UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2012

OR

o 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.)

Montpelier House

94 Pitts Bay Road

Pembroke HM 08

Bermuda

(Address of Principal Executive Offices)

(441) 296-5550

(Registrant’s Telephone Number, Including Area Code)

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 x   No o

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No x

As of November 1, 2012, the registrant had 55,522,489 common shares outstanding, with a par value of 1/6 cent per share (“Common Shares”).

MONTPELIER RE HOLDINGS LTD.

INDEX TO FORM 10-Q

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011 (Unaudited)	3
	Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Month Periods Ended September 30, 2012 and 2011 (Unaudited)	4
	Consolidated Statements of Common Shareholders’ Equity for the Nine Month Periods Ended September 30, 2012 and 2011 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2012 and 2011 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	81
Item 4.	Controls and Procedures	81
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	81
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82
Item 3.	Defaults Upon Senior Securities	83
Item 4.	Mine Safety Disclosures	83
Item 5.	Other Information	83
Item 6.	Exhibits	83
SIGNATURES		83

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

Unaudited

	September 30,			December 31,
(In millions of U.S. dollars, except share amounts)	2012			2011
Assets
Fixed maturity investments, at fair value (amortized cost: $2,617.1 and $2,359.1)	$	2,697.6		$	2,390.2
Equity securities, at fair value (cost: $38.9 and $79.3)	40.9			96.1
Other investments (cost: $101.6 and $100.0)	102.2			102.4
Total investments	2,840.7			2,588.7
Cash and cash equivalents	414.3			340.3
Restricted cash	100.8			128.4
Reinsurance recoverable on unpaid losses	80.2			77.7
Reinsurance recoverable on paid losses	5.3			7.7
Insurance and reinsurance premiums receivable	287.9			213.4
Unearned reinsurance premiums ceded	47.6			22.0
Deferred insurance and reinsurance acquisition costs	54.2			50.9
Accrued investment income	15.7			16.2
Unsettled sales of investments	181.4			33.9
Other assets	21.4			20.3
Total Assets	$	4,049.5		$	3,499.5
Liabilities
Loss and loss adjustment expense reserves	$	1,039.4		$	1,077.1
Debt	327.9			327.8
Unearned insurance and reinsurance premiums	368.2			265.9
Insurance and reinsurance balances payable	68.9			44.0
Liability for investment securities sold short	153.4			136.3
Unsettled purchases of investments	375.5			69.9
Accounts payable, accrued expenses and other liabilities	42.2			29.2
Total Liabilities	2,375.5			1,950.2
Commitments and Contingent Liabilities (See Note 11)	—			—
Shareholders’ Equity
Non-cumulative preferred shares (“Preferred Shares”) - issued 6,000,000 shares	150.0			150.0
Common Shares at par value - issued 57,301,141 and 62,260,930 shares	0.1			0.1
Additional paid-in capital	1,075.1			1,165.6
Treasury shares at cost: 1,778,652 and 1,396,756 shares	(30.2		)	(22.0		)
Retained earnings	482.6			259.7
Accumulated other comprehensive loss	(3.6		)	(4.1		)
Total Shareholders’ Equity	1,674.0			1,549.3
Total Liabilities and Shareholders’ Equity	$	4,049.5		$	3,499.5

See Notes to Consolidated Financial Statements

3

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Unaudited

	Three Month Periods Ended						Nine Month Periods Ended
	September 30,						September 30,
(In millions of U.S. dollars, except per share amounts)	2012			2011			2012			2011
Revenues
Gross insurance and reinsurance premiums written	$	127.7		$	162.5		$	640.9		$	633.8
Ceded reinsurance premiums	(26.2		)	(40.9		)	(108.6		)	(91.4		)
Net insurance and reinsurance premiums written	101.5			121.6			532.3			542.4
Change in net unearned insurance and reinsurance premiums	51.5			34.3			(72.4		)	(68.0		)
Net insurance and reinsurance premiums earned	153.0			155.9			459.9			474.4
Net investment income	15.5			17.0			50.3			51.6
Net realized and unrealized investment gains (loss)	33.2			(31.3		)	78.9			(5.3		)
Net foreign exchange losses	(10.8		)	(4.1		)	(10.5		)	(3.8		)
Net income (loss) from derivative instruments	0.7			(6.3		)	4.3			(3.0		)
Other revenue	0.1			0.2			0.8			0.3
Total revenues	191.7			131.4			583.7			514.2
Expenses
Underwriting expenses:
Loss and loss adjustment expenses	57.3			138.7			158.5			491.5
Insurance and reinsurance acquisition costs	23.5			26.7			71.9			77.7
General and administrative expenses	30.5			24.0			87.2			73.5
Non-underwriting expenses:
Interest and other financing expenses	4.7			4.9			14.5			15.7
Total expenses	116.0			194.3			332.1			658.4
Income (loss) before income taxes	75.7			(62.9		)	251.6			(144.2		)
Income tax benefit (provision)	(0.7		)	—			(0.7		)	0.6
Net income (loss)	75.0			(62.9		)	250.9			(143.6		)
Dividends declared on Preferred Shares	(3.3		)	(3.3		)	(10.0		)	(5.7		)
Net income (loss) available to common shareholders	$	71.7		(66.2		)	$	240.9		(149.3		)
Net income (loss)	$	75.0		(62.9		)	$	250.9		(143.6		)
Net change in foreign currency translation	1.7			0.6			0.5			2.0
Comprehensive income (loss)	$	76.7		$	(62.3	)	$	251.4		$	(141.6	)
Per share data:
Basic and diluted earnings (loss) per Common Share	$	1.25		$	(1.07	)	$	4.08		$	(2.41	)
Dividends declared per Common Shares	0.105			0.100			0.315			0.300

See Notes to Consolidated Financial Statements

4

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Month Periods Ended September 30, 2012 and 2011

Unaudited

											Common						Accum.
	Total					Common		Additional			Shares held						other
	shareholders’			Preferred		Shares at		paid-in			in treasury			Retained			comprehensive
(In millions of U.S. dollars)	equity			Shares		par value		capital			at cost			earnings			loss
Opening balances at January 1, 2012	$	1,549.3		$	150.0	$	0.1	$	1,165.6		$	(22.0	)	$	259.7		$	(4.1	)
Net income	250.9			—		—		—			—			250.9			—
Net change in foreign currency translation	0.5			—		—		—			—			—			0.5
Repurchases of Common Shares	(107.6		)	—		—		(98.6		)	(9.0		)	—			—
Issuances of Common Shares from treasury	—			—		—		(0.8		)	0.8			—			—
Expense recognized for RSUs	9.1			—		—		9.1			—			—			—
RSUs withheld for income taxes	(0.2		)	—		—		(0.2		)	—			—			—
Dividends declared on Common Shares	(18.0		)	—		—		—			—			(18.0		)	—
Dividends declared on Preferred Shares	(10.0		)	—		—		—			—			(10.0		)	—
Ending balances at September 30, 2012	$	1,674.0		$	150.0	$	0.1	$	1,075.1		$	(30.2	)	$	482.6		$	(3.6	)

