with major London brokers, smaller brokers, UK cedants and international cedants
visiting London. In addition, MMSL conducts trips to various countries around the
world to visit with clients, prospects and markets. Claims Management Claims management includes the receipt of loss notifications, the establishment of case loss
reserves and approval of loss payments. Additionally, if considered necessary, claims audits may be
conducted for specific claims and claims procedures at the offices of certain ceding companies. We
recognize that fair interpretation of our reinsurance agreements with our customers and timely
payment of covered claims is a valuable service to our clients and enhances our reputation. Reserves We maintain loss and loss adjustment expense reserves to cover our estimated liability for
both reported and unreported claims. We utilize a reserving methodology that calculates a point
estimate for our ultimate losses, and we then develop a range around our point estimate. The point
estimate represents managements best estimate of ultimate loss and loss adjustment expenses. Our
internal actuaries review our reserving assumptions and our methodologies on a quarterly basis and
our loss estimates are subject to an annual corroborative review by independent actuaries using
generally accepted actuarial principles. The extent of reliance on management judgment in the reserving process differs as to whether
the business is insurance or reinsurance and as to whether the business is written on an excess of
loss or on a pro-rata basis. Loss reserve calculations for insurance business are not precise in that they deal with the
inherent uncertainty of future contingent events. Estimating loss reserves requires us to make
assumptions regarding future reporting and development patterns, frequency and severity trends,
claims settlement practices, potential changes in the legal environment and other factors such as
inflation. Reserving for reinsurance business introduces further uncertainties. As predominantly a broker
market reinsurer for both excess of loss and proportional contracts, we must rely on loss
information reported to brokers by primary insurers who must estimate their own losses at the
policy level, often based on incomplete and changing information. The information we receive varies
by cedant and may include paid losses, estimated case reserves, and an estimated provision for
incurred but not reported losses (IBNR reserves). Additionally, reserving practices and the
quality of data reporting may vary among ceding companies which adds further uncertainty to the
estimation of our ultimate losses. - 10 -




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The uncertainties inherent in the reserving process, together with the potential for
unforeseen developments, may result in loss and loss adjustment expenses significantly greater or
less than the reserves provided. Changes to our prior year loss reserves will impact our current
underwriting results by improving our results if the prior year reserves prove to be redundant or
reducing our results if the prior year reserves prove to be insufficient. We expect volatility in
our results in periods that significant loss events occur because U.S. GAAP does not permit
insurers or reinsurers to reserve for loss events until they have occurred and are expected to give
rise to a claim. As a result, we are not allowed to record contingency reserves to account for
expected future losses. We anticipate that claims arising from future events will require the
establishment of substantial reserves from time to time. Management believes that the reserves for loss and loss adjustment expenses are sufficient to
cover losses that fall within assumed coverages on the basis of the methodologies used to estimate
those reserves. However, there can be no assurance that actual losses will not exceed our total
reserves. Loss and loss adjustment expense reserve estimates and the methodology of estimating such
reserves are regularly reviewed and updated as new information becomes known to us. Any resulting
adjustments are reflected in income in the period in which they become known. For additional
information on loss and loss adjustment reserves see Item Part II, Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations. Investments We follow an investment strategy designed to emphasize the preservation of invested assets and
provide sufficient liquidity for the prompt payment of claims. At December 31, 2004, our portfolio
of fixed maturity investments comprised U.S. government securities (17.7%), U.S.
government-sponsored enterprises securities (41.0%), Non U.S. government securities (0.9%),
corporate debt securities (31.0%) and mortgage-backed and asset-backed securities (9.4%). All of
our fixed maturity investments were publicly traded at December 31, 2004 and 99.8% were
investment grade. The average duration of the portfolio was 2.2 years and the average rating of the
portfolio was AA+ at December 31, 2004. The Company did not have an aggregate investment in a
single entity other than the U.S. government securities and U.S. government-sponsored enterprises
securities, in excess of 10% of the Companys shareholders equity at December 31, 2004 or 2003.
U.S. government-sponsored enterprises do not have the full and complete support of the U.S.
government and therefore the Company does face credit risk in respect of these
holdings. We also hold a modest portfolio of publicly traded equity securities. In determining our investment portfolio allocation among different classes of securities, we
consider the potential impact of various catastrophic events on our insurance and reinsurance
portfolio and the corresponding liquidity needs. We take into account the need to service our
liquidity needs in extreme circumstances by deploying the majority of our portfolio in fixed income
securities. However, over longer time horizons, we believe some investment in common equity
securities or alternative asset classes will enhance returns without significantly raising the risk
profile of the portfolio. Our portfolio has been particularly weighted towards short-term fixed
income securities to date. We expect that over time we will increase our exposure modestly to
equities and, perhaps, to alternative asset classes such as hedge funds and private equity funds. Our Finance Committee and its investment sub-committee establish investment guidelines and
supervise our investment activity. These objectives and guidelines stress diversification of risk,
capital preservation, market liquidity, and stability of portfolio income. The Finance Committee
regularly monitors the overall investment results, reviews compliance with our investment
objectives and guidelines, and ultimately reports the overall investment results to the Board of
Directors. These guidelines specify minimum criteria on the overall credit quality and liquidity
characteristics of the portfolio. They also include limitations on the size of certain holdings as
well as restrictions on purchasing certain types of securities or investing in certain industries. We have engaged White Mountains Advisors LLC, a wholly owned indirect subsidiary of White
Mountains Insurance Group, one of our major shareholders, to provide investment advisory and
management services. We pay investment management fees based on the month-end market values held
under management. The fees, which vary depending on the amount of assets under management, are
included in net investment income. We incurred an average fee of 0.11%, 0.17% and 0.19% for the
years ended December 31, 2004, 2003 and 2002, respectively. We expensed investment management fees
of approximately $2.4 million, $3.2 million and $2.1 million for the years ended December 31, 2004,
2003 and 2002, respectively, and have recorded an amount payable for these services of
approximately $0.7 million, $0.9 million and $0.6 million for the years ended December 31, 2004,
2003 and 2002, respectively. - 11 -




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The table below shows the aggregate amounts of investments available for sale, other
investments and cash and cash equivalents comprising our portfolio of invested assets ($ in
thousands): As at December 31,2004
    
    
    2003Fixed maturities, available for sale, at fair value
    
    $
    2,325,273
    
    
    $
    1,976,165Equity investments, available for sale, at fair value
    
    
    45,355
    
    
    
    37,564Other investments, at estimated fair value
    
    
    117,453
    
    
    
    84,354Cash and cash equivalents, at fair value
    
    
    110,576
    
    
    
    139,587Total Invested Assets
    
    $
    2,598,657
    
    
    $
    2,237,670
 Our net investment returns for the years ended December 31, 2004, 2003 and 2002 were as
follows ($ in millions): 2004
    
    
    2003
    
    
    2002Fixed maturities
    
    $
    82,180
    
    
    $
    65,902
    
    
    $
    44,137Net amortization of premium/discount
    
    
    (14,640
    )
    
    
    (14,603
    )
    
    
    (3,803
    )Equity investments
    
    
    1,300
    
    
    
    407
    
    
    
    Cash and cash equivalents
    
    
    2,270
    
    
    
    1,506
    
    
    
    1,677Securities lending
    
    
    588
    
    
    
    157
    
    
    
    71,698
    
    
    
    53,369
    
    
    
    42,011Net investment expenses
    
    
    (2,626
    )
    
    
    (3,221
    )
    
    
    (2,263
    )$
    69,072
    
    
    $
    50,148
    
    
    $
    39,748
 We have an investment in the common shares of Aspen Insurance Holdings Limited (Aspen), a
Bermuda based holding company of Aspen Insurance UK Limited (Aspen Re). At December 31, 2004, we
owned 4.0 million shares of Aspen, which represented approximately 5.8% of Aspen on an undiluted
basis. Aspen completed their initial public offering on December 4, 2003. Our investment in Aspen
is carried at quoted market value at December 31, 2004. At December 31, 2003 the shareholders
agreement and other restrictions presented significant obstacles and uncertainties in the
determination of the number of shares that could be reasonably expected to qualify for sale within
one year. As a result of this illiquidity, at December 31, 2003 a portion of the total investment
was considered restricted and was discounted. The aggregate unrealized gain is included in
accumulated other comprehensive income. On February 3, 2005, the Company sold 1.5 million of its
Aspen shares at $24.80 per common share for total proceeds of $37.2 million, realizing a gain of
$14.4 million. The Company currently owns 2.5 million shares, or approximately 3.6% of Aspen. On August 2, 2004, we invested an aggregate of $20.0 million as part of an investor group
acquiring the life and investments business of Safeco Corporation (since renamed Symetra Financial
Corporation), pursuant to a Stock Purchase Agreement. Symetra is an unquoted investment and is
carried at estimated fair value based on reported net asset values and other information available
to management, with any unrealized gain or loss included in accumulated other comprehensive income. For additional information concerning the Companys investments and reserves, see Item 7,
Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 8,
Financial Statements and Supplementary Data. Competition The insurance and reinsurance industries are highly competitive. We compete with major U.S.,
Bermuda and other international insurers and reinsurers and certain underwriting syndicates and
insurers, some of which have greater financial, marketing and management resources than we do. In
particular, we compete with insurers that provide property-based lines of insurance and
reinsurance, such as Aspen, ACE Tempest Re, Everest Reinsurance Company, IPC Re Limited, Lloyds of
London syndicates, Munich Re, PartnerRe Ltd., PXRE - 12 -




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Reinsurance Company, Renaissance Reinsurance Ltd., Swiss Re and XL Re. In addition, there are
other Bermuda reinsurers, such as Allied World Assurance Company, Ltd., Arch Reinsurance Ltd., AXIS
Specialty Limited, Endurance Specialty Insurance Ltd. and Platinum Underwriters Holdings Ltd. with
whom we also compete. Competition varies depending on the type of business being insured or
reinsured and whether we are in a leading position or acting on a following basis. Competition in the types of business that we underwrite is based on many factors, including:  
    Premiums charged and other terms and conditions offered;
    Services provided;
    Financial ratings assigned by independent rating agencies;
    Speed of claims payment;
    Reputation;
    Perceived financial strength; and
    The experience of the underwriter in the line of insurance or reinsurance to be written. Increased competition could result in fewer submissions, lower premium rates, and less
favorable policy terms, which could adversely impact our growth and profitability. In addition,
capital market participants have created alternative products such as catastrophe bonds that are
intended to compete with reinsurance products. Additionally, we do see growing competition from
hedge funds. We are unable to predict the extent to which these new, proposed or potential
initiatives may affect the demand for our products or the risks that may be available for us to
consider underwriting. We believe that we are well positioned in terms of client services and underwriting expertise.
We also believe that our capitalization and strong financial ratios provide us with a competitive
advantage in the marketplace. Bermuda Insurance Regulation The following summary of Bermuda insurance regulation is based upon current law and is for
general information only. The Insurance Act.As a holding company, Montpelier Re Holdings Ltd. is not subject to Bermuda
insurance law and regulations; however, Montpelier Re is subject to the Insurance Act and related
regulations. No person shall carry on any insurance business in or from within Bermuda unless
registered as an insurer under the Insurance Act by the Bermuda Monetary Authority, which we refer
to as the BMA, which has responsibility for the day-to-day supervision of insurers. Under the
Insurance Act, insurance business includes reinsurance business. The continued registration of a
company as an insurer under the Insurance Act is subject to its complying with the terms of its
registration and such other conditions as the BMA may impose from time to time. An Insurance Advisory Committee appointed by the Bermuda Minister of Finance advises the BMA
on matters connected with the discharge of the BMAs functions, and sub-committees thereof
supervise and review the law and practice of insurance in Bermuda, including reviews of accounting
and administrative procedures. The Insurance Act imposes on Bermuda insurance companies solvency and liquidity standards and
auditing and reporting requirements and grants to the BMA powers to supervise, investigate and
intervene in the affairs of insurance companies. Certain significant aspects of the Bermuda
insurance regulatory framework are set forth below. Classification of Insurers.The Insurance Act distinguishes between insurers carrying on
long-term business and insurers carrying on general business. There are four classifications of
insurers carrying on general business, with Class 4 insurers subject to the strictest regulation.
Montpelier Re is registered to carry on general business as a Class 4 insurer in Bermuda and is
regulated as such under the Insurance Act. As so registered, Montpelier Re may not carry on
long-term business. In general, long-term business includes effecting and carrying out contracts of
insurance on human life or contracts to pay annuities on human life, and contracts of insurance
against risks of the persons insured sustaining injury as the result of an accident, or dying as
the result of an accident or becoming incapacitated or dying in consequence of disease. These are
contracts that are expressed to be in effect for a period of not less than five years or unlimited
and to be terminable by the insurer before the expiration of five years or are so terminable before
the expiration of that period only in special circumstances. - 13 -




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Cancellation of Insurers Registration .An insurers registration may be canceled
by the BMA on certain grounds specified in the Insurance Act, including failure of the insurer to
comply with its obligations under the Insurance Act or if, in the opinion of the BMA, the insurer
has not been carrying on business in accordance with sound insurance principles. Principal Representative.An insurer is required to maintain a principal office in Bermuda and
to appoint and maintain a principal representative in Bermuda. For the purpose of the Insurance
Act, the principal office of Montpelier Re is at the Companys principal executive offices in
Hamilton, Bermuda, and Montpelier Res principal representative is Mr. Anthony Taylor. Without a
reason acceptable to the BMA, an insurer may not terminate the appointment of its principal
representative, and the principal representative may not cease to act as such, unless 30 days
notice in writing to the BMA is given of the intention to do so. It is the duty of the principal
representative, upon reaching the view that there is a likelihood of the insurer for which the
principal representative acts becoming insolvent or that a reportable event has, to the principal
representatives knowledge, occurred or is believed to have occurred, to verbally notify the BMA
immediately and, within 14 days of such notification, to make a report in writing to the BMA
setting out all the particulars of the case that are available to the principal representative.
Examples of such a reportable event include failure by the insurer to comply substantially with a
condition imposed upon the insurer by the BMA relating to a solvency margin or a liquidity or other
ratio. Independent Approved Auditor.Every registered insurer must appoint an independent auditor who
will annually audit and report on the statutory financial statements and the statutory financial
return of the insurer, both of which, in the case of Montpelier Re, are required to be filed
annually with the BMA. The independent auditor of Montpelier Re must be approved by the BMA and may
be the same person or firm who audits Montpelier Res financial statements and reports for
presentation to its shareholders. The auditor must notify the BMA in the event of its resignation
or removal, or if there is material modification to a report on Montpelier Res statutory financial
statements. Montpelier Res independent auditor is PricewaterhouseCoopers (Bermuda). Loss Reserve Specialist.As a registered Class 4 insurer, Montpelier Re is required to submit
an opinion of its approved loss reserve specialist with its statutory financial return in respect
of its loss and loss expense reserves. The loss reserve specialist, who will normally be a
qualified casualty actuary, must be approved by the BMA. Statutory Financial Statements.Montpelier Re must prepare and file annual statutory financial
statements. The Insurance Act prescribes rules for the preparation and substance of such statutory
financial statements (which include, in statutory form, a balance sheet, an income statement, a
statement of capital and surplus and notes thereto). Montpelier Re is required to give detailed
information and analyses regarding premiums, claims, reinsurance and investments. The statutory
financial statements of Montpelier Re are not prepared in accordance with U.S. GAAP and are
distinct from the Companys consolidated financial statements which, under the Companies Act, are
prepared in accordance with U.S. GAAP. Montpelier Re, as a general business insurer, is required to
submit their annual statutory financial statements as part of the annual statutory financial
return. The statutory financial statements and the statutory financial return do not form part of
the public records maintained by the BMA. Annual Statutory Financial Return.Montpelier Re is required to file with the BMA a statutory
financial return no later than four months after its financial year end (unless specifically
extended). The statutory financial return for a Class 4 insurer includes, among other matters, a
report of the approved independent auditor on the statutory financial statements of such insurer,
solvency certificates, the statutory financial statements themselves, the opinion of the loss
reserve specialist and a schedule of reinsurance ceded. The solvency certificates must be signed by
the principal representative and at least two directors of the insurer who are required to certify,
among other matters, whether the minimum solvency margin has been met and whether the insurer
complied with the conditions attached to its certificate of registration. The independent approved
auditor is required to state whether in its opinion it was reasonable for the directors to so
certify. Where an insurers accounts have been audited for any purpose other than compliance with
the Insurance Act, a statement to that effect must be filed with the statutory financial return. Minimum Solvency Margin and Restrictions on Dividends and Distributions.Under the Insurance
Act, the value of the general business assets of a Class 4 insurer, such as Montpelier Re, must
exceed the amount of its general business liabilities by an amount greater than the prescribed
minimum solvency margin. Montpelier Re: (1) is required, with respect to its general business, to maintain a minimum solvency margin
(the prescribed - 14 -




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amount by which the value of its general business assets must exceed its general business
liabilities) equal to the greatest of: (A) $100 million; (B) 50% of net premiums written (being gross premiums written less any premiums ceded by
Montpelier Re but Montpelier Re may not deduct more than 25% of gross premiums when computing net
premiums written); and (C) 15% of net loss, loss expense and other insurance reserves; (2) is prohibited from declaring or paying any dividends during any financial year if it is in
breach of its minimum solvency margin or minimum liquidity ratio or if the declaration or payment
of such dividends would cause it to fail to meet such margin or ratio (if it has failed to meet its
minimum solvency margin or minimum liquidity ratio on the last day of any financial year,
Montpelier Re will be prohibited, without the approval of the BMA, from declaring or paying any
dividends during the next financial year); (3) is prohibited from declaring or paying in any financial year dividends of more than 25% of
its total statutory capital and surplus (as shown on its previous financial years statutory
balance sheet) unless it files (at least 7 days before payment of such dividends) with the BMA an
affidavit stating that it will continue to meet the required margins; (4) is prohibited, without the prior approval of the BMA, from reducing by 15% or more its
total statutory capital as set out in its previous years financial statements and any application
for such approval must include an affidavit stating that it will continue to meet the required
margins; and (5) is required, at any time it fails to meet its solvency margin, within 30 days (45 days
where total statutory capital and surplus falls to $75 million or less) after becoming aware of
that failure or having reason to believe that such failure has occurred, to file with the BMA a
written report containing certain information and is precluded from declaring and/or paying
dividends until the failure is rectified. Minimum Liquidity Ratio.The Insurance Act provides a minimum liquidity ratio for general
business insurers, such as Montpelier Re. An insurer engaged in general business is required to
maintain the value of its relevant assets at not less than 75% of the amount of its relevant
liabilities. Relevant assets include cash and time deposits, quoted investments, unquoted bonds and
debentures, first liens on real estate, investment income due and accrued, account and premiums
receivable and reinsurance balances receivable. There are certain categories of assets which,
unless specifically permitted by the BMA, do not automatically qualify as relevant assets, such as
unquoted equity securities, investments in and advances to affiliates and real estate and
collateral loans. The relevant liabilities are total general business insurance reserves and total
other liabilities less deferred income tax and sundry liabilities (by interpretation, those not
specifically defined). Supervision, Investigation and Intervention.The BMA may appoint an inspector with extensive
powers to investigate the affairs of an insurer if it believes that an investigation is required in
the interest of the insurers policyholders or persons who may become policyholders. In order to
verify or supplement information otherwise provided to the BMA, it may direct an insurer to produce
documents or information relating to matters connected with the insurers business. If it appears to the BMA that there is a risk of Montpelier Re becoming insolvent, or that it
is in breach of the Insurance Act or any conditions imposed upon its registration, the BMA may,
among other things, direct Montpelier Re (1) not to take on any new insurance business, (2) not to
vary any insurance contract if the effect would be to increase the insurers liabilities, (3) not
to make certain investments, (4) to realize certain investments, (5) to maintain in, or transfer to
the custody of a specified bank, certain assets, (6) not to declare or pay any dividends or other
distributions or to restrict the making of such payments and/or (7) to limit its premium income. Disclosure of Information.In addition to powers under the Insurance Act to investigate the
affairs of an insurer, the BMA may require certain information from an insurer (or certain other
persons) to be produced to them. Further, the BMA has been given powers to assist other regulatory
authorities, including foreign insurance regulatory authorities with their investigations involving
insurance and reinsurance companies in Bermuda but subject to restrictions. For example, the BMA
must be satisfied that the assistance being requested is in connection with the discharge of
regulatory responsibilities of the foreign regulatory authority. Further, the BMA must consider
whether to cooperate is in the public interest. The grounds for disclosure are limited and the
Insurance Act provides sanctions for breach of the statutory duty of confidentiality. - 15 -




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Employees As of March 1, 2005, we had 65 employees. Our employees are employed by Montpelier Re or by
Montpelier Marketing Services (UK) Limited. None of our employees are subject to collective
bargaining agreements, and we know of no current efforts to implement such agreements. Many of our Montpelier Re employees, including all of our executive officers, are employed
pursuant to work permits granted by the Bermuda authorities. These permits expire at various times
over the next several years. We have no reason to believe that these permits would not be extended
at expiration upon request, although no assurances can be given in this regard. The Bermuda
government has a policy that limits the duration of work permits to six years, subject to certain
exemptions for key employees. Segment Information Management has determined that the Company operates in one segment only. The Company focuses
on writing global property and casualty reinsurance and insurance business as described earlier. Additional Information The Registrants website address is www.montpelierre.bm. The Registrant makes available on its
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and all amendments to those reports free of charge as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and Exchange Commission. Risk Factors Factors that could cause our actual results to differ materially from those in the forward
looking statements contained in this Form 10-K and other documents we file with the Securities and
Exchange Commission are outlined below. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business or results of operations. Any of the risks
described below could result in a significant or material adverse effect on our results of
operations or financial condition. Risks Related to Our Company Our future performance is difficult to predict because we have a limited operating history. We were formed in November 2001, and we only have three full fiscal years of operating and
financial history. As a result, there is limited historical financial and operating information
available to help you evaluate our performance. Companies in their initial stages of development
present substantial business and financial risks and may suffer significant losses. Our historical
financial results may not accurately indicate our future performance. We could be adversely affected by the loss of one or more principal employees or by an inability to
attract and retain staff. Our success will depend in substantial part upon our ability to attract and retain our
principal employees. As of March 1, 2005 we have 65 full-time employees and depend upon them for
the generation and servicing of our business. We rely substantially upon the services of Anthony
Taylor, our Chairman, Chief Executive Officer and President of Montpelier Re and Russell Fletcher,
our Chief Underwriting Officer of Montpelier Re. Although to date we have generally been successful
in recruiting employees, our location in Bermuda may be an impediment to attracting and retaining
experienced personnel, particularly if they are unable to secure work permits, as described below.
Furthermore, although we are not aware of any planned departures, if we were to lose the services
of members of our management team, our business could be adversely affected. We do not currently
maintain key man life insurance policies with respect to our employees except for Anthony Taylor.
We also may experience difficulty in attracting and retaining qualified independent directors in
the increasingly regulated corporate governance environment. Our ability to conduct our business may be adversely affected by Bermuda employment restrictions. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding
permanent resident certificates, are not permitted to engage in any gainful occupation in Bermuda
without a work permit issued by the Bermuda government. A work permit is only granted or extended
if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a
Bermudian or individual holding a permanent resident certificate is available who meets the minimum
standards for the position. The Bermuda - 16 -




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government has announced a policy that places a six-year term limit on individuals with work
permits, subject to specified exemptions for persons deemed to be key employees and persons holding
positions recognised as key occupations where the particular business has a significant physical
presence in Bermuda. A list of categories recognised as key occupations has recently been issued.
Businesses may request that holders of posts in such categories be exempted from the term limits on
work permits. Many of our Montpelier Re employees, including all of our executive officers, are employed
pursuant to work permits granted by the Bermuda authorities. These permits expire at various times
over the next several years. We have no reason to believe that these permits would not be extended
at expiration upon request, although no assurances can be given in this regard. None of our executive officers based in Bermuda are Bermudian. Of our employees in Bermuda, 37
are Bermudian. Anthony Taylor, our Chief Executive Officer, Russell Fletcher, our Chief
Underwriting Officer, and Thomas Busher, our Chief Operating Officer, are working under work
permits that will expire in 2010 and Kernan Oberting, our Chief Financial Officer, is working under
a work permit which expires in 2009. If work permits are not obtained or renewed for our principal
employees, we could lose their services, which could materially affect our business. We could face unanticipated losses from war, terrorism and political unrest, and these or other
unanticipated losses could have a material adverse effect on our financial condition and results of
operations. We may have substantial exposure to large, unexpected losses resulting from future man-made
catastrophic events, such as acts of war, acts of terrorism and political instability. Although we
may attempt to exclude losses from terrorism and certain other similar risks from some coverages we
write, we may not be successful in doing so. In addition, we have written and will continue to
write some policies explicitly covering acts of terrorism. We have entered into agreements with the
Overseas Private Investment Corporation (OPIC) to form an insurance facility to underwrite
stand-alone terrorism insurance products. These risks are inherently unpredictable and recent
events may lead to increased frequency and severity of losses. It is difficult to predict the
timing of such events with statistical certainty or to estimate the amount of loss that any given
occurrence will generate. To the extent that losses from such risks occur, our financial condition
and results of operation could be materially adversely affected. Our financial condition could be adversely affected by the occurrence of disasters. We have substantial exposure to losses resulting from natural and man-made disasters and other
catastrophic events. Catastrophes can be caused by various events, including hurricanes,
earthquakes, hailstorms, explosions, severe winter weather and fires. The incidence and severity of
such catastrophes are inherently unpredictable and our losses from catastrophes could be
substantial. The occurrence of claims from catastrophic events is likely to result in substantial
volatility in our financial condition or results of operations for any fiscal quarter or year and
could have a material adverse effect on our financial condition or results and our ability to write
new business. This volatility is compounded by accounting regulations that do not permit reinsurers
to reserve for such catastrophic events until they occur. We expect that increases in the values
and concentrations of insured property will increase the severity of such occurrences in the
future. Although we will attempt to manage our exposure to such events, a single catastrophic event
could affect multiple geographic zones or the frequency or severity of catastrophic events could
exceed our estimates, either of which could have a material adverse effect on our financial
condition or results of operations. Emerging claim and coverage issues could adversely affect our casualty business. As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may
adversely affect our business by either extending coverage beyond our underwriting intent or by
increasing the number or size of claims. Because of the long-tail nature of our casualty business
in which claims can typically be made for many years, it is more susceptible to these issues than
the majority of our business, which is predominantly short-tail. In some instances, these changes
may not become apparent until some time after we have issued reinsurance contracts that are
affected by the changes. In addition, we are unable to predict the extent to which the courts may
expand the theory of liability under a casualty insurance contract, such as the range of the
occupational hazards causing losses under employers liability insurance, thereby increasing our
reinsurance exposure. As a result, the full extent of liability under our reinsurance contracts,
and in particular our casualty reinsurance contracts, may not - 17 -




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be known for many years after a contract is issued. If actual claims exceed our loss reserves, our financial results could be significantly adversely
affected. Our success depends upon our ability to accurately assess the risks associated with the
businesses that we reinsure. To the extent actual claims exceed our expectations we will be
required to immediately recognize the less favorable experience as we become aware of it. This
could cause a material increase in our liabilities and a reduction in our profitability, including
an operating loss and reduction of capital. It is early in our history and the number and size of
reported claims may increase, and their size could exceed our expectations. A significant portion of the Companys business is property catastrophe and other classes with
high attachment points of coverage. Reserving for losses in the property catastrophe market is
inherently complicated in that losses in excess of the attachment level of the Companys policies
are characterized by high severity and low frequency, and other factors which could vary
significantly as claims are settled. This limits the volume of relevant industry claims experience
available from which to reliably predict ultimate losses following a loss event. In addition, there always exists a reporting lag between a loss event taking place and the
reporting of the loss to the Company. These incurred but not reported losses are inherently
difficult to predict. Because of the variability and uncertainty associated with loss estimation,
it is possible that our individual case reserves for each catastrophic event and other case
reserves are incorrect, possibly materially. These factors require us to make significant assumptions when establishing loss reserves.
Since the Company has insufficient past loss experience, management supplements this information
with industry data. This industry data may not match the risk profile of the Company, which
introduces a further degree of uncertainty into the process. Accordingly, actual claims and claim
expenses paid may deviate, perhaps substantially, from the reserve estimates reflected in our
financial statements. Like other reinsurers, we do not separately evaluate each of the individual risks assumed
under reinsurance treaties. Therefore, we are largely dependent on the original underwriting
decisions made by ceding companies. We are subject to the risk that the ceding companies may not
have adequately evaluated the risks to be reinsured and that the premiums ceded may not adequately
compensate us for the risks we assume. If our loss reserves are determined to be inadequate, we will be required to increase loss
reserves at the time of such determination with a corresponding reduction in our net income in the
period in which the deficiency is rectified. It is possible that claims in respect of events that
have occurred could exceed our loss reserves and have a material adverse effect on our results of
operations or our financial condition in general. In addition, unlike the loss reserves of U.S.
reinsurers, our loss reserves are not regularly examined by U.S. or other insurance regulators. The failure of any of the loss limitation methods we employ could have a material adverse effect on
our financial condition or our results of operations. We seek to limit our loss exposure by writing a number of our reinsurance contracts on an
excess of loss basis, adhering to maximum limitations on reinsurance written in defined
geographical zones, limiting program size for each client and prudent underwriting of each program
written. In the case of proportional treaties, we seek per occurrence limitations or loss ratio
caps to limit the impact of losses from any one event. We cannot be sure that any of these loss
limitation methods will be effective. We also seek to limit our loss exposure by geographic
diversification. Geographic zone limitations involve significant underwriting judgments, including
the determination of the area of the zones and the inclusion of a particular policy within a
particular zones limits. There can be no assurance that various provisions of our policies, such
as limitations or exclusions from coverage or choice of forum, will be enforceable in the manner we
intend. Disputes relating to coverage and choice of legal forum may also arise. Underwriting is
inherently a matter of judgment, involving important assumptions about matters that are inherently
unpredictable and beyond our control, and for which historical experience and probability analysis
may not provide sufficient guidance. One or more catastrophic or other events could result in
claims that substantially exceed our expectations, which could have a material adverse effect on
our financial condition or our results of operations, possibly to the extent of eliminating our
shareholders equity. - 18 -




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Our ability to pay dividends may be constrained by our holding company structure and the
limitations on payment of dividends Bermuda law and regulations impose on us. We are a holding company and, as such, have no substantial operations of our own. We do not
expect to have any significant operations or assets other than our ownership of the shares of
Montpelier Re. Dividends and other permitted distributions from Montpelier Re are expected to be
our sole source of funds to meet ongoing cash requirements, including debt service payments and
other expenses, and to pay dividends to our shareholders. Bermuda law and regulations, including,
but not limited to Bermuda insurance regulation, limit the declaration and payment of dividends and
the making of distributions by Montpelier Re to us. The inability of Montpelier Re to pay dividends
in an amount sufficient to enable us to meet our cash requirements at the holding company level
could have a material adverse effect on our operations. We may encounter difficulties in maintaining the information technology systems necessary to
run our business. The performance of our information technology systems is critical to our business and
reputation and our ability to process transactions and provide high quality customer service. Such
technology is and will continue to be a very important part of our underwriting process. We
currently purchase risk modeling services from AIR, EQE and RMS. In addition, we purchase insurance
consulting services from Black Diamond Group and Complexus Ltd. for the enhancement of our
proprietary modeling technologies. We cannot be certain that we would be able to replace these service providers or consultants
without slowing our underwriting response time, or that our proprietary technology will operate as
intended. Any defect or error in our information technology systems could result in a loss or delay
of revenues, higher than expected loss levels, diversion of management resources, harm to our
reputation or an increase in costs. One of our founders and certain of our directors and officers may have conflicts of interest with
us. One of our founders, White Mountains, beneficially owns 19.4% (assuming the exercise of
warrants) of our common shares. In addition, two of our directors are affiliated with White
Mountains. Affiliates of White Mountains engage in certain commercial activities and transactions or
agreements with us, which may give rise to conflicts of interest. We may also enter into commercial
arrangements with related parties in the ordinary course of business. In addition, White Mountains
conducts a reinsurance business through some of its subsidiaries, and we may compete with such
subsidiaries for the same prospective clients. Our founders and their affiliates have also entered
into agreements with and made investments in numerous companies that may compete with us. In
particular:  
    Raymond Barrette, the lead director of our Board of Directors and a member of the
Underwriting Policy Committee of our Board of Directors, is President and Chief Executive
Officer of White Mountains Insurance Group.
    John Gillespie, a member of our Board of Directors and Chairman of the Finance
Committee of our Board, is Deputy Chairman of the Board of Directors of White Mountains
Insurance Group. Mr. Gillespie is Chairman and President of White Mountains Advisors LLC,
a wholly owned indirect subsidiary of White Mountains Insurance Group, which we have
engaged to provide investment advisory and management services. In addition, Mr.
Gillespie is either general manager or investment manager of various funds, which own
less than 5% of our common shares.
    Kip Oberting, our Chief Financial Officer, was previously
employed by and is permitted to provide limited
services to White Mountains
Capital, Inc. or its affiliates, provided that such services do not interfere with his
performance for the Company. Such services must be fully disclosed to the Company, and
the Company may require Mr. Oberting to cease such services at
any time. Long-term incentive awards granted by White Mountains
Capital, Inc.
to Mr. Oberting prior to his employment by the Company continue to vest. In addition, our founders and entities affiliated with some of our directors have sponsored or
invested in, and may in the future sponsor or invest in, other entities engaged in or intending to
engage in insurance and reinsurance underwriting, some of which may compete with us. They have also
entered into, or may in the future enter into, agreements with companies that may compete with us. We have a policy in place applicable to each of our directors and officers which provides for
the resolution of potential conflicts of interest. However, we may not be in a position to
influence any partys decision to engage in activities that would give risk to a conflict of
interest, and they may take actions that are not in our shareholders best interests. - 19 -




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If we choose to purchase reinsurance, we may be unable to do so. We purchased reinsurance for our own account in 2004 in order to limit the effect of large and
multiple losses upon our financial condition, and we may seek to buy reinsurance in the future.
This type of insurance is known as retrocessional reinsurance. A reinsurers insolvency or
inability to make payments under the terms of its reinsurance treaty with us could have a material
adverse effect on us. From time to time, market conditions have limited, and in some cases have prevented, insurers
and reinsurers from obtaining the types and amounts of reinsurance which they consider adequate for
their business needs. Accordingly, we may not be able to obtain our desired amounts of
retrocessional reinsurance. In addition, even if we are able to obtain such retrocessional
reinsurance, we may not be able to negotiate terms that we deem appropriate or acceptable or from
entities with satisfactory creditworthiness. We will be subject to the credit risk of our reinsurers. If we purchase retrocessional reinsurance for our own account, the insolvency, inability or
reluctance of any of our reinsurers to make timely payments to us under the terms of our
reinsurance agreements could have a material adverse effect on us. The same risk also exists with
respect to certain contracts that carry underlying reinsurance protection. Since we depend on a few reinsurance brokers for a large portion of our revenues, loss of business
provided by them could adversely affect us. We market our reinsurance worldwide primarily through reinsurance brokers. For the year ended
December 31, 2004, 90.9% of our gross premiums written were sourced through brokers. Subsidiaries
and affiliates of Marsh, Aon, Benfield (one of our founders and a shareholder) and Willis provided
22.5%, 19.9%, 16.0% and 12.4% (for a total of 70.8%), respectively, of our gross premiums written
sourced through brokers for the year ended December 31, 2004. Affiliates of two of these brokers,
Aon and Marsh, have also co-sponsored the formation of Bermuda reinsurance companies that may
compete with us, and these brokers may favor their own reinsurers over other companies. Loss of all
or a substantial portion of the business provided by one or more of these brokers could have a
material adverse effect on our business. Our reliance on reinsurance brokers subjects us to their credit risk. In accordance with industry practice, we frequently pay amounts owed on claims under our
policies to reinsurance brokers, and these brokers, in turn, pay these amounts over to the ceding
insurers that have reinsured a portion of their liabilities with us. In some jurisdictions, if a
broker fails to make such a payment, we might remain liable to the ceding insurer for the
deficiency. Conversely, in certain jurisdictions, when the ceding insurer pays premiums for these
policies to reinsurance brokers for payment over to us, these premiums are considered to have been
paid and the ceding insurer will no longer be liable to us for those amounts, whether or not we
have actually received the premiums. Consequently, consistent with the industry, we assume a degree
of credit risk associated with brokers around the world. Our investment performance may affect our financial results and ability to conduct business. Our funds are invested on a discretionary basis by a professional investment advisory
management firm, White Mountains Advisors LLC, a wholly-owned subsidiary of White Mountains
Insurance Group, subject to policy guidelines, which are periodically reviewed by the Finance
Committee of our Board of Directors. Although our investment policies stress diversification of risks, conservation of principal
and liquidity, our investments are subject to market-wide risks and fluctuations, as well as to
risks inherent in particular securities. In particular, the volatility of our claims submissions may force us to liquidate securities
which may cause us to incur capital losses. If we structure our investments improperly relative to
our reinsurance liabilities, we may be forced to liquidate investments prior to maturity at a
significant loss to cover such liabilities. Realized and unrealized investment losses resulting
from an other than temporary decline in value could significantly decrease our assets, thereby
affecting our ability to conduct business. Our operating results may be adversely affected by currency fluctuations. Our functional currency is the U.S. dollar. We write a portion of our business, receive
premiums and pay losses in foreign currencies and may maintain a small portion of our investment
portfolio in investments - 20 -




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denominated in currencies other than U.S. dollars. A portion of our loss reserves are also in
non-U.S. currencies. We may experience foreign exchange losses to the extent our foreign currency
exposure is not properly managed or otherwise hedged, which in turn would adversely affect our
statement of operations and financial condition. At present we have no currency hedges in place, nor are we aware of any significant exposures
to loss payments that will be paid in non-U.S. currencies. We intend to consider using hedges when
we are advised of known or probable significant losses that will be paid in non-U.S. currencies. We
can, therefore, choose to manage currency fluctuation exposure during the period between advice and
ultimate payment. However, we would not normally hedge against this possible exposure for IBNR.
Reserves for IBNR are a substantial part of our total loss reserves. We are rated by rating agencies and a decline in our ratings could affect our standing among
brokers and customers and cause our revenue and earnings to decrease. Ratings have become an increasingly important factor in establishing the competitive position
of reinsurance companies. A.M. Best assigned Montpelier Re a financial strength rating of A
(Excellent), which is the third highest of fifteen rating levels. The objective of A.M. Bests
rating system is to provide an opinion of an insurers financial strength and ability to meet
ongoing obligations to its policyholders. Our rating reflects A.M. Bests opinion of the results of
our operations capitalization and management. Montpelier Re has been assigned an A3 (Good) rating
by Moodys Investors Service, the seventh highest rating of twenty-one rating levels. This rating
reflects Moodys opinion of the ability of Montpelier Re to punctually repay senior policyholder
claims and obligations. Montpelier Re has been assigned an A - (Strong) financial strength rating
by Standard & Poors, which is the seventh highest of twenty-one rating levels. The rating reflects
Standard & Poors opinion of Montpelier Res ability to pay under its insurance policies and
contracts in accordance with their terms. These ratings are not evaluations directed to investors
in our securities or a recommendation to buy, sell or hold our securities. Our ratings are subject
to periodic review by, and may be revised or revoked at the sole discretion of the rating agencies
and we cannot assure you that we will be able to retain these ratings. If our ratings are reduced from their current levels by A.M. Best, Moodys or Standard &
Poors, our competitive position in the insurance industry would suffer and it would be more
difficult for us to market our products. A significant downgrade could result in a substantial loss
of business as ceding companies, and brokers that place such business, move to other reinsurers
with higher ratings. We may require additional capital in the future. Our future capital requirements depend on many factors, including our ability to write new
business successfully and to establish premium rates and reserves at levels sufficient to cover
losses. To the extent that the funds generated by our ongoing operations, initial capitalization
and initial public offering are insufficient to fund future operating requirements and cover claim
payments, we may need to raise additional funds through financings or curtail our growth and reduce
our assets. Any equity or debt financing, if available at all, may be on terms that are not
favorable to us. If we cannot obtain adequate capital, our business, operating results and
financial condition could be adversely affected. If our subsidiary is unable to obtain the necessary credit, we may not be able to offer reinsurance
in certain markets. Montpelier Re is not licensed or admitted as an insurer in any jurisdiction other than
Bermuda. Because many jurisdictions do not permit insurance companies to take credit for
reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial
statements unless appropriate security mechanisms are in place, our reinsurance clients will
typically require us to post a letter of credit or other collateral. In order for Montpelier Re to
write Lloyds QQS business, it must provide a letter of credit in favor of The Society and Council
of Lloyds (Lloyds) in accordance with Lloyds rules. Effective May 27, 2004 the Company entered
into a three-year Amended and Restated Letter of Credit Reimbursement and Pledge Agreement with
Banc of America Securities LLC and a syndicate of lending institutions for the provision of a
letter of credit facility for the account of Montpelier Re in favor of Lloyds or certain U.S.
ceding companies (Tranche A) in an amount of up to $250.0 million, and in favor of certain U.S.
ceding companies only (Tranche B) in an amount of up to $200.0 million of which up to $50.0
million may be used by us as a revolving line of credit for general corporate purposes. On October
28, 2004, we exercised an option to increase the aggregate amount of Tranche B by $50.0 million to
$250.0 million. In addition, effective December 23, 2004, Montpelier Re entered into a $50 million
Letter of Credit Reimbursement and Pledge Agreement with HSBC Bank USA, National Association. The
agreement is a one year secured facility that allows Montpelier Re to issue up to $50 million in
letters of credit. - 21 -




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If Montpelier Re were to become unable to obtain necessary credit, Montpelier Re could be
limited in its ability to write business for certain of our clients. Risks Related to Our Industry Substantial new capital inflows into the reinsurance industry will increase competition. The reinsurance industry is highly competitive. We compete, and will continue to compete, with
major U.S. and non-U.S. reinsurers, many of which have greater financial, marketing and management
resources than we have. We also compete with several other Bermuda-based reinsurers that write
reinsurance and that target the same market as we do and utilize similar business strategies, and
some of these companies currently have more capital than we have. We also compete with financial
products, such as risk securitization, the usage of which has grown in volume. Established
competitors may be planning additional capital raising transactions. Ultimately, this competition could affect our ability to
attract or retain business or to write business at premium rates sufficient to cover losses. If
competition limits our ability to write new business at adequate rates, our return on capital may
be adversely affected. Events may result in political, regulatory and industry initiatives, which could adversely affect
our business. The supply of property catastrophe reinsurance coverage decreased due to the withdrawal of
capacity and substantial reductions in capital resulting from, among other things, the September
11th terrorist attacks. This tightening of supply resulted in government intervention in the
insurance and reinsurance markets in relation to terrorism coverage both in the U.S. and through
industry initiatives in other countries. The Terrorism Risk Insurance Act of 2002 was enacted to
ensure the availability of insurance coverage for certain types of terrorist acts in the U.S. This
law establishes a federal assistance program that will continue through the end of 2005 to help the
commercial insurers and reinsurers in the property and casualty insurance industry cover claims
related to future terrorism related losses and regulates the terms of insurance relating to
terrorism coverage. Although there has been limited take-up from commercial policyholders to date
there remains an uncertainty of the future of terrorism coverage should the U.S. government
discontinue the program after December 31, 2005. This government intervention and the possibility of future interventions have created
uncertainty in the insurance and reinsurance markets about the definition of terrorist acts and the
extent to which future coverages will extend to terrorist acts. Government regulators are generally
concerned with the protection of policyholders to the exclusion of other constituencies, including
shareholders of insurers and reinsurers. While we cannot predict the exact nature, timing or scope
of possible governmental initiatives, such proposals could adversely affect our business by:  
    Providing insurance and reinsurance capacity in markets and to consumers that we target;
    Requiring our participation in industry pools and guaranty associations;
    Regulating the terms of insurance and reinsurance policies; or
    Disproportionately benefiting the companies of one country over those of another. The insurance industry is also affected by political, judicial and legal developments that may
create new and expanded theories of liability. Such changes may result in delays or cancellations
of products and services by insurers and reinsurers, which could adversely affect our business. Current legal and regulatory activities relating to insurance brokers and agents, contingent
commissions and certain finite-risk insurance products could affect our business, results of
operations and financial condition. Contingent commission arrangements and finite-risk reinsurance have become the focus of
investigations by the Securities and Exchange Commission and numerous state Attorneys General.
Finite-risk reinsurance has been defined as a form of reinsurance in which, among other things, the
time value of money is considered in the products design and pricing, in addition to the expected
amount of the loss payments. At this time, we are unable to predict the potential effects, if any, that these
investigations may have upon the insurance and reinsurance markets and industry business practices
or what, if any, changes may be made to - 22 -




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laws and regulations regarding the industry and financial reporting. Any of the foregoing
could adversely affect our business, results of operations and financial condition. Competition in the insurance industry could reduce our operating margins. Competition in the insurance industry has increased as industry participants seek to enhance
their product and geographic reach, client base, operating efficiency and general market share
through organic growth, mergers and acquisitions, and reorganization activities. As the insurance
industry evolves, competition for customers may become more intense and the importance of acquiring
and properly servicing each customer will grow. We could incur greater expenses relating to
customer acquisition and retention, which could reduce our operating margins. There are also many
potential initiatives by capital market participants to produce alternative products that may
compete with the existing catastrophe reinsurance markets. In addition, hedge funds are
increasingly participating in our markets through various structures. Over time, these numerous
initiatives could significantly affect supply, pricing and competition in our industry. The reinsurance business is historically cyclical and we expect to experience periods with excess
underwriting capacity and unfavorable premiums. Historically, reinsurers have experienced significant fluctuations in operating results due to
competition, frequency of occurrence or severity of catastrophic events, levels of capacity,
general economic conditions and other factors. Demand for reinsurance is influenced significantly
by underwriting results of primary property insurers and prevailing general economic conditions.
The supply of reinsurance is related to prevailing prices, the levels of insured losses and the
levels of industry surplus which, in turn, may fluctuate in response to changes in rates of return
on investments being earned in the reinsurance industry. As a result, the reinsurance business
historically has been a cyclical industry characterized by periods of intense price competition due
to excessive underwriting capacity as well as periods when shortages of capacity permitted
favorable premium levels. The supply of reinsurance may increase, either by capital provided by new
entrants or by the commitment of additional capital by existing reinsurers, which may cause prices
to decrease. Any of these factors could lead to a significant reduction in premium rates, less
favorable policy terms and fewer submissions for our underwriting services. In addition to these
considerations, changes in the frequency and severity of losses suffered by insurers may affect the
cycles of the reinsurance business significantly, and we expect to experience the effects of such
cyclicality. We may be adversely affected by interest rate changes. Our operating results depend, in part, on the performance of our investment portfolio. Our
investment portfolio contains interest rate sensitive instruments, such as bonds, which may be
adversely affected by changes in interest rates. Changes in interest rates could also have an
adverse effect on our investment income and results of operations. Interest rates are highly sensitive to many factors, including governmental monetary policies,
domestic and international economic and political conditions and other factors beyond our control.
Any measures we take that are intended to manage the risks of operating in a changing interest rate
environment may not effectively mitigate such interest rate sensitivity. Risks Related to Our Common Shares Future sales of common shares may affect their market price. We cannot predict what effect, if any, future sales of our common shares, or the availability
of common shares for future sale, will have on the market price of our common shares. Sales of
substantial amounts of our common shares in the public market, or the perception that such sales
could occur, could adversely affect the market price of our common shares. There are provisions in our charter documents which restrict the voting rights of our common
shares. Our bye-laws generally provide that any shareholder owning, directly or by attribution, more
than 9.5% of our common shares will have the voting rights attached to such common shares reduced
so that it may not exercise more than 9.5% of the total voting rights. - 23 -




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U.S. persons who own our common shares may have more difficulty in protecting their interests than
U.S. persons who are shareholders of a U.S. corporation. The Companies Act 1981 of Bermuda, which applies to us, differs in certain material respects
from laws generally applicable to U.S. corporations and their shareholders. Set forth below is a
summary of certain significant provisions of the Companies Act which includes, where relevant,
information on modifications thereto adopted pursuant to our bye-laws, applicable to us, which
differ in certain respects from provisions of Delaware corporate law. Because the following
statements are summaries, they do not discuss all aspects of Bermuda law that may be relevant to us
and our shareholders. Interested Directors.Bermuda law and our bye-laws provide that we cannot void any transaction
we enter into in which a director has an interest, nor can such director be liable to us for any
profit realized pursuant to such transaction, provided the nature of the interest is disclosed at
the first opportunity at a meeting of directors, or in writing, to the directors. Under Delaware
law such transaction would not be voidable if:  
    the material facts as to such interested directors relationship or interests were
disclosed or were known to the board of directors and the board had in good faith
authorized the transaction by the affirmative vote of a majority of the disinterested
directors;
    such material facts were disclosed or were known to the stockholders entitled to
vote on such transaction and the transaction were specifically approved in good faith by
vote of the majority of shares entitled to vote thereon; or
    the transaction were fair as to the corporation as of the time it was authorized, approved
or ratified. Under Delaware law, the interested director could be held liable for a transaction in which the
director derived an improper personal benefit. Business Combinations with Large Shareholders or Affiliates.As a Bermuda company, we may
enter into business combinations with our large shareholders or affiliates, including mergers,
asset sales and other transactions in which a large shareholder or affiliate receives, or could
receive, a financial benefit that is greater than that received, or to be received, by other
shareholders, without obtaining prior approval from our Board of Directors or from our
shareholders. If we were a Delaware company, we would need prior approval from our Board of
Directors or a supermajority of our shareholders to enter into a business combination with an
interested shareholder for a period of three years from the time the person became an interested
shareholder, unless we opted out of the relevant Delaware statute. Shareholders Suits.The rights of shareholders under Bermuda law are not as extensive as the
rights of shareholders in many United States jurisdictions. Class actions and derivative actions
are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts
ordinarily would be expected to follow English case law precedent, which would permit a shareholder
to commence an action in the name of the company to remedy a wrong done to the company where an act
is alleged to be beyond the corporate power of the company, is illegal or would result in the
violation of our memorandum of association or bye-laws. Furthermore, consideration would be given
by the court to acts that are alleged to constitute a fraud against the minority shareholders or
where an act requires the approval of a greater percentage of our shareholders than actually
approved it. The winning party in such an action generally would be able to recover a portion of
attorneys fees incurred in connection with such action. Our bye-laws provide that shareholders
waive all claims or rights of action that they might have, individually or in the right of the
company, against any director or officer for any act or failure to act in the performance of such
directors or officers duties, except with respect to any fraud or dishonesty of such director or
officer. Class actions and derivative actions generally are available to stockholders under
Delaware law for, among other things, breach of fiduciary duty, corporate waste and actions not
taken in accordance with applicable law. In such actions, the court has discretion to permit the
winning party to recover attorneys fees incurred in connection with such action. Indemnification of Directors.We may indemnify our directors or officers or any person
appointed to any committee by the Board acting in their capacity as such in relation to any of our
affairs for any loss arising or liability attaching to them by virtue of any rule of law in respect
of any negligence, default, breach of duty or breach of trust of which such person may be guilty in
relation to the company other than in respect of his own fraud or dishonesty. Under Delaware law, a
corporation may indemnify a director or
officer of the corporation against expenses (including attorneys fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in defense of an action, suit or
proceeding by reason of such position if such director or officer acted in good faith and in a
manner he or she reasonably believed to be in or not be opposed to the best - 24 -




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interests of the corporation and, with respect to any criminal action or proceeding,
such director or officer had no reasonable cause to believe his or her conduct was unlawful. Anti-takeover provisions in our bye-laws could impede an attempt to replace or remove our
directors, which could diminish the value of our common shares. Our bye-laws contain provisions that may entrench directors and make it more difficult for
shareholders to replace directors even if the shareholders consider it beneficial to do so. In
addition, these provisions could delay or prevent a change of control that a shareholder might
consider favorable. For example, these provisions may prevent a shareholder from receiving the
benefit from any premium over the market price of our common shares offered by a bidder in a
potential takeover. The Board of Directors has the power to appoint a managing director or chief
executive officer, a president and a vice president and such additional officers as the Board may
determine to perform such duties in the management, business and affairs of the Company as may be
delegated to them by the Board. Even in the absence of an attempt to effect a change in management
or a takeover attempt, these provisions may adversely affect the prevailing market price of our
common shares if they are viewed as discouraging changes in management and takeover attempts in the
future.  For example, our bye-laws contain the following provisions that could have such an effect:  
    election of our directors is staggered, meaning that the members of only one of
three classes of our directors are elected each year;
    shareholders have limited ability to remove directors;
    the total voting power of any shareholder owning more than 9.5% of our common shares
will be reduced to 9.5% of the total voting power of our common shares; and
    our directors may decline to record the transfer of any common shares on our share
register if they believe that registration of the transfer is required under any federal
or state securities law or under the laws of any other jurisdiction and the registration
has not yet been effected. You may have difficulty effecting service of process on us or enforcing judgments against us in the
United States. We are incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In
addition, certain of our directors and officers reside outside the United States, and all or a
substantial portion of our assets and the assets of such persons are located in jurisdictions
outside the United States. As such, we have been advised that there is doubt as to whether:  
    a holder of our common shares would be able to enforce, in the courts of Bermuda,
judgments of United States courts against persons who reside in Bermuda based upon the
civil liability provisions of the United States federal securities laws;
    a holder of our common shares would be able to enforce, in the courts of Bermuda,
judgments of United States courts based upon the civil liability provisions of the United
States federal securities laws;
    a holder of our common shares would be able to bring an original action in the
Bermuda courts to enforce liabilities against us or our directors and officers, as well
as the experts named in this prospectus, who reside outside the United States based
solely upon United States federal securities laws. Further, we have been advised that there is no treaty in effect between the United States and
Bermuda providing for the enforcement of judgments of United States courts, and there are grounds
upon which Bermuda courts may not enforce judgments of United States courts. Because judgments of
United States courts are not automatically enforceable in Bermuda, it may be difficult for you to
recover against us based upon such judgments. We may require our shareholders to sell us their common shares. Under our bye-laws and subject to Bermuda law, we have the option, but not the obligation, to
require a shareholder to sell some or all of its common shares to us at fair market value (which
would be based upon the average closing price of the common shares as defined under our bye-laws)
if the Board reasonably determines, in good faith based on an opinion of counsel, that share
ownership, directly, indirectly or constructively by any shareholder is likely to result in adverse
tax, regulatory or legal consequences to us, certain of our other - 25 -




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shareholders or our subsidiaries. Risks Related to Taxation We and our subsidiaries may be subject to U.S. tax. We and Montpelier Re are organized under the laws of Bermuda and believe, based on the advice
of counsel, that we operate in a manner such that we are not subject to U.S. taxation on our income
(other than excise taxes on insurance and reinsurance premium income attributable to insuring or
reinsuring U.S. risks and U.S. withholding taxes on certain U.S. source investment income).
However, because there is considerable uncertainty as to the activities which constitute being
engaged in a trade or business within the United States, there can be no assurances that the U.S.
Internal Revenue Service will not contend successfully that we or Montpelier Re are engaged in a
trade or business in the United States. If we or Montpelier Re were considered to be engaged in a
business in the United States, we could be subject to U.S. corporate income and branch profits
taxes on the portion of our earnings effectively connected to such U.S. business. U.S. persons who hold common shares may be subject to U.S. income taxation at ordinary income rates
on their proportionate share of our related party insurance income (RPII). RPII is the income of Montpelier Re, if any, attributable to insurance or reinsurance policies
where the direct or indirect insureds are U.S. shareholders or are related to U.S. shareholders.
RPII may be included in a U.S. shareholders gross income whether or not such shareholder is a
policyholder. We do not expect our gross RPII to equal or exceed 20% of our gross insurance income
in any taxable year for the foreseeable future and do not expect our direct or indirect insureds
(and related persons) to directly or indirectly own 20% or more of either the voting power or value
of our common shares, but we cannot assure you that this will be the case. If our expectation is
incorrect, a U.S. person owning any common shares directly or indirectly on the last day of our
taxable year will be required to include in gross income for U.S. federal income tax purposes such
holders share of the RPII for up to the entire taxable year, determined as if all such RPII were
distributed proportionately only to such U.S. shareholders at that date, but limited by such
holders share of our current-year earnings and profits as reduced by the holders share, if any,
of certain prior-year deficits in earnings and profits attributable to our insurance business. Upon
the sale or other disposition of any common shares, such person may also be required to recognize
ordinary income rather than capital gain to the extent of the shareholders pro rata share of our
undistributed earnings and profits and to file IRS Form 5471, although this should not be the case
because we should not be treated as deriving RPII income directly. The RPII provisions have never
been interpreted by the courts or the U.S. Treasury Department in final regulations, and
regulations interpreting the RPII provisions of the Code exist only in proposed form. It is not
certain whether these regulations will be adopted in their proposed form or what changes or
clarifications might ultimately be made thereto or whether any such changes, as well as any
interpretation or application of RPII by the IRS, the courts, or otherwise, might have retroactive
effect. The Treasury Department has authority to impose, among other things, additional reporting
requirements with respect to RPII. Accordingly, the meaning of the RPII provisions and the
application thereof to us and our subsidiaries is uncertain. U.S. persons who hold common shares will be subject to adverse tax consequences if we are
considered a PFIC for U.S. federal income tax purposes. Based on the advice of counsel, we believe that we are not, and we currently do not expect to
become, a passive foreign investment company (a PFIC) for U.S. federal income purposes. We can
not assure you, however, that we will not be considered a PFIC. If we were considered a PFIC it
could have material adverse tax consequences for an investor that is subject to U.S. federal income
taxation, including subjecting the investor to a greater tax liability than might otherwise apply
and subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed.
There are currently no regulations regarding the application of the passive foreign investment
company provisions to an insurance company. New regulations or pronouncements interpreting or
clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance
would have on a shareholder that is subject to United States federal income taxation. We may become subject to U.S. tax legislation concerning Bermuda companies. Congress has been discussing legislation intended to eliminate certain perceived tax
advantages of Bermuda insurance companies and U.S. companies having Bermuda affiliates. While
currently there is no specific legislative proposal which, if enacted, would adversely affect us,
Montpelier Re or our shareholders, legislative proposals could emerge that could conceivably have
an adverse impact on us, Montpelier Re or our - 26 -




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shareholders. We may become subject to taxes in Bermuda after 2016, which may have a material adverse effect on
our financial condition. The Bermuda Minister of Finance, under the Exempted Undertaking Tax Protection Act 1966, as
amended, of Bermuda, has given us an assurance that if any legislation 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 the nature of estate duty or inheritance tax, then the imposition of any such tax will
not be applicable to us or any of our operations or our shares, debentures or other obligations
until March 28, 2016. We cannot assure you that we will not be subject to any Bermuda tax after
that date. The impact of Bermudas letter of commitment to the Organization for Economic Cooperation and
Development to eliminate harmful tax practices is uncertain and could adversely affect our tax
status in Bermuda. The Organization for Economic Cooperation and Development, which is commonly referred to as
the OECD, has published reports and launched a global dialogue among member and non-member
countries on measures to limit harmful tax competition. These measures are largely directed at
counteracting the effects of tax havens and preferential tax regimes in countries around the world.
In the OECDs report dated June 26, 2000, Bermuda was not listed as a tax haven jurisdiction
because it had previously signed a letter committing itself to eliminate harmful tax practices by
the end of 2005 and to embrace international tax standards for transparency, exchange of
information and the elimination of any aspects of the regimes for financial and other services that
attract business with no substantial domestic activity. We are not able to predict what changes
will arise from the commitment or whether such changes will subject us to additional taxes. Risks Related to Regulation If we become subject to insurance statutes and regulations in jurisdictions other than Bermuda or
there is a change to Bermuda law or regulations or application of Bermuda law or regulations, there
could be a significant and negative impact on our business. Montpelier Re, our wholly owned operating subsidiary, is a registered Bermuda Class 4 insurer.
As such, it is subject to regulation and supervision in Bermuda. Bermuda insurance statutes,
regulations and policies of the Bermuda Monetary Authority require Montpelier Re to, among other
things:  
    maintain a minimum level of capital, surplus and liquidity;
    satisfy solvency standards;
    restrict dividends and distributions;
    obtain prior approval of ownership and transfer of shares;
    maintain a principal office and appoint and maintain a principal representative in Bermuda;
and
    provide for the performance of certain periodic examinations of Montpelier Re and its
financial condition. These statutes and regulations may, in effect, restrict our ability to write reinsurance policies,
to distribute funds and to pursue our investment strategy. We do not presently intend that Montpelier Re will be admitted to do business in any
jurisdiction in the United States, the United Kingdom or elsewhere (other than Bermuda). However,
we cannot assure you that insurance regulators in the United States, the United Kingdom or
elsewhere will not review the activities of Montpelier Re or related companies or its agents and
claim that Montpelier Re is subject to such jurisdictions licensing requirements. If any such
claim is successful and Montpelier Re must obtain a license, we may be subject to taxation in such
jurisdiction. In addition, Montpelier Re is subject to indirect regulatory requirements imposed by
jurisdictions that may limit its ability to provide insurance or reinsurance. For example,
Montpelier Res ability to write insurance or reinsurance may be subject, in certain cases, to
arrangements satisfactory to applicable regulatory bodies. Proposed legislation and regulations may
have the effect of imposing additional requirements upon, or restricting the market for, alien
insurers or reinsurers with whom domestic companies place business. Generally, Bermuda insurance statutes and regulations applicable to Montpelier Re are less
restrictive than those that would be applicable if it were governed by the laws of any state in the
United States. In the past, there have been congressional and other initiatives in the United
States regarding proposals to supervise and regulate insurers domiciled outside the United States.
If in the future we become subject to any insurance laws of the - 27 -




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United States or any state thereof or of any other jurisdiction, we cannot assure you that we
would be in compliance with those laws or that coming into compliance with those laws would not
have a significant and negative effect on our business. The process of obtaining licenses is very time consuming and costly, and we may not be able to
become licensed in a jurisdiction other than Bermuda, should we choose to do so. The modification
of the conduct of our business resulting from our becoming licensed in certain jurisdictions could
significantly and negatively affect our business. In addition, our inability to comply with
insurance statutes and regulations could significantly and adversely affect our business by
limiting our ability to conduct business as well as subjecting us to penalties and fines. Because we are incorporated in Bermuda, we are subject to changes of Bermuda law and
regulation that may have an adverse impact on our operations, including imposition of tax liability
or increased regulatory supervision. In addition, we will be exposed to changes in the political
environment in Bermuda. The Bermuda insurance and reinsurance regulatory framework recently has
become subject to increased scrutiny in many jurisdictions, including in the United States and in
various states within the United States. We cannot predict the future impact on our operations of
changes in the laws and regulation to which we are or may become subject. 
 Item 2.Properties The Company leases office spaces in Hamilton, Bermuda, where the Companys principal executive
offices are located. The Company also leases office space in London, United Kingdom, where the
Companys subsidiary, Montpelier Marketing Services (UK) Limited is located. We believe our
facilities are adequate for our current needs. 
 Item 3.Legal Proceedings The Company, in common with the insurance and reinsurance industry in general, is subject to
litigation and arbitration in the normal course of its business. We are not currently involved in
any material pending litigation or arbitration proceedings. 
 Item 4.Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal
year covered by this report. - 28 -




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PART II 
 Item 5.Market for Registrants Common Equity and Related
Stockholder Matters and Issuer Purchases of Equity Securities Our common shares began publicly trading on October 10, 2002 on the New York Stock Exchange
under the symbol MRH. The following table sets forth, for the periods indicated, the high and low
sales prices per share of our common shares as reported in composite New York Stock Exchange
trading. Price Range ofCommon SharesPeriod
    
    High
    
    
    Low2002Fourth Quarter (beginning October 10, 2002)
    
    $
    29.75
    
    
    $
    21.402003First Quarter
    
    $
    30.35
    
    
    $
    25.00Second Quarter
    
    $
    35.22
    
    
    $
    27.60Third Quarter
    
    $
    33.35
    
    
    $
    28.85Fourth Quarter
    
    $
    37.56
    
    
    $
    30.142004First Quarter
    
    $
    39.25
    
    
    $
    34.25Second Quarter
    
    $
    37.24
    
    
    $
    32.85Third Quarter
    
    $
    37.79
    
    
    $
    34.17Fourth Quarter
    
    $
    39.15
    
    
    $
    35.192005First
Quarter through February 28, 2005
    
    $
    42.17
    
    
    $
    36.48
 The
approximate number of record holders of ordinary shares as of
March 1, 2005 was 74, not including beneficial owners of shares registered in nominee or street name. Dividend Policy We
initiated a regular dividend program of $0.34 per common voting share
and warrant per quarter and declared our first
dividend to shareholders and warrant holders of record at December 31, 2003 which was paid on January 15, 2004. The
Board of Directors declared regular quarterly dividends of $0.34 per
common voting share and warrant on March 2, 2004, June 16, 2004, September 17, 2004 and December 14, 2004. In addition, on February 25, 2005 we declared a
special dividend in the amount of $5.50 per common voting share and
warrant payable on March 31, 2005 to
shareholders and warrant holders of record on March 15, 2005. We expect to continue the payment of dividends in the
future but we cannot assure you that such payments will continue. Any determination to pay cash
dividends will be at the discretion of our Board of Directors and will be dependent upon our
results of operations and cash flows, our financial position and capital requirements, general
business conditions, legal, tax, regulatory and any contractual restrictions on the payment of
dividends and any other factors our Board of Directors deems relevant. Our ability to pay dividends depends, in part, on the ability of our subsidiaries to pay
dividends to us. Montpelier Re is subject to Bermuda laws and regulatory constraints which affect
its ability to pay dividends to us. For additional information concerning Bermuda regulatory
restrictions, see Part 1, Item 1, Bermuda Insurance
Regulation. In addition, under the Companies
Act, the Company and Montpelier Re may only declare or pay a dividend if, among other matters,
there are reasonable grounds for believing that each of them is, or would after the payment be,
able to pay their respective liabilities as they become due. Accordingly, we cannot assure you that
we will declare or pay dividends in the future. - 29 -