											Common						Accum.
	Total					Common		Additional			Shares held						other
	shareholders’			Preferred		Shares at		paid-in			in treasury			Retained			comprehensive
(In millions of U.S. dollars)	equity			Shares		par value		capital			at cost			earnings			loss
Opening balances at January 1, 2011	$	1,628.8		$	—	$	0.1	$	1,258.7		$	(32.7	)	$	408.9		$	(6.2	)
Net loss	(143.6		)	—		—		—			—			(143.6		)	—
Net change in foreign currency translation	2.0			—		—		—			—			—			2.0
Repurchases of Common Shares	(62.5		)	—		—		(62.5		)	—			—			—
Issuances of Common Shares from treasury	—			—		—		(3.2		)	3.2						—
Issuance of Preferred Shares	150.0			150.0		—		—			—			—			—
Preferred Share issuance costs	(4.6		)	—		—		(4.6		)	—			—			—
Expense recognized for RSUs	5.3			—		—		5.3			—			—			—
RSUs withheld for income taxes	(0.8		)	—		—		(0.8		)	—			—			—
Dividends declared on Common Shares	(18.5		)	—		—		—			—			(18.5		)	—
Dividends declared on Preferred Shares	(5.7		)	—		—		—			—			(5.7		)	—
Ending balances at September 30, 2011	$	1,550.4		$	150.0	$	0.1	$	1,192.9		$	(29.5	)	$	241.1		$	(4.2	)

See Notes to Consolidated Financial Statements

5

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Nine Month Periods Ended
	September 30,
(In millions of U.S. dollars)	2012			2011
Cash flows from operations:
Net income (loss)	$	250.9		$	(143.6	)
Charges (credits) to reconcile net income (loss) to net cash from operations:
Net realized and unrealized investment (gains) losses	(78.9		)	5.3
Net realized and unrealized (gains) losses on investment-related derivative instruments	(0.6		)	6.7
Net amortization and depreciation of assets and liabilities	10.9			14.8
Expense recognized for RSUs	9.1			5.3
Net change in:
Loss and loss adjustment expense reserves	(49.7		)	276.1
Reinsurance recoverable on paid and unpaid losses	8.5			(7.2		)
Unearned insurance and reinsurance premiums	97.4			92.6
Insurance and reinsurance balances payable	23.8			22.4
Unearned reinsurance premiums ceded	(25.3		)	(24.7		)
Deferred insurance and reinsurance acquisition costs	(2.1		)	(10.2		)
Insurance and reinsurance premiums receivable	(71.1		)	(82.7		)
Other assets	(2.3		)	2.6
Accounts payable, accrued expenses and other liabilities	3.3			(23.6		)
Other	4.8			2.8
Net cash provided from operations	178.7			136.6
Cash flows from investing activities:
Purchases of fixed maturity investments	(3,170.1		)	(2,009.5		)
Purchases of equity securities	(133.3		)	(156.1		)
Purchases of other investments	(30.1		)	(11.6		)
Sales, maturities, calls and pay downs of fixed maturity investments	3,098.2			2,094.1
Sales of equity securities	197.2			141.2
Sales and redemptions of other investments	38.5			22.1
Payment of closing expenses associated with the MUSIC Sale	(1.0		)	—
Settlements of investment-related derivative instruments	(1.5		)	(2.6		)
Net change in restricted cash	27.9			(71.9		)
Payment of accrued investment performance fees	—			(2.1		)
Acquisitions of capitalized assets	(0.4		)	(0.5		)
Net cash provided from investing activities	25.4			3.1
Cash flows from financing activities:
Repurchases of Common Shares	(107.6		)	(62.5		)
Net proceeds from issuance of Preferred Shares	—			145.4
Dividends paid on Common Shares	(18.6		)	(18.8		)
Dividends paid on Preferred Shares	(10.0		)	(2.4		)
Net cash (used for) provided from financing activities	(136.2		)	61.7
Effect of exchange rate fluctuations on cash and cash equivalents	6.1			(0.8		)
Net increase in cash and cash equivalents during the period	74.0			200.6
Cash and cash equivalents - beginning of year	340.3			232.3
Cash and cash equivalents - end of period	$	414.3		$	432.9

See Notes to Consolidated Financial Statements

6

MONTPELIER RE HOLDINGS LTD.

Notes To Consolidated Financial Statements

(In millions of U.S. dollars, except share and per

share amounts or as otherwise indicated)

Unaudited

NOTE 1.  Summary of Significant Accounting Policies

Basis of Presentation

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

On December 31, 2011, the Company completed the sale of Montpelier U.S. Insurance Company (“MUSIC”), its former U.S.-based excess and surplus lines insurance company, to Selective Insurance Group, Inc. (“Selective”). In connection with this transaction (the “MUSIC Sale”), Montpelier has either retained, reinsured or otherwise indemnified Selective for all business written by MUSIC with an effective date on or prior to December 31, 2011 (the “MUSIC Run-Off”).  See Note 2.

The Company currently operates through three reportable segments:  Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC Run-Off. The Montpelier Bermuda and Montpelier Syndicate 5151 segments represent separate underwriting platforms through which the Company writes insurance and reinsurance business. The MUSIC Run-Off segment consists of: (i) for all periods through December 31, 2011, the historical operations of the Company’s former MUSIC segment; and (ii) for all subsequent periods, the insurance business retained, reinsured or otherwise indemnified by Montpelier in accordance with the MUSIC Sale. The segment disclosures provided herein present the operations of the Montpelier Bermuda, Montpelier Syndicate 5151 and MUSIC Run-Off segments prior to the effects of intercompany quota share reinsurance agreements among them.

Detailed financial information about each of the Company’s reportable segments for the three and nine month periods ended September 30, 2012 and 2011 is presented in Note 9. The activities of the Company, certain of its intermediate holding and service companies and eliminations relating to intercompany reinsurance and support services, collectively referred to as “Corporate and Other”, are also presented in Note 9.

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

Montpelier Bermuda

The Montpelier Bermuda segment consists of the assets and operations of Montpelier Reinsurance Ltd. (“Montpelier Re”) and Blue Water Re Ltd. (“Blue Water Re”), the Company’s wholly-owned operating subsidiaries based in Pembroke, Bermuda.

Montpelier Re seeks to identify and underwrite attractive insurance and reinsurance opportunities by combining underwriting experience with proprietary risk pricing and capital allocation models and catastrophe modeling tools.

Blue Water Re is a registered Bermuda Special Purpose Insurer (“SPI”) that underwrites property catastrophe risks on a fully-collateralized basis.