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Unregistered Sales of Equity Securities and Use of Proceeds There were no stock repurchases for the quarter ended December 31, 2004. (c)
    
    
    (d)Total Number of
    
    
    Approximate Dollar Value(a)
    
    
    (b)
    
    
    Shares Purchased as
    
    
    of Shares thatTotal Number
    
    
    Average Price
    
    
    Part of Publicly
    
    
    May Yetof Shares
    
    
    Paid Per
    
    
    Announced
    
    
    Be Purchased Under thePurchased
    
    
    Share
    
    
    Plans or Programs (1)
    
    
    Plans or Programs(1)October 1,
2004 through
October 31, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    $
    84,521,657November 1, 2004
through November 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 1, 2004
through December
31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    $
    
    
    
    
    
    
    

    
    
    $
    84,521,657
   (1)
    
    On May 26, 2004 the Companys Board of Directors approved a plan to repurchase up to
$150.0 million of the Companys shares from time to time depending on market conditions
during a period of up to 24 months. Equity Compensation Plan Information The following table provides information as of December 31, 2004 with respect to the Companys
Share Option Plan and Performance Unit Plan. The table does not include information with respect
to the Montpelier Long-Term Incentive Plan, which is described below. Number of
    
    
    
    
    
    
    Number of SecuritiesSecurities to be
    
    
    Weighted-
    
    
    Remaining Available forIssued Upon
    
    
    Average
    
    
    Future Issuance UnderExercise of
    
    
    Exercise Price of
    
    
    Equity CompensationOutstanding Options,
    
    
    Outstanding Options,
    
    
    Plans (ExcludingWarrants and Rights
    
    
    Warrants and Rights
    
    
    Securities Reflected inPlan Category
    
    (a)
    
    
    (b)
    
    
    Column (a)) (c)Equity
compensation plans
approved by
security holders
    
    
    0
    
    
    
    0
    
    
    
    0Equity compensation
plans not approved
by security
holders(1)
    
    
    3,794,500
    (2)
    
    $
    18.47
    
    
    
    0Total
    
    
    3,794,500
    
    
    $
    18.47
    
    
    
    0
   (1)
    
    These compensation plans were approved prior to the Companys October 2002 initial public
offering of Common Shares.(2)
    
    Consists of 1,922,500 outstanding share options granted under the Share Option Plan and
1,872,000 Common Shares subject to the Performance Unit Plan. The number of Common Shares subject
to the Performance Unit Plan shown in the table represents the maximum number of Common Shares that
may be issued if the performance targets applicable to such units are achieved at the maximum
level. If target performance levels are achieved, only half of these shares would be issued.
The Compensation and Nominating Committee of the Board has discretion to settle these awards in
cash, Common Shares or a combination of cash and Common Shares. Performance units do not require
the payment of an exercise price. Accordingly, there is no weighted average exercise price for
these awards. The following is a description of the Companys equity compensation plans: - 30 -




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Performance Unit Plan.Pursuant to the terms of the Performance Unit Plan, at the discretion
of the Compensation and Nominating Committee, performance units may be granted to executive
officers and certain other key employees. Performance units are conditional grants that entitle
the recipient to receive, without payment to the Company, all, double, or a part of the target
value of the units granted, depending on the achievement of specific financial or operating goals.
Performance units vest at the end of a three-year performance cycle, and can be denominated in
Common Shares at market value and are payable in cash, Common Shares or a combination of both at
the discretion of the Compensation and Nominating Committee. The performance target for full
payment of performance units issued in the 2002-2004 performance cycle is the achievement of an
average combined ratio of 70% as measured over the applicable performance periods. The performance
target for full payment of performance units issued in the 2003-2005 performance period and the
2004-2006 performance period is a combination of the achievement of an average combined ratio of
72% as measured over the period, and the achievement of an annual increase in fully converted book
value per share of 18% as measured over the period. The payment on performance units can double if
the performance is significantly above target and conversely, the payment on performance units
declines to zero with a performance significantly below target. The Compensation and Nominating
Committee has sole discretion regarding the payout level of the performance units. Share Option Plan. Pursuant to the terms of the Share Option Plan, the Compensation and
Nominating Committee has discretion to grant share options to certain principal employees. The
options expire ten years after the award date, are subject to various vesting periods, and require
full payment in cash prior to exercise. A total of 1,922,500 options are outstanding pursuant to
the Share Option Plan at December 31, 2004, 627,500 options were exercised by optionholders during
Fiscal Year 2004 as described above. Available grants under the Performance Unit Plan and the Share Option Plan, which together
constitute the Companys current long-term incentive plans, were exhausted at December 31, 2004.
In order to provide a means of granting long-term equity-based incentive compensation in future
years, the Board has adopted the Montpelier Long-Term Incentive Plan, which was approved at the
2004 Annual General Meeting. A description of the Montpelier Long-Term Incentive Plan is
contained below. Montpelier
Long-Term Incentive Plan (LTIP) The
purpose of the LTIP, which came into effect on January 1, 2005, is to advance the Companys interests by providing to certain key
employees, non-employee directors and consultants of the Company and its subsidiaries long-term
incentive awards, the value of which is based on the Companys Common Shares. The Boards
Compensation and Nominating Committee will administer the LTIP. The Compensation and Nominating
Committee, subject to the provisions of the LTIP, has the exclusive authority to: (1) select
employees, directors and consultants to whom awards will be granted; (2) determine the type, size,
and terms of awards and prescribe the form of award agreement evidencing awards; (3) determine
whether awards will be settled in cash, Common Shares, or a combination of cash and Common Shares,
(4) interpret and administer the LTIP and awards granted under the LTIP; (5) establish, amend and
rescind any rules and regulations relating to the LTIP; and (6) make any other determinations
necessary or advisable for the administration of the LTIP. Any decision of the committee with
respect to the administration of the LTIP will be final and conclusive with respect to all parties. Awards that may be granted under the LTIP consist of share appreciation rights (SARs),
restricted share units (RSUs) and performance shares (Performance Shares). SARs give a participant the right to receive a payment in cash or Common Shares (or a
combination of cash and Common Shares) based on the post-grant appreciation of a number of Common
Shares subject to the award if vesting conditions are satisfied. The vesting conditions are
determined by the Compensation and Nominating Committee and may relate to a period of continued
employment or service, attainment of performance goals, or a combination of the two. Once vested,
a participant may settle the SAR at any time prior to the SARs expiration. The amount distributed
to a participant upon exercise is determined by multiplying the excess of the fair market value of
a Company common share on the date of exercise over the fair market value on the date of grant, by
the number of shares with respect to which the SAR is being exercised. The fair market value of a
Company common share for this purpose will be the 5-day average of the daily closing prices of the
shares on the New York Stock Exchange or other principal securities exchange on which the shares
are traded, as reported in the Wall Street Journal, for the 5 consecutive trading days previous to
and including as the last day the date of valuation or, if there is no trading on the date of
valuation, the last previous day on which the shares were traded. - 31 -




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RSUs give a participant the right to receive a payment in cash or Common Shares (or a
combination of cash and Common Shares) equal to the number of RSUs subject to the award if vesting
conditions are satisfied. The vesting conditions are determined by the Compensation and Nominating
Committee and may relate to a period of continued employment or service, attainment of performance
goals, or a combination of the two. If all applicable terms and conditions of the award are met,
the participant will be entitled to receive a number of Common Shares equal to the number of RSUs
earned, a cash payment in an amount determined by multiplying the fair market value of Common
Shares by the number of restricted share units earned, or a combination of Common Shares and cash.
The fair market value of Common Shares for this purpose will be the 5-day average of the daily
closing prices of the shares on the New York Stock Exchange or other principal securities exchange
on which the shares are traded, as reported in the Wall Street Journal, for the 5 consecutive
trading days previous to and including as the last day the date of valuation or, if there is no
trading on the date of valuation, the last previous day on which the shares were traded. Performance Shares give a participant the right to receive a payment in cash or Common Shares
(or a combination of cash and Common Shares) equal to the number of Performance Shares subject to
the award if performance goals are satisfied. The performance goals are determined by the
Compensation and Nominating Committee and may relate to the Company, one or more of its
subsidiaries, or one or more of its divisions, units, partnerships, joint ventures, minority
investments, product lines or products, or any combination of the foregoing. If all applicable
terms and conditions of the award are satisfied, the participant will be entitled to receive a
number of Common Shares equal to the number of Performance Shares earned, a cash payment in an
amount determined by multiplying the fair market value of Common Shares by the number of
Performance Shares earned, or a combination of Common Shares and cash. The fair market value of
Common Shares for this purpose will be the 5-day average of the daily closing prices of the shares
on the New York Stock Exchange or other principal securities exchange on which the shares are
traded, as reported in the Wall Street Journal, for the 5 consecutive trading days previous to and
including as the last day the date of valuation or, if there is no trading on the date of
valuation, the last previous day on which the shares were traded. Shareholders Agreement. In December 2001, the Company entered into a shareholders agreement with all of the
shareholders who purchased their shares in the private placement. Many provisions of this agreement
terminated when the Company became a publicly traded company in October 2002. As described below,
the shareholders who are a party to the shareholders agreement have retained rights relating to
participation in large sales of the Companys common shares and registration of their restricted
shares. Shareholders who are party to the shareholders agreement who hold 15% of the registrable
securities then held by such holders (or 20% after the first such request), will have the right to
request registration for a public offering of common shares. The Company will use their best
efforts to cause the prompt registration of common shares, but will not be required to file a
registration statement if the proposed offering is not an appropriate size, if the managing
underwriter determines that a registration would be adverse to another proposed offering for a
period of time, if the Company holds material non-public information that the board determines
should not be disclosed (for a period of time) or if the Company has filed a registration statement
within a period of time before the proposed registration. If the number of common shares to be sold
in the offering is limited by the managing underwriter, then the number of shares requested to be
registered will be allocated, pro rata, among the requesting shareholders. In addition, until December 12, 2011, if the Company proposes to register any common shares or
any options, warrants or other rights to acquire, or securities convertible into or exchangeable
for, the Companys common shares under the Securities Act (other than shares to be issued pursuant
to an employee benefits plan or in connection with a merger, acquisition or similar transaction),
the Company will offer shareholders who are party to the shareholders agreement and who are not
currently entitled to sell their shares pursuant to Rule 144(k) under the Securities Act, the
opportunity, subject to certain conditions, to include their common shares in such registration
statement. Certain of the Companys shareholders exercised this right in connection with the
Companys filing of a Registration Statement on Form S-3 dated February 12, 2004. See Item 7 
Managements Discussion and Analysis of Financial Condition and Results of Operations  Financial
Condition and Liquidity  Capital Resources. - 32 -




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##### Table of Contents



Item 6.Selected Financial Data The following table sets forth our selected financial data and other financial information as
at December 31, 2004, 2003, 2002 and 2001 and for the years ended December 31, 2004, 2003 and 2002
and for the period from November 14, 2001 to December 31, 2001. The historical financial
information was prepared in accordance with U.S. GAAP. The statement of income data for the periods
ended December 31, 2004, 2003, 2002 and 2001, and the balance sheet data at December 31, 2004,
2003, 2002 and 2001 were derived from our audited consolidated financial statements, which have
been audited by PricewaterhouseCoopers, our independent registered public
accounting firm. You should read the selected
financial data in conjunction with our consolidated financial statements and related notes thereto
contained in Item 8  Financial Statements and Supplementary Data and Item 7  Managements
Discussion and Analysis of Financial Condition and Results of Operations, included in this filing
and all other information appearing elsewhere or incorporated into this filing by reference. 2004
    
    
    2003
    
    
    2002
    
    
    2001Income Statement DataGross premiums written
    
    $
    837,051
    
    
    $
    809,733
    
    
    $
    607,688
    
    
    $
    150Reinsurance premiums ceded
    
    
    87,735
    
    
    
    31,758
    
    
    
    41,779
    
    
    
    Net premiums written
    
    
    749,316
    
    
    
    777,975
    
    
    
    565,909
    
    
    
    150Net premiums earned
    
    
    787,515
    
    
    
    705,333
    
    
    
    329,926
    
    
    
    8Net investment income
    
    
    69,072
    
    
    
    50,148
    
    
    
    39,748
    
    
    
    1,139Net realized gains on investments
    
    
    7,248
    
    
    
    7,631
    
    
    
    7,716
    
    
    
    Net foreign exchange gains
    
    
    6,999
    
    
    
    8,310
    
    
    
    1,681
    
    
    
    Loss and loss adjustment expenses
    
    
    404,802
    
    
    
    164,107
    
    
    
    133,310
    
    
    
    Acquisition costs and general and administrative
expenses
    
    
    208,073
    
    
    
    190,412
    
    
    
    89,204
    
    
    
    1,208Financing expense
    
    
    17,534
    
    
    
    9,688
    
    
    
    4,460
    
    
    
    236Fair value of warrants issued (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,321Income (loss) before taxes
    
    
    240,425
    
    
    
    407,215
    
    
    
    152,097
    
    
    
    (61,618
    )Net income (loss)
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045
    
    
    $
    (61,618
    )Basic earnings (loss) per share (2)
    
    $
    3.84
    
    
    $
    6.42
    
    
    $
    2.76
    
    
    $
    (1.18
    )Diluted earnings (loss) per share (2)
    
    $
    3.55
    
    
    $
    6.05
    
    
    $
    2.74
    
    
    $
    (1.18
    )Weighted average number of common shares
outstanding  basic
    
    
    62,633,467
    
    
    
    63,392,597
    
    
    
    55,178,150
    
    
    
    52,440,000Weighted average number of common shares
outstanding  diluted
    
    
    67,706,972
    
    
    
    67,275,287
    
    
    
    55,457,141
    
    
    
    52,440,000Cash dividends per share
    
    $
    1.36
    
    
    $
    0.34
    
    
    $
    
    
    
    $
    Balance Sheet DataFixed maturities
    
    $
    2,325,273
    
    
    $
    1,976,165
    
    
    $
    1,354,845
    
    
    $
    640,403Equity investments
    
    
    45,355
    
    
    
    37,564
    
    
    
    
    
    
    
    Other investments
    
    
    117,453
    
    
    
    84,354
    
    
    
    63,691Cash and cash equivalents
    
    
    110,576
    
    
    
    139,587
    
    
    
    162,925
    
    
    
    350,606Total Assets
    
    
    3,398,113
    
    
    
    2,552,589
    
    
    
    1,833,918
    
    
    
    1,021,798Net loss and loss adjustment expense reserves
    
    
    454,841
    
    
    
    242,064
    
    
    
    129,459
    
    
    
    Debt
    
    
    248,963
    
    
    
    248,843
    

    
    
    150,000
    
    
    
    150,000Shareholders Equity
    
    $
    1,751,944
    
    
    $
    1,657,705
    
    
    $
    1,252,535
    
    
    $
    860,653Operating Ratios and Other Non-GAAP MeasuresLoss ratio (3)
    
    
    51.4
    %
    
    
    23.3
    %
    
    
    40.4
    %
    
    
    Expense ratio (4)
    
    
    26.4
    %
    
    
    27.0
    %
    
    
    27.0
    %
    
    
    N/MCombined ratio (5)
    
    
    77.8
    %
    
    
    50.3
    %
    
    
    67.4
    %
    
    
    N/MBook value per share (6)
    
    $
    28.20
    
    
    $
    26.15
    
    
    $
    19.76
    
    
    $
    16.41Fully converted book value per share (7)
    
    $
    26.75
    
    
    $
    24.92
    
    
    $
    19.39
    
    
    $
    16.41
 - 33 -




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The Company commenced operations on December 16, 2001 and, as a result, underwrote only one
reinsurance policy during the period ended December 31, 2001.   (1)
    
    Fair value of warrants issued to the founding shareholders. The warrants are classified as
equity instruments, and in accordance with EITF 00-19, the estimated aggregate fair value was
reported as an expense and an addition to additional paid-in capital.(2)
    
    Basic earnings (loss) per share is calculated using the basic weighted average number of
common shares. Diluted earnings per share assumes the exercise of all dilutive warrants and
options, using the treasury stock method.(3)
    
    The loss ratio is calculated by dividing loss and loss adjustment expenses by net premiums
earned.(4)
    
    The expense ratio is calculated by dividing acquisition costs plus general and administrative
expenses by net premiums earned.(5)
    
    Combined ratio is the sum of the loss ratio and the expense ratio.(6)
    
    Book value per share is calculated using total shareholders equity divided by basic shares
outstanding.(7)
    
    Fully converted book value per share is a non-GAAP measure, based on total shareholders
equity plus the assumed proceeds from the exercise of outstanding options and warrants of
$157.5 million for the year ended December 31, 2004 and $168.1 million, for the year ended
December 31, 2003, 2002 and 2001 divided by the sum of shares, options and warrants
outstanding (assuming their exercise) of 71,372,892 shares at December 31, 2004, 73,261,757
shares at December 31, 2003 and 2002 and 52,440,000 shares at December 31, 2001. The Company
believes that fully converted book value per share more accurately reflects the value
attributable to a common share. N/M  Not meaningful. 
 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations Overview The following is a discussion and analysis of our results of operations for the years ended
December 31, 2004, 2003 and 2002 and financial condition as at December 31, 2004. This discussion
and analysis should be read in conjunction with the audited consolidated financial statements and
related notes thereto included in this filing. This discussion contains forward-looking statements that are not historical facts, including
statements about the Companys beliefs and expectations. These statements are based upon current
plans, estimates and projections. Our actual results may differ materially from those projected in
these forward-looking statements as a result of various factors. See Cautionary Statement under
Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995.and Risk
Factors contained in Item 1 Business of this filing. - 34 -




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Executive Overview Our principal operating subsidiary, Montpelier Re, operates as a Bermuda-based provider of
global property and casualty reinsurance and insurance products. We operate in markets where we
believe our underwriting expertise and financial strength represent a relative advantage. Our
profitability in any given period is based upon our premium and investment revenues less net loss
and loss adjustment expenses. Premiums are a function of the number and type of reinsurance and insurance contracts we
write, as well as prevailing market prices. Renewal dates for reinsurance business tends to be
concentrated at the beginning of quarters, and the timing of premium written varies by line of
business. Most property catastrophe business is written in the January 1, April 1, June 1 and July
1 renewal periods, while the property specialty and other specialty lines are written throughout
the year. Written premiums are generally lower during the fourth quarter of the year as compared to
prior quarters. The following are the main categories of gross premium written: Property Specialty Contracts in this category include risk excess of loss, property pro-rata
and direct insurance and facultative reinsurance business. Risk excess of loss reinsurance protects
insurance companies on their primary insurance risks and facultative reinsurance transactions on a
single risk basis. Coverage is usually triggered by a large loss sustained by an individual risk
rather than by smaller losses which fall below the specified retention of the reinsurance contract. We also write direct insurance and facultative reinsurance coverage on commercial property
risks where we assume all or part of a risk under a single insurance contract. We generally write
such coverage on an excess of loss basis. We also write property pro-rata reinsurance contracts which are reinsurances of individual
property risks written on a proportional basis rather than on an excess of loss basis. Property Catastrophe These contracts are typically all risk in nature, providing
protection against losses from earthquakes and hurricanes, as well as other natural and man-made
catastrophes such as floods, tornadoes, fires and storms. The predominant exposures covered are
losses stemming from property damage and business interruption coverage resulting from a covered
peril. Certain risks, such as war, nuclear contamination and terrorism, are almost always excluded,
partially or wholly, from our contracts. Property catastrophe reinsurance is written on an excess
of loss basis, which provides coverage to primary insurance companies when aggregate claims and
claims expenses from a single occurrence from a covered peril exceed a certain amount specified in
a particular contract. To a lesser extent, we also write retrocessional coverage contracts, which provide reinsurance
protection to other reinsurers, also called retrocedants. Coverage generally provides catastrophe
protection for the property portfolios of other reinsurers. Retrocessional contracts typically
carry a higher degree of volatility than reinsurance contracts as they protect against
concentrations of exposures written by retrocedants, which in turn may experience an aggregation of
losses from a single catastrophic event. Other Specialty Reinsurance contracts of aviation liability, aviation war, marine, personal
accident catastrophe, workers compensation, terrorism, other casualty and other reinsurance
business are included in this category. Marine and aviation contracts are primarily written on a
retrocessional excess of loss basis. Qualifying Quota Share (QQS) This category represents whole account quota share
reinsurance to three Lloyds syndicates. Under QQS contracts, we assume a specified portion of the
risk on a specified coverage in exchange for an equal proportion of the premiums. Gross premiums
written related to QQS arrangements have been recorded gross of original commissions to the
syndicates. We did not write any QQS contracts in 2004. Income from our investment portfolio is primarily comprised of interest on fixed maturity
investments net of investment expenses, dividends received on our equity investments, and to a
lesser extent from net realized gains on the sale of investments. A significant portion of our
contracts provide short-tail reinsurance coverage for damages resulting mainly from natural and
man-made catastrophes, which means that we could become liable for a significant amount of losses
on short notice. Accordingly, we have structured our investment portfolio to preserve capital and
provide us with a high level of liquidity, which means that the large majority of our investment
portfolio contains shorter term fixed maturity investments with a modest portfolio of equity
investments. - 35 -




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Our expenses consist primarily of loss and loss adjustment expenses, acquisition costs,
general and administrative expenses and interest costs related to our debt. Loss and loss adjustment expenses are a function of the amount and type of reinsurance and
insurance contracts we write and of the loss experience of the underlying risks. Loss and loss
adjustment expense reserves include a component for outstanding case reserves for claims which have
been reported and a component for losses incurred but not reported. The uncertainties inherent in
the reserving process, together with the potential for unforeseen developments, may result in loss
and loss adjustment expenses significantly greater or less than the reserve provided. Changes to
our prior year loss reserves will impact our current underwriting results by improving our results
if the prior year reserves prove to be redundant or reducing our results if the prior year reserves
prove to be insufficient. As new information becomes known to us, any resulting adjustments will be
reflected in income in the period in which they become known. Our ability to estimate loss and loss
adjustment expenses accurately at the time of pricing our contracts is a critical factor in
determining our profitability. Since the classes of business we underwrite have large aggregate exposures to natural and
man-made catastrophes, we expect that our claims experience will predominantly be the result of
relatively few events of significant severity. The occurrence of claims from catastrophic events is
likely to result in substantial volatility in, and could have a material adverse effect on, our
financial condition and results of operations and our ability to write new business. Acquisition costs consist principally of brokerage expenses and commissions which are driven
by contract terms on the reinsurance and insurance contracts we write, and are normally a set
percentage of premiums. Under certain contracts we may also pay profit commission to cedants which
will vary depending on the loss experience on the contract. General and administrative expenses are comprised of fixed expenses which include salaries and
benefits, professional fees, office and risk management expenses, and variable expenses which
include costs related to our performance unit plan, bonuses and stock option plan. Other than
bonuses and performance units, expenses are primarily fixed in nature and do not vary with the
amount of premiums written or losses incurred. Summary of Critical Accounting Estimates The Companys consolidated financial statements have been prepared in accordance with U.S.
GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect reported and disclosed amounts of assets and
liabilities, as well as disclosure of contingent assets and liabilities as at the balance sheet
date and the reported amounts of revenues and expenses during the reporting period. We believe the
following accounting policies are critical to our operations as their application requires
management to make the most significant judgments. Other significant accounting policies that we use to prepare our consolidated financial
statements are included in Note 2 to the December 31, 2004 Consolidated Financial Statements
included in this filing. Loss and Loss Adjustment Expense Reserves.For most insurance and reinsurance companies, the
most significant judgment made by management is the estimation of loss and loss adjustment expense
reserves. We maintain loss and loss adjustment expense reserves to cover our estimated liability for
both reported and unreported claims. We utilize a reserving methodology that calculates a point
estimate for our ultimate losses, and we then develop a range around our point estimate. The point
estimate represents managements best estimate of ultimate loss and loss adjustment expenses. Our
internal actuaries review our reserving assumptions and our methodologies on a quarterly basis and
our loss estimates are subject to an annual corroborative review by independent actuaries using
generally accepted actuarial principles. The extent of reliance on management judgment in the reserving process differs as to whether
the business is insurance or reinsurance and as to whether the business is written on an excess of
loss or on a pro-rata basis. Loss reserve calculations for insurance business are not precise in that they deal with the
inherent uncertainty of future contingent events. Estimating loss reserves requires us to make
assumptions regarding future reporting and development patterns, frequency and severity trends,
claims settlement practices, potential changes in the legal environment and other factors such as
inflation. - 36 -




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Reserving for reinsurance business introduces further uncertainties. As predominantly a broker
market reinsurer for both excess of loss and proportional contracts, we must rely on loss
information reported to brokers by primary insurers who must estimate their own losses at the
policy level, often based on incomplete and changing information. The information we receive varies
by cedant and may include paid losses, estimated case reserves, and an estimated provision for
incurred but not reported losses (IBNR reserves). Additionally, reserving practices and the
quality of data reporting may vary among ceding companies which adds further uncertainty to the
estimation of our ultimate losses. There is a time lag inherent in reporting from the original claimant to the primary insurer to
the reinsurer especially in the case of excess of loss reinsurance contracts. Also, the
combination of low claim frequency and high severity make the available data more volatile and less
useful for predicting ultimate losses. In the case of proportional contracts, we rely on an
analysis of a contracts historical experience, industry information, and the professional judgment
of underwriters in estimating reserves for these contracts. In addition, if available, we also rely
partially on ultimate loss ratio forecasts as reported by cedants, which are normally subject to a
quarterly or six month lag. As a result of the time lag described above, we must estimate IBNR reserves, which consist of
a provision for additional development in excess of the case reserves reported by ceding companies,
as well as a provision for claims which have occurred but which have not yet been reported to us by
ceding companies. Because of the degree of reliance that we necessarily place on ceding companies
for claims reporting, the associated time lag, the low frequency/high severity nature of much of
the business that we underwrite, and the varying reserving practices among ceding companies, our
reserve estimates are highly dependent on management judgment and therefore uncertain. Estimating loss reserves for our small book of longer tail casualty reinsurance business,
which can be either on an excess of loss or proportional basis, involves further uncertainties. In
addition to the uncertainties inherent in the reserving process described above, casualty business
can be subject to much longer reporting lags than property business, and claims often take many
years to settle. During this period, additional factors and trends will be revealed and as these
factors become apparent, reserves will be adjusted. There is also the potential for the emergence
of new classes of losses or types of losses within the casualty book. Any factors that extend the
time until claims are settled add uncertainty to the reserving process. At December 31, 2004,
management has estimated gross loss and loss adjustment expense
reserves related to our casualty
business of
$65.6 million. Since we rely on estimates of paid losses, case reserves, and IBNR provided by ceding
companies in order to assist us in estimating our own loss and loss adjustment expense reserves, we
maintain certain procedures in order to mitigate the risk that such information is incomplete or
inaccurate. At least monthly management assesses the reporting activities of these companies on the
basis of qualitative and quantitative criteria. On a timely basis management takes appropriate
follow-up action as required, which may include requests for supplemental information or analysis
and, in certain cases, ceding company audits conducted by our own staff or by third parties as
appropriate. In our short history, disputes with ceding companies have been extremely rare and
those which have not been resolved in negotiation have been resolved through arbitration in
accordance with contractual provisions. Our loss and loss adjustment expense reserves include both a component for outstanding case
reserves for claims which have been reported and a component for IBNR reserves. Our case reserve estimates are initially set on the basis of loss reports received from third
parties. The majority of both our reinsurance and insurance business is sourced through brokers but
a small proportion is sourced directly from the insured party or ceding company. The reinsurance
and insurance business which is sourced through brokers is subject to a potential time lag in the
receipt of information which we factor into our reserving process as discussed above. We are predominantly a reinsurance company specializing in short tail property reinsurance
business, but we write a small proportion of longer tail casualty reinsurance business. We also
write a small book of direct insurance business, all of which is comprised of short tail property
risks. In general, claims relating to short tail property risks are reported more promptly by third
parties than those relating to long tail risks, including the majority of casualty risks. However,
the timeliness of reporting can be affected by such factors as the nature of the event causing the
loss, the location of the loss, and whether the losses - 37 -




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are from policies in force with primary insurers or with reinsurers. The claim count on the types of insurance and reinsurance that we write, which are low
frequency and high severity in nature, is generally low. The reporting delay for longer tail
casualty business, which comprises a small proportion of our business, is traditionally longer than
for our short tail lines. Because our casualty premiums written have been small relative to our
property premiums written and because losses associated with such casualty premiums are
substantially slower to develop than those associated with our property premiums, our volume of
casualty claims has been significantly smaller than our volume of property claims to date. Due to these factors, we do not normally expect to experience significant claims processing
back-logs. At December 31, 2004, we did not have a significant back-log in either our insurance or
reinsurance claims processing. IBNR reserves are estimated by management using various actuarial methods as well as a
combination of our own historical loss experience, historical insurance industry loss experience,
our underwriters experience, estimates of pricing adequacy trends, and managements professional
judgment. In the case of our reinsurance business, we also take into account ceding company reports
on IBNR reserves in making our estimates. Due to our relatively short operating history, our loss experience is limited and reliable
evidence of changes in trends of numbers of claims incurred, average settlement amounts, numbers of
claims outstanding and average losses per claim will necessarily take many years to develop. In
addition, due to the nature of the business, this information is not routinely provided by the
cedants for every contract. Because of these factors, management supplements our own claims experience with other
information in setting reserves. For catastrophic events, we consider aggregate industry loss
reports and catastrophe model projections in addition to ceding company estimates and other factors
as described above. For other classes, we utilize industry loss ratio and development pattern
information in conjunction with our own experience. To the extent we rely on industry data to aid us in our reserve estimates there is a risk that
the data may not match our risk profile or that the industrys reserving practices overall differ
from our own and our cedants. In addition, reserving can prove especially difficult should a
significant loss event take place near the end of an accounting period, particularly if it involves
a catastrophic event. These factors further contribute to the degree of uncertainty in the
reserving process. The uncertainties inherent in the reserving process, together with the potential for
unforeseen developments, may result in loss and loss adjustment expenses significantly greater or
less than the reserves provided. Changes to our prior year loss reserves will impact our current
underwriting results by improving our results if the prior year reserves prove to be redundant or
reducing our results if the prior year reserves prove to be insufficient. We expect volatility in
our results in periods that significant loss events occur because U.S. GAAP does not permit
insurers or reinsurers to reserve for loss events until they have occurred and are expected to give
rise to a claim. As a result, we are not allowed to record contingency reserves to account for
expected future losses. We anticipate that claims arising from future events will require the
establishment of substantial reserves from time to time. Management believes that the reserves for loss and loss adjustment expenses are sufficient to
cover losses that fall within assumed coverages on the basis of the methodologies used to estimate
those reserves. However, there can be no assurance that actual losses will not exceed our total
reserves. Loss and loss adjustment expense reserve estimates and the methodology of estimating such
reserves are regularly reviewed and updated as new information becomes known to us. Any resulting
adjustments are reflected in income in the period in which they become known. Management has determined that the best estimate for gross loss and loss adjustment expense
reserves at December 31, 2004 was $549.5 million. Of this
estimate $9.6 million relates to our
insurance business and $539.9 million relates to our reinsurance business. Managements best
estimate of a range of likely outcomes around this estimate is between $425.6 million and $673.4
million. For additional information concerning our loss and loss adjustment expense reserves, see
Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of
Operations. - 38 -




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The following table sets forth a breakdown between case reserves and IBNR by line of business
at December 31, 2004 ($ in millions): Gross IBNR at
    
    
    Gross Case Reserves at
    
    

Gross
Loss and LossAdjustment ExpenseReserves atDecember 31, 2004
    
    
    December 31, 2004
    
    
    December 31, 2004Property Specialty
    
    $
    104,517
    
    
    $
    103,183
    
    
    $
    207,700Property Catastrophe
    
    
    96,957
    
    
    
    59,824
    
    
    
    156,781Other Specialty
    
    
    115,366
    
    
    
    13,266
    
    
    
    128,632Qualifying Quota Share
    
    
    32,178
    
    
    
    24,250
    
    
    
    56,428Total
    
    $
    349,018
    
    
    $
    200,523
    
    
    $
    549,541
 Premiums.Though we are principally a provider of reinsurance, we write both insurance and
reinsurance contracts. Our insurance premium is all written on an excess of loss basis. Our assumed
reinsurance premium is written on an excess of loss or on a pro-rata basis. Reinsurance contracts
are generally written prior to the time the underlying direct policies are written by cedants and
accordingly they must estimate such premiums when purchasing reinsurance coverage. For the majority
of excess of loss contracts, including all insurance business, the deposit premium is defined in
the contract wording. The deposit premium is based on the ceding companies estimated premium, and
this is the amount we record as written premium in the period the underlying risks incept. In the majority of cases, these contracts are adjustable at the
end of the contract period to reflect the changes in underlying risks during the contract period.
Subsequent adjustments, based on reports by the ceding companies of actual premium, are recorded in
the period they are determined, which are normally reported within six months to a one year
subsequent to the expiration of the policy. To date these adjustments have not been significant. On pro-rata contracts and certain excess of loss contracts where the deposit premium is not
specified in the contract, an estimate of written premium is recorded in the period in which the
underlying risks incept. The premium estimate is based on information provided by ceding companies.
At the inception of the contract the ceding company estimates how much premium they expect to write
during the year. As these are pro-rata contracts, our gross written premium related to these
contracts is a function of the amount of premium they estimate they will write. When the actual
premium is reported by the ceding company, which may be on a quarterly or six month lag, it may be
significantly higher or lower than the estimate. We regularly evaluate the appropriateness of these premium estimates based on the latest
information available, which includes actual reported premium to date, the latest premium estimates
as provided by cedants and brokers, historical experience, managements professional judgment,
information obtained during the underwriting renewal process, as well as a continuing assessment of
relevant economic conditions. Any adjustments to premium estimates are recorded in the period in
which they become known. Adjustments to original premium estimates could be material and may
significantly impact earnings in the period they are determined. The
net income impact in 2004 of premium adjustments with respect to
premiums estimated to have been earned in 2003 was immaterial. We
expect the net income impact in 2005 of premium adjustments with
respect to premiums estimated to have been earned in 2004 to be
immaterial. Where contract terms on excess of loss contracts require the reinstatement of coverage after a
ceding companys loss, the mandatory reinstatement premiums are recorded as written premiums when
the loss event occurs, and are recognized as earned premium ratably over the remaining contract
period. We accrue reinstatement premiums based on case reserves reported by ceding companies and on
managements best estimate of IBNR reserves as described above under Loss and Loss Adjustment
Expense Reserves when the IBNR reserves can be identified on an individual contract basis.
Generally pro-rata contracts do not contain provisions for the reinstatement of coverage. Management includes an assessment of the creditworthiness of cedants in the review process
above, primarily based on market knowledge, the timeliness of cedants past payments and the status
of current balances owing. In addition, management may also review the financial statements of
ceding companies. Based on this - 39 -




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assessment, management believes that as at December 31, 2004 no provision for doubtful
accounts is necessary. For excess of loss contracts, other than risk attaching contracts or contracts where the
deposit premium is not defined, premium income is generally earned ratably over the term of the
reinsurance contract, usually 12 months. For all other contracts, including contracts written on a
pro-rata or risks attaching basis, premiums are generally earned over a 24 month period which is
the risk period of the underlying (12 month) policies. The portion of the premium related to the
unexpired portion of the policy at the end of any reporting period is reflected on the balance
sheet in unearned premium. Performance Unit Plan (the PUP).The PUP was the Companys primary executive long-term
incentive scheme, until it was exhausted at December 31, 2004. Pursuant to the terms of the PUP, at
the discretion of the Compensation and Nominating Committee of the Board of the Directors (the
Committee), performance units were granted to executive officers and certain other key employees.
Performance units entitle the recipient to receive, without payment to the Company, all, double, or
a part of the value of the units granted, depending on the achievement of specific financial or
operating goals. Performance units vest at the end of a three-year performance cycle, and are
payable in cash, common shares or a combination thereof at the discretion of the Committee. A total of 936,000 performance units were authorized under the PUP at December 31, 2004 and
2003 (or up to 1,872,000 common shares should the maximum harvest of 200% of units apply) covering
the three performance periods, 2002-2004, 2003-2005 and 2004-2006. We accrue the projected value of these units and expense the value in the income statement
over the course of each three-year performance period. The accrual is based on the number of units
granted, the share price at the end of the respective fiscal period
end plus an adjustment for any dividends paid out during the
performance period, and an initial assumption
of a 100% harvest ratio, unless otherwise adjusted as discussed below. At the end of the sixth
quarter, and every subsequent quarter, we reassess the projected results for each three year
performance period and adjust the accrued PUP liability as necessary. We recalculate the liability
under the PUP as our financial results evolve and the share price changes, and reflect such
adjustments in the income statement in the period in which they are determined. This may result in
an adjustment to the harvest ratio used in the liability calculation which may increase or decrease
the amount of liability and expense recorded during the period. For the 2002-2004 cycle, the target combined ratio was 70% for a 100% harvest ratio. The
target for a maximum harvest of 200% of the value of the units granted is a combined ratio of 50%
or less. A combined ratio of 95% or more would have resulted in a harvest of nil. Straight line
interpolation is used between these points. At December 31, 2004 the actual harvest ratio for this
performance period was 132.0%, compared to the estimated harvest ratio at December 31, 2003 of
137.5%. On February 28, 2005, we paid out the 2002-2004 PUP accrual of approximately $14.0 million. For the 2003-2005 cycle, the performance target for a 100% harvest ratio is the achievement of
a combined ratio of 72% over the period or the achievement of an annual total return to
shareholders of 18% as measured over the period. To date we have experienced a combined ratio less
than 72% for this three-year performance period. Taking into account our results to date as well as
the estimated combined ratio for the remainder of this performance period, we have adjusted the
estimated harvest ratio from 100.0% at December 31, 2003 to 116.4% at December 31, 2004. This
resulted in an increase in the PUP liability and PUP expense during the year ended December 31,
2004. For the 2004-2006 cycle, the performance target for a 100% harvest ratio is the achievement of
a combined ratio of 72% over the period or the achievement of an annual total return to
shareholders of 18% as measured over the period. Consistent with our accounting policy, we are
currently estimating the PUP liability and PUP expense using a 100% harvest ratio and will reassess
the harvest ratio used in the calculation of the PUP liability at June 30, 2005 and each quarter
thereafter. As at December 31, 2004, the following table summarizes the impact of potential share price
changes and potential adjustments to the harvest ratio used in the liability calculation on the
amount of liability and expense recorded for the remaining three-year cycles ($ in thousands): - 40 -




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##### Table of Contents



Increase/Decrease in PUPIncrease/Decrease in PUP
    
    
    Accrual Resulting from aAccrual Resulting from a
    
    
    5% Increase/Decrease in$1 Increase/Decrease in
    
    
    the Estimated HarvestPUP Performance Period
    
    the Share Price*
    
    
    Ratio Applied**2003-05
    
    
    260
    
    
    
    4492004-06
    
    
    112
    
    
    
    225
    *
    
    Based on estimated harvest ratios applied at December 31, 2004**
    
    Based on the share price of $38.45 at December 31, 2004 An estimated 1% change in the estimated combined ratio is approximately equivalent to a 5%
change in the harvest ratio for the respective performance period. The Compensation and Nominating Committee of the Board of Directors has approved a new
Long-Term Incentive Plan effective as of January 1, 2005. At the discretion of the Committee,
performance shares or other types of awards will be granted to executive officers and certain other
key employees. Performance shares entitle the recipient to receive, without payment to the Company,
all, double, or a part of the value of the performance shares granted, depending on the achievement
of specific financial or operating goals. Performance shares vest at the end of a three-year
performance cycle, and are payable in cash, common shares or a combination thereof at the
discretion of the Committee. For the 2005-2007 cycle the Committee has adopted a return on
allocated capital (ROAC) framework to assess managements performance. Outlook and Trends Generally speaking, pricing in property and other insurance and reinsurance markets has been
cyclical in nature. Multi-year periods of intense price competition and insufficient pricing
(soft market) have been followed by periods of higher, sufficient pricing (a hard market).
Then, over a period of a few years, as lost capital is replenished, and new competitors enter the
business, prices fall again. A hard market has sometimes been precipitated by a large catastrophic event or series of
events. The terrorist events of September 11, 2001 occurred at the end of a long period of
insufficient pricing, and additionally, it was a period where asbestos and other latent loss
liabilities had significantly weakened the ability of some competitors to assume insurance risk.
For these reasons, adequately priced opportunities were widespread for the past few years. In market loss terms, 2004 was the worst year ever for natural catastrophes. At December 31,
2004 we estimated industry insured losses of approximately $37 billion for the four U.S. hurricanes
and two large Japanese typhoons that occurred during the third quarter of 2004. Such catastrophic
events had a material adverse impact on our financial condition and results of operations. While
such events might have been expected to improve pricing in the future, due to the financial
strength of the industry, we continue to see competition eroding the adequacy of rate levels in
many of the classes of business, with commercial property insurance worldwide and non-U.S. property
treaty renewals particularly impacted. We expect that casualty reinsurance rates will remain relatively stable overall. Rate levels
in other classes of business are expected to vary from stable to some rate reductions. Separately, we see the growth of a new class of competition in our markets. Hedge Funds and
catastrophe bonds are elements we now see more regularly as competition to traditional reinsurance
markets. In general, as it currently stands we estimate that our overall gross premiums written for
2005 will be lower by at least 10% as compared to 2004 as a result of the above factors and perhaps
more if as the year develops we find that we do not like the way market rates are trending. See the
gross premiums written discussion below for additional commentary. We continue to believe that
superior long-term returns for shareholders will be driven by disciplined underwriting through the
cycle. - 41 -




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##### Table of Contents



Results of Operations Years Ended December 31, 2004, 2003 and 2002 The decrease in net income for the year ended December 31, 2004 year compared to 2003 was
principally driven by losses incurred related to the four major U.S. hurricanes and two Japanese
typhoons which occurred during the third quarter of 2004. There were no loss events of a comparable
magnitude in the same period in 2003. As at December 31, 2004 we estimated the overall negative
impact on net income related to these catastrophes to be approximately $240.0 million which is as a
result of the increase in loss and loss adjustment expenses and related increase in reinstatement
premium ceded, which was partially offset by reinstatement premium written and a reduction in
profit commission and incentive compensation expenses. Other factors contributing to the decrease in net income as compared to the prior year are as
follows:  
    A greater level of reinsurance premiums ceded;
    An increase in acquisition costs due to the increased level of proportional business written;
    An increase in financing expense due to a full years interest expense on the Senior Notes; and
    An increase in general and administrative expenses due to increased professional
fees and staffing costs. These factors were partially offset by:  
    An increase in net premiums earned;
    Favorable development of net losses from prior years of approximately $97.6 million
in 2004 compared to $58.2 million in 2003; and
    An increase in net investment income as a result of our higher investment portfolio
balance. The following table summarizes our consolidated financial results for the years indicated ($ in millions): Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Net premiums earned
    
    $
    787.5
    
    
    $
    705.4
    
    
    $
    329.9Net investment income
    
    
    69.1
    
    
    
    50.1
    
    
    
    39.7Net realized gains on investments
    
    
    7.2
    
    
    
    7.6
    
    
    
    7.7Net foreign exchange gains
    
    
    7.0
    
    
    
    8.3
    
    
    
    1.7Loss and loss adjustment expenses
    
    
    404.9
    
    
    
    164.1
    
    
    
    133.3Acquisition costs
    
    
    152.7
    
    
    
    140.4
    
    
    
    62.9General and administrative expenses.
    
    
    55.3
    
    
    
    50.0
    
    
    
    26.3Financing expense
    
    
    17.5
    
    
    
    9.7
    
    
    
    4.5Income tax expense
    
    
    0.1
    
    
    
    
    
    
    
    Net income
    
    $
    240.3
    
    
    $
    407.2
    
    
    $
    152.0Basic earnings per common share
    
    $
    3.84
    
    
    $
    6.42
    
    
    $
    2.76Diluted earnings per common share
    
    $
    3.55
    
    
    $
    6.05
    
    
    $
    2.74
 The following table summarizes our book values per common share as at the periods indicated: As at December 31,
    
    2004
    
    
    2003
    
    
    2002Book value per share (1)
    
    $
    28.20
    
    
    $
    26.15
    
    
    $
    19.76Fully converted book value per share (2)
    
    $
    26.75
    
    
    $
    24.92
    
    
    $
    19.39
   (1)
    
    Based on total shareholders equity divided by basic shares outstanding.(2)
    
    Fully converted book value per share is a non-GAAP measure, based on total shareholders
equity plus the assumed proceeds from the exercise of outstanding options and warrants of
$157.5 million for 2004 and $168.1 million for 2003 and 2002, divided by the sum of shares,
options and warrants outstanding (assuming their exercise) of 71,372,892 for 2004 and
73,261,757 for 2003 and 2002. The Company believes that fully converted book value per share
more accurately reflects the value attributable to a common share. - 42 -




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We ended the 2004 year with a fully converted book value per share (as defined above) of
$26.75, an increase of $1.83 from December 31, 2003. This increase of 7.3% mainly resulted from the
net effect of the factors described above. In addition, we paid a regular quarterly dividend of
$0.34 per quarter during the year. We experienced a return of approximately 3.3% on our investment
portfolio including unrealized gains for the year ended December 31, 2004 as compared to a return
of 4.0% for the year ended December 31, 2003. Total return to shareholders, which is a non-GAAP measure, was $3.19 or 13.1% for the year
ended December 31, 2004. It is the internal rate of return of the increase in fully converted book
value per share from $24.92 at December 31, 2003 to $26.75 at December 31, 2004, including the
accrued dividends of $0.34 for each of the four quarters of 2004. Management believes that this
measure most accurately reflects the return made by its shareholders as it takes into account the
effect of all dilutive securities and the effect of dividends. Management believes that fully converted book value per share and total return to shareholders
are measurements which are important to investors and other interested parties, and that these
persons benefit from having a consistent basis for comparison with other companies within the
industry. However, these measures may not be comparable to similarly titled measures used by
companies either outside or inside of the insurance industry. These measures may be incorporated
into the formulae applied by our Compensation and Nominating Committee when determining the harvest
ratio under our Performance Unit Plan. Gross Premiums Written Details
of gross premiums written by line of business are provided below ($
in millions): Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (1)Property Specialty
    
    $
    314.0
    
    
    
    37.5
    %
    
    $
    307.4
    
    
    
    37.9
    %
    
    $
    194.3
    
    
    
    32.0
    %Property Catastrophe
    
    
    330.3
    
    
    
    39.5
    
    
    
    315.4
    
    
    
    39.0
    
    
    
    186.0
    
    
    
    30.6Other Specialty
    
    
    186.8
    
    
    
    22.3
    
    
    
    134.1
    
    
    
    16.6
    
    
    
    55.7
    
    
    
    9.2Qualifying Quota Share
    
    
    5.9
    
    
    
    0.7
    
    
    
    52.8
    
    
    
    6.5
    
    
    
    171.7
    
    
    
    28.2Total
    
    $
    837.0
    
    
    
    100.0
    %
    
    $
    809.7
    
    
    
    100.0
    %
    
    $
    607.7
    
    
    
    100.0
    %
   (1)
    
    During 2003, we refined the classification of gross premiums written for certain pro-rata
contracts between the Property Specialty line and the Property Catastrophe and Other Specialty
lines. There was no effect on total gross premiums written. For the year ended December 31, 2004, excluding the effects of $33.4 million in
reinstatement premiums recorded as a result of the third quarter catastrophes, gross premiums
written were at a similar level to 2003. However, disregarding the QQS business, gross premiums
written increased during the year ended December 31, 2004 compared to 2003 by approximately 9.8 %. As expected, our mix of business changed in 2004. As always envisaged we did not renew the QQS
programs in 2004 and increased the level of Other Specialty business, consisting mainly of
increases in casualty business and other miscellaneous classes of business. Consistent with 2003,
for the three syndicates we did reinsure in 2003 and 2002, we negotiated substantial other
reinsurance contracts for 2004 to partially replace the reduction in QQS premium in 2003 and the
non-renewed QQS premium income in 2004. Gross premiums written related to the Property Specialty category increased only marginally

compared to the same period in 2003 mainly as a result of an increase in proportional business.
This increase was offset somewhat by the decreases in premium levels on direct and facultative
business. The Property Catastrophe category has shown a slight increase in gross premiums written during
the year ended December 31, 2004 as compared to the same period in 2003 mainly due to an increase
in reinstatement premiums written as a result of the catastrophes which occurred during the third
quarter of 2004. Offsetting this increase was a decrease due to the reduction in premium rate
levels as discussed elsewhere. - 43 -




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The Other Specialty category strengthened as compared to the prior year, partly due to
increased market penetration resulting mainly from our ability to capitalize on market
opportunities and, we believe, due to the developing reputation of our underwriting and risk
management skills. This category has also increased due to increases in the level of our casualty
business. Casualty business included professional indemnity casualty reinsurance, predominantly
medical malpractice, specialized errors and omissions business, UK Employers Liability and
catastrophe and/or clash layers for general liability and retrocessional accounts, on an excess of
loss basis. As previously stated, we wrote a larger amount of casualty reinsurance in 2004 as
compared to 2003 due to improving terms and conditions of casualty reinsurance contracts. For the
years ended December 31, 2004 and 2003, casualty accounted for approximately 8.5% and 5.4% of gross
premiums written, respectively. We estimate that casualty business will account for approximately
10% of our gross premiums written during 2005 but this level could be affected by premium rate
levels. In addition, we have added a dedicated underwriter to focus on the sabotage and terrorism
class and we have also entered into agreements with the Overseas Private Investment Corporation
(OPIC) to form an insurance facility to underwrite stand-alone terrorism insurance products. We
anticipate writing a modestly higher amount of this business in 2005 as compared to 2004. As expected, we did not write QQS business for the 2004 underwriting year and as a result the
gross premiums written for this category decreased as compared to the same period in 2003. The QQS
gross premiums written in 2004 related to adjustments in estimates made to the 2003 and 2002
underwriting years mainly as a result of the movement in foreign exchange rates. We expect to
commute all 2002 underwriting year contracts during the first or second quarter of 2005. The increase in gross premiums written in all classes of business, except QQS, from 2002 to
2003 resulted mainly from increased market penetration which allowed us to capitalize on market
opportunities in virtually all lines of business. In 2003 we also experienced increases in our
written line sizes and in our average signing percentages. Premium rate levels were stable in 2003
as compared to 2002 across the major classes of business in which we specialize in but we
experienced improved signings on renewals as well as increased access to more original programs
than in 2002. Our reputation, combined with our strong capital base and additional ratings also
contributed to the increase in gross premiums written. As expected, QQS gross premiums written accounted for less gross premiums written in 2003 than
in 2002. Part of the reduction related to reduced premiums for the 2002 and 2003 underwriting years
as during 2003 the receipt of new information indicated that the expected premiums for the QQS
business for both these underwriting years was going to be lower than previous forecasts. The QQS
results for both the 2002 and 2003 underwriting years are estimated on the basis of projections for
the respective years supplied by the underlying syndicates, adjusted for actual reported results
from the underlying syndicates. The January 2005 renewal season saw increasing price deterioration and a reduced number of
risks meeting our return criteria. However, while we believe pricing remains adequate on the
business we have renewed, we have declined a significant number of programs in all categories where
we believe pricing was inadequate. As a result, the January renewal season showed an initial
reduction in our estimated premium income of approximately 20% by comparison to the same time last
year. This will be reflected in our results for the first quarter of 2005 and is not necessarily
indicative of our expectations of our level of gross premium income for 2005 as a whole. The final
number will depend significantly upon the outcome of the opportunities we see for the renewal of
the Japanese treaty accounts in April and the Florida programs in June, and, of course, any
significant loss activity during 2005. As it currently stands we estimate our overall gross premium
income for 2005 will be lower by at least 10% as compared to 2004 and perhaps more if as the year
develops we find that we do not like the way the market rates are trending. We continue to believe
that superior long-term returns for shareholders will be driven by disciplined underwriting through
the cycle. Reinsurance Premiums Ceded Year
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Reinsurance premiums ceded
    
    $
    87.7
    
    
    $
    31.7
    
    
    $
    41.8
 Reinsurance premiums ceded for 2004 increased from 2003 primarily because we purchased
additional protection against our catastrophe book as compared to the prior year. In addition, in
2004 we also purchased protection for our casualty book and recorded reinstatement reinsurance
premiums ceded of $19.4 million related - 44 -




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##### Table of Contents



to the catastrophes which occurred during the third quarter of 2004. There was also a slight
increase during 2004 in the amount of inuring reinsurance recorded as part of our reinsurance
arrangements with certain ceding companies. For both the 2004 and 2003 years we have purchased
reinsurance protecting ourselves against large risk losses on our direct and facultative book and
small to medium-size catastrophes on our overall property writings. Excluding storm related
reinsurance premiums ceded, we anticipate that reinsurance premiums ceded will rise slightly in
2005. For the year ended December 31, 2004, the majority of reinsurance premiums ceded related to
retrocessional protection purchased on our own account and inuring reinsurance as part of our
reinsurance arrangements with certain ceding companies. The remainder related to reinsurance
premiums ceded related to QQS business. As we have not written any QQS business for the 2004
underwriting year, we have not recorded a material amount of reinsurance premiums ceded in 2004
related to this business. Reinsurance premiums ceded in 2002 solely related to the QQS syndicates with respect to the
contracts in which we participate for the 2002 and 2003 underwriting years. The lower level of QQS
inuring reinsurance premiums ceded in 2003 as compared to 2002 is directly related to the level of
QQS gross premiums written as discussed above. Net Premiums Earned Years
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Net premiums earned
    
    $
    787.5
    
    
    $
    705.4
    
    
    $
    329.9
 Net premiums earned increased in each of the three years ended December 31, 2004, 2003 and
2002 mainly due to the increase in premiums written for the majority of our lines of business in
the current and prior year. Net premiums earned have also increased due to the acceleration of
earned premiums related to certain policies affected by the catastrophes which occurred during the
third quarter of 2004. We also earned a portion of the reinstatement premiums written and ceded
related to the third quarter catastrophes. Offsetting these increases is a decrease in net earned
premium as a result of the earning of the additional reinsurance purchased during the year. Net
premiums earned increased by approximately $13.1 million as result of the effect of the third
quarter catastrophes. Net premiums earned are expected to decrease in 2005 due to the expected decline in gross and
net premiums written during 2005 as discussed above. Loss and Loss Adjustment Expenses The underwriting results of an insurance or reinsurance company are often measured by
reference to its loss ratio and expense ratio. The loss ratio is calculated by dividing loss and
loss adjustment expenses incurred (including estimates for incurred but not reported losses) by net
premiums earned. The expense ratio is calculated by dividing acquisition costs combined with
general and administrative expenses by net premiums earned. The combined ratio is the sum of the
loss ratio and the expense ratio. For comparative purposes, our combined ratio and components thereof are set out below for the
years indicated: Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Loss ratio
    
    
    51.4
    %
    
    
    23.3
    %
    
    
    40.4
    %Expense ratio
    
    
    26.4
    %
    
    
    27.0
    %
    
    
    27.0
    %Combined ratio
    
    
    77.8
    %
    
    
    50.3
    %
    
    
    67.4
    %
 The nature of our business means that loss ratios can vary widely from period to period
depending on the occurrence and severity of natural and man-made catastrophes. During the year
ended December 31, 2004, we incurred estimated gross and net
losses of $369.6 million and $283.8
million, respectively, from four U.S. hurricanes, two Japanese typhoons, and the tsunami which
occurred in southeast Asia in December 2004. - 45 -




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Catastrophe losses contributed significantly more to the 2004 loss ratio than in 2003 or 2002.
For business less heavily impacted by catastrophes, the level of losses experienced has generally
been lower than our long term expectations for the years ended December 31, 2004, 2003 and 2002.
The variation in the loss ratios between the year ended December 31, 2003 and the prior year
results from the fact that in 2002 we did not have the benefit of prior years loss history on
which to base our loss reserve analysis and, accordingly, we relied more heavily on industry
experience and professional judgment to estimate our loss and loss adjustment expense reserves. As
our business developed in 2003, we supplemented industry information with our own specific
experience in our actuarial analysis. This led to reduced projections of ultimate losses,
particularly in the Property Specialty classes of business. Net loss and loss adjustment expenses were $404.9 million, $164.1 million and $133.3 million
for the years ended December 31, 2004, 2003 and 2002, respectively. Reinsurance recoveries of $88.5
million, $(8.4) million and $16.7 million were netted against loss and loss adjustment expenses for
the years ended December 31, 2004, 2003 and 2002, respectively. Approximately 97% of the
reinsurance recoveries for 2004 relates to the hurricanes and typhoons which occurred during the third quarter.
The remainder relates to QQS business. Reinsurance recoveries for the years ended December 31, 2003
and 2002 related to QQS only. Based on additional information received from the syndicates, we
reduced our estimated recovery ratio on reinsurance purchased by the QQS syndicates which resulted
in the negative reinsurance recovery amount for the year ended December 31, 2003. We paid net
losses of $192.0 million, $53.2 million and $4.2 million for the years ended December 31, 2004,
2003 and 2002, respectively. The majority of the increase in paid losses during 2004 as compared to
2003 related to payments made for the hurricane losses as discussed above. In addition, excluding
the 2004 catastrophes, net paid losses have increased each year as our book of business has matured
and we make claim payments related to multiple underwriting years. We expect that our paid losses
will be higher than average during the first six months of 2005 as we continue to pay claims
related to the 2004 catastrophes. At December 31, 2004
approximately 43% of our gross reserves
related to the third quarter catastrophes. The following are our net loss ratios by line of business for the periods indicated: Years ended December 31,
    
    2004 (1)
    
    
    2003 (2)
    
    
    2002 (3)Property Specialty
    
    
    51.5
    %
    
    
    24.8
    %
    
    
    55.7
    %Property Catastrophe
    
    
    50.3
    
    
    
    9.5
    
    
    
    25.7Qualifying Quota Share
    
    
    18.9
    
    
    
    48.4
    
    
    
    60.2Other Specialty
    
    
    61.7
    
    
    
    37.5
    
    
    
    24.9Overall Ratio
    
    
    51.4
    %
    
    
    23.3
    %
    
    
    40.4
    %
   (1)
    
    The overall gross loss ratio for the year ended December 31, 2004 was 56.8%.(2)
    
    The overall gross loss ratio for the year ended December 31, 2003 was 21.3%.(3)
    
    The overall gross loss ratio for the year ended December 31, 2002 was 41.0%. The Property Catastrophe and Property Specialty groups of business contained the lines most
impacted by the aforementioned catastrophes. Excluding the seven major catastrophic events, the net
loss ratios for the year ended December 31, 2004 for both the Property Catastrophe and Property
Specialty groups of business were lower in 2004 than in 2003 primarily because there were
relatively few other property loss events which impacted us during the year. In the same period in
2003, we incurred losses from Hurricanes Fabian and Isabel as well as the wildfires which occurred
in California. The catastrophes which occurred during 2004 were of a much greater magnitude than
those which occurred during 2003. The 2004 loss ratios for the Property Catastrophe and Property
Specialty groups have also benefited from favorable prior year development. The Other Specialty
class continues to experience very low levels of reported losses, but has also been impacted to
some extent by the catastrophes which occurred during the third quarter of 2004, resulting in a
higher net loss ratio for 2004 as compared to the same period in 2003. There is also a higher
percentage of casualty business in the Other Specialty group in 2004 compared with 2003. These
classes have been reserved at higher loss ratios due to the longer-tail nature of casualty
business. The Qualifying Quota Share loss ratio for the year ended December 31, 2004 is lower than
the same period in 2003. This is as a result of the QQS syndicates lowering their ultimate loss - 46 -




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##### Table of Contents



ratio projections for both the 2002 and the 2003 underwriting years. The third quarter
catastrophes are expected to have minimal impact on the QQS business since these contracts were not
renewed for the 2004 underwriting year. The following tables set forth a reconciliation of our gross and net loss and loss
adjustment expense reserves by line of business for the year ended December 31, 2004 ($ in
millions): Gross Loss and Loss Adjustment Expense Reserves EstimatedUltimateChange in
    
    
    
    
    
    
    LossesGross
    
    
    Prior Years
    
    
    
    
    
    
    for the 2004
    
    
    GrossReserves at
    
    
    Estimates
    
    
    Paid Losses
    
    
    Year at
    
    
    Reserves atDecember 31,
    
    
    During
    
    
    During
    
    
    December 31,
    
    
    December 31,2003
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Property Specialty
    
    $
    98.8
    
    
    $
    (54.1
    )
    
    $
    (78.2
    )
    
    $
    241.2
    
    
    $
    207.7Property Catastrophe
    
    
    40.0
    
    
    
    (17.8
    )
    
    
    (81.4
    )
    
    
    216.0
    
    
    
    156.8Qualifying Quota Share
    
    
    68.1
    
    
    
    (11.0
    )
    
    
    (22.1
    )
    
    
    21.4
    
    
    
    56.4Other Specialty
    
    
    42.9
    
    
    
    (15.3
    )
    
    
    (11.9
    )
    
    
    112.9
    
    
    
    128.6Total
    
    $
    249.8
    
    
    $
    (98.2
    )
    
    $
    (193.6
    )
    
    $
    591.5
    
    
    $
    549.5
 Net Loss and Loss Adjustment Expense Reserves EstimatedUltimateChange in
    
    
    
    
    
    
    LossesNet
    
    
    Prior Years
    
    
    
    
    
    
    for the 2004
    
    
    NetReserves at
    
    
    Estimates
    
    
    Paid Losses
    
    
    Year at
    
    
    Reserves atDecember 31,
    
    
    During
    
    
    During
    
    
    December 31,
    
    
    December 31,2003
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Property Specialty
    
    $
    98.8
    
    
    $
    (54.1
    )
    
    $
    (78.2
    )
    
    $
    194.3
    
    
    $
    160.8Property Catastrophe
    
    
    40.0
    
    
    
    (17.8
    )
    
    
    (81.4
    )
    
    
    177.1
    
    
    
    117.9Qualifying Quota Share
    
    
    60.4
    
    
    
    (10.4
    )
    
    
    (20.6
    )
    
    
    18.1
    
    
    
    47.5Other Specialty
    
    
    42.9
    
    
    
    (15.3
    )
    
    
    (11.8
    )
    
    
    112.8
    
    
    
    128.6Total
    
    $
    242.1
    
    
    $
    (97.6
    )
    
    $
    (192.0
    )
    
    $
    502.3
    
    
    $
    454.8
 The 2004 and 2003 years include approximately $97.6 million and $58.2 million, respectively,
of favorable development of net losses from prior years. Favorable prior year development benefited
the net loss ratio for the years ended December 31, 2004 and 2003 by approximately 12.4% and 7.2%,
respectively. The favorable development during the year ended December 31, 2004 of losses incurred during
prior accident years primarily resulted from the following:  
    In the Property Specialty Category, both the frequency and severity of reported
losses have been lower than the assumed reporting pattern of losses established for this
class of business at December 31, 2003. Many of the proportional contracts have continued
to have little or no reported loss activity on the 2002 and 2003 accident years. Reported
losses on 2002 and 2003 occurrences for our Property Facultative book of business
decreased by $4.3 million during the year ended December 31, 2004. As these years
develop, we place more weight in the reserving process on the actual loss experience
compared with the initial loss ratio expectation. The low level of reported losses for
2002 and 2003 and the increasing weight on the actual experience have led to the
reduction in the ultimate loss projection of $54.1 million during 2004.
    Property Catastrophe net loss and loss adjustment expense reserves as at December
31, 2003, included reserves for several major catastrophic events from 2002 and 2003. The
largest of these were the European Floods of August 2002, Hurricane Isabel which occurred
in September 2003, and the October - 47 -




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2003 wildfires in California. Claims from these three events have developed less than our
initial projections indicated, leading to a reduction in net ultimate losses of $17.8
million during 2004.
    The lack of development in the year ended December 31, 2004, combined with the
increasing weight placed on our actual experience in selecting a loss ratio, led to a
decrease in our projected loss ratio attributable to the Other Specialty business during
2004. Claim frequency has been very low for these classes of business. In addition, we
have given more weight to the actual loss experience compared to the initial expected
loss ratios in our reserving process, resulting in reduced projections for 2002 and 2003.
The lower selected loss ratios have resulted in a reduction of $15.3 million in net loss
and loss adjustment expense reserves for our Other Specialty business.
    Due to the potential variability in ultimate premiums and the limited availability
of underlying loss information with the QQS business, our actuaries selected an expected
loss ratio based on a review of the information supplied by cedants and applied it to
projected premiums. During the year ended December 31, 2004, we reduced our expected
gross loss ratio based on information provided by ceding companies, which resulted in a
reduction of $11.0 million in gross loss and loss adjustment expense reserves. This was
largely due to decreases in the loss ratio estimates provided by the syndicates. Taking
into account the effect of reinsurance purchased by the QQS syndicates with respect to
the contracts in which we participate, our net loss and loss adjustment expense reserves
decreased by $10.4 million for the year ended December 31, 2004. The development of
ultimate loss ratios for the 2002 and 2003 underwriting years on QQS contracts continue
to improve and we expect to commute the 2002 QQS contracts during the first quarter of
2005. Other than the matters described above, we did not make any significant changes in the
assumptions or methodology used in our reserving process during the year ended December 31, 2004. At December 31, 2004, we estimated our gross and net reserves for loss and loss adjustment
expenses using the methodology as outlined in our Critical Accounting Policy earlier in this
section. Management has determined that the best estimate for gross loss and loss adjustment expense
reserves at December 31, 2004, 2003 and 2002 was $549.5 million, $249.8 million and $146.1 million,
respectively. Management has determined that the best estimate for net loss and loss adjustment expense
reserves at December 31, 2004, 2003 and 2002 was $454.8 million, $242.1 million and $129.5 million,
respectively. The following are managements best estimate of a range of likely outcomes around their best
estimate of gross and net loss and loss adjustment expense reserves by line of business ($ in
millions): Gross loss and loss adjustment expense reserves at December 31, 2004 Low End of
    