7

Montpelier Syndicate 5151

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

Syndicate 5151, the Company’s wholly-owned Lloyd’s of London (“Lloyd’s”) syndicate based in London, was established in July 2007.  Syndicate 5151 underwrites property insurance and reinsurance, engineering, marine hull and liability, cargo and specie and specialty casualty classes sourced mainly from the London, U.S. and European markets.

MCL, the Company’s wholly-owned subsidiary based in London, serves as Syndicate 5151’s sole corporate underwriting member of Lloyd’s.

MUAL, the Company’s wholly-owned Lloyd’s Managing Agent based in London, provides management and governance services to Syndicate 5151.

MUSL, the Company’s wholly-owned subsidiary based in London, provides support services to Syndicate 5151, MUAL and certain other U.K. subsidiaries.

MUI and MEAG serve as Lloyd’s Coverholders, meaning that each are authorized to enter into contracts of insurance and reinsurance and/or issue documentation on behalf of Syndicate 5151. MUI, the Company’s wholly-owned subsidiary based in Hartford, Connecticut, underwrites reinsurance business on behalf of Syndicate 5151 through managing general agents and intermediaries.  MEAG, the Company’s wholly-owned subsidiary based in Baar, Canton Zug, Switzerland, focuses on marketing activities in Continental Europe and the Middle East on behalf of Syndicate 5151 and Montpelier Re.

On September 30, 2012, the Company sold PUAL to a former employee of Montpelier in exchange for a contingent note receivable of $0.4 million and recognized a loss on the sale of $0.5 million, which has been netted against “other revenue” on the Company’s consolidated statement of operations.  PUAL, formerly a wholly-owned subsidiary based in London, served as a Lloyd’s Coverholder and underwrote business on behalf of Syndicate 5151 and third parties.

MUSIC Run-Off

On December 31, 2011, Montpelier completed the MUSIC Sale. See Note 2.  Prior to the MUSIC Sale, MUSIC was a domestic surplus lines insurer and was authorized as an excess and surplus lines insurer in all 50 U.S. states and the District of Columbia. MUSIC underwrote smaller commercial property and casualty risks that did not conform to standard insurance lines.

Since Montpelier has either retained, reinsured or otherwise indemnified Selective for all of the business written by MUSIC with an effective date on or prior to December 31, 2011, the Company’s former and future operations associated with MUSIC do not constitute a “discontinued operation” in accordance with generally accepted accounting principles in the U.S. (“GAAP”).  The cash flows that Montpelier will retain subsequent to the MUSIC Sale, as well as certain reinsurance balances and other designated assets serving as collateral supporting such cash flows, will continue to be presented within the MUSIC Run-Off segment.  See Note 9.

Corporate and Other

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

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

8

The unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. The financial statements incorporated in this report on Form 10-Q should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission. In the opinion of management, these interim financial statements include all normally recurring adjustments considered necessary to fairly present the Company’s financial position, results of operations and cash flows. All significant intercompany accounts and transactions have been eliminated in consolidation. These interim financial statements may not be indicative of financial results for the full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues earned and expenses incurred during the period. Actual results could differ materially from those estimates. The significant estimates reflected in the Company’s unaudited consolidated financial statements include, but are not limited to, loss and loss adjustment expense (“LAE”) reserves, written and earned insurance and reinsurance premiums, ceded reinsurance and share-based compensation.

Insurance and Reinsurance Premiums and Related Costs

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

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

For contracts that have a risk period of three years or less, the premiums are earned ratably over the term. For the few contracts with risk periods greater than three years, premiums are earned in accordance with predetermined schedules that reflect the level of risk associated with each period in the contract term. These schedules are reviewed periodically and are adjusted as deemed necessary.

For the majority of Montpelier’s excess-of-loss contracts, written premium is based on the deposit or minimum premium as defined in the contract. Subsequent adjustments, based on reports of actual premium or revisions in estimates by ceding companies, are recorded in the period in which they are determined.  For Montpelier’s pro-rata contracts and excess-of-loss contracts where no deposit or minimum premium is specified in the contract, written premium is recognized based on estimates of ultimate premiums provided by ceding companies and Montpelier’s underwriters. 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 in which they are determined. Such adjustments are generally determined after the associated risk periods have expired, in which case the premium adjustments are fully earned when written.  Unearned premiums represent the portion of premiums written that are applicable to future insurance or reinsurance coverage provided by policies or contracts in force.

Premiums receivable are recorded at amounts due less any provision for doubtful accounts.  As of September 30, 2012 and December 31, 2011, Montpelier’s provision for doubtful accounts was $3.9 million and $3.6 million, respectively.

When a reinsurance contract provides for a reinstatement of coverage following a covered loss, the associated reinstatement premium is recorded as both written and earned when it is determined that such a loss event has occurred.

9

Deferred acquisition costs are comprised of commissions, brokerage costs, premium taxes and excise taxes, each of which relates directly to the writing of insurance and reinsurance contracts. These deferred acquisition costs are generally amortized over the underlying risk period of the related contracts.  However, if the sum of a contract’s expected losses and LAE, and deferred acquisition costs exceeds related unearned premiums and projected investment income, a premium deficiency is determined to exist. In this event, deferred acquisition costs are immediately expensed to the extent necessary to eliminate the premium deficiency.  If the premium deficiency exceeds deferred acquisition costs then a liability is accrued for the excess deficiency. There were no significant premium deficiency adjustments recognized during the periods presented.

Also included in acquisition costs are profit commissions earned and incurred. Accrued profit commissions are included in insurance and reinsurance balances payable.

Foreign Currency Exchange

The U.S. dollar is the Company’s reporting currency.  The British pound is the functional currency for the Company’s U.K.- based operations and the Swiss franc is the functional currency for the operations of MEAG. The U.S. dollar is the functional currency for all other operations. The assets and liabilities of the Company’s U.K. and Swiss operations are converted to U.S. dollars at exchange rates in effect at the balance sheet date, and the related revenues and expenses are converted using average exchange rates for the period. Net foreign exchange gains and losses arising from translating these foreign operations to U.S. dollars are reported as a separate component of shareholders’ equity as translation gains and losses, with changes therein reported as a component of other comprehensive income.

The following rates of exchange to the U.S. dollar were used to translate the results of the Company’s U.K. and Swiss operations:

Currency	Opening Rate January 1, 2012	Closing Rate September 30, 2012	Opening Rate January 1, 2011	Closing Rate September 30, 2011
British Pound (GBP)	1.5617	1.6162	1.5441	1.5584
Swiss Franc (CHF)	1.0634	1.0640	1.0429	1.1013

Other transactions involving certain monetary assets and liabilities denominated in foreign currencies have been converted into the appropriate functional currencies at exchange rates in effect at the balance sheet date, and the related revenues and expenses are converted using either specific or average exchange rates for the period, as appropriate.  Net foreign exchange transaction gains and losses arising from these activities are reported as a component of net income in the period in which they arise.