    
    
    
    
    
    High End ofthe Range
    
    
    Selected
    
    
    the RangeProperty Specialty
    
    $
    155.8
    
    
    $
    207.7
    
    
    $
    259.6Property Catastrophe
    
    
    125.4
    
    
    
    156.8
    
    
    
    188.2Qualifying Quota Share
    
    
    48.0
    
    
    
    56.4
    
    
    
    64.8Other Specialty
    
    $
    96.4
    
    
    
    128.6
    
    
    $
    160.8Total
    
    
    
    
    
    $
    549.5
 Net loss and loss adjustment expense reserves at December 31, 2004 Low End of
    
    
    
    
    
    
    High End ofthe Range
    
    
    Selected
    
    
    the RangeProperty Specialty
    
    $
    120.6
    
    
    $
    160.8
    
    
    $
    201.0Property Catastrophe
    
    
    94.3
    
    
    
    117.9
    
    
    
    141.5Qualifying Quota Share
    
    
    40.4
    
    
    
    47.5
    
    
    
    54.6Other Specialty
    
    $
    96.4
    
    
    
    128.6
    
    
    $
    160.8Total
    
    
    
    
    
    $
    454.8
 - 48 -




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Net Foreign Exchange Gains Net foreign exchange gains result from the effect of the fluctuation in foreign currency
exchange rates on the translation of foreign currency assets and liabilities combined with realized
gains (losses) resulting from the receipt of premium installments and payment of claims in foreign
currencies. The foreign exchange gain during the years ended December 31, 2004, 2003 and 2002 is
primarily due to the weakening of the U.S. dollar resulting in gains on translation arising out of
receipts of foreign currency premium installments. Our premiums receivable and liabilities for
losses incurred in currencies other than the U.S. dollar are exposed to the risk of changes in
value resulting from fluctuations in foreign exchange rates and may affect our financial results in
the future. Underwriting Expenses Years
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Acquisition costs (including profit commission)
    
    $
    152.7
    
    
    $
    140.4
    
    
    $
    62.9General and administrative expenses
    
    $
    55.3
    
    
    $
    50.0
    
    
    $
    26.3Expense Ratio (including profit commission)
    
    
    26.4
    %
    
    
    27.0
    %
    
    
    27.0
    %Expense Ratio (excluding profit commission)
    
    
    25.4
    %
    
    
    24.2
    %
    
    
    26.6
    %
 Acquisition costs are generally driven by contract terms and are normally a set percentage of
premiums. General and administrative expenses are comprised of fixed expenses, which include
salaries and benefits, share options and office and risk management expenses, and variable expenses
which include costs related to our performance unit plan and bonuses. Acquisition costs as a percentage of gross
premiums earned, excluding reinsurance and profit commission, were 16.7%, 16.5% and 16.7% for the years ended December 31, 2004, 2003 and 2002,
respectively. The 2004 ratio is broadly similar to the 2003 and 2002 ratios. We anticipate that the
acquisition cost ratio, excluding profit commission, will remain at a similar level in 2005 as in
2004 although the amount may vary due to the mix of business written and estimated loss experience. Profit commission expensed was $7.6 million, $19.6 million, and $1.5 million for the years
ended December 31, 2004, 2003 and 2002, respectively. Profit commission has declined substantially
as compared to the same period in 2003 mainly due to the increase in loss and loss adjustment
expenses related to the third quarter of 2004 catastrophes. The accrual for profit commission
increased in 2003 as compared to 2002 as a result of favorable loss experience. Profit commission
will fluctuate as our estimate of loss and loss adjustment expense reserves fluctuates. General and administrative expenses for the years indicated consisted of the following ($ in
millions): Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Fixed expenses, excluding share options
    
    $
    34.2
    
    
    $
    29.0
    
    
    $
    15.7Current and deferred incentive compensation
    
    
    18.8
    
    
    
    17.0
    
    
    
    5.2Fair value of share options expense
    
    
    2.3
    
    
    
    4.0
    
    
    
    5.4Total General and Administrative expenses
    
    $
    55.3
    
    
    $
    50.0
    
    
    $
    26.3
 The increase in general and administrative expenses from 2003 to 2004 is partially as a result
of an increase in fixed expenses for professional fees and employment costs, consistent with the
increase in staff numbers in 2004. In addition, there was an increase in the accrual for current
and deferred incentive compensation expense but not as much as originally anticipated as our net
income decreased due to the catastrophes which occurred during the third quarter of 2004. For the year ended December 31, 2004, the performance unit plan (PUP) expense included
in current and deferred incentive compensation was higher than the same period in 2003 as a result
of a combination of factors. The factors that affect the calculation of the PUP expense in 2004
consist of a decrease in the harvest ratio used in calculating the expense for the 2002-2004
performance period from 137.5% at December 31, 2003 to 132.0% at December 31, 2004. This reduction resulted mainly from the effect of the third
quarter of 2004 catastrophes, the effect of which was partially offset by an increase in our share
price which includes an adjustment for any dividends paid out during
the performance period from 2003 to 2004. For the 2003-2005 - 49 -




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period, the expense increased in 2004 due to the increase in the harvest ratio from 100% at
the end of 2003 to 116.4% at December 31, 2004, combined with
the increase in our share price which includes an adjustment for any
dividends paid out during the performance period, from
2003 to 2004. The 2004 year also includes an additional accrual for the 2004-2006 performance
period. The overall effect was a net increase in the PUP expense as
compared to 2003. On February 28, 2005 we paid out the 2002-2004 PUP accrual of approximately $14.0 million. The current and deferred incentive compensation expense was higher in 2003 as compared to 2002
as the 2003 year included an accrual for both the 2002-2004 and the 2003-2005 performance periods
as well as the fact that the share price at December 31, 2003 was significantly higher than at
December 31, 2002. As our results evolve, we may need to increase or decrease our harvest ratio
used in the expense calculation which could either reduce or increase the PUP expense. We anticipate that our general and administrative expense ratio will increase during 2005 as
we expect our general and administrative expenses to be at a similar level to 2004 but anticipate
that our earned premium will decline as discussed above in the gross premiums written section. The fair value of share options expense has decreased from 2002 to 2004 as a portion of the
outstanding share options became fully vested and expensed. Net Investment Income Years
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Net investment income
    
    $
    69.1
    
    
    $
    50.1
    
    
    $
    39.7
 Net investment income was primarily composed of interest on coupon-paying bonds and bank
interest, partially offset by accretion of premium on bonds and investment management and custodian
fees of $2.6 million, $3.2 million and $2.1 million, respectively, for the years ended December 31,
2004, 2003 and 2002. The investment management fees were paid to White Mountains Advisors LLC, a
wholly-owned indirect subsidiary of White Mountains Insurance Group, one of our major shareholders.
Management believes that the fees charged were consistent with those that would have been charged
by an unrelated party. The investment management and custodian fees are lower for 2004 as compared
to 2003 even though the asset base has increased because the investment management fee structure
was revised during the first quarter of 2004, resulting in a lower expense for our current
portfolio mix. The fees increased from 2002 to 2003 due to the increase in our asset base. The fees
will vary as our mix of investments changes. Because we provide short-tail insurance and reinsurance coverage for losses resulting mainly
from natural and man-made catastrophes, we could become liable to pay substantial claims on short
notice. Accordingly, we have structured our investment portfolio to preserve capital and provide us
with a high level of liquidity, which means that the large majority of our investment portfolio
contains shorter term fixed maturity investments, such as U.S. government and agency bonds, U.S.
government-sponsored enterprises, corporate debt securities and mortgage-backed and asset-backed
securities. Based on the weighted average monthly investments held, and including net unrealized gains of
$1.3 million, $18.1 million and $33.6 million for the years ended December 31, 2004, 2003 and 2002,
respectively, the total investment return was 3.3%, 4.0%, and 7.0%, respectively. In 2004, as
expected, our investment income has increased as a result of our larger investment portfolio, but
has been offset somewhat by the higher level of paid claims during the year related to the
catastrophes that occurred during the third quarter of 2004. Net paid claims were $192.0 million in
2004 as compared to $53.2 million in 2003. During 2005 we expect to pay substantial additional
claims related to the catastrophes and, as such, the portfolio may shrink which may lead to minimal
growth or a reduction in net investment income for 2005. In addition, the level of the investment
portfolio and related investment income will be affected by the special dividend we declared on February
25, 2005 of approximately $390.0 million, any catastrophes which
could occur during 2005 and by
other capital management initiatives enacted. Proceeds from sales of available for sale securities for the years ended December 31, 2004,
2003 and 2002 were $1.1 billion, $1.3 billion and $1.2 billion, respectively. Gross realized losses
in 2004 included a loss of $0.1 million relating to an equity security for a decline in value
considered to be other than temporary. There were no such losses realized during 2003 or 2002. The
aggregate fair value of securities in an unrealized loss position was $1.4 billion and $397.2
million at December 31, 2004 and 2003, respectively. Of the gross - 50 -




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unrealized losses of $11.1 million at December 31, 2004, investments with a market value of
$8.3 million have been in a continuous unrealized loss position for more than 12 months. Of the
gross unrealized losses of $1.5 million at December 31, 2003, no investment had continuously been
in an unrealized loss position for more than 12 months. We believe that the gross unrealized losses relating to our fixed maturity investments at
December 31, 2004 of $11.1 million resulted primarily from increases in market interest rates from
the dates that certain investments within that portfolio were acquired as opposed to fundamental
changes in the credit quality of the issuers of such securities. Therefore, these decreases in
value are viewed as being temporary because we have the intent and ability to retain such
investments for a period of time sufficient to allow for any anticipated recovery in market value.
We also believe that the gross unrealized losses relating to our equity portfolio of $0.1 million
at December 31, 2004 are temporary based on an analysis of various factors including the time
period during which the individual investments has been in an unrealized loss position and the
significance of the decline. The performance results of our fixed maturity portfolio, with a comparison to the Lehman
Brothers Government/Credit 1-5 Year Index combined with the 1-3 month Treasury Bill rate, for the
year ended December 31, 2004 was as follows: Lehman BrothersMontpelier Re
    
    
    Govt/Credit1-5 Year IndexPerformance
    
    Holdings Ltd.(1)
    
    
    / 1-3 month T-BillTotal return
    
    
    2.6%
    
    
    
    1.7%(1)  Total return is calculated by dividing total net investment income on fixed maturity
investments by the monthly average of the sum of such investments at
amortized cost in 2004.
 The combination of the Lehman Brothers Government/Credit 1-5 Year Index and the 1-3 month
Treasury Bill rate is used for comparative purposes as it closely reflects our asset mix. Financing Expense Years
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Fees  letter of credit facilities
    
    $
    1.7
    
    
    $
    1.0
    
    
    $
    Interest  Senior Notes
    
    
    15.4
    
    
    
    6.4
    
    
    
    Interest  term loan and revolving facilities
    
    
    
    
    
    
    2.3
    
    
    
    4.5Interest  funds withheld
    
    
    0.4
    
    
    
    
    
    
    
    Total Financing Expense
    
    $
    17.5
    
    
    $
    9.7
    
    
    $
    4.5
 Fees for the letter of credit facilities relate to the Letters of Credit that we have in place
as detailed in the Capital Resourcessection. These fees are higher than the same period in 2003 as
more reinsureds have requested additional security as a result of the third quarter catastrophes. We paid interest expense during the year ended December 31, 2004 of $15.8 million related to
the Senior Notes. We expect to pay the same amount of interest in 2005 related to the Senior Notes
as they bear a fixed interest rate of 6.125%. We paid interest expense during the years ended
December 31, 2003 and 2002 of $2.8 million and $3.5 million, respectively, which related to the
term loan facility and revolving loan facility only. The term loan facility and revolving credit
facility were repaid and terminated during 2003. For the years ended December 31, 2003 and 2002, interest expensed relating to the term loan
facility and revolving loan facility represented an average rate of
1.7% and 2.2%, respectively. Net Realized Gains (Losses) on Investment Net realized gains (losses) on investments for the years ended December 31, 2004, 2003 and
2002 were $7.2 million, $7.6 million and $7.7 million, respectively, which were due to net gains
(losses) realized from the sale of fixed maturity and equity investments and a realized loss of
$1.0 million during 2003 which resulted from the termination of the interest rate swap contract,
cancelled simultaneously with the repayment of the term loan facility on August 4, 2003. - 51 -




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Financial Condition and Liquidity We are a holding company that conducts no operations of its own. We rely primarily on cash
dividends and management fees from Montpelier Re to pay our operating expenses, interest on our
debt and to pay dividends to our shareholders and warrant holders. There are restrictions on the payment of dividends
from Montpelier Re to the Company, which are described in more detail below. We currently have in
place a regular dividend program of $0.34 per share per quarter. In addition, on February 25, 2005
we declared a special dividend in the amount of $5.50 per common
voting share and warrant payable on March 31,
2005 to shareholders and warrant holders of record on March 15, 2005. We expect to continue the payment of dividends in
the future but we cannot assure that such payments will continue. Any determination to pay any
future cash dividends will be at the discretion of our Board of Directors and will be dependent
upon our results of operations and cash flows, our financial position and capital requirements,
general business conditions, legal, tax, regulatory and any contractual restrictions on the payment
of dividends, and any other factors our Board of Directors deems relevant. Our ability to underwrite business is dependent upon the quality of our claims paying and
financial strength ratings as evaluated by independent rating agencies. In the normal course of
business, we evaluate our capital needs to support the volume of business written in order to
maintain our claims paying and financial strength ratings. We regularly provide financial
information to rating agencies to both maintain and enhance existing ratings. Capital Resources Our shareholders equity at December 31, 2004 was $1,751.9 million, of which $585.0 million
was retained earnings. Our capital base has increased by $94.2 million since December 31, 2003 as
our retained earnings have increased by more than the dividends paid and net repurchases of our
common shares. Our contractual obligations and commitments are set out below as at December 31,
2004. Contractual Obligations and Commitments Due in
    
    
    
    
    
    
    
    
    
    
    Due inLess than
    
    
    Due in
    
    
    Due in
    
    
    More thanTotal
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 Years($ in thousands)Debt:6.125% Senior Notes due 2013
    
    $
    382,071
    
    
    $
    15,313
    
    
    $
    30,625
    
    
    $
    30,625
    
    
    $
    305,508Gross Loss and Loss
Adjustment Expense Reserves
    
    
    549,541
    
    
    
    373,037
    
    
    
    126,643
    
    
    
    33,603
    
    
    
    16,258Operating leases
    
    
    40,942
    
    
    
    2,181
    
    
    
    7,386
    
    
    
    9,063
    
    
    
    22,312Total
    
    $
    972,554
    
    
    $
    390,531
    
    
    $
    164,654
    
    
    $
    73,291
    
    
    $
    344,078
 On August 4, 2003, we issued $250.0 million aggregate principal amount of senior unsecured
debt (the Senior Notes) at an issue price of 99.517% of their principal amount. The net proceeds
were used to repay a term loan facility with the remainder used for general corporate purposes. The
Senior Notes bear interest at a rate of 6.125%, payable semi-annually in arrears on February 15 and
August 15 of each year. Unless previously redeemed, the Senior Notes will mature on August 15,
2013. We may redeem the Senior Notes at any time and from time to time, in whole or in part, at a
make-whole redemption price. The Senior Notes do not contain any covenants regarding financial
ratios or specified levels of net worth or liquidity to which we must adhere. The table above includes the estimated timing of the payment of estimated future cash flows
for gross loss and loss adjustment expenses based on our best estimate of obligations to pay
policyholders at December 31, 2004. The amount and timing of the cash flows are uncertain and do
not have contractual payout terms. Due to the short-tail nature of our business we expect that
gross and net loss and loss adjustment expenses generally will be settled during the time period in which they are incurred. For a
discussion of these uncertainties refer to the Loss and Loss Adjustment Expensessection in Part
II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations
included with this filing. These estimated obligations will be funded through existing cash and
investments. We may issue additional debt or equity as circumstances warrant. In this regard, on February
12, 2004 we filed a universal shelf registration statement on Form S-3 with the U.S. Securities and
Exchange Commission for - 52 -




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the potential future sale of up to $500.0 million of debt, trust preferred and/or equity
securities. The registration statement was declared effective and should provide us with
significant flexibility with respect to our access to the public capital markets. Also included in
the registration statement were 31,665,460 common shares which may be offered for sale by our
shareholders. We will not receive any proceeds from sales by our
shareholders but may have to pay related
expenses. We cannot assure you that additional financing under the universal shelf registration
statement or elsewhere will be available at terms acceptable to us. On May 26, 2004 our Board of Directors approved a plan to repurchase up to $150.0
million of our common shares from time to time depending on market conditions during a period up to
24 months. On June 2, 2004, we repurchased 1,263,865 common shares at $34.50 per common share. The
closing market price per common share on May 28, 2004 was $34.88. The purchase price totaled $43.6
million and was funded using existing cash on hand. On August 5, 2004, we repurchased a further
625,000 common shares at $35.00 per common share. The closing market price per common share on
August 3, 2004 was $35.43. The purchase price totaled $21.9 million and was funded using existing
cash on hand. Our Chairman, President and Chief Executive Officer adopted a written plan in accordance with
Rule 10b5-1 under the Securities Exchange Act of 1934 for the purpose of the exercise of options
and the sale of limited amounts of our shares owned by him. The plan covered the possible exercise
of 600,000 options and share sales over a 12 month period commencing March 3, 2004, subject to
market conditions and the terms of the plan. Pursuant to this plan, options for 500,000 common
shares were exercised during the year ended December 31, 2004 at the exercise price of $16.67,
resulting in an increase in common shares by their par amount and an increase in additional paid-in
capital of $8.3 million. Subsequent to December 31, 2004, 10,000 options and 90,000 options with an
exercise price of $16.67 and $17.50, respectively, were exercised for an additional 100,000 common
shares, which has exhausted the plan. Credit Facilities ($ in
thousands): Letters
of Credit Facilities:
    
    Credit Line
    
    
    Usage
    
    
    Expiry Date
    
    PurposeOne facility  Total
    
    $
    500,000
    
    
    $
    252,043
    
    
    May 2007
    
    Required security for reinsuredsOne facility  Total
    
    $
    50,000
    
    
    $
    Nil
    
    
    December 2005
    
    Required security for reinsureds
 In the normal course of business, we provide security to reinsureds as required under contract
provisions. Such security takes the form of a letter of credit issued by a bank at our request. In
order for us to write Lloyds Qualifying Quota Share business, we must provide a letter of credit
in favor of The Society and Council of Lloyds (Lloyds) in accordance with Lloyds rules.
Effective May 27, 2004 the Company entered into a three-year Amended and Restated Letter of Credit
Reimbursement and Pledge Agreement with Banc of America Securities LLC and a syndicate of lending
institutions for the provision of a letter of credit facility for the account of Montpelier Re in
favor of Lloyds or certain U.S. ceding companies (Tranche A) in an amount of up to $250.0
million, and in favor of certain U.S. ceding companies only (Tranche B) in an amount of up to
$200.0 million of which up to $50.0 million may be used by us as a revolving line of credit for
general corporate purposes. This agreement replaced the Letter of Credit Reimbursement and Pledge
Agreement with Fleet National Bank discussed below. Letters of credit issued under this facility at
December 31, 2004 were $252.0 million and are secured by cash and investments of approximately
$277.2 million. On October 28, 2004, we exercised an option to increase the aggregate amount of
Tranche B by $50.0 million to $250.0 million as we anticipated that reinsureds would be requesting
additional security as a result of the third quarter catastrophes. Effective December 23, 2004, Montpelier Re entered into a $50.0 million Letter of Credit
Reimbursement and Pledge Agreement with HSBC Bank USA, National Association. The agreement is a one
year secured facility that allows Montpelier Re to issue up to $50.0 million in letters of credit.
The agreements covenants are - 53 -




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the same as those under the above Letter of Credit Facility Agreement and are described below.
There were no letters of credit issued under this facility at December 31, 2004. We expect these letter of credit facilities to be sufficient to support Montpelier Res
estimated obligations for the next 12 months in the absence of a very major catastrophe. The Letter
of Credit Facility Agreements contain covenants that limit our and Montpelier Res ability, among
other things, to grant liens on their assets, sell assets, merge or consolidate. The Letter of
Credit Facility Agreements also require us to maintain specific financial ratios and Montpelier Re
to maintain certain credit ratings. If we or Montpelier Re fails to comply with these covenants or
meet these financial ratios, the lenders could declare a default and begin exercising remedies
against the collateral, Montpelier Re would not be able to request the issuance of additional
letters of credit and we would not be able to borrow under the revolving line of credit. For the
year ended December 31, 2004 we were in compliance with all covenants. Montpelier Re is registered under The Insurance Act 1978 (Bermuda), Amendments Thereto and
Related Regulations (the Act). Under the Act, Montpelier Re is required annually to prepare and
file Statutory Financial Statements and a Statutory Financial Return. The Act also requires
Montpelier Re to meet minimum solvency requirements. For the years ended December 31, 2004 and
2003, Montpelier Re satisfied these requirements. Bermuda law limits the maximum amount of annual dividends or distributions payable by
Montpelier Re to us and in certain cases requires the prior notification to, or the approval of,
the Bermuda Monetary Authority. Subject to such laws, the directors of Montpelier Re have the
unilateral authority to declare or not to declare dividends to us. There is no assurance that
dividends will be declared or paid in the future. Off-Balance Sheet Arrangements We are not party to any transaction, agreement or other contractual arrangement to which an
entity unconsolidated with us is a party that management believes is reasonably likely to have a
current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to investors. Investments The table below shows the aggregate amounts of investments available for sale, other
investments and cash and cash equivalents comprising our portfolio of invested assets ($ in
thousands): As at December 31,
    
    2004
    
    
    2003Fixed maturities, available for sale, at fair value
    
    $
    2,325,273
    
    
    $
    1,976,165Equity investments, available for sale, at fair value
    
    
    45,355
    
    
    
    37,564Other investments, at estimated fair value
    
    
    117,453
    
    
    
    84,354Cash and cash equivalents, at fair value
    
    
    110,576
    
    
    
    139,587Total Invested Assets
    
    $
    2,598,657
    
    
    $
    2,237,670
 Because a significant portion of our contracts provide short-tail reinsurance coverage for
damages resulting mainly from natural and man-made catastrophes, we could become liable for a
significant amount of losses on short notice. Accordingly, we have structured our investment
portfolio to preserve capital and provide us with a high level of liquidity, which means that the
large majority of our investment portfolio contains shorter term fixed maturity investments, such
as U.S. government and agency bonds, U.S. government-sponsored corporate debt securities and
mortgage-backed and asset-backed securities. The market value of our portfolio of fixed maturity investments at December 31, 2004 comprises
U.S. government securities (17.7%), Non U.S. government securities (0.9%), U.S.
government-sponsored enterprises securities (41.0%), corporate debt
securities (31.0%) and
mortgage-backed and asset-backed securities (9.4%). All of the fixed
maturity investments we currently
hold were publicly traded at December 31, 2004. Based on the weighted average monthly
investments held, and including net unrealized gains, our total return on investments for the year
ended December 31, 2004 was 3.3%. This return was partially due to the unrealized gain on our
investment in Aspen at December 31, 2004 of $13.7 million. The average duration of our invested
asset portfolio was 2.2 years and the average rating of the portfolio was AA+ at December 31, 2004.
If the right - 54 -




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conditions
arise in 2005, we may deploy further capital in strategic investments or investment
classes other than existing classes. We have an investment in the common shares of Aspen Insurance Holdings Limited (Aspen), a
Bermuda based holding company of Aspen Insurance UK Limited (Aspen Re). At December 31, 2004, we
owned 4.0 million shares of Aspen, which represented approximately 5.8% of Aspen on an undiluted
basis. Aspen completed their initial public offering on December 4, 2003. Our investment in Aspen
is carried at quoted market value at December 31, 2004. At December 31, 2003 the shareholders
agreement and other restrictions presented significant obstacles and uncertainties in the
determination of the number of shares that could be reasonably expected to qualify for sale within
one year. As a result of this illiquidity, at December 31, 2003 a portion of the total investment
was considered restricted and was discounted. The aggregate unrealized gain is included in
accumulated other comprehensive income. On February 3, 2005, the Company sold 1.5 million of its
Aspen shares at $24.80 per common share for total proceeds of $37.2 million, realizing a gain of
$14.4 million. The Company currently owns 2.5 million shares, or approximately 3.6% of Aspen. On August 2, 2004, the Company invested an aggregate of $20.0 million as part of an investor
group acquiring the life and investments business of Safeco Corporation (since renamed Symetra
Financial Corporation), pursuant to a Stock Purchase Agreement. Symetra is an unquoted investment
and is carried at estimated fair value based on reported net asset values and other information
available to management, with any unrealized gain or loss included in accumulated other
comprehensive income. Cash Flows In the year ended December 31, 2004, we generated an operating net cash inflow of $519.7
million, primarily relating to premiums net of acquisition costs received by Montpelier Re. We paid
net losses of $192.0 million during the year ended December 31, 2004. We invested a net amount of
$396.3 million during the year ended December 31, 2004, and had a cash balance of $110.6 million at
December 31, 2004. The increase in liquidity has resulted from premiums received that were higher
than the level of paid claims during the year. Our liquidity depends on operating, investing and
financing cash flows as described below. Our sources of funds primarily consist of the receipt of premiums written, investment income
and proceeds from sales and redemptions of investments. Cash is used primarily to pay loss and loss adjustment expenses, brokerage commissions,
general and administrative expenses, to purchase new investments, to pay dividends, to pay for any
premiums retroceded and future authorized share repurchases. In 2004 we purchased retrocessional
excess of loss protection against large risk losses on the direct insurance and facultative book
and against small to medium-size catastrophes on our overall property writings. In addition, in
2004 we also purchased retrocessional stop-loss protection against losses on our casualty writings.
For 2005 we expect to purchase a slightly higher amount of reinsurance protection as compared to
2004. Our cash flows from operations represent the difference between premiums collected and
investment earnings realized, and the loss and loss adjustment expenses, underwriting and other
expenses paid and investment losses realized. Cash flows from operations may differ substantially,
however, from net income. To date, we have invested the majority of our cash flows not required for
operating purposes but have also paid out dividends to our shareholders and repurchased common
shares during 2004 as discussed above. We have written certain business that has loss experience generally characterized as having
low frequency and high severity. This may result in volatility in both our results of operations
and operational cash flows. The potential for a large claim under one of our insurance or
reinsurance contracts means that substantial and unpredictable payments may need to be made within
relatively short periods of time. As a result, cash flows from operating activities may fluctuate,
perhaps significantly, between individual quarters and years. We intend to manage these risks by structuring our investments in an effort to anticipate the
payout patterns of our liabilities under insurance or reinsurance policies. No assurance can be
given, however, that we will successfully match the structure of Montpelier Res investments with
its liabilities under insurance or reinsurance contracts. If our calculations with respect to these
reinsurance liabilities are incorrect, or if we improperly structure our investments to match such
liabilities, we could be forced to liquidate investments prior to maturity, - 55 -




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potentially at a significant loss. The estimated fair value of fixed maturity, equity, other investments and our cash and cash
equivalents balance was $2,598.7 million as of December 31, 2004, compared to $2,237.7 million at
December 31, 2003. The primary cause of this increase was the receipt of $718.7 million in premiums
net of acquisition costs, net investment income of $69.1 million and net realized gains on
investments of $7.2 million for the year ended December 31, 2004, offset by paid claims, the
payment of general and administrative expenses, the payment of dividends and the repurchase of some
of our common shares. For the period from inception until December 31, 2004, we have had sufficient cash flow from
operations to meet our liquidity requirements. We have generated cash flows from operations since
our inception significantly in excess of our operating commitments. To the extent that capital is
not utilized in our reinsurance operations we have used such capital to invest in new opportunities
and returned additional capital to shareholders in the form of dividends or share repurchases under
certain circumstances. As announced on February 25, 2005, we will return approximately $390.0
million of capital to shareholders and warrant holders by way of a special dividend to be paid on March 31, 2005 to
shareholders of record as of March 15, 2005. We may take similar measures in the future. 
 Item 7A.Quantitative and Qualitative Disclosures About Market Risk We believe that we are principally exposed to three types of market risk: interest rate risk,
foreign currency risk and credit risk. The company has in place a derivatives use plan. However it has not entered into any
derivative contracts to date. Interest Rate Risk.Our primary market risk exposure is to changes in interest rates. Our
fixed maturity portfolio is exposed to interest rate risk. Fluctuations in interest rates have a
direct impact on the market valuation of these investments. As interest rates rise, the market
value of our fixed maturity portfolio falls, and the converse is also true. We manage interest rate
risk by selecting investments with characteristics such as duration, yield, currency and liquidity
tailored to the anticipated cash outflow characteristics of Montpelier Res reinsurance

liabilities. As of December 31, 2004, an immediate 100 basis point
increase in market interest rates would have resulted in an estimated
decrease in the market value of our fixed maturity portfolio of
2.2% or approximately $52.3 million and the impact on our portfolio from an immediate 100 basis
point decrease in market interest rates would have resulted in an estimated increase in market
value of 2.0% or approximately $46.6 million. As of December 31, 2003, the impact on our portfolio from an immediate 100 basis point
increase in market interest rates would have resulted in an estimated decrease in market value of
2.0% or approximately $40.6 million and the impact on our portfolio from an immediate 100 basis
point decrease in market interest rates would have resulted in an estimated increase in market
value of 2.0% or approximately $40.6 million. As
of December 31, 2004, we held $219.2 million, or 8.4% of our total invested assets, in
mortgage-related securities. These assets are exposed to prepayment risk, which occurs when holders
of individual mortgages increase the frequency with which they prepay the outstanding principal
before the maturity date and refinance at a lower interest rate cost. Given the proportion that
these securities comprise of the overall portfolio, and the current low interest rate environment,
prepayment risk is not considered significant at this time. As
of December 31, 2003, we held $164.9 million, or 7.4% of our total invested assets, in
mortgage-backed and asset-backed securities. Foreign
Currency Risk.A significant portion of our business is reinsuring or insuring risks,
receiving premiums and paying losses in currencies other than the U.S. dollar.
We also maintain a small portion of our investment portfolio in
investments in foreign currencies. Accordingly, we are exposed to fluctuations in the rates
of these currencies. In the event of a significant loss event which requires settlement in a
currency other than the United States dollar, we may use forward foreign currency exchange
contracts in an effort to hedge against movements in the value of foreign currencies relative to
the United States dollar. A forward foreign currency exchange contract involves an obligation to
purchase or sell a specified currency at a future date at a price set at the time of the contract. - 56 -




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Foreign currency exchange contracts will not eliminate fluctuations in the value of our assets
and liabilities denominated in foreign currencies but rather allow us to establish a rate of
exchange for a future point in time. We do not expect to enter into such contracts with respect to
a material amount of our assets. At December 31, 2004 and 2003, we did not have any outstanding
forward foreign currency exchange contracts. Our functional currency is the U.S. dollar. The British pound is the functional currency of
our wholly-owned subsidiary, Montpelier Marketing Services (UK) Limited (MMSL). Accordingly,
MMSLs assets and liabilities are translated at exchange rates in effect at the balance sheet date.
Revenue and expenses of MMSL are translated at average exchange rates during the period. The effect
of translation adjustments at the end of the period is not included in our consolidated results of
operations but is included in accumulated other comprehensive income, a separate component of
shareholders equity. On a consolidated basis, MMSL does not generate material revenue and expenses
and, therefore, the effects of changes in exchange rates during the period are not material. Our premiums receivable and liabilities for losses incurred in foreign currencies are exposed
to the risk of changes in value resulting from fluctuations in foreign exchange rates and may
affect our financial results in the future. Credit Risk.We have exposure to credit risk primarily as a holder of fixed maturity
investments. In accordance with our investment guidelines as approved by our Board of Directors,
our risk management strategy and investment policy is to invest in debt instruments of high credit
quality issuers and to limit the amount of credit exposure with respect to particular ratings
categories and any one issuer. All of our fixed maturity investments were publicly traded at
December 31, 2004 and 99.8% were investment grade. All of our fixed maturity investments were
publicly traded and were all investment grade at December 31, 2003. Effects of Inflation The potential exists, after a catastrophe loss, for the development of inflationary pressures
in a local economy. We take into account the anticipated effects on us in our catastrophe loss models.
The effects of inflation are also considered in pricing and in estimating reserves for loss and
loss adjustment expenses we cannot know the precise effects of inflation on our results until claims are ultimately settled. We do not believe that inflation has had a material effect on our consolidated results of
operations, except insofar as inflation may affect interest rates. 
 Item 8.Financial Statements and Supplementary Data Reference is made to Item 15 (a) of this Report for the Consolidated Financial Statements of
Montpelier Re Holdings Ltd. and the Notes thereto, as well as the Schedules to the Consolidated
Financial Statements. 
 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or any disagreements with accountants regarding accounting and
financial disclosure for the period since the Companys
incorporation November 14, 2001 through the
date of this filing. 
 Item 9A.Controls and Procedures Evaluation of disclosure controls and procedures. We have established disclosure controls and procedures designed to ensure that material
information relating to the Company, including its consolidated subsidiaries, is made known to the
officers who certify the Companys financial reports and to other members of management and the
Board of Directors. We conducted an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as of December 31, 2004 under the supervision and with the
participation of management, including our CEO and CFO. Based on their evaluation as of December
31, 2004 the Companys principal executive officer and - 57 -