Investments and Cash

Montpelier’s fixed maturity investments and equity securities are carried at fair value, with the net unrealized appreciation or depreciation on such securities included in income and reported within “net realized and unrealized investment gains (losses)” in the Company’s statement of operations.

Montpelier’s other investments are carried at either fair value or on the equity method of accounting (which is based on underlying net asset values) and consist primarily of investments in limited partnership interests and private investment funds, event-linked securities whose principal and interest are forgiven if specific events occur (“CAT Bonds”), private placements and certain derivative instruments.  See Notes 5 and 7.

Investments, including investment securities sold short, are recorded on a trade date basis. For those marketable securities not listed and regularly traded on an established exchange, fair values are determined based on bid prices, as opposed to ask prices.  Fair values are not adjusted for transaction costs. Gains and losses on sales of investments are determined on the first-in, first-out basis and are included in income when realized. Realized investment gains and losses typically result from the actual sale of securities. Unrealized investment gains and losses represent the gain or loss that would result from a hypothetical sale of securities on the reporting date. In instances where the Company becomes aware of a significant unrealized loss with little or no likelihood of recovery, it writes down the cost basis of the investment and recognizes the loss as being realized.

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Some of Montpelier’s investment managers are entitled to performance fees determined as a percentage of their portfolio’s net total return achieved over specified periods. Montpelier’s net realized and unrealized investment gains and net income (loss) from derivative instruments are presented net of any associated performance fees.  Montpelier incurred (reversed) performance fees related to its investments and investment-related derivative instruments of $1.5 million and less than $0.1 million during the three month periods ended September 30, 2012 and 2011, respectively, and $4.3 million and $0.1 million during the nine month periods ended September 30, 2012 and 2011, respectively.

Cash and cash equivalents include cash and fixed income investments with maturities of less than three months, as measured from the date of purchase.  Restricted cash of $100.8 million at September 30, 2012 consisted of $87.2 million of collateral supporting open short sale investment and derivative positions, and $13.6 million of foreign deposit accounts held at Lloyd’s.  Restricted cash of $128.4 million at December 31, 2011 consisted of $121.7 million of collateral supporting open short sale investment and derivative positions, and $6.7 million of foreign deposit accounts held at Lloyd’s.

As of September 30, 2012 and December 31, 2011, $60.7 million and $34.8 million, respectively, of Montpelier’s cash equivalents represented repurchase agreements which were fully collateralized.

Net investment income is stated net of investment management, custody and other investment-related expenses. Investment income is recognized when earned and includes interest and dividend income together with the amortization of premiums and the accretion of discounts associated with those fixed maturity investments that were purchased at amounts different from their par value.

Common Shares Held in Treasury

Common Shares held in treasury are carried at cost and any resulting gain or loss on subsequent issuances is determined on a last-in, first-out basis.  As of September 30, 2012 and December 31, 2011, the Company had inception-to-date gains from issuances of its treasury shares of $2.3 million and $2.2 million, respectively, which have been recorded as additional paid-in capital. See Note 8.

Funds Withheld

Funds withheld by reinsured companies represent insurance balances retained by ceding companies in accordance with contractual terms. Montpelier typically earns investment income on these balances during the period the funds are held.  At September 30, 2012 and December 31, 2011, funds withheld balances of $4.4 million and $6.0 million, respectively, were recorded within “other assets” on the Company’s consolidated balance sheets.

NOTE 2.  MUSIC Sale

On December 31, 2011, Montpelier completed the MUSIC Sale, received total proceeds of $54.9 million therefrom and recorded an after tax gain on the sale of $11.1 million, which is inclusive of $1.0 million of expenses related to the transaction.  At the time of the MUSIC Sale, MUSIC had 44 employees, all of whom were retained by Selective.

In connection with this transaction, Montpelier has either retained, reinsured or otherwise indemnified Selective for all business written by MUSIC with an effective date on or prior to December 31, 2011. These protections were effected through the following arrangements, each of which became effective as of the closing date:

(i)Montpelier Re amended and increased its existing quota share arrangement with MUSIC from 75% to 100% (the “MUSIC Quota Share”) which has the effect of ceding the majority of MUSIC’s unearned premiums at December 31, 2011 to Montpelier Re;

(ii)Montpelier Re entered into a Loss Development Cover (the “Loss Development Cover”) with MUSIC which has the effect of ensuring that MUSIC’s net loss and LAE reserves relating to retained business written on or prior to December 31, 2011 (that business not otherwise covered by the MUSIC Quota Share) remains adequate.  Under the Loss Development Cover, any future adverse development associated with such retained reserves will be protected by Montpelier Re and any future favorable development associated with such retained reserves will benefit Montpelier Re; and

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(iii)the Company provided Selective with an indemnification which has the effect of guaranteeing each of the contractual arrangements (those with MUSIC and/or Selective) of Montpelier Re U.S. Holdings Ltd.  (“MRUSHL”), as MUSIC’s seller, and Montpelier Re, as MUSIC’s primary reinsurer.

Also in connection with the MUSIC Sale, Montpelier has agreed not to compete directly with MUSIC’s business for a period of three years after the closing date.

During the three and nine month periods ended September 30, 2012, Montpelier Re assumed $0.6 million and $2.1 million of MUSIC’s premium writings, respectively, which represented: (i) policies bound by MUSIC in 2012 with an effective date on or prior to December 31, 2011; and (ii) additional audit premium relating to policies written on or prior to December 31, 2011.  Under certain circumstances,  Montpelier may be required to assume additional MUSIC premium writings in future periods but such additional writings are not currently expected to be significant.

As of September 30, 2012 and December 31, 2011, Montpelier Re had remaining unearned premiums of $1.6 million and $24.8 million, respectively, and loss and LAE reserves of $44.7 million and $38.3 million, respectively, under the MUSIC Quota Share.

NOTE 3.  Loss and LAE Reserves

The following table summarizes Montpelier’s loss and LAE reserve movements for the three and nine month periods ended September 30, 2012 and 2011:

	Three Month Periods Ended September 30,						Nine Month Periods Ended September 30,
	2012			2011			2012			2011
Gross unpaid loss and LAE reserves - beginning	$	1,029.9		$	1,031.1		$	1,077.1		$	784.6
Reinsurance recoverable on unpaid losses - beginning	(78.8		)	(73.8		)	(77.7		)	(62.4		)
Net unpaid loss and LAE reserves - beginning	951.1			957.3			999.4			722.2
Losses and LAE incurred:
Current year losses	73.0			156.7			219.6			562.8
Prior year losses	(15.7		)	(18.0		)	(61.1		)	(71.3		)
Total incurred losses and LAE	57.3			138.7			158.5			491.5
Net foreign currency translation movements	11.7			(6.7		)	10.5			(1.7		)
Losses and LAE paid and approved for payment:
Current year losses	(15.8		)	(66.7		)	(24.9		)	(87.3		)
Prior year losses	(45.1		)	(40.7		)	(184.3		)	(142.8		)
Total losses and LAE paid and approved for payment	(60.9		)	(107.4		)	(209.2		)	(230.1		)
Net unpaid loss and LAE reserves - ending	959.2			981.9			959.2			981.9
Reinsurance recoverable on unpaid losses - ending	80.2			74.7			80.2			74.7
Gross unpaid loss and LAE reserves - ending	$	1,039.4		$	1,056.6		$	1,039.4		$	1,056.6