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principal financial officer have concluded that the Companys disclosure controls and
procedures (as defined in §§240.13a-15(e) and 240.15d-15(e) of the Securities Exchange Act of 1934
(the Exchange Act)) are effective to provide reasonable assurance that information required to be
disclosed by the Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange
Commission rules and forms. Managements Report on Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial reporting is defined in
Rules 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and principal financial
officers and effected by the companys board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:  
    Pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the company;
    Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and
    Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect
on the financial statements. Because of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. The Companys management assessed the effectiveness of the Companys internal control over
financial reporting as of December 31, 2004. In making this assessment, the Companys management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework.
Based on this assessment, management has determined that, as of December 31, 2004, the Companys
internal control over financial reporting was effective based on those criteria. Our
managements assessment of the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2004 has been audited by PricewaterhouseCoopers, an
independent registered public accounting firm, as stated in their
report which appears on page F-2. Changes in internal controls. During the fourth quarter of 2004, there were no changes in the Companys internal controls
that materially affected or are reasonably likely to materially affect the Companys internal
control over financial reporting. 
 Item 9B.Other Information None. - 58 -




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PART III 
 Item 10.Directors and Executive Officers of the Registrant This item is omitted because a definitive proxy statement that involves the election of
directors will be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is
incorporated by reference. 
 Item 11.Executive Compensation This item is omitted because a definitive proxy statement that involves the election of
directors will be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is
incorporated by reference. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management This item is omitted because a definitive proxy statement that involves the election of
directors will be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is
incorporated by reference. 
 Item 13.Certain Relationships and Related Transactions This item is omitted because a definitive proxy statement that involves the election of
directors will be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is
incorporated by reference. 
 Item 14.Principal Accounting Fees and Services This item is omitted because a definitive proxy statement that involves the election of
directors will be filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to Regulation 14A, which proxy statement is
incorporated by reference. - 59 -




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PART IV 
 Item 15.Exhibits, Financial Statement Schedules (a) Financial Statements, Financial Statement Schedules and Exhibits. 1. Financial Statements The Consolidated Financial Statements of Montpelier Re Holdings Ltd. and related Notes
thereto are listed in the accompanying Index to Consolidated Financial Statements and are filed
as part of this Report. 2. Financial Statement Schedules The Schedules to the Consolidated Financial Statements of Montpelier Re Holdings Ltd. are
listed in the accompanying Index to Schedules to Consolidated Financial Statements and are filed
as part of this Report. 3. Exhibits (b) Exhibits ExhibitNumber
    
    Description of Document3.1
    
    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
    
    Amended and Restated Bye-Laws (incorporated herein by reference to
Exhibit 3.1 to the Companys Current Report on Form 8-K dated May
20, 2003).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
    
    Share Purchase Warrant, dated as of January 3, 2002, between the
Registrant and Banc of America Securities LLC, as amended by
Amendment, dated as of February 11, 2002, as further amended by
Amendment, dated as of July 1, 2002 (incorporated herein by
reference to Exhibit 4.2 to the Companys Registration Statement
on Form S-1 (Registration No. 333-89408)), as further amended by
Amendment 3 dated as of March 31, 2003 (incorporated herein by
reference to Exhibit 4.5 to the Companys Quarterly Report on Form
10-Q for the period ended March 31, 2003).4.3
    
    Share Purchase Warrant, dated January 3, 2002, between the
Registrant and entities affiliated with White Mountains Insurance
Group (originally issued to Benfield Group plc), as amended by
Amendment, dated as of February 11, 2002, as further amended by
Amendment, dated as of July 1, 2002(incorporated herein by
reference to Exhibit 4.3 to the Companys Registration Statement
on Form S-1 (Registration No. 333-89408)), as further amended by
Amendment 3 dated as of March 31, 2003 (incorporated herein by
reference to Exhibit 4.5 to the Companys Quarterly Report on Form
10-Q for the period ended March 31, 2003).4.4
    
    Share Purchase Warrant, dated January 3, 2002, between the
Registrant and White Mountains Insurance Group, Ltd., as amended
by Amendment, dated as of February 11, 2002, as further amended by
Amendment, dated as of July 1, 2002 (incorporated herein by
reference to Exhibit 4.4 to the Companys Registration Statement
on Form S-1 (Registration No. 333- 89408)), as further amended by
Amendment 3 dated as of March 31, 2003 (incorporated herein by
reference to Exhibit 4.5 to the Companys Quarterly Report on Form
10-Q for the period ended March 31, 2003).4.5
    
    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)).4.6
    
    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)).
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ExhibitNumber
    
    Description of Document10.2
    
    Service Agreement, dated as of December 12, 2001, between Anthony
Taylor, the Registrant and Montpelier Reinsurance Ltd.
(incorporated herein by reference to Exhibit 10.2 to the Companys
Registration Statement on Form S-1 (Registration No. 333-89408)),
as further amended by Amendment dated as of August 27, 2004
(incorporated herein by reference to Exhibit 10.1 to the Companys
Current Report on Form 8-K filed September 1, 2004).10.3
    
    Service Agreement, dated as of January 24, 2002, between Anthony
Taylor and Montpelier Marketing Services (UK) Limited
(incorporated herein by reference to Exhibit 10.3 to the Companys
Registration Statement on Form S-1 (Registration No. 333-89408)).10.4
    
    Service Agreement, dated as of January 1, 2002, between C. Russell
Fletcher, III and Montpelier Reinsurance Ltd. (incorporated herein
by reference to Exhibit 10.4 to the Companys Registration
Statement on Form S-1 (Registration No. 333-89408)).10.5
    
    Service Agreement, dated as of January 1, 2002, between Thomas
George Story Busher and Montpelier Reinsurance Ltd. (incorporated
herein by reference to Exhibit 10.5 to the Companys Registration
Statement on Form S-1 (Registration No. 333-89408)).10.6
    
    Service Agreement, dated as of January 24, 2002, between Thomas
George Story 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)).10.7
    
    Service Agreement, dated as of January 24, 2002, between Nicholas
Newman-Young and Montpelier Marketing Services (UK) Limited
(incorporated herein by reference to Exhibit 10.6 to the Companys
Registration Statement on Form S-1 (Registration No. 333-89408)).10.9
    
    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).10.10
    
    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).10.11
    
    Long-Term Incentive Plan as amended August 27, 2004 (incorporated
herein by reference to Exhibit 10.5 to the Companys Current
Report on Form 8-K filed September 1, 2004).10.12
    
    Amended Letter of Credit Reimbursement and Pledge Agreement, among
Montpelier Re and Banc of America Securities LLC and a syndicate
of lending institutions, dated May 27, 2004 (incorporated herein
by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed on June 2, 2004).10.13
    
    Service Agreement, dated as of August 27, 2004, between Anthony
Taylor and Montpelier Re Holdings Ltd. (incorporated herein by
reference to Exhibit 10.2 to the Companys Current Report on Form
8-K filed September 1, 2004).10.14
    
    Service Agreement, dated as of August 27, 2004, between Anthony
Taylor and Montpelier Marketing Services (UK) Limited
(incorporated herein by reference to Exhibit 10.3 to the Companys
Current Report on Form 8-K filed September 1, 2004).10.15
    
    Severance Plan, dated as of August 27, 2004, between 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
    
    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).10.17
    
    Letter of Credit Reimbursement and Pledge Agreement, among
Montpelier Reinsurance Ltd. and HSBC Bank USA, National
Association, dated December 23, 2004 (incorporated herein by
reference to Exhibit 10.1 to the Companys Current Report on Form
8-K filed on December 23, 2004).10.18
    
    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).
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ExhibitNumber
    
    Description of Document10.19
    
    Montpelier Re Holdings Ltd. 2005 Annual Bonus Plan (incorporated
herein by reference to Exhibit 10.2 to the Companys Current
Report on Form 8-K filed February 28, 2005).10.20
    
    Montpelier Re Holdings Ltd. Directors Share Plan (incorporated
herein by reference to Exhibit 10.3 to the Companys Current
Report on Form 8-K filed February 28, 2005).10.21
    
    Net Share Settlement Agreement
between Montpelier Re Holdings Ltd. and Anthony Taylor, filed with
this report.10.22
    
    Net Share Settlement Agreement
between Montpelier Re Holdings Ltd. and Thomas George Story Busher,
filed with this report.10.23
    
    Net Share Settlement Agreement
between Montpelier Re Holdings Ltd. and C. Russell
Fletcher III, filed with this report.10.24
    
    Net Share Settlement Agreement
between Montpelier Re Holdings Ltd. and Nicholas Newman-Young, filed
with this report.10.25
    
    Montpelier Reinsurance Ltd. Amended
and Restated Deferred Compensation Plan, filed with this report.21.1
    
    Subsidiaries of the Registrant, filed with this report.23.1
    
    Consent of PricewaterhouseCoopers, filed with this report.31.1
    
    Officer Certification of Anthony Taylor, Chief Executive Officer
of Montpelier Re Holdings Ltd., and Kernan Oberting, Chief
Financial Officer of Montpelier Re Holdings Ltd., as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed
with this report.32.1
    
    Officer Certification of Anthony Taylor, Chief Executive Officer
of Montpelier Re Holdings Ltd., and Kernan Oberting, Chief
Financial Officer of Montpelier Re Holdings Ltd., pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, submitted with this report.
  (c)
    See (a) above - 62 -




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SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized in Hamilton, Bermuda, on the
4th day of
March, 2005. MONTPELIER RE HOLDINGS LTD.(Registrant)By:
    
    /s/ ANTHONY TAYLORName:
    
    Anthony TaylorTitle:
    
    Chairman and Chief Executive Officer
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POWER OF ATTORNEY Know all men by these presents, that the undersigned directors and officers of the Company, a
Bermuda limited liability company, which is filing a Form 10-K with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of 1934 hereby
constitute and appoint Anthony Taylor and Thomas Busher, and each of them, the individuals true
and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for
the person and in his or her name, place and stead, in any and all capacities, to sign such Form
10-K therewith to be filed with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and confirming all that
said attorneys-in-fact as agents or any of them, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Form 10-K has been signed by
the following persons in the capacities indicated on the
4th day of March, 2005. Signature
    
    Title/s/ ANTHONY TAYLOR
    
    Chairman and Chief Executive Officer and Director(Principal Executive Officer)Anthony Taylor/s/ KERNAN V. OBERTING
    
    Chief Financial Officer(Principal Financial Officer)Kernan V. Oberting/s/ NEIL MCCONACHIE
    
    Chief Accounting Officer and Treasurer(Principal Accounting Officer)Neil McConachie/s/ K. THOMAS KEMP
    
    DirectorK. Thomas Kemp/s/ JOHN D. GILLESPIE
    
    DirectorJohn D. Gillespie/s/ RAYMOND BARRETTE
    
    DirectorRaymond Barrette/s/ G. THOMPSON HUTTON
    
    DirectorG. Thompson Hutton/s/ RAYMOND M. SALTER
    
    DirectorRaymond M. Salter/s/ ALLAN W. FULKERSON
    
    DirectorAllan W. Fulkerson/s/ WILLIAM L. SPIEGEL
    
    DirectorWilliam L. Spiegel/s/ STEVEN J. GILBERT
    
    DirectorSteven J. Gilbert/s/ KAMIL M. SALAME
    
    DirectorKamil M. Salame/s/ JOHN F. SHETTLE JR.
    
    DirectorJohn F. Shettle Jr.
 - 64 -




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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm.
    
    F-2Consolidated Balance Sheets as at December 31, 2004 and 2003.
    
    F-4Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2004, 2003 and 2002.
    
    F-5Consolidated Statements of Shareholders Equity for the years
ended December 31, 2004, 2003 and 2002.
    
    F-6Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002.
    
    F-7Notes to Consolidated Financial Statements.
    
    F-8
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm To The Board of Directors and Shareholders of Montpelier Re Holdings Ltd: We have completed an integrated audit of Montpelier Re Holdings Ltd.s 2004
consolidated financial statements and of its internal control over financial reporting as of
December 31, 2004 and audits of its 2003 and 2002 consolidated financial
statements in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below. Consolidated financial statements and financial statement schedules In
our opinion, the consolidated financial statements listed in the
index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Montpelier Re Holdings
Ltd. and its subsidiaries at December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2004
in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index appearing under
Item 15(a)(2) present fairly, in all material respects the information set forth therein when read
in conjunction with the related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. Internal control over financial reporting Also, in our opinion, managements assessment, included in Managements Report on Internal
Control over Financial Reporting appearing under Item 9A of this filing,that the Company maintained
effective internal control over financial reporting as of December 31, 2004 based on criteria
established in Internal Control  Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based
on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control  Integrated Framework by the COSO. The Companys management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of the Companys internal control over financial reporting. Our
responsibility is to express opinions on managements assessment and on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control over financial
reporting includes obtaining an understanding of internal control over financial reporting,
evaluating managements assessment, testing and evaluating the design and operating effectiveness
of internal control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting principles generally
accepted in the United States of America. A companys internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with accounting principles, generally
accepted in the United States of F-2




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##### Table of Contents



America, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the companys assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. /s/ PRICEWATERHOUSECOOPERS PricewaterhouseCoopers Hamilton, Bermuda March 4, 2005 F-3




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD. 
 CONSOLIDATED BALANCE SHEETS
AS AT DECEMBER 31, 2004 AND 2003
(Expressed in thousands of United States Dollars, except share amounts)
 2004
    
    
    2003ASSETSFixed maturities, at fair value (amortized
cost: 2004  $2,320,229; 2003  $1,951,875)
    
    $
    2,325,273
    
    
    $
    1,976,165Equity investments, at fair value
(cost: 2004 - $32,239, 2003 - $31,811)
    
    
    45,355
    
    
    
    37,564Total investments available for sale
    
    
    2,370,628
    
    
    
    2,013,729Other investments
    
    
    117,453
    
    
    
    84,354Total investments
    
    
    2,488,081
    
    
    
    2,098,083Cash and cash equivalents, at fair value
    
    
    110,576
    
    
    
    139,587Unearned premium ceded
    
    
    16,982
    
    
    
    9,910Premiums receivable
    
    
    173,763
    
    
    
    207,901Securities lending collateral
    
    
    420,856
    
    
    
    354,524Funds withheld
    
    
    5,130
    
    
    
    3,724Deferred acquisition costs
    
    
    59,031
    
    
    
    59,817Reinsurance recoverable
    
    
    94,700
    
    
    
    7,727Accrued investment income
    
    
    23,822
    
    
    
    20,666Other assets
    
    
    5,172
    
    
    
    5,174Total Assets
    
    $
    3,398,113
    
    
    $
    2,907,113LIABILITIESLoss and loss adjustment expense reserves
    
    
    549,541
    
    
    
    249,791Unearned premium
    
    
    287,546
    
    
    
    318,673Reinsurance balances payable
    
    
    74,909
    
    
    
    24,935Investment trades pending
    
    
    129
    
    
    
    376Securities lending payable
    
    
    420,856
    
    
    
    354,524Debt
    
    
    248,963
    
    
    
    248,843Accounts payable, accrued expenses and other liabilities.
    
    
    40,612
    
    
    
    28,224Dividends payable
    
    
    23,613
    
    
    
    24,042Total Liabilities
    
    $
    1,646,169
    
    
    $
    1,249,408SHAREHOLDERS EQUITYCommon voting shares: 1/6 cent par value; authorized
1,200,000,000 shares; issued
and outstanding at December
31, 2004; 62,131,232 shares (2003  63,392,597)
    
    
    104
    
    
    
    106Additional paid-in capital
    
    
    1,111,735
    
    
    
    1,130,305Accumulated other comprehensive income
    
    
    55,094
    
    
    
    53,731Retained earnings
    
    
    585,011
    
    
    
    473,563Total Shareholders Equity
    
    
    1,751,944
    
    
    
    1,657,705Total Liabilities and Shareholders Equity
    
    $
    3,398,113
    
    
    $
    2,907,113
 The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. F-4




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD. 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of United States Dollars, except share amounts)
 2004
    
    
    2003
    
    
    2002REVENUESGross premiums written
    
    $
    837,051
    
    
    $
    809,733
    
    
    $
    607,688Reinsurance premiums ceded
    
    
    (87,735
    )
    
    
    (31,758
    )
    
    
    (41,779
    )Net premiums written
    
    
    749,316
    
    
    
    777,975
    
    
    
    565,909Change in net unearned premiums
    
    
    38,199
    
    
    
    (72,642
    )
    
    
    (235,983
    )Net premiums earned
    
    
    787,515
    
    
    
    705,333
    
    
    
    329,926Net investment income
    
    
    69,072
    
    
    
    50,148
    
    
    
    39,748Net realized gains on investments
    
    
    7,248
    
    
    
    7,631
    
    
    
    7,716Net foreign exchange gains
    
    
    6,999
    
    
    
    8,310
    
    
    
    1,681Total Revenues
    
    
    870,834
    
    
    
    771,422
    
    
    
    379,071EXPENSESLoss and loss adjustment expenses
    
    
    404,802
    
    
    
    164,107
    
    
    
    133,310Acquisition costs
    
    
    152,779
    
    
    
    140,391
    
    
    
    62,926General and administrative expenses
    
    
    55,294
    
    
    
    50,021
    
    
    
    26,278Financing expense
    
    
    17,534
    
    
    
    9,688
    
    
    
    4,460Total Expenses
    
    
    630,409
    
    
    
    364,207
    
    
    
    226,974Income before taxes
    
    
    240,425
    
    
    
    407,215
    
    
    
    152,097Income tax expense
    
    
    144
    
    
    
    37
    
    
    
    52NET INCOME
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045COMPREHENSIVE INCOMENet income
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045Other comprehensive income
    
    
    1,363
    
    
    
    18,164
    
    
    
    33,689Comprehensive income
    
    $
    241,644
    
    
    $
    425,342
    
    
    $
    185,734Per share dataWeighted average number of common
and common equivalent
shares outstanding:Basic
    
    
    62,633,467
    
    
    
    63,392,597
    
    
    
    55,178,150Diluted
    
    
    67,706,972
    
    
    
    67,275,287
    
    
    
    55,457,141Basic earnings per common share
    
    $
    3.84
    
    
    $
    6.42
    
    
    $
    2.76Diluted earnings per common share
    
    $
    3.55
    
    
    $
    6.05
    
    
    $
    2.74
 The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. F-5




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of United States Dollars)
 2004
    
    
    2003
    
    
    2002Common voting sharesBalance  beginning of year
    
    $
    106
    
    
    $
    106
    
    
    $
    87Issue of common shares
    
    
    1
    
    
    
    
    
    
    
    19Repurchase of common shares
    
    
    (3
    )
    
    
    
    
    
    
    Balance  end of year
    
    
    104
    
    
    
    106
    
    
    
    106Additional paid-in-capitalBalance  beginning of year
    
    
    1,130,305
    
    
    
    1,126,435
    
    
    
    920,306Issue of common shares
    
    
    10,612
    
    
    
    
    
    
    
    219,034Repurchase of common shares
    
    
    (31,487
    )
    
    
    
    
    
    
    Direct equity offering expenses
    
    
    
    
    
    
    (170
    )
    
    
    (18,300
    )Compensation recognized under stock option plan
    
    
    2,305
    
    
    
    4,040
    
    
    
    5,395Balance  end of year
    
    
    1,111,735
    
    
    
    1,130,305
    
    
    
    1,126,435Accumulated other comprehensive incomeBalance  beginning of year
    
    
    53,731
    
    
    
    35,567
    
    
    
    1,878Net change in unrealized gains on investments
    
    
    1,309
    
    
    
    18,120
    
    
    
    33,642Net change in currency translation adjustments.
    
    
    54
    
    
    
    44
    
    
    
    47Balance  end of year
    
    
    55,094
    
    
    
    53,731
    
    
    
    35,567Retained earnings (accumulated deficit)Balance  beginning of year
    
    
    473,563
    
    
    
    90,427
    
    
    
    (61,618
    )Net income
    
    
    240,281
    
    
    
    407,178
    
    
    
    152,045Repurchase of common shares
    
    
    (33,989
    )
    
    
    
    
    
    
    Dividends on common shares
    
    
    (94,844
    )
    
    
    (24,042
    )
    
    
    Balance  end of year
    
    
    585,011
    
    
    
    473,563
    
    
    
    90,427Total Shareholders Equity
    
    $
    1,751,944
    
    
    $
    1,657,705
    
    
    $
    1,252,535
 The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. F-6




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MONTPELIER RE HOLDINGS LTD. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of United States Dollars)
 2004
    
    
    2003
    
    
    2002Cash flows provided by operating activities:Net income
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045Adjustments to reconcile net income to net cash
provided by operating activities:Accretion (amortization) of premium/(discount) on
fixed maturities
    
    
    14,640
    
    
    
    14,679
    
    
    
    3,803Depreciation
    
    
    1,808
    
    
    
    903
    
    
    
    364Compensation recognized under stock option plan
    
    
    2,305
    
    
    
    4,040
    
    
    
    5,395Net realized gains on investments
    
    
    (7,248
    )
    
    
    (7,631
    )
    
    
    (7,716
    )Realized gain on disposal of equipment
    
    
    (68
    )
    
    
    
    
    
    
    Amortization of deferred financing costs
    
    
    
    
    
    
    1,325
    
    
    
    680Accretion of Senior Notes
    
    
    120
    
    
    
    50
    
    
    
    Change in:Unearned premium ceded
    
    
    (7,072
    )
    
    
    (6,158
    )
    
    
    (3,752
    )Premiums receivable
    
    
    34,138
    
    
    
    (60,693
    )
    
    
    (147,075
    )Funds withheld
    
    
    (1,406
    )
    
    
    16,783
    
    
    
    (20,507
    )Deferred acquisition costs
    
    
    786
    
    
    
    (14,936
    )
    
    
    (44,865
    )Reinsurance recoverable
    
    
    (86,973
    )
    
    
    8,929
    
    
    
    (16,656
    )Accrued investment income
    
    
    (3,156
    )
    
    
    (7,609
    )
    
    
    (11,358
    )Other assets
    
    
    496
    
    
    
    66
    
    
    
    (1,387
    )Loss and loss adjustment expense reserves
    
    
    299,750
    
    
    
    103,676
    
    
    
    146,115Unearned premium
    
    
    (31,127
    )
    
    
    77,673
    
    
    
    240,858Reinsurance balances payable
    
    
    49,974
    
    
    
    22,487
    
    
    
    2,448Accounts payable, accrued expenses and other liabilities
    
    
    12,388
    
    
    
    20,684
    
    
    
    (2,889
    )Net change in currency translation adjustments
    
    
    54
    
    
    
    44
    
    
    
    47Amount due to affiliates
    
    
    
    
    
    
    
    
    
    
    (324
    )Net cash provided by operating activities
    
    
    519,690
    
    
    
    581,490
    
    
    
    295,226Cash flows used in investing activities:Purchases of fixed maturities
    
    
    (1,501,642
    )
    
    
    (1,991,760
    )
    
    
    (1,922,773
    )Purchases of equity investments
    
    
    (10,338
    )
    
    
    (34,204
    )
    
    
    Purchases of other investment
    
    
    (20,000
    )
    
    
    
    
    
    
    Proceeds from sale and maturity of fixed maturities
    
    
    1,123,882
    
    
    
    1,322,003
    
    
    
    1,216,475Proceeds from sale of equity investments
    
    
    11,769
    
    
    
    2,585
    
    
    
    Investment of securities lending collateral
    
    
    (66,332
    )
    
    
    (354,524
    )
    
    
    Payment on settlement of interest rate swap
    
    
    
    
    
    
    (1,002
    )
    
    
    Purchases of equipment
    
    
    (2,993
    )
    
    
    (1,072
    )
    
    
    (3,112
    )Sale of equipment
    
    
    759
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (464,895
    )
    
    
    (1,057,974
    )
    
    
    (709,410
    )Cash flows (used in) provided by financing activities:Issue of common shares
    
    
    10,612
    
    
    
    
    
    
    
    245,053Repurchase of common shares
    
    
    (65,476
    )
    
    
    
    
    
    
    Securities lending collateral received
    
    
    66,332
    
    
    
    354,524
    
    
    
    Repayment of debt
    
    
    
    
    
    
    (150,000
    )
    
    
    Net proceeds received from issuance of Senior Notes
    
    
    
    
    
    
    248,792
    
    
    
    Dividends paid
    
    
    (95,274
    )
    
    
    
    
    
    
    Direct equity offering expenses
    
    
    
    
    
    
    (170
    )
    
    
    (18,300
    )Amount paid to affiliate for overpayment of subscription
    
    
    
    
    
    
    
    
    
    
    (250
    )Net cash (used in) provided by financing activities
    
    
    (83,806
    )
    
    
    453,146
    
    
    
    226,503Decrease in cash and cash equivalents
    
    
    (29,011
    )
    
    
    (23,338
    )
    
    
    (187,681
    )Cash and cash equivalents  Beginning of year
    
    
    139,587
    
    
    
    162,925
    
    
    
    350,606Cash and cash equivalents  End of year
    
    $
    110,576
    
    
    $
    139,587
    
    
    $
    162,925
 The accompanying Notes to the Consolidated Financial Statements are an
integral part of the Consolidated Financial Statements. F-7




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MONTPELIER RE HOLDINGS LTD. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004 and 2003
(Expressed in thousands of United States Dollars,
except per share amounts or as where otherwise described)
 1. General Montpelier Re Holdings Ltd. (the Company) was incorporated under the laws of Bermuda on
November 14, 2001. The Company, through its principal operating subsidiary Montpelier
Reinsurance Ltd. (Montpelier Re), is a provider of global property and casualty reinsurance
and insurance products. Montpelier Re is incorporated in Bermuda and is registered as a Class
4 insurer under The Insurance Act 1978 (Bermuda), Amendments Thereto and Related Regulations
(The Act). On July 23, 2004, the Company incorporated Montpelier Agency Ltd. (MAL),
another wholly-owned subsidiary of the Company, to provide insurance management services. MAL
has not yet commenced operations. Montpelier Re has two subsidiaries: Montpelier Marketing Services (UK) Limited (MMSL) and
Montpelier Holdings (Barbados) SRL (MHB). MMSL was incorporated on November 19, 2001, and
provides business introduction and other support services to Montpelier Re. MHB, a Barbados
registered society with Restricted Liability incorporated on July 25, 2002, is the registered
holder of certain types of securities, including United States equity securities. Loudoun Re
(Loudoun) is a captive insurance company incorporated in the United States. Montpelier Re has
no equity investment in Loudoun; however, Montpelier Re financed Loudoun during the fourth
quarter of 2004 through the issuance of a surplus note. Under FIN 46R, Loudoun is consolidated
into the financial statements of Montpelier Re. Montpelier Re has also established a
trust known as the Montpelier Re Foundation to promote or carry out charitable purposes. This
trust is not consolidated into the financial statements of the Company. 2. Significant Accounting Policies Basis of Presentation The Companys financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The preparation of
financial statements in accordance with GAAP requires management to make estimates and
assumptions that affect reported and disclosed amounts of assets and liabilities, as well as
disclosure of contingent assets and liabilities as at the balance sheet date and the reported
amounts of revenues and expenses during the reporting period. Estimates also affect the reported
amounts of income and expenses for the reporting period. Actual results could differ materially
from those estimates. Premiums and related costs Premiums are recognized as written for the full period of the contract as of the date that
the contract is bound. The Company writes both excess of loss and pro-rata contracts. For the majority of excess of loss contracts, written premium is based on the deposit
premium as defined in the contract. Subsequent adjustments to the deposit premium are
recognized in the period in which they are determined. For excess of loss and pro-rata
contracts where no deposit premium is specified in the contract, written premium is recognized
based on estimates of ultimate premiums provided by the ceding companies. Initial estimates of
written premium are recognized in the period in which the underlying risks incept. Subsequent
adjustments, based on reports of actual premium by the ceding companies, or revisions in
estimates, are recorded in the period they are determined. Premiums are earned ratably over the term of the reinsurance contract. The portion of the
premium related to the unexpired portion of the contract is reflected in unearned premium. Premiums receivable are recorded at amounts due less any required provision for doubtful
accounts. Where contract terms require the reinstatement of coverage after a ceding companys loss,
the mandatory reinstatement premiums are recorded as written premium when the loss event
occurs, and are earned ratably over the remaining contract risk period. Acquisition costs are comprised of ceding commissions, brokerage, premium taxes and other
expenses that relate directly to the writing of reinsurance contracts. Deferred acquisition
costs are amortized over the F-8




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terms of the related contracts and are limited to their estimated realizable value based
on the related unearned premium, anticipated claims expenses and investment income. Acquisition
costs also include profit commission. Reinsurance In the normal course of business, the Company seeks to reduce the loss that may arise from
events that could cause unfavorable underwriting results by reinsuring certain levels of risk
in various areas of exposure with other insurers or reinsurers. The Company remains liable in
the event that it is unable to collect amounts due from its own reinsurers, and with respect to
certain contracts that carry underlying reinsurance protection, the Company would be liable in
the event that the ceding companies are unable to collect amounts due from the underlying third
party reinsurers. The Company records provisions for uncollectible underlying reinsurance
recoverable when collection becomes unlikely. The Company is selective in regard to its
reinsurers, placing reinsurance only with reinsurers with a strong financial condition,
industry ratings and underwriting ability. The Company monitors the financial condition and
ratings of its reinsurers on an ongoing basis. Reinsurance recoverable includes the Companys share of balances due from the underlying
third party reinsurance contracts for paid losses, unpaid loss and loss adjustment expenses and
reserves for losses incurred but not reported. Initial estimates of reinsurance recoverable are
recognized in the period in which the loss event occurs. Subsequent adjustments, based on
reports of actual amounts recoverable by ceding companies, are recorded in the period they are
determined. Funds Withheld Funds held by reinsured companies represent insurance balances retained by ceding companies for a
period in accordance with contractual terms. The Company generally earns investment income on
these balances during the period funds are held. Loss and Loss Adjustment Expense Reserves Loss and loss adjustment expense reserves are maintained by the Company to cover the
estimated liability for both reported and unreported claims. A significant portion of the
Companys business is property catastrophe and other classes with higher attachment points of
coverage. Reserving for losses in such programs is inherently complicated in that losses in
excess of the attachment level of the Companys policies are characterized by high severity and
low frequency and other factors which could vary significantly as claims are settled. This
limits the volume of industry claims experience available from which to reliably predict
ultimate losses following a loss event. In addition, the Company has limited past loss
experience due to its short operating history, which increases the inherent uncertainty in
estimating ultimate loss levels. Loss and loss adjustment expense reserves include a component for outstanding case
reserves for which claims have been reported and a component for losses incurred but not
reported (IBNR). Case reserve estimates are initially set on the basis of loss reports
received from third parties. Estimated IBNR reserves consist of a provision for additional
development in excess of the case reserves reported by ceding companies as well as a provision
for claims which have occurred but which have not yet been reported to us by ceding companies.
IBNR reserves are estimated by management using various actuarial methods as well as a
combination of our own loss experience, historical insurance industry loss experience, our
underwriters experience, estimates of pricing adequacy trends, and managements professional
judgement. The Companys internal actuaries review the reserving assumptions and methodologies
on a quarterly basis and the Companys loss estimates are subject to an annual corroborative
review by independent actuaries using generally accepted actuarial principles. The uncertainties inherent in the reserving process, delays in ceding companies reporting
losses to the Company, together with the potential for unforeseen adverse developments, may
result in loss and loss adjustment expenses significantly greater or less than the reserve
provided at the time of the loss event. Reserving can prove especially difficult should a
significant loss event take place near the end of an accounting period, particularly if the
loss is a catastrophic event. Loss and loss adjustment expense reserve estimates and the
methodology of estimating such reserves are regularly reviewed and updated as new information
becomes known. Any resulting adjustments are reflected in income in the period in which they
become known. F-9




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Investments and cash Fixed maturity and equity investments are classified as available for sale and are
carried at fair value, based on quoted market prices. The net unrealized appreciation or
depreciation on fixed maturities and equity investments are included in accumulated other
comprehensive income. Other investments are recorded at estimated fair value based on financial information
received and other information available to management, including factors restricting the
liquidity of the investments. Investments are reviewed to determine if they have sustained an impairment in value that
is considered to be other than temporary. This review involves consideration of several factors
including (i) the time period during which there has been a significant decline in value, (ii)
an analysis of the liquidity, business prospects and overall financial condition of the issuer,
(iii) the significance of the decline, and (iv) the Companys intent and ability to hold the
investment for a sufficient period of time for the value to recover. The identification of
potentially impaired investments involves significant management judgment, which includes the
determination of their fair value and the assessment of whether any decline in value is other
than temporary. Unrealized depreciation in the value of individual investments, considered by
management to be other than temporary, is charged to income in the period it is determined. Investments are recorded on a trade date basis. Gains and losses on sales of investments
are determined on the first-in, first-out basis and are included in investment income when
realized. Net investment income is stated net of investment management and custody fees. Investment
income is recognized when earned and includes interest and dividend income together with the
amortization of premiums and the accretion of discounts on fixed maturities purchased at amounts
different from their par value. Cash and cash equivalents include amounts held in banks and time deposits with maturities
of less than three months from the date of purchase. The Company participates in a securities lending program whereby certain of its fixed
maturity investments are loaned to other institutions for short periods of time through a
lending agent. The Company maintains control over the securities it lends, retains the earnings
and cash flows associated with the loaned securities and receives a fee from the borrower for
the temporary use of the securities. Collateral in the form of cash, government securities and
letters of credit is required at a rate of 102% of the market value of the loaned securities
and is monitored and maintained by the lending agent. Earnings (Loss) Per Share The calculation of basic earnings (loss) per common share is based on the weighted average
number of common shares and excludes any dilutive effects of warrants and options. The
calculation of diluted earnings (loss) per common share assumes the exercise of all dilutive
warrants and options, using the treasury stock method. Warrants and options are dilutive when the quoted market value of the Companys common shares exceeds the strike price
of the warrants or options. Foreign Currency Translation The Companys functional currency is the United States dollar. Assets and liabilities of
foreign operations whose functional currency is not the United States dollar are translated at
exchange rates in effect at the balance sheet date. Revenue and expenses of such foreign
operations are translated at average exchange rates during the year. The effect of translation
adjustments of foreign subsidiaries is included in accumulated other comprehensive income. Other monetary assets and liabilities denominated in foreign currencies have been
translated into United States dollars at the rates of exchange prevailing at the balance sheet
date. Income and expense transactions originating in foreign currencies are translated at the
average rate of exchange prevailing on the date of the transaction. Gains and losses on foreign
currency translation are recognized in income. Employee Incentive Plans Performance Unit Plan (the PUP).Performance units have been granted to executive
officers and certain other key employees. The ultimate value of these performance units, which
vest at the end of three-year F-10




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##### Table of Contents



performance periods, is dependent upon the Companys achievement of specific performance
targets over the course of the overlapping three-year periods and the market value of the
Companys shares at the end of the vesting period. Performance units are payable in cash, common
stock or a combination of both. The liability is based on the number of units granted, the share
price at the end of the respective fiscal period end, plus an
adjustment for any dividends paid out during the performance period and an assumption of a 100% harvest ratio,
unless otherwise adjusted, and is expensed over the vesting period of the performance units
granted. At the end of the sixth quarter and every quarter thereafter of each three-year
performance period, the Company reassesses the projected results for each three year performance
period and adjusts the accrued PUP liability as necessary. The Company recalculates the
liability under the PUP as the financial results evolve and the share price changes and reflects
such adjustments in income in the period in which they are determined. Final determination of
actual performance and amount of payment is at the sole discretion of the Compensation and
Nominating Committee of the Board of Directors. Option Plan.The Company has adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-based Compensation. Accordingly, the Company recognizes the compensation
expense for stock option grants based on the fair value of the award on the date of grant. The
compensation expense is recognized over the vesting period of each grant, with a corresponding
recognition of the equity expected to be issued in additional paid-in capital. Deferred Compensation Plan.The Company provides a deferred compensation plan (DCP) to
executive officers and certain other key employees, whereby the individual can elect to defer
receipt of compensation by choosing to theoretically transfer compensation to certain investment
options, including a phantom share investment option and investment fund options. The DCP would
be an unfunded obligation of the Company and would be included within accounts payable, accrued
expenses and other liabilities. 3. Investments The amortized cost, fair value and related gross unrealized gains and losses on our
investment portfolio are as follows: Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedAt December 31, 2004
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed Maturities:U.S. government
    
    $
    416,140
    
    
    $
    58
    
    
    $
    4,363
    
    
    $
    411,835U.S. government-sponsored enterprises
    
    
    952,326
    
    
    
    3,557
    
    
    
    2,234
    
    
    
    953,649Non U.S. government
    
    
    19,987
    
    
    
    
    
    
    
    73
    
    
    
    19,914Corporate debt securities
    
    
    713,755
    
    
    
    10,072
    
    
    
    3,161
    
    
    
    720,666Mortgage-backed and asset-backed
securities
    
    
    218,021
    
    
    
    2,417
    
    
    
    1,229
    
    
    
    219,2092,320,229
    
    
    
    16,104
    
    
    
    11,060
    
    
    
    2,325,273Equity investments
    
    
    32,239
    
    
    
    13,172
    
    
    
    56
    
    
    
    45,355Other investments
    
    
    80,758
    
    
    
    37,322
    
    
    
    627
    
    
    
    117,453Total
    
    $
    2,433,226
    
    
    $
    66,598
    
    
    $
    11,743
    
    
    $
    2,488,081
 Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedAt December 31, 2003
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed Maturities:U.S. government
    
    $
    458,368
    
    
    $
    2,797
    
    
    $
    728
    
    
    $
    460,437U.S. government-sponsored enterprises
    
    
    923,132
    
    
    
    11,351
    
    
    
    318
    
    
    
    934,165Corporate debt securities
    
    
    406,102
    
    
    
    10,930
    
    
    
    376
    
    
    
    416,656Mortgage-backed and asset-backed
securities
    
    
    164,273
    
    
    
    749
    
    
    
    115
    
    
    
    164,9071,951,875
    
    
    
    25,827
    
    
    
    1,537
    
    
    
    1,976,165Equity investments
    
    
    31,811
    
    
    
    5,770
    
    
    
    17
    
    
    
    37,564Other investments
    
    
    60,758
    
    
    
    23,596
    
    
    
    
    
    
    
    84,354Total
    
    $
    2,044,444
    
    
    $
    55,193
    
    
    $
    1,554
    
    
    $
    2,098,083
 F-11




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##### Table of Contents



The following table sets forth the composition of the cost or amortized cost of fixed
maturities by ratings assigned by rating agencies (e.g. Standard & Poors Corporation). Cost orAmortizedAt December 31, 2004
    
    Cost
    
    
    %RatingsU.S. government
    
    $
    416,140
    
    
    
    17.9
    %U.S. government-sponsored enterprises
    
    
    952,326
    
    
    
    41.0Non U.S. government
    
    
    19,987
    
    
    
    0.9AAA
    
    
    232,794
    
    
    
    10.0AA
    
    
    118,202
    
    
    
    5.1A
    
    
    410,289
    
    
    
    17.7BBB
    
    
    166,974
    
    
    
    7.2BB
    
    
    162
    
    
    
    B
    
    
    231
    
    
    
    Other
    
    
    3,124
    
    
    
    0.2$
    2,320,229
    
    
    
    100.0
    %
 Cost orAmortizedAt December 31, 2003
    
    Cost
    
    
    %RatingsU.S. government
    
    $
    458,368
    
    
    
    23.5
    %U.S. government-sponsored enterprises
    
    
    923,132
    
    
    
    47.3AAA
    
    
    199,034
    
    
    
    10.2AA
    
    
    112,532
    
    
    
    5.8A
    
    
    253,911
    
    
    
    13.0BBB
    
    
    4,898
    
    
    
    0.2$
    1,951,875
    
    
    
    100.0
    %
 The contractual maturities of fixed maturity investments are shown below: Years ended December 31,
    
    2004
    
    
    2003Cost or
    
    
    
    
    
    
    Cost orAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueDue within one year
    
    $
    5,019
    
    
    $
    5,000
    
    
    $
    71,295
    
    
    $
    71,795Due after one year through five years
    
    
    1,873,661
    
    
    
    1,874,372
    
    
    
    1,601,406
    
    
    
    1,623,045Due after five years through ten years
    
    
    216,998
    
    
    
    219,616
    
    
    
    110,003
    
    
    
    110,843Due after ten years
    
    
    6,530
    
    
    
    7,076
    
    
    
    4,898
    
    
    
    5,575Mortgage-backed and asset-backed
securities
    
    
    218,021
    
    
    
    219,209
    
    
    
    164,273
    
    
    
    164,907$
    2,320,229
    
    
    $
    2,325,273
    
    
    $
    1,951,875
    
    
    $
    1,976,165
 Actual maturity may differ from contractual maturity because certain borrowers have the
right to call or prepay certain obligations with or without call or prepayment penalties.  The analysis of net realized gains and the change in net unrealized gains on investments
is as follows: Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Gross realized gains

    
    $
    9,312
    
    
    $
    13,859
    
    
    $
    8,828Gross realized losses
    
    
    (2,064
    )
    
    
    (5,226
    )
    
    
    (1,112
    )Realized loss on settlement of interest rate swap
    
    
    
    
    
    
    (1,002
    )
    
    
    Net realized gains on investments
    
    
    7,248
    
    
    
    7,631
    
    
    
    7,716Net unrealized gains
    
    
    1,309
    
    
    
    18,120
    
    
    
    33,642Total realized and unrealized gains on investments
    
    $
    8,557
    
    
    $
    25,751
    
    
    $
    41,358
 F-12




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##### Table of Contents



Net investment income is derived from the following sources: Year ended December 31,
    
    2004
    
    
    2003
    
    
    2002Fixed maturities
    
    $
    82,180
    
    
    $
    65,902
    
    
    $
    44,137Net amortization of premium/discount
    
    
    (14,640
    )
    
    
    (14,603
    )
    
    
    (3,803
    )Equity investments
    
    
    1,300
    
    
    
    407
    
    
    
    Cash and cash equivalents
    
    
    2,270
    
    
    
    1,506
    
    
    
    1,677Securities lending
    
    
    588
    
    
    
    157
    
    
    
    71,698
    
    
    
    53,369
    
    
    
    42,011Net investment expenses (1)
    
    
    (2,626
    )
    
    
    (3,221
    )
    
    
    (2,263
    )$
    69,072
    
    
    $
    50,148
    
    
    $
    39,748
   (1)
    
    $2.4 million, $3.2 million and $2.1 million relates to White Mountains Advisors LLC for
2004, 2003 and 2002, respectively. The following is an analysis of how long each of the available for sale securities held at
December 31, 2004 had been in a continued unrealized loss position: Equal to or greaterLess than 12 months
    
    
    than 12 monthsGross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    UnrealizedMarket Value
    
    
    Losses
    
    
    Market Value
    
    
    LossesFixed Maturities:U.S. government
    
    $
    352,501
    
    
    $
    4,363
    
    
    $
    
    
    
    $
    U.S.
government-sponsored
enterprises
    
    
    494,771
    
    
    
    2,234
    
    
    
    
    
    
    
    Non U.S. government
    
    
    19,914
    
    
    
    73
    
    
    
    
    
    
    
    Corporate debt securities
    
    
    314,191
    
    
    
    3,120
    
    
    
    6,074
    
    
    
    41Mortgage-backed and
asset-backed securities
    
    
    162,833
    
    
    
    1,200
    
    
    
    2,263
    
    
    
    29Equity investments
    
    
    1,457
    
    
    
    56
    
    
    
    
    
    
    
    Total
    
    $
    1,345,667
    
    
    $
    11,046
    
    
    $
    8,337
    
    
    $
    70
 Proceeds from sales of available for sale securities for the years ended December 31, 2004,
2003 and 2002 were $1.1 billion, $1.3 billion and $1.2 billion, respectively. Gross realized
losses in 2004 included a loss of $0.1 million relating to an equity security for a decline in
value considered to be other than temporary. There were no such losses realized during 2003 or
2002. The aggregate fair value of securities available for sale in an unrealized loss position
was $1.4 billion and $397.2 million at December 31, 2004 and 2003, respectively. Of the gross
unrealized losses of $11.1 million at December 31, 2004, investments with a market value of $8.3
million have been in a continuous unrealized loss position for more than 12 months. Of the gross
unrealized losses of $1.5 million at December 31, 2003, no related investment had continuously
been in an unrealized loss position for more than 12 months. The Company has two facilities available for the issue of letters of credit with a total
value of $550.0 million and $500.0 million at December 31, 2004 and 2003, respectively. At
December 31, 2004 and 2003, approximately $252.0 million and $247.1 million, respectively, of
letters of credit were issued and outstanding under these facilities which were secured by
investments of approximately $277.2 million and $271.8 million, respectively. Securities Lending The Company participates in a securities lending program whereby certain of its fixed
maturity investments are loaned to other institutions for short periods of time through a
lending agent. The Company receives a fee from the borrower for the temporary use of the
securities. Collateral in the form of cash, F-13




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##### Table of Contents



government securities and letters of credit is required at a rate of 102% of the market
value of the loaned securities and is held by a third party. The Company had $415.3 million and
$348.9 million in securities on loan at December 31, 2004 and 2003, respectively. Other Investments The Company has an investment in the common shares of Aspen Insurance Holdings Limited
(Aspen), the Bermuda-based holding company of Aspen Insurance UK Limited (Aspen Re). At
December 31, 2004, the Company owned 4.0 million shares of Aspen, which represented
approximately 5.8% of Aspen on an undiluted basis. Aspen completed their initial public offering
on December 4, 2003. Our investment in Aspen is carried at quoted market value at December 31,
2004. At December 31, 2003, the shareholders agreement and other restrictions presented
significant obstacles and uncertainties in the determination of the number of shares that could
be reasonably expected to qualify for sale within one year. As a result of this illiquidity, at
December 31, 2003 a portion of the total investment was considered restricted and was
discounted. The aggregate unrealized gain is included in accumulated
other comprehensive income. See Subsequent Events
regarding the Companys sale of a portion of our Aspen holdings. The carrying value of Aspen
at December 31, 2004 and 2003 was $98.1 million and $84.4 million, respectively. On
August 2, 2004, the Company invested an aggregate of
$20.0 million, or less than 2%, as part of an
investor group which included one of our major shareholders, acquiring the life and investments business of Safeco Corporation (since renamed
Symetra Financial Corporation) pursuant to a Stock Purchase Agreement. Symetra is an unquoted
investment and is carried at estimated fair value at
December 31, 2004 of $19.4 million based on reported net asset values and other
information available to management, with the unrealized loss included in accumulated
other comprehensive income. 4. Loss and Loss Adjustment Expense Reserves Loss and loss adjustment expense reserves are estimates subject to variability, and the
variability could be material in the near term. The variability arises because all events
affecting the ultimate settlement of claims have not taken place and may not take place for some
time. Variability can be caused by the receipt of additional claim information, changes in
judicial interpretation of contracts or significant changes in the severity or frequency of
claims from historical trends. Loss and loss adjustment expense reserve estimates are based on all relevant information
available to the Company. The Company believes that the reserves for loss and loss adjustment
expenses are sufficient to cover losses that fall within coverages assumed by the Company;
however, there can be no assurance that actual losses will not exceed the Companys total
reserves. Activity in the reserve for loss and loss adjustment expenses is summarized as follows: Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Net reserves at January 1
    
    $
    242,064
    
    
    $
    129,459
    
    
    $
    Net losses incurred (released) related to:Current year
    
    
    502,341
    
    
    
    222,261
    
    
    
    133,310Prior years
    
    
    (97,538
    )
    
    
    (58,154
    )
    
    
    Total net incurred losses
    
    
    404,803
    
    
    
    164,107
    
    
    
    133,310Net paid losses related to:Current year
    
    
    150,737
    
    
    
    30,029
    
    
    
    4,193Prior years
    
    
    41,289
    
    
    
    23,188
    
    
    
    Total net paid losses
    
    
    192,026
    
    
    
    53,217
    
    
    
    4,193Effect of foreign exchange movements(1)
    
    
    
    
    
    
    1,715
    
    
    
    342Total net reserves as at December 31
    
    
    454,841
    
    
    
    242,064
    
    
    
    129,459Losses recoverable as at December 31
    
    
    94,700
    
    
    
    7,727
    
    
    
    16,656Total gross reserves as at December 31
    
    $
    549,541
    
    
    $
    249,791
    
    
    $
    146,115
  (1)
    
    For 2004, the effect of foreign currency movements on loss
and loss adjustment expense reserves has been included in loss and
loss adjustment expenses in the statement of operations as opposed to
net foreign exchange gains as in prior years. The December 31, 2004, 2003 and 2002 gross reserve balance comprises reserves for reported
claims of $200.5 million, $64.9 million and $38.0 million, respectively and reserves for claims
incurred but not reported of $349.0 million, $184.8 million and $108.1 million, respectively.
The increase in incurred losses for the current year primarily relates to the four hurricanes and two
Japanese typhoons which occurred during the third quarter of 2004. F-14




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For the year ended December 31, 2004 the Companys favorable development on net losses
related to prior years is summarized as follows: Property
Specialty: Both the frequency and severity of reported losses was lower
than the assumed reporting pattern of losses established for this class of business at December
31, 2003. This category accounted for approximately 55% of the favorable development. Property Catastrophe: Reserves at December 31, 2003 included reserves in respect of the
European Floods of August 2002, Hurricane Isabel which occurred in September 2003, and the
October 2003 wildfires in California. Loss development on these
events was significantly
less than the Companys initial assumptions. Other Specialty: The lack of development in 2004 combined with the increasing weight
placed on the Companys actual experience in selecting a loss ratio led to a decrease in the
Companys expected loss ratio for prior years. QQS: During 2004 the Company reduced the expected loss ratio based on additional
information provided by ceding companies. For the year ended December 31, 2003, the Companys favorable development on net losses
related to prior periods is summarized as follows: Property
Specialty: Both the frequency and severity of reported losses was lower than
the assumed reporting pattern of losses established for this class of business at December 31,
2002. A reduction in reported losses during 2003 also contributed to the favorable development
during 2003. This category accounted for approximately two-thirds of the favorable development. Property Catastrophe: Reserves at December 31, 2002 included reserves in respect of the
European Floods and Hurricane Lili whose development was significantly less than the
Companys initial assumptions. This category, combined with the Property Specialty category,
accounted for the majority of the favorable development. Other Specialty: The lack of development in 2003 combined with the increasing weight placed
on the Companys actual experience in selecting a loss ratio led to a decrease in our expected
loss ratio. QQS: During 2003 the Company reduced the expected loss ratio based on additional
information provided by ceding companies. Some of the reduction in incurred losses was also due
to revised estimated ultimate premiums that were considerably lower than those at December 31,
2002. 5. Reinsurance In 2004 and 2003, the Company purchased retrocessional excess of loss protection against
large risk losses on the direct insurance and facultative book and against small to medium-size
catastrophes on the Companys overall property writings. In addition, in 2004 the Company
purchased retrocessional stop-loss protection against losses on the Companys casualty writings.
For certain pro-rata contracts the subject direct insurance contracts carry underlying
reinsurance protection from third party reinsurers. The Company records its pro-rata share of
gross premiums from the direct insurance contracts as gross written premiums and records its
pro-rata share of amounts incurred by the ceding company for the underlying third party
reinsurance coverage as reinsurance premiums ceded. Reinsurance recoverable includes the Companys share of balances due from reinsurance
contracts for paid losses, unpaid loss and loss adjustment expenses and reserves for losses
incurred but not reported. Initial estimates of reinsurance recoverable are recognized in the
period in which the loss event occurs. Subsequent adjustments are recorded in the period they
are determined. The earned reinsurance premiums ceded were $80.7 million, $25.6 million and
$38.0 million for the years ended December 31, 2004, 2003 and 2002, respectively. Total
recoveries netted against loss and loss adjustment expenses was $88.5 million, $(8.4) million
and $16.7 million for the years ended December 31, 2004, 2003 and 2002, respectively. The Company remains liable in the event that it is unable to collect amounts due from its
own reinsurers, and with respect to certain contracts that carry underlying reinsurance
protection. The Company would be F-15




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##### Table of Contents



liable in the event that the ceding companies are unable to collect amounts due from the
underlying third party reinsurers. The Company records provisions for uncollectible underlying
reinsurance recoverable when collection becomes unlikely. There were no such provisions recorded
for uncollectible reinsurance recoverable amounts at
December 31, 2004, 2003 or 2002. Under the Companys
reinsurance security policy, reinsurers are generally required to be
rated A- or better by A.M. Best. The Company will consider
reinsurers that are not rated or do not fall within the above rating category on a case-by-case basis. 6. Debt and Financing Arrangements Senior Notes On August 4, 2003, the Company issued $250.0 million aggregate principal amount of senior
unsecured debt (the Senior Notes) at an issue price of 99.517%. The net proceeds were used in
part to repay the amount outstanding under the term loan facility (see below) with the remainder
used for general corporate purposes. The Senior Notes bear interest at a rate of 6.125%, payable
semi-annually in arrears on February 15 and August 15 of each year. Unless previously redeemed,
the Senior Notes will mature on August 15, 2013. The Company may redeem the Senior Notes at any
time and from time to time, in whole or in part, at a make-whole redemption price, however,
the Company has no current intention of calling the notes. The Senior Notes do not contain any
covenants regarding financial ratios or specified levels of net worth or liquidity to which the
Company must adhere. The Company incurred interest expense on the Senior Notes for the year ended December 31,
2004 and 2003 of $15.4 million and $6.4 million and paid interest of $15.8 million and $nil,
respectively. Term Loan Facility and 364-Day Revolver As part of the Companys formation and funding, the Company entered into a three-year term
loan facility with Bank of America, N.A. and a syndicate of commercial banks, with an aggregate
borrowing limit of $150.0 million. The Company borrowed $150.0 million under this facility at
the Companys formation. On August 4, 2003, using the net proceeds from the issuance of $250.0
million in Senior Notes (see above), the Company repaid the full amount under this facility. The
term loan facility required that the Company and/or certain of its subsidiaries comply with
specific covenants, including a tangible net worth covenant and a maximum leverage covenant, and
had a final maturity date of December 12, 2004. The facility also restricted the payment of
dividends. The Company was in compliance with all covenants during the time that the facility
was in place. On December 12, 2001, the Company obtained a $50.0 million revolving loan facility from a
syndicate of lenders, with the Company and its subsidiaries as borrowers and guarantors. The
facility was for general corporate purposes, and required that the Company and/or certain of its
subsidiaries maintained specific covenants, including a tangible net worth covenant and a
maximum leverage covenant. No amounts had been drawn down under this facility which was
cancelled concurrently with the repayment of the term loan facility on August 4, 2003. The
Company incurred interest expense for the term loan facility and
revolving loan facility for the years ended
December 31, 2003 and 2002 of $2.3 million and $4.5 million, respectively, at an average annual
interest rate of 1.7% and 2.2%, respectively, and paid interest of $2.8 million and $3.5
million, respectively. Letter of Credit Facilities In the normal course of business, the Company provides security to reinsureds as required
under contract provisions. Such security takes the form of a letter of credit issued by a bank
at the request of the Company. In order for the Company to write Lloyds Qualifying Quota Share
business, it must provide a letter of credit in favor of The Society and Council of Lloyds
(Lloyds) in accordance with Lloyds rules. Effective May 27, 2004 the Company entered into a
three-year Amended and Restated Letter of Credit Reimbursement and Pledge Agreement with Banc of
America Securities LLC and a syndicate of lending institutions for the provision of a letter of
credit facility for the account of Montpelier Re in favor of Lloyds or certain U.S. ceding
companies (Tranche A) in an amount of up to $250.0 million, and in favor of certain U.S.
ceding companies only (Tranche B) in an amount of up to $200.0 million of which up to $50.0
million may be used by the Company as a revolving line of credit for general corporate purposes.
On October 28, 2004, Montpelier Re exercised an option to increase the aggregate amount of
Tranche B by $50.0 million to $250.0 million. This agreement replaces the Letter of Credit
Reimbursement and Pledge Agreement with Fleet National Bank discussed below. Letters of credit
issued under this facility at December 31, 2004 were $252.0 million and the letter of credit and
the revolving line of credit were secured by cash and investments of approximately $277.2
million. F-16




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##### Table of Contents



The Letter of Credit Facility Agreement contains covenants that limit the Companys and
Montpelier Res ability, among other things, to grant liens on their assets, sell assets, merge
or consolidate. The Letter of Credit Facility Agreement also requires the Company to maintain
specific financial ratios and Montpelier Re to maintain certain credit ratings. If the Company
or Montpelier Re fails to comply with these covenants or meet these financial ratios, the
lenders could declare a default and begin exercising remedies against the collateral, Montpelier
Re would not be able to request the issuance of additional letters of credit and the Company
would not be able to borrow under the revolving line of credit. For the year ended December 31,
2004, the Company was in compliance with all covenants. Effective December 23, 2004, Montpelier Re entered into a $50.0 million Letter of Credit
Reimbursement and Pledge Agreement with HSBC Bank USA, National Association. The agreement is a
one year secured facility that allows Montpelier Re to issue up to $50.0 million in letters of
credit. The agreements covenants are the same as those described above under the above Letter
of Credit Facility Agreement with Banc of America Securities LLC. There were no letters of
credit issued under this facility at December 31, 2004. Effective June 20, 2003, the Company entered into a Letter of Credit Reimbursement and
Pledge Agreement with Fleet National Bank and a syndicate of lending institutions for the
provision of a letter of credit facility in favor of Lloyds in an amount of up to $250.0
million, and in favor of certain U.S. ceding companies in an amount of up to $200.0 million.
This facility has been superseded by the agreement discussed above with Banc of America
Securities LLC. Letters of credit outstanding under this facility in favor of Lloyds at
December 31, 2003 were $245.7 million and were secured by cash and investments of approximately
$270.3 million. The Company previously made arrangements with Barclays Bank PLC for the provision of an
additional letter of credit facility in favor of certain U.S. ceding companies in an amount of
up to $50.0 million which was cancelled on January 31, 2004. Letters of credit outstanding at
December 31, 2003 under the Barclays facility were approximately $1.4 million and were secured
by cash and investments of approximately $1.5 million. 7. Related Party Transactions As at December 31, 2004, two directors were employed by White Mountains Insurance Group,
which beneficially owned 19.4% and 22.9% of the Company at December 31, 2004 and 2003. The Company has engaged White Mountains Advisors LLC, a wholly owned indirect subsidiary of
White Mountains Insurance Group, to provide investment advisory and management services. The
Company pays investment management fees based on the month-end market values held under
management. The fees, which vary depending on the amount of assets under management, are
included in net investment income. The Company incurred an average fee of 0.11%, 0.17% and 0.19%
for the years ended December 31, 2004, 2003 and 2002, respectively. The Companys Chairman of
the Finance Committee is Deputy Chairman of the Board of Directors of White Mountains Insurance
Group, the Principal Executive Officer of White Mountains Advisors LLC and is the general
manager or investment manager of various funds which own less than 5% of the Company. Years
ended December 31, ($ in millions):
    
    2004
    
    
    2003
    
    
    2002Investment manager fees expensed
    
    $
    2.4
    
    
    $
    3.2
    
    
    $
    2.1Investment manager fees payable
    
    $
    0.7
    
    
    $
    0.9
    
    
    $
    0.6
 In the ordinary course of business, the Company entered into one reinsurance agreement with
OneBeacon Insurance Group, a subsidiary of White Mountains Insurance Group, for each of the years
ended December 31, 2004 and 2003. The Company entered into four reinsurance agreements with
OneBeacon Insurance Group for the year ended December 31, 2002. Aggregate annual premiums from
these agreements were $1.4 million, $1.2 million and $0.7 million, respectively, for the years
ended December 31, 2004, 2003 and 2002, respectively. F-17




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##### Table of Contents



8. Shareholders Equity Authorized and Issued At December 31, 2004 and 2003, the total authorized common voting shares of the Company
were 1,200,000,000, with a par value of 1/6 cent each. At December 31, 2004 and 2003, the total issued and outstanding shares of the Company were
62,131,232 and 63,392,597, respectively. The holders of common voting shares are entitled to
receive dividends and are allocated one vote per share, provided that, if the controlled shares
of any shareholder or group of related shareholders constitute more than 9.5 percent of the
outstanding common shares of the Company, their voting power will be reduced to 9.5 percent.
There are various restrictions on the ability of certain shareholders to dispose of their
shares. On October 15, 2002, the Company completed an initial public offering and issued 10,952,600
common shares for proceeds, net of fees, discounts and commissions of approximately $201.2
million. The Companys common shares began trading on the New York Stock Exchange on October 10,
2002. Costs associated with the sale of the shares, totaling approximately $18.3 million, were
deducted from the related proceeds. The net amount received in excess of common share par value
was recorded in additional paid-in capital. On July 1, 2003, the Company completed a secondary offering of 8,050,000 common shares.
Certain original investors sold an average of 24.4% of their holdings, which increased the
public ownership of the Companys shares by 12.7%. The secondary offering did not have any
impact on common shares outstanding. The Company did not receive any proceeds from the secondary
offering but was required to pay offering expenses of approximately $1.1 million which are
included in general and administrative expenses for the year ended December 31, 2003. On March 17, 2004, April 6, 2004 and November 22, 2004, different shareholders of the
Company completed secondary offerings of 4,785,540, 4,000,000 and 3,500,000 common shares,
respectively. The secondary offerings did not have any impact on common shares outstanding. The
Company did not receive any proceeds from the secondary offerings but was required to pay
offering expenses of approximately $ 0.5 million for each of the March 17, 2004 and April 6,
2004 secondary offerings only, which are included in general and administrative expenses for the
year ended December 31, 2004. On May 26, 2004 the Companys Board of Directors approved a plan to repurchase up to $150.0
million of the Companys shares from time to time depending on market conditions during a period
of up to 24 months. On June 2, 2004, the Company repurchased 1,263,865 common shares at $34.50
per common share for a total purchase price of $43.6 million. The closing market price per
common share on May 28, 2004 was $34.88. On August 5, 2004, the Company repurchased 625,000
common shares at $35.00 per common share for a total purchase price of $21.9 million. The
closing market price per common share on August 3, 2004 was $35.43. The Companys Chairman, President and Chief Executive Officer has adopted a written plan in
accordance with Rule 10b5-1 under the Securities Exchange Act of 1934 for the purpose of the
exercise of options and the sale of limited amounts of the Companys shares owned by him. The
plan covered the possible exercise of 600,000 options and share sales over a 12 month period
commencing March 3, 2004, subject to market conditions and the terms of the plan. Pursuant to
this plan, options for 500,000 common shares were exercised during the year ended December 31,
2004 at the exercise price of $16.67, resulting in an increase in common shares by their par
amount and an increase in additional paid-in capital of $8.3 million. Subsequent to December 31,
2004, 10,000 options and 90,000 options with an exercise price of $16.67 and $17.50,
respectively, were exercised for an additional 100,000 common shares, which has exhausted the
plan. During the year ended December 31, 2004, two other officers of the Company exercised
options for 127,500 common shares at an average exercise price of $17.87. Warrants The Companys founders provided their insurance industry expertise, resources and
relationships during the fourth quarter of 2001 to ensure that the Company would be fully
operational with key management in place in time for the January 2002 renewal season. In
consideration for the founders position and commitment, the Company issued warrants to the
founding shareholders to purchase, in the aggregate, up to 7,319,160.1 common shares. Warrants
will expire either five or ten years from the date of issue depending on the grant terms, and
will be exercisable at a price per share of $16.67, equal to the price per share paid by F-18




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##### Table of Contents



investors in the initial private offering. The warrant contracts may be settled using either the physical settlement or net-share
settlement methods. The warrants have been classified as equity instruments, in accordance with
EITF 00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Companys Own Stock. The warrants were initially measured at an aggregate fair value of
$61.3 million and reported as an expense and an addition to additional paid-in-capital for the
period ended December 31, 2001. The fair value of each warrant grant was estimated on the date of grant using the
Black-Scholes option-pricing model. The volatility assumption used, of approximately 30.0%, was
derived from the historical volatility of the share price of a range of publicly-traded Bermuda
reinsurance companies of a similar business nature to the Company. No allowance was made for any
potential liquidity associated with the private trading of the Companys shares. The other
assumptions used for grants in 2001 were as follows: risk free interest rate of 4.5%, expected
life of five or ten years as appropriate, and a dividend yield of nil%. Dividends Dividends
declared and paid on common voting shares and warrants during 2004 amounted to $1.36 per
common voting share and warrant. Dividends declared during 2003 were $0.34 per common voting share and warrant. The
total amount of dividends paid to holders of the common voting shares
and warrants during 2004 and
2003 was $95.3 million and $nil, respectively. There were no dividends declared or paid during
the periods ended 2002 or 2001. 9. Segment Reporting Management has determined that the Company operates in one segment only. The Company
focuses on writing global property and casualty reinsurance and insurance products. The following tables set forth a breakdown of the Companys gross premiums written by line
of business and by geographic area of risks insured for the years indicated ($ in millions): Gross Premiums Written by Line Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (1)Property Specialty
    