Loss and LAE reserves are comprised of case reserves (which are based on claims that have been reported) and IBNR reserves (which are based on losses that are believed to have occurred but for which claims have not yet been reported and may include a provision for expected future development on existing case reserves). Case reserve estimates are initially set on the basis of loss reports received from third parties.  IBNR reserves are estimated by management using various actuarial methods as well as a combination of Montpelier’s own loss experience, historical insurance industry loss experience and management’s professional judgment. Montpelier’s internal actuaries review the reserving assumptions and methodologies on a quarterly basis and its loss estimates are subject to an annual corroborative review by independent actuaries using generally accepted actuarial principles.

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Montpelier’s reserving process is highly dependent on loss information received from its cedants. With respect to prior year loss and LAE development, information and experience obtained since the last reporting date included changes in loss amounts reported by ceding companies, IBNR recorded as a result of these loss advices and other information and events.

In particular, loss and LAE reserves for non-catastrophe losses initially include significant IBNR as a result of timing lags inherent in the reporting process.

Prior Year Loss and LAE Development — three and nine month periods ended September 30, 2012

During the third quarter of 2012, Montpelier experienced $15.7 million in net favorable development on prior year loss and LAE reserves.

The net favorable development recognized during the third quarter of 2012 related to the following events and factors:

·2011 and prior year property losses incurred at Montpelier Syndicate 5151 ($5.6 million decrease),

·2009 and prior year casualty losses incurred at Montpelier Syndicate 5151 ($5.0 million increase),

·2011 Japan earthquake ($3.2 million decrease),

·2010 and 2011 space and aviation losses incurred at Montpelier Bermuda ($2.0 million decrease), and

·2005 hurricanes ($1.4 million decrease).

The remaining net favorable development on prior year loss and LAE reserves recognized during the third quarter of 2012 related to several smaller adjustments made across multiple classes of business.

During the nine month period ended September 30, 2012, Montpelier experienced $61.1 million in net favorable development on prior year loss and LAE reserves.  In addition to the items noted above, the favorable development recognized during the nine month period ended September 30, 2012 also included the following events and factors recognized during the first six months of 2012:

·Reserve reductions within the Other Speciality - Treaty line of business ($18.1 million decrease, $5.0 million of which related specifically to Montpelier Bermuda’s medical malpractice line of business),

·2011 Japan earthquake ($12.0 million decrease),

·2011 Danish cloudburst ($7.1 million increase),

·2011 Thai flood losses incurred at Montpelier Syndicate 5151 ($6.5 million decrease),

·An individual risk loss incurred during 2008 at Montpelier Bermuda ($5.1 million increase),

·Three fire losses occurring during 2011 and 2010 ($3.9 million decrease),

·February 2011 New Zealand earthquake ($2.8 million increase), and

·2011 U.S. windstorm and flood losses, including those from Hurricane Irene, incurred at Montpelier Syndicate 5151 ($1.3 million decrease).

In addition to the foregoing, claims reported to Montpelier in 2012 indicated that the non-catastrophe property and casualty IBNR it initially recorded during 2011 and 2010 exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by a further $15.1 million during the first six months of 2012.

The remaining net favorable development on prior year loss and LAE reserves recognized during the first six months of 2012 related to several smaller adjustments made across multiple classes of business.

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Prior Year Loss and LAE Development — three and nine month periods ended September 30, 2011

During the third quarter of 2011, Montpelier experienced $18.0 million in net favorable development on prior year loss and LAE reserves relating primarily to the following:

·2010 earthquake losses in Chile and New Zealand ($5.1 million decrease),

·Two individual risk losses incurred at Montpelier Bermuda in 2010 ($2.4 million decrease), and

·2010 non-catastrophe property losses incurred at Montpelier Syndicate 5151 ($2.4 million decrease).

The remaining net favorable development on prior year loss and LAE reserves related to several smaller adjustments made across multiple classes of business.

During the nine month period ended September 30, 2011, Montpelier experienced $71.3 million in net favorable development on prior year loss and LAE reserves.  In addition to the items noted above, the favorable development recognized during the nine month period ended September 30, 2011 also included the following events and factors recognized during the first six months of 2011:

·2010 non-catastrophe property losses incurred at Montpelier Syndicate 5151 ($14.0 million decrease),

·Casualty losses relating to several prior accident years ($8.0 million decrease, $3.3 million of which related specifically to the medical malpractice class of business),

·2010 Australian flood losses incurred at Montpelier Syndicate 5151 ($3.7 million decrease),

·2005 hurricanes ($2.7 million decrease), and

·2007 Windstorm Kyrill and U.K. floods ($1.7 million decrease).

The remaining favorable development on prior year loss and LAE reserves related to several smaller adjustments made across multiple classes of business.

Net Impact of Foreign Currency Movements on Loss and LAE Incurred and Loss and LAE Reserves

Montpelier recognized net foreign exchange transaction gains (losses) related to its current and prior year loss and LAE of $2.9 million and $1.9 million during the three month periods ended September 30, 2012 and 2011, respectively, and $3.2 million and $(3.3) million during the nine month periods ended September 30, 2012 and 2011, respectively.

Montpelier’s foreign currency transaction gains (losses) on its loss and LAE incurred are incorporated in its underwriting results (including its underwriting ratios) as a decrease (increase) in its loss and LAE.  Montpelier’s foreign currency translation gains and losses on its loss and LAE reserves, which are a component of its comprehensive income or loss, do not impact Montpelier’s underwriting results.

NOTE 4.  Reinsurance

In the normal course of business, Montpelier purchases reinsurance from third parties in order to manage its exposures. The amount of reinsurance that Montpelier buys varies from year to year depending on its risk appetite, as well as the availability and cost of the reinsurance coverage. Ceded reinsurance premiums are accounted for on a basis consistent with those used in accounting for the underlying premiums assumed, and are reported as a reduction of net premiums written.  Certain of Montpelier’s assumed pro-rata contracts incorporate reinsurance protection provided by third-party reinsurers that inures to Montpelier’s benefit. These reinsurance premiums are reported as a reduction in gross premiums written.

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All of Montpelier’s reinsurance purchases to date have represented prospective cover, meaning that the coverage has been purchased to protect Montpelier against the risk of future losses as opposed to covering losses that have already occurred but have not yet been paid. Montpelier’s reinsurance contracts consist of excess-of-loss contracts covering one or more lines of business and pro-rata reinsurance with respect to specific lines of its business. Montpelier also purchases industry loss warranty (“ILW”) policies which provide coverage for certain losses incurred, provided they are triggered by events exceeding a specified industry loss size as well as Montpelier’s own incurred loss. For non-ILW excess-of-loss reinsurance contracts, the attachment point and exhaustion of these contracts are based solely on the amount of Montpelier’s actual losses incurred from an event or events.

Montpelier remains liable for losses it incurs to the extent that any third-party reinsurer is unable or unwilling to make timely payments under reinsurance agreements.  Montpelier would also be liable in the event that its ceding companies were unable to collect amounts due from underlying third-party reinsurers.

Montpelier records provisions for uncollectible reinsurance recoverable when collection becomes unlikely due to the reinsurer’s inability to pay.  Montpelier does not believe that there are any amounts uncollectible from its reinsurers as of the balance sheet dates presented.

Earned reinsurance premiums ceded were $30.1 million and $31.3 million for the three month periods ended September 30, 2012 and 2011, respectively, and $83.4 million and $67.5 million for the nine month periods ended September 30, 2012 and 2011, respectively.  Net increases in estimated ultimate reinsurance recoveries included in loss and LAE were $4.4 million and $9.7 million for the three month periods ended September 30, 2012 and 2011, respectively, and $10.9 million and $26.5 million for the nine month periods ended September 30, 2012 and 2011, respectively.  Changes in estimated ultimate reinsurance recoveries are primarily the result of changes in the estimated gross losses incurred. In addition to loss recoveries, certain of Montpelier’s ceded reinsurance contracts provide for recoveries of additional premiums, reinstatement premiums and for forgone no-claims bonuses, which are incurred when losses are ceded to these reinsurance contracts.

Reinsurance Recoverable on Paid and Unpaid Losses

Under Montpelier’s reinsurance security policy, reinsurers are generally required to be rated “A-” (Excellent) or better by A.M. Best (or an equivalent rating with another recognized rating agency) at the time the policy is written. Montpelier also considers reinsurers that are not rated or do not fall within this threshold on a case-by-case basis if adequately collateralized.  Montpelier monitors the financial condition and ratings of its reinsurers on an ongoing basis.

The A.M. Best ratings of Montpelier’s reinsurers related to reinsurance recoverable on paid losses as of September 30, 2012 and December 31, 2011, are as follows:

	September 30, 2012				December 31, 2011
Rating	Amount		% of Total		Amount		% of Total
A+	$	0.8	15	%	$	3.2	42	%
A	2.7		51		4.4		57
A-	0.5		9		0.1		1
Unrated by A.M. Best	1.3		25		—		—
Total reinsurance recoverable on paid losses	$	5.3	100	%	$	7.7	100	%

The A.M. Best ratings of Montpelier’s reinsurers related to reinsurance recoverable on unpaid losses at September 30, 2012 and December 31, 2011, are as follows:

	September 30, 2012				December 31, 2011
Rating	Amount		% of Total		Amount		% of Total
A+	$	22.3	28	%	$	23.6	30	%
A	27.9		35		27.5		35
A-	4.8		6		2.8		4
Unrated by A.M. Best	25.2		31		23.8		31
Total reinsurance recoverable on unpaid losses	$	80.2	100	%	$	77.7	100	%

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Montpelier’s unrated reinsurance recoverables as of September 30, 2012 and December 31, 2011 relate to reinsurers that have either: (i) fully collateralized the reinsurance obligation; (ii) a Standard & Poor’s financial strength rating equivalent to an A.M. Best rating of “A-” (Excellent) or better; or (iii) are considered by management to be financially sound.

Reinsurance Disputes

Montpelier is subject to litigation and arbitration proceedings in the normal course of its business.  These proceedings often involve reinsurance contract disputes which are typical for the reinsurance industry.  Expected or actual reductions in reinsurance recoveries due to contract disputes, as opposed to a reinsurer’s inability to pay, are not recorded as an uncollectible reinsurance recoverable. Rather, they are factored into the determination of Montpelier’s net loss and LAE reserves.

As of September 30, 2012, Montpelier had no ongoing material insurance or reinsurance contract disputes.

NOTE 5.  Investments

Fixed Maturity Investments and Equity Securities

The table below shows the aggregate cost (or amortized cost) and fair value of Montpelier’s fixed maturity investments and equity securities, by investment type, as of the dates indicated:

	September 30, 2012				December 31, 2011
	Cost or AmortizedCost		FairValue		Cost or Amortized Cost		Fair Value
Fixed maturity investments:
Corporate debt securities	$	910.8	$	942.3	$	887.1	$	886.2
Residential mortgage-backed securities	667.7		687.2		560.8		574.4
Debt securities issued/sponsored by the U.S. Treasury and its agencies	508.6		516.7		488.6		495.7
Debt securities issued by foreign governments and their agencies	124.0		128.8		46.2		46.8
Commercial mortgage-backed securities	106.1		112.2		139.2		142.0
Debt securities issued by U.S. states and political subdivisions	64.1		71.3		58.3		64.7
Other debt obligations	235.8		239.1		178.9		180.4
Total fixed maturity investments	$	2,617.1	$	2,697.6	$	2,359.1	$	2,390.2
Equity securities:
Exchange-listed funds	$	25.0	$	26.2	$	25.0	$	23.6
Industrial	4.0		4.4		4.7		6.4
Financial	3.9		4.0		11.9		9.4
Consumer goods	3.2		3.6		4.6		9.0
Utilities	1.9		1.9		—		—
Energy	0.1		0.1		16.5		24.5
Technology	0.1		0.1		14.2		19.5
Other	0.7		0.6		2.4		3.7
Total equity securities	$	38.9	$	40.9	$	79.3	$	96.1

As a provider of insurance and reinsurance for natural and man-made catastrophes, Montpelier could become liable for significant losses on short notice.  As a result, its asset allocation is predominantly oriented toward high quality, fixed maturity securities with a short average duration. This asset allocation is designed to reduce Montpelier’s sensitivity to interest rate fluctuations and provide a secure level of liquidity for the settlement of its liabilities as they arise.  As of September 30, 2012, Montpelier’s fixed maturities had an average credit quality of “AA-” (Very Strong) by Standard & Poor’s and an average duration of 3.2 years (inclusive of fixed maturity short positions).

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As of September 30, 2012, 78% of Montpelier’s fixed maturity investments were either rated “A” (Strong) or better by Standard & Poor’s (or represented U.S. government or U.S. government-sponsored enterprise securities), 10% were rated “BBB” (Good) by Standard & Poor’s and 12% were either unrated or rated below “BBB”.

In addition to the investment securities presented above, Montpelier had open short fixed maturity positions of $143.9 million and $128.5 million as of September 30, 2012 and December 31, 2011, respectively.  Montpelier also had open short equity and investment option and future positions of $9.5 million and $7.8 million at September 30, 2012 and December 31, 2011, respectively.  Net unrealized gains (losses) associated with Montpelier’s open short positions totaled $(4.9) million and $1.1 million as of September 30, 2012 and December 31, 2011, respectively.