    $
    314.0
    
    
    
    37.5
    %
    
    $
    307.4
    
    
    
    37.9
    %
    
    $
    194.3
    
    
    
    32.0
    %Property Catastrophe
    
    
    330.3
    
    
    
    39.5
    
    
    
    315.4
    
    
    
    39.0
    
    
    
    186.0
    
    
    
    30.6Other Specialty
    
    
    186.8
    
    
    
    22.3
    
    
    
    134.1
    
    
    
    16.6
    
    
    
    55.7
    
    
    
    9.2Qualifying Quota Share
    
    
    5.9
    
    
    
    0.7
    
    
    
    52.8
    
    
    
    6.5
    
    
    
    171.7
    
    
    
    28.2Total
    
    $
    837.0
    
    
    
    100.0
    %
    
    $
    809.7
    
    
    
    100.0
    %
    
    $
    607.7
    
    
    
    100.0
    %
   (1)
    
    During 2003, the Company refined the classification of gross premiums written for certain
pro-rata contracts between the Property Specialty line and the Property Catastrophe and Other
Specialty lines. There was no effect on total gross premiums written. F-19




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##### Table of Contents



Gross Premiums Written
by Geographic Area of Risks Insured Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (3)USA and Canada
    
    $
    375.6
    
    
    
    44.9
    %
    
    $
    381.8
    
    
    
    47.1
    %
    
    $
    204.1
    
    
    
    33.6
    %Worldwide (1)
    
    
    249.7
    
    
    
    29.8
    
    
    
    227.6
    
    
    
    28.1
    
    

    
    309.9
    
    
    
    51.0United Kingdom and Ireland
    
    
    58.9
    
    
    
    7.0
    
    
    
    50.4
    
    
    
    6.2
    
    
    
    13.1
    
    
    
    2.2Japan
    
    
    36.5
    
    
    
    4.4
    
    
    
    32.8
    
    
    
    4.1
    
    
    
    20.6
    
    
    
    3.4Western Europe, excluding
the United Kingdom and
Ireland
    
    
    36.1
    
    
    
    4.3
    
    
    
    35.3
    

    
    
    4.4
    
    
    
    20.9
    
    
    
    3.4Worldwide, excluding USA
and Canada (2)
    
    
    29.9
    
    
    
    3.6
    
    
    
    35.8
    
    
    
    4.4
    
    
    
    11.9
    
    
    
    1.9Others (1.5% or less)
    
    
    50.3
    
    
    
    6.0
    
    
    
    46.0
    
    
    
    5.7
    
    
    
    27.2
    
    
    
    4.5Total
    
    $
    837.0
    
    
    
    100.0
    %
    
    $
    809.7
    
    
    
    100.0
    %
    
    $
    607.7
    
    
    
    100.0
    %
   (1)
    
    Worldwide comprises insurance and reinsurance contracts that insure or reinsure risks in
more than one geographic area.(2)
    
    Worldwide, excluding USA and Canada comprises insurance and reinsurance contracts that
insure or reinsure risks in more than one geographic area but specifically exclude the USA and
Canada.(3)
    
    During 2003, the Company refined the classification of gross premiums written between
geographic areas. There was no effect on total gross premiums written. The Qualifying Quota Share contracts are worldwide in nature, with the majority of business
related to North America and Europe. No such contracts have been written in 2004. The following table sets forth a breakdown of the Companys gross premiums written by broker
for the years indicated ($ in millions): Gross Premiums Written by Broker Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002 (2)Marsh
    
    $
    188.7
    
    
    
    24.8
    %
    
    $
    204.7
    
    
    
    28.1
    %
    
    $
    143.6
    
    
    
    23.8
    %Aon
    
    
    166.9
    
    
    
    21.9
    
    
    
    145.9
    
    
    
    20.0
    
    
    
    92.7
    
    
    
    15.4Benfield (1)
    
    
    133.9
    
    
    
    17.6
    
    
    
    147.1
    
    
    
    20.2
    
    
    
    163.1
    
    
    
    27.0Willis Group (1)
    
    
    104.1
    
    
    
    13.7
    
    
    
    120.9
    
    
    
    16.6
    
    
    
    148.1
    
    
    
    24.5Other brokers
    
    
    167.2
    
    
    
    22.0
    
    
    
    110.1
    
    
    
    15.1
    
    
    
    56.2
    
    
    
    9.3Total brokers
    
    
    760.8
    
    
    
    100.0
    %
    
    
    728.7
    
    
    
    100.0
    %
    
    
    603.7
    
    
    
    100.0
    %Direct (no broker)
    
    
    76.2
    
    
    
    
    
    
    
    81.0
    
    
    
    
    
    
    
    4.0Total
    
    $
    837.0
    
    
    
    
    
    
    $
    809.7
    
    
    
    
    
    
    $
    607.7
   (1)
    
    Includes QQS gross premiums written(2)
    
    During 2003, the Company refined the broker classifications. There was no effect on total
gross premiums written. F-20




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##### Table of Contents



10. Earnings Per Share The reconciliation of basic and diluted earnings per share is as follows: Years ended December 31,
    
    2004
    
    
    2003
    
    
    2002Basic earnings per common share:Net income available to common shareholders
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045Weighted average common shares outstanding
 Basic
    
    
    62,633,467
    
    
    
    63,392,597
    
    
    
    55,178,150Basic earnings per common share
    
    $
    3.84
    
    
    $
    6.42
    
    
    $
    2.76Diluted earnings per common share:Net income available to common shareholders
    
    $
    240,281
    
    
    $
    407,178
    
    
    $
    152,045Weighted average common shares outstanding
 Basic
    
    
    62,633,467
    
    
    
    63,392,597
    
    
    
    55,178,150Dilutive effect of warrants
    
    
    3,967,866
    
    
    
    3,110,351
    
    
    
    263,070Dilutive effect of share options
    
    
    1,105,639
    
    
    
    772,339
    
    
    
    15,921Weighted average common and common
equivalent shares outstanding  Diluted
    
    
    67,706,972
    
    
    
    67,275,287
    
    
    
    55,457,141Diluted earnings per common share
    
    $
    3.55
    
    
    $
    6.05
    
    
    $
    2.74
 11. Commitments and Contingencies Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentration of credit risk
consist principally of investments, cash and reinsurance balances. The investment portfolio is
managed following prudent standards of diversification. Specific provisions limit the allowable
holdings of a single issue or issuer. The Company believes that there are no significant
concentrations of credit risk associated with its investments. Concentrations of credit risk with
respect to reinsurance balances are limited due to their dispersion across various companies and
geographies. The Company did not have an aggregate investment in a single entity other than the
U.S. government and U.S. government-sponsored enterprises, in excess of 10% of the Companys
shareholders equity at December 31, 2004 or 2003. U.S. government-sponsored enterprises do not
have the full and complete support of the U.S. government and therefore the Company does face
credit risk in respect of these holdings. Concentrations of credit risk with respect to
reinsurance balances are limited due to their dispersion across various companies and geographies. The Company also underwrites a significant amount of its reinsurance and insurance business
through brokers and a credit risk exists should any of these brokers be unable to fulfill their
contractual obligations with respect to the payments of reinsurance and insurance balances to the
Company. Litigation The Company, in common with the insurance and reinsurance industry in general, is subject to
litigation and arbitration in the normal course of its business. The Company was not involved in
any material pending litigation or arbitration proceedings at December 31, 2004 or 2003. Lease Commitments The Company and its subsidiaries lease office space in the countries in which they operate
under operating leases, which expire at various dates. The Company has also entered into operating
leases for office equipment and furniture. Future minimum annual commitments under existing leases
and future leases to which the Company is committed, are expected to be as follows: 2005-$2.2 million; 2006-$2.9 million; 2007-$4.5 million; 2008-$4.5
million; and 2009-$4.6 million. 12. Employee Incentive Plans Long-Term Incentive Plan (LTIP) On January 8, 2002, the Company adopted a Long-Term Incentive Plan (the LTIP). Pursuant to
the terms of the LTIP, at the discretion of the Compensation Committee of the Board of Directors
(the Committee), various types of share-based incentive awards, including phantom performance
shares, performance units and options to acquire common shares, may be granted to executive
officers, and certain other principal employees. F-21




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##### Table of Contents



Performance Unit Plan (the PUP) The PUP is the Companys primary executive long-term incentive scheme. Performance units
entitle the recipient to receive, without payment to the Company, all, double, or a part of the
value of the units granted, depending on the achievement of specific financial or operating goals.
Performance units vest at the end of a three-year performance cycle, and can be denominated in
common shares at market value and are payable in cash, common shares or a combination thereof at
the discretion of the Committee. A total of 936,000 performance units were authorized under the PUP at December 31, 2004, 2003
and 2002 (or up to 1,872,000 common shares should the maximum harvest of 200% of units apply)
covering the three performance periods 2002  2004, 2003  2005 and 2004  2006. For the 2002-2004 cycle, the target combined ratio for a 100% harvest of value of the units
granted is an average combined ratio of 70%. The target for a maximum harvest of 200% of the value
of the units granted is a combined ratio of 50% or less. A combined ratio of 95% or more will
result in a harvest of nil. Straight line interpolation is used between these points. At December
31, 2004 the harvest ratio for this performance period was 132.0%, compared to the estimated
harvest ratio at December 31, 2003 of 137.5%.  On
February 28, 2005 the Company paid out the
2002  2004 PUP accrual of approximately $14.0 million. For the 2003-2005 cycle, the performance target for a 100% harvest ratio is the achievement of
a combined ratio of 72% over the period or the achievement of an annual total return to
shareholders of 18% as measured over the period. To date we have experienced a combined ratio
slightly less than 72% for this three-year performance period. Taking into account our results to
date as well as the estimated combined ratio for the remainder of the 2005 period, we have adjusted
the harvest ratio for this performance period from 100% at December 31, 2003 to 116.4% at December
31, 2004. This resulted in an increase in the PUP liability and PUP expense during the year ended
December 31, 2004. For the 2004-2006 cycle, the performance target for a 100% harvest ratio is the achievement of
a combined ratio of 72% over the period or the achievement of an annual total return to
shareholders of 18% as measured over the period. Consistent with our accounting policy, we are
estimating the PUP liability and PUP expense using a 100% harvest ratio and will reassess the
harvest ratio used in the calculation of the PUP liability at June 30, 2005 and each quarter
thereafter. As at December 31, 2004, the following table summarizes the impact of potential share price
changes and potential adjustments to the harvest ratio used in the liability calculation on the
amount of liability and expense recorded for the remaining three-year cycles ($ in thousands): Increase/Decrease in PUPIncrease/Decrease in PUP
    
    Accrual Resulting from aAccrual Resulting from a
    
    5% Increase/Decrease in$1 Increase/Decrease in
    
    the Estimated HarvestPUP Performance Period
    
    the Share Price*
    
    Ratio Applied**2003-05
    
    260
    
    4492004-06
    
    112
    
    225
   *
    
    Based on estimated harvest ratios applied at December 31, 2004**
    
    Based on the share price of $38.45 at December 31, 2004 An estimated 1% change in the estimated combined ratio is approximately equivalent to a 5%
change in the harvest ratio for the respective performance period. Option Plan Under the option plan, options expire ten years after the award date, and are subject to
various vesting periods. Options granted under the option plan may be exercised for common shares
upon vesting. No more common shares may be issued under the option plan under current Committee
approvals. F-22




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##### Table of Contents



A summary of options issued and related activity: 2004
    
    
    2003
    
    
    2002Options for
    
    
    Average
    
    
    Options for
    
    
    Average
    
    
    Options for
    
    
    AverageCommon
    
    
    Exercise
    
    
    Common
    
    
    Exercise
    
    
    Common
    

    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding beginning of year
    
    
    2,550,000
    
    
    $
    18.08
    
    
    
    2,550,000
    
    
    $
    18.08
    
    
    
    
    
    
    
    Options granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,550,000
    
    
    $
    18.08Options exercised
    
    
    627,500
    
    
    
    16.91
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding end of year
    
    
    1,922,500
    
    
    $
    18.47
    
    
    
    2,550,000
    
    
    $
    18.08
    
    
    
    2,550,000
    
    
    $
    18.08
 The following table summarizes the range of exercise prices for outstanding options at
December 31, 2004: WeightedAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedOptions
    
    
    Contractual
    
    
    Average
    
    
    Options
    
    
    AverageExercise Prices
    
    Outstanding
    
    
    Life
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercise Price$16.67
    
    
    10,000
    
    
    7.00 years
    
    $
    16.67
    
    
    
    10,000
    
    
    $
    16.67$17.50
    
    
    566,250
    
    
    7.15 years
    
    $
    17.50
    
    
    
    566,250
    
    
    
    17.50$18.33
    
    
    581,250
    
    
    7.15 years
    
    $
    18.33
    
    
    
    581,250
    
    
    
    18.33$19.17
    
    
    637,500
    
    
    7.15 years
    
    $
    19.17
    
    
    
    
    
    
    
    $20.00
    
    
    127,500
    
    
    7.75 years
    
    $
    20.00
    
    
    
    
    
    
    
    1,922,500
    
    
    
    
    
    
    
    
    
    
    
    1,157,500
    
    
    $
    17.91
 The fair value of each option grant was estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk free interest rate of
3.8% to 4.8% based on the applicable zero-coupon bond interest rates, expected life of two years
after vesting date as detailed below, expected volatility of 30.0% to 31.2% and a dividend yield of
0.0%. The weighted average fair value of options granted during 2002 is detailed below: Assumption of
    
    Fair Value onOptions
    
    
    
    
    Expected Life at
    
    Date of GrantExercise Prices
    
    Outstanding
    
    
    Vesting Date
    
    Date of Grant
    
    (in millions)$16.67
    
    
    510,000
    
    
    December 31, 2002
    
    3 years
    
    $
    2.1$17.50
    
    
    510,000
    
    
    December 31, 2003
    
    4 years
    
    
    2.4$17.50
    
    
    127,500
    
    
    September 30, 2003
    
    3 years
    
    
    0.6$18.33
    
    
    510,000
    
    
    December 31, 2004
    
    5 years
    
    
    2.7$18.33
    
    
    127,500
    
    
    September 30, 2004
    
    4 years
    
    
    0.7$19.17
    
    
    510,000
    
    
    December 31, 2005
    
    6 years
    
    
    2.9$19.17
    
    
    127,500
    
    
    September 30, 2005
    
    5 years
    
    
    0.8$20.00
    
    
    127,500
    
    
    September 30, 2006
    
    6 years
    
    
    0.82,550,000
    
    
    
    
    
    
    $
    13.0
 A compensation expense of $2.3 million, $4.0 million and $5.4 million was recorded in general
and administrative expenses for the years ended December 31, 2004, 2003 and 2002, respectively,
with a corresponding increase to additional paid-in capital. The expense represents the
proportionate accrual of the fair value of each grant based on the remaining vesting period. Deferred Compensation Plan (DCP) The DCP gives executive officers the ability to defer receipt of executive compensation,
including performance unit payouts, at no cost to the Company. Under the DCP, various investment
options are available including a phantom Company share tracking option, a fixed income investment
option and an equity fund F-23




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##### Table of Contents



investment option. The DCP would be a non-funded general obligation of the Company. 13. Taxation Bermuda The Company has received an assurance from the Bermuda government exempting it from all local
income, withholding and capital gains taxes until March 28, 2016. At the present time, no such
taxes are levied in Bermuda. United States The Company does not consider itself to be engaged in trade or business in the United States
and, accordingly, does not expect to be subject to United States taxation. Other MMSL is subject to the taxation laws of the United Kingdom and MHB is subject to the taxation
laws of Barbados. 14. Statutory Requirements Montpelier Re is registered under the Act. Under the Act, Montpelier Re is required to
annually prepare and file Statutory Financial Statements and a Statutory Financial Return. The Act
also requires Montpelier Re to maintain a minimum share capital of $1.0 million and to meet a
minimum solvency margin equal to the greater of $100.0 million, 50% of net premiums written or 15%
of the loss and loss adjustment expense reserves. To satisfy these requirements, Montpelier Re was
required to maintain a minimum level of statutory capital and surplus of $374.7 million and $389.0
million at December 31, 2004 and 2003, respectively. Montpelier Res statutory capital and surplus
was $2.0 billion and $1.8 billion at December 31, 2004 and 2003, respectively, of which $1.2
billion is fully paid up share capital. The Act limits the maximum amount of annual dividends or distributions paid by Montpelier Re
to the Company without the prior notification to, and in certain cases the approval of, the Bermuda
Monetary Authority of such payment. The maximum amount of dividends that could be paid by
Montpelier Re to the Company, without such notification, was $489.4 million and $448.3 million at
December 31, 2004 and 2003, respectively. Montpelier Re is also required to maintain a minimum liquidity ratio, which was met for both
years ended December 31, 2004 and 2003. 15. Subsequent Events On February 3, 2005, the Company sold 1.5 million of its Aspen shares at $24.80 per common
share for total proceeds of $37.2 million, realizing a gain of $14.4 million. As a result, the
Company currently owns 2.5 million shares, or approximately 3.6% of Aspen. In addition, on February 25, 2005 the Company declared a special dividend in the amount of
$5.50 per common voting share and warrant payable on March 31, 2005 to
shareholders and warrant holders of record on March 15,
2005. F-24




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##### Table of Contents



16. Unaudited Quarterly Financial Data March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Quarter ended
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004Gross premiums written
    
    $
    333,225
    
    
    $
    210,418
    
    
    $
    184,443
    
    
    $
    108,965Net premiums written
    
    
    297,370
    
    
    
    182,200
    
    
    
    170,848
    
    
    
    98,898Net premiums earned
    
    
    190,824
    
    
    
    193,633
    
    
    
    209,982
    
    
    
    193,076Net investment income
    
    
    15,282
    
    
    
    16,263
    
    
    
    18,016
    
    
    
    19,511Net realized gains (losses) on
investments
    
    
    1,736
    
    
    
    1,436
    
    
    
    1,994
    
    
    
    2,082Net foreign exchange gains (losses)
    
    
    1,009
    
    
    
    (1,033
    )
    
    
    1,227
    
    
    
    5,796Total revenues
    
    
    208,851
    
    
    
    210,299
    
    
    
    231,219
    
    
    
    220,465Loss and loss adjustment
expenses
    
    
    46,185
    
    
    
    40,172
    
    
    
    263,461
    
    
    
    54,984Acquisition costs
    
    
    35,704
    
    
    
    43,862
    
    
    
    32,571
    
    
    
    40,642General & administrative
expenses
    
    
    13,711
    
    
    
    14,816
    
    
    
    8,897
    
    
    
    17,870Financing expense
    
    
    4,170
    
    
    
    4,441
    
    
    
    4,302
    
    
    
    4,621Total expenses
    
    
    99,770
    
    
    
    103,291
    
    
    
    309,231
    
    
    
    118,117Income (loss) before taxes
    
    
    109,081
    
    
    
    107,008
    
    
    
    (78,012
    )
    
    
    102,348Income tax expense (recovery)
    
    
    38
    
    
    
    25
    
    
    
    158
    
    
    
    (77
    )Net income
    
    $
    109,043
    
    
    $
    106,983
    
    
    $
    (78,170
    )
    
    $
    102,425Basic earnings per common share
    
    $
    1.72
    
    
    $
    1.70
    
    
    $
    (1.26
    )
    
    $
    1.65Diluted earnings per common share
    
    $
    1.59
    
    
    $
    1.57
    
    

    $
    (1.26
    )
    
    $
    1.53Weighted average shares  basic
    
    
    63,409,264
    
    
    
    63,078,809
    
    
    
    62,012,065
    
    
    
    62,033,732Weighted average shares  diluted
    
    
    68,769,273
    
    
    
    67,942,191
    
    
    
    62,012,065
    
    
    
    67,068,252Loss ratio
    
    
    24.2
    %
    
    
    20.7
    %
    
    
    125.5
    %
    
    
    28.5
    %Expense ratio
    
    
    25.9
    %
    
    
    30.3
    %
    
    
    19.7
    %
    
    
    30.3
    %Combined ratio
    
    
    50.1
    %
    
    
    51.0
    %
    
    
    145.2
    %
    
    
    58.8
    %
 March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,Quarter ended
    
    2003
    
    
    2003
    
    
    2003
    
    
    2003Gross premiums written
    
    $
    366,563
    
    
    $
    194,082
    
    
    $
    145,931
    
    
    $
    103,156Net premiums written
    
    
    332,296
    
    
    
    186,694
    
    
    
    147,662
    
    
    
    111,322Net premiums earned
    
    
    184,655
    
    
    
    174,391
    
    
    
    162,926
    
    
    
    183,360Net investment income
    
    
    11,684
    
    
    
    11,715
    
    
    
    12,345
    
    
    
    14,404Net realized gains (losses) on
investments
    
    
    4,681
    
    
    
    4,650
    
    
    
    (3,009
    )
    
    
    1,309Net foreign exchange gains (losses)
    
    
    1,359
    
    
    
    (1,539

    )
    
    
    2,077
    
    
    
    6,414Total revenues
    
    
    202,379
    
    
    
    189,217
    
    
    
    174,339
    
    
    
    205,487Loss and loss adjustment
expenses
    
    
    47,690
    
    
    
    30,157
    
    
    
    35,097
    
    
    
    51,162Acquisition costs
    
    
    40,998
    
    
    
    33,851
    
    
    
    32,352
    
    
    
    33,190General & administrative
expenses
    
    
    8,884
    
    
    
    11,930
    
    
    
    12,838
    
    
    
    17,157Interest expense
    
    
    965
    
    
    
    802
    
    
    
    2,991
    
    
    
    4,143Total expenses
    
    
    98,537
    
    
    
    76,740
    
    
    
    83,278
    
    
    
    105,652Income before taxes
    
    
    103,842
    
    
    
    112,477
    
    
    
    91,061
    
    
    
    99,835Income tax expense (recovery)
    
    
    1
    
    
    
    (2
    )
    
    
    69
    
    
    
    (31
    )Net income
    
    $
    103,841
    
    
    
    112,479
    
    
    $
    90,992
    
    
    $
    99,866Basic earnings per common share
    
    $
    1.64
    
    
    $
    1.77
    
    
    $
    1.44
    
    
    $
    1.58Diluted earnings per common share
    
    $
    1.56
    
    
    $
    1.66
    
    
    $
    1.34
    
    
    $
    1.46Weighted average shares  basic
    
    
    63,392,597
    
    
    
    63,392,597
    
    
    
    63,392,597
    
    
    
    63,392,597Weighted average shares  diluted
    
    
    66,479,217
    
    
    
    67,777,953
    
    
    
    67,779,246
    
    
    
    68,264,030Loss ratio
    
    
    25.8
    %
    
    
    17.3
    %
    
    
    21.5
    %
    
    
    27.9
    %Expense ratio
    
    
    27.0
    %
    
    
    26.2
    %
    
    
    27.7
    %
    
    
    27.5
    %Combined ratio
    
    
    52.8
    %
    
    
    43.5
    %
    
    
    49.2
    %
    
    
    55.4
    %
 F-25




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##### Table of Contents



Index to Financial Statement Schedules SchedulePage
    
    
    NumberSummary of Investments  Other than Investments in Related
Parties as at December 31, 2004
    
    
    S-2
    
    
    
    ICondensed Financial Information of Registrant
    
    
    S-3
    
    
    IISupplementary Insurance Information for the years ended December
31, 2004, 2003, and 2002
    
    
    S-6
    
    
    IIIReinsurance for the years ended December 31, 2004, 2003 and 2002.
    
    
    S-7
    
    
    IV
 Note: Other Schedules have been omitted as they are not applicable to the Company. S-1




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE I
Summary of Investments
Other than Investments in Related Parties
As at December 31, 2004
(Expressed in thousands of United States dollars) Cost or Amortized
    
    
    Fair
    
    
    Amount shown in theType of Investment
    
    Cost
    
    
    Value
    
    
    Balance SheetFixed maturities:U.S. government
    
    $
    416,140
    
    
    
    411,835
    
    
    $
    411,835U.S. government-sponsored enterprises
    
    
    952,326
    
    
    
    953,649
    
    
    
    953,649Non U.S.government
    
    
    19,987
    
    
    
    19,914
    
    
    
    19,914Corporate debt securities
    
    
    713,755
    
    
    
    720,666
    
    
    
    720,666Mortgage-backed and asset-backed
securities
    
    
    218,021
    
    
    
    219,209
    
    
    
    219,209Total fixed maturities
    
    
    2,320,229
    
    
    
    2,325,273
    
    
    
    2,325,273Equity investments:
    
    
    32,239
    
    
    
    45,355
    
    
    
    45,355Other investments:
    
    
    80,758
    
    
    
    117,453
    
    
    
    117,453Cash and cash equivalents
    
    
    110,576
    
    
    
    110,576
    
    
    
    110,576Total investments, cash and cash
equivalents
    
    $
    2,543,802
    
    
    
    2,598,657
    
    
    $
    2,598,657
 S-2




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE II
Condensed Financial Information of Registrant
Condensed Balance Sheets  Parent company only
AS AT DECEMBER 31, 2004 AND 2003
(Expressed in thousands of United States dollars) 2004
    
    
    2003ASSETSCash and cash equivalents, at fair value
    
    $
    12,622
    
    
    $
    58,795Investment in consolidated subsidiaries, on an equity basis
    
    
    2,017,095
    
    
    
    1,876,772Other assets
    
    
    1,128
    
    
    
    1,798Total Assets
    
    $
    2,030,845
    
    
    $
    1,937,365LIABILITIESAccounts payable and accrued expenses
    
    
    6,325
    
    
    
    6,775Debt
    
    
    248,963
    
    
    
    248,843Dividends payable
    
    
    23,613
    
    
    
    24,042Total Liabilities
    
    $
    278,901
    
    
    $
    279,660SHAREHOLDERS EQUITYCommon voting shares: 1/6 cent par value; authorized
1,200,000,000 shares; issued and outstanding at
December 31, 2004; 62,131,232 shares (2003  63,392,597)
    
    
    104
    
    
    
    106Additional paid-in capital
    
    
    1,111,735
    
    
    
    1,130,305Accumulated other comprehensive income
    
    
    55,094
    
    
    
    53,731Retained earnings
    
    
    585,011
    
    
    
    473,563Total Shareholders Equity
    
    
    1,751,944
    
    
    
    1,657,705Total Liabilities and Shareholders Equity
    
    $
    2,030,845
    
    
    $
    1,937,365
 S-3




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE II
Condensed Financial Information of Registrant
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of United States Dollars, except share amounts) 2004
    
    
    2003
    
    
    2002REVENUESEquity in net earnings of subsidiaries
    
    $
    261,871
    
    
    $
    421,907
    
    
    $
    151,487Management fee from subsidiary
    
    
    
    
    
    
    5,000
    
    
    
    8,000Other income
    
    
    331
    
    
    
    52
    
    
    
    165Total Revenue
    
    
    262,202
    
    
    
    426,959
    
    
    
    159,652EXPENSESFinancing expense
    
    
    15,433
    
    
    
    8,731
    
    
    
    4,460Payment on settlement of interest rate swap
    
    
    
    
    
    
    1,002
    
    
    
    Other expenses
    
    
    6,488
    
    
    
    10,047
    
    
    
    3,147Total Expenses
    
    
    21,921
    
    
    
    19,780
    
    
    
    7,607NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS
    
    $
    240,281
    
    
    $
    407,179
    
    
    $
    152,045
 S-4




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE II
Condensed Financial Information of Registrant
Statements of Cash Flows  Parent company only
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of United States dollars) 2004
    
    
    2003
    
    
    2002Cash flows provided by (used in) operating activities:Net income
    
    $
    240,281
    
    
    $
    407,179
    
    
    $
    152,045Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Equity in net earnings of subsidiaries
    
    
    (261,871
    )
    
    
    (421,907
    )
    
    
    (151,487
    )Compensation recognized under stock option plan
    
    
    2,305
    
    
    
    4,040
    
    
    
    5,395Accretion of Senior Notes
    
    
    120
    
    
    
    50
    
    
    
    Change in:Other assets and liabilities Dividends payable
    
    
    220
    
    
    
    12,554
    
    
    
    (15,502

    )Net cash provided by (used in) operating activities
    
    
    (18,945
    )
    
    
    1,916
    
    
    
    (9,549
    )Cash flows provided by (used in) investing activities:Net capital
contribution from (to) subsidiary
    
    
    122,910
    
    
    
    (47,161
    )
    
    
    (221,719
    )Net cash provided by (used in) investing activities
    
    
    122,910
    
    
    
    (47,161
    )
    
    
    (221,719
    )Cash flows provided by (used in) financing activities:Issue of common shares
    
    
    10,612
    
    
    
    
    
    
    
    245,053Repurchase of common shares
    
    
    (65,476
    )
    
    
    
    
    
    
    Repayment of debt
    
    
    
    
    
    
    (150,000
    )
    
    
    Net proceeds received from issuance of Senior Notes
    
    
    
    
    
    
    248,792
    
    
    
    Dividends paid
    
    
    (95,274
    )
    
    
    
    
    
    
    Direct equity offering expenses
    
    
    
    
    
    
    (170
    )
    
    
    (18,300
    )Amount paid to affiliate for overpayment of subscription
    
    
    
    
    
    
    
    
    
    
    (250
    )Net cash provided by (used in) financing activities
    
    
    (150,138
    )
    
    
    98,622
    
    
    
    226,503Increase (decrease) in cash and cash equivalents
    
    
    (46,173
    )
    
    
    53,377
    
    
    
    (4,765
    )Cash and cash equivalents  Beginning of year
    
    
    58,795
    
    
    
    5,418
    
    
    
    10,183Cash and cash equivalents  End of year
    
    $
    12,622
    
    
    $
    58,795
    
    
    $
    5,418
 S-5




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE III Supplementary Insurance Information
As at and for the Periods Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of United States dollars) Future Policy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net Benefits,
    
    
    AmortizationDeferred
    
    
    benefits,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Claims, Losses
    
    
    of DeferredPolicy
    
    
    Losses, Claims
    
    
    
    
    
    
    Net
    
    
    Net
    
    
    and
    
    
    Policy
    
    
    Other
    
    
    GrossAcquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Premiums
    
    
    Investment
    
    
    Settlement
    
    
    Acquisition
    
    
    Operating
    
    
    PremiumsCosts
    
    
    Expenses
    
    
    Premiums
    
    
    Earned
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    Written2004 
Property and
Casualty
    
    $
    59,031
    
    
    $
    549,541
    
    
    $
    287,546
    
    
    $
    787,515
    
    
    $
    69,072
    
    
    $
    404,802
    
    
    $
    145,184
    
    
    $
    55,294
    
    
    $
    837,0512003  Property
and Casualty
    
    $
    59,817
    
    
    $
    249,791
    
    
    $
    318,673
    
    
    $
    705,333
    
    
    $
    50,148
    
    
    $
    164,107
    
    
    $
    120,752
    
    
    $
    50,021
    
    
    $
    809,7332002  Property
and Casualty
    
    $
    44,881
    
    
    $
    146,115
    
    
    $
    241,000
    
    
    $
    329,926
    
    
    $
    39,748
    
    
    $
    133,310
    
    
    $
    62,926
    
    
    $
    26,278
    
    
    $
    607,688
 S-6




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##### Table of Contents



MONTPELIER RE HOLDINGS LTD.
SCHEDULE IV Reinsurance
As at and for the Periods Ended December 31, 2004, 2003 and 2002
(Expressed in thousands of United States dollars) Ceded to
    
    
    Assumed
    
    
    
    
    
    
    Percentage ofDirect
    
    
    Other
    
    
    from Other
    
    
    
    
    
    
    Amount AssumedAmount(1)
    
    

Companies
    
    
    Companies(1)
    
    
    Net Amount
    
    
    to Net2004  Property and Casualty
    
    $
    49,409
    
    
    $
    87,735
    
    
    $
    787,641
    
    
    $
    749,316
    
    
    
    105
    %2003  Property and Casualty
    
    $
    58,654
    
    
    $
    31,758
    
    
    $
    751,079
    
    
    $
    777,975
    
    
    
    97
    %2002  Property and Casualty
    
    $
    56,483
    
    
    $
    41,779
    
    
    $
    551,205
    
    
    $
    565,909
    
    
    
    97
    %
 (1)

During 2004, the Company refined the
classification of gross premiums written between direct insurance and
reinsurance assumed from other companies for prior years. There was no effect on total gross premiums written. S-7