Other Investments

Montpelier’s investments in limited partnership interests and private investment funds are carried at either their fair values or their underlying net asset values, depending on Montpelier’s ownership share. For those funds carried at fair values, the underlying net asset value is used as a best estimate of fair value.  Montpelier’s CAT Bonds and derivative instruments are carried at fair value.  The table below shows the aggregate cost and carrying value of Montpelier’s other investments, by investment type, as of the dates indicated:

	September 30, 2012				December 31, 2011
	Cost		CarryingValue		Cost		Carrying Value
Other investments carried at net asset value:
Limited partnership interests and private investment funds	$	74.2	$	74.2	$	59.8	$	59.8
Other investments carried at fair value:
Limited partnership interests and private investment funds	$	16.5	$	13.5	$	29.2	$	29.3
CAT Bonds	10.0		10.0		10.0		10.2
Derivative instruments	0.9		4.5		1.0		3.1
Total other investments carried at fair value	$	27.4	$	28.0	$	40.2	$	42.6
Other investments	$	101.6	$	102.2	$	100.0	$	102.4

Net appreciation or depreciation in the value of Montpelier’s investments in limited partnerships, private investment funds and CAT Bonds is reported within “net realized and unrealized investment gains” in the Company’s consolidated statements of operations.  Net appreciation or depreciation on Montpelier’s derivative instruments is reported within “net income (loss) from derivative instruments” in the Company’s consolidated statements of operations.  See Note 7.

Montpelier’s interests in limited partnerships and private investment funds that are carried at fair value relate to vehicles that invest in distressed mortgages. Redemptions from these investments occur at the discretion of the investment manager or, in other cases, subject to a unanimous vote of the partners. Montpelier does not currently expect to redeem a significant portion of these investments during 2012.

Montpelier’s interests in limited partnerships and private investment funds that are carried at net asset value relate to vehicles that invest in the following:

·Small growth-oriented businesses,

·Structured credit instruments backed by residential mortgages and other loans and receivables, and

·Public and private equity, fixed maturity and derivative instruments.

Approximately half of Montpelier’s interests in limited partnerships and private investment funds carried at net asset value can be redeemed with no penalty upon 45 days’ notice.  Redemptions of the remaining interests are subject to  early termination fees and liquidity constraints.  Montpelier does not currently expect to redeem a significant portion of any of these investments during 2012.

Montpelier also had open Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts and Investment Options and Futures contracts as of September 30, 2012 and December 31, 2011.  See Note 7.

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Fair Value Hierarchy

GAAP establishes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into the three broad levels described below. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date, Level 2 inputs are inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly, and Level 3 inputs are unobservable inputs for the asset or liability.

Montpelier uses an independent service provider for assistance with its investment accounting function. This service provider, as well as Montpelier’s investment managers, use several pricing services and brokers to assist with the determination of the fair value of Montpelier’s marketable securities. Montpelier performs several reviews of these values as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s financial statements are appropriate. The ultimate pricing source varies depending on the security and pricing service, but investments valued on the basis of observable (Levels 1 and 2) inputs are generally assigned values on the basis of actual transactions. Securities valued on the basis of pricing models with significant unobservable inputs or non-binding broker quotes are classified as Level 3.

In accordance with GAAP, the valuation techniques used by Montpelier and its pricing services maximize the use of observable inputs.  Unobservable inputs are used to measure fair value only to the extent that observable inputs are unavailable. Montpelier uses both the market and income approaches in valuing its investments.  There have been no significant changes in the Company’s use of valuation techniques or related inputs during the periods presented.

The following tables present Montpelier’s investments carried at fair value, categorized by the level within the hierarchy in which the fair value measurements fall, at September 30, 2012 and December 31, 2011:

	September 30, 2012
	Level 1		Level 2		Level 3		Total
Fixed maturity investments:
Corporate debt securities	$	—	$	846.1	$	96.2	$	942.3
Residential mortgage-backed securities	—		687.2		—		687.2
Debt securities issued/sponsored by the U.S. Treasury and its agencies	291.4		225.3		—		516.7
Debt securities issued by foreign governments and their agencies	3.8		125.0		—		128.8
Commercial mortgage-backed securities	—		112.2		—		112.2
Debt securities issued by U.S. states and political subdivisions	—		71.3		—		71.3
Other debt obligations	—		225.3		13.8		239.1
Total fixed maturity investments	$	295.2	$	2,292.4	$	110.0	$	2,697.6
Equity securities:
Exchange-listed funds	$	—	$	26.2	$	—	$	26.2
Industrial	4.4		—		—		4.4
Financial	4.0		—		—		4.0
Consumer goods	3.6		—		—		3.6
Utilities	1.9		—		—		1.9
Energy	0.1		—		—		0.1
Technology	0.1		—		—		0.1
Other	0.6		—		—		0.6
Total equity securities	$	14.7	$	26.2	$	—	$	40.9
Other investments carried at fair value	$	—	$	14.5	$	13.5	$	28.0
Total investments carried at fair value	$	309.9	$	2,333.1	$	123.5	$	2,766.5
Other investments carried at net asset value	$	—	$	50.7	$	23.5	$	74.2
Total investments	$	309.9	$	2,383.8	$	147.0	$	2,840.7

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	December 31, 2011
	Level 1		Level 2		Level 3		Total
Fixed maturity investments:
Corporate debt securities	$	—	$	841.5	$	44.7	$	886.2
Residential mortgage-backed securities	—		574.4		—		574.4
Debt securities issued/sponsored by the U.S. Treasury and its agencies	163.1		332.6		—		495.7
Commercial mortgage-backed securities	—		142.0		—		142.0
Debt securities issued by U.S. states and political subdivisions	—		64.7		—		64.7
Debt securities issued by foreign governments and their agencies	1.6		45.2		—		46.8
Other debt obligations	—		170.7		9.7		180.4
Total fixed maturity investments	$	164.7	$	2,171.1	$	54.4	$	2,390.2
Equity securities:
Exchange-listed funds	$	—	$	23.6	$	—	$	23.6
Financial	9.4		—		—		9.4
Consumer goods	9.0		—		—		9.0
Industrial	6.4		—		—		6.4
Energy	24.5		—		—		24.5
Technology	19.5		—		—		19.5
Other	3.7		—		—		3.7
Total equity securities	$	72.5	$	23.6	$	—	$	96.1
Other investments carried at fair value	$	—	$	13.3	$	29.3	$	42.6
Total investments carried at fair value	$	237.2	$	2,208.0	$	83.7	$	2,528.9
Other investments carried at net asset value	$	—	$	25.4	$	34.4	$	59.8
Total investments	$	237.2	$	2,233.4	$	118.1	$	2,588.7

Level 1 Securities

Montpelier’s investments classified as Level 1 as of September 30, 2012 and December 31, 2011, consisted of U.S. Treasuries, debt securities issued by foreign governments and long and short equity positions that are publicly listed and/or actively traded in an established market.  In addition, as of September 30, 2012 and December 31, 2011, approximately 17% and 40%, respectively, of Montpelier’s open short fixed maturity positions were valued on the basis of Level 1 inputs.

Level 2 Securities

For Montpelier’s investments classified as Level 2 as of September 30, 2012 and December 31, 2011, Montpelier’s pricing vendors generally utilize third-party market data and other observable inputs in matrix pricing models to determine prices. Although prices for these securities obtained from broker quotations are generally considered non-binding, they are based on observable inputs and secondary trading patterns of similar securities obtained from active, non-distressed markets.  In addition, as of September 30, 2012 and December 31, 2011, approximately 83% and 60%, respectively, of Montpelier’s open short fixed maturity positions are valued on the basis of Level 2 inputs.

Further details for selected investment types classified as Level 2 follow:

Corporate debt securities.  Montpelier’s Level 2 corporate debt securities are priced using market sources and other considerations such as the issuer of the security, credit data, the specific terms and conditions of the securities, including any specific features which may influence risk, as well as other observations from relevant market and sector news reports.  Evaluations are updated by obtaining broker quotes and other market information including actual trade volumes, when available.  Each security is individually evaluated using a spread model which is added to the U.S. Treasury curve.

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Residential mortgage-backed securities and debt securities issued/sponsored by the U.S. Treasury and its agencies.  Montpelier’s Level 2  residential mortgage-backed securities and debt securities issued by U.S. agencies are priced using a mortgage-pool-specific model which utilizes daily inputs from the to-be-announced, or “TBA” market (the most liquid secondary market for mortgage loans), as well as the U.S. Treasury market. This pricing model also utilizes additional information such as the weighted average maturity, weighted average coupon and other available pool level data which is provided by the agency. Valuations are also corroborated by daily active market quotes.

Montpelier’s Level 2 U.S. government-sponsored enterprise securities are priced using information from market sources, as well as other observations from relevant market and sector news. Evaluations are updated by obtaining broker quotes and other market information including actual trade volumes, when available. Each security is individually evaluated using analytical models which incorporate option-adjusted spreads and other relevant interest rate data.

Commercial mortgage-backed securities.  Montpelier’s Level 2 commercial mortgage-backed securities are priced using dealer quotes and other available trade information such as bids and offers, prepayment speeds (which may be adjusted for the underlying collateral or current price data), the U.S. Treasury curve, swap curve and TBA values, as well as cash settlement. This pricing methodology utilizes a single cash flow stream, computes both a yield-to-call and weighted average yield-to-maturity and generates a derived price for the security by applying the most likely scenario.

Equity securities.  Montpelier’s Level 2 equity securities represent investments in exchange-listed funds which are priced based on net asset values provided by the relevant investment managers.

There were no transfers between Levels 1 and 2 during the three and nine month periods ended September 30, 2012 and 2011.

Level 3 Securities

Montpelier’s investments classified as Level 3 as of September 30, 2012 and December 31, 2011 consisted primarily of the following: (i) with respect to certain fixed maturity investments, bank loans and certain asset-backed securities, many of which are not actively traded; and (ii) with respect to other investments, certain limited partnerships and private investment funds.

Further details for selected investment types follow:

Corporate debt securities.  Montpelier’s Level 3 corporate debt securities represent bank loans that are priced using non-binding broker quotes that cannot be corroborated with other externally obtained information.

Other investments.  Montpelier’s Level 3 other investments include investments in limited partnerships and private investment funds at September 30, 2012 and December 31, 2011 which represent alternative asset limited partnerships that invest in distressed mortgages.  The fair value of these private equity investments is based on net asset values obtained from the investment manager or general partner of the respective entity. The underlying investments held by the investee, which form the basis of the net asset valuation, can require significant management judgment by the investee to determine the underlying value.  Montpelier also considers financial and other information in making its own determination of value. Montpelier regularly reviews the performance of these entities directly with the fund and partnership managers.

As of September 30, 2012 and December 31, 2011, the Company’s Level 3 investments measured at fair value represented 4.5% and 3.3% of its total investments measured at fair value, respectively.  As of September 30, 2012 and December 31, 2011, the Company’s total Level 3 investments represented 5.2% and 4.6% of its total investments, respectively.

The following tables present a reconciliation of the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and nine month periods ended September 30, 2012 and 2011:

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	Three Month Period Ended September 30, 2012
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains		Net unrealized gains (losses)			Ending  Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	75.6	$	33.4	$	(14.1	)	$	—	$	1.3		$	96.2
Other debt obligations	7.3		8.8		(2.4		)	—		0.1			13.8
Total fixed maturity investments	82.9		42.2		(16.5		)	—		1.4			110.0
Other investments	26.0		—		(13.3		)	4.2		(3.4		)	13.5
Total Level 3 investments at fair value	$	108.9	$	42.2	$	(29.8	)	$	4.2	$	(2.0	)	$	123.5

	Nine Month Period Ended September 30, 2012
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains		Net unrealized gains (losses)			Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	44.7	$	114.9	$	(66.2	)	$	0.5	$	2.3		$	96.2
Other debt obligations	9.7		8.8		(4.8		)	—		0.1			13.8
Total fixed maturity investments	54.4		123.7		(71.0		)	0.5		2.4			110.0
Other investments	29.3		—		(18.1		)	5.5		(3.2		)	13.5
Total Level 3 investments at fair value	$	83.7	$	123.7	$	(89.1	)	$	6.0	$	(0.8	)	$	123.5

	Three Months Ended September 30, 2011
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized losses			Net unrealized losses			Net transfers out		Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	35.6	$	13.7	$	(4.2	)	$	—		$	(0.9	)	$	—	$	44.2
Other debt obligations	12.1		—		(1.4		)	—			—			—		10.7
Total fixed maturity investments	$	47.7	$	13.7	$	(5.6	)	$	—		$	(0.9	)	$	—	$	54.9
Other investments	$	34.7	$	—	$	(1.8	)	$	(0.7	)	$	(0.6	)	$	—	$	31.6
Total Level 3 investments	$	82.4	$	13.7	$	(7.4	)	$	(0.7	)	$	(1.5	)	$	—	$	86.5

	Nine Months Ended September 30, 2011
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized losses			Net unrealized gains (losses)			Net transfers out		Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	37.9	$	20.1	$	(13.1	)	$	—		$	(0.7	)	$	—	$	44.2
Other debt obligations	4.7		7.7		(1.8		)	—			0.1			—		10.7
Total fixed maturity investments	$	42.6	$	27.8	$	(14.9	)	$	—		$	(0.6	)	$	—	$	54.9
Other investments	$	42.6	$	—	$	(8.1	)	$	(0.2	)	$	(2.7