Basis of Presentation and Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2014

Basis of Presentation and Summary of Significant Accounting Policies

Insurance and Reinsurance Premiums and Related Costs

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 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 March 31, 2014 and December 31, 2013, Montpelier’s provision for doubtful accounts was $3.6 million.

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 Montpelier determines that such a loss event has occurred.

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 typically 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 herein.

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

Foreign Currency Exchange

Foreign Currency Exchange

The U.S. dollar is the Company’s reporting currency and the British pound is the functional currency for the Company’s U.K.- based operations. The U.S. dollar is the functional currency for all other operations. The assets and liabilities of the Company’s U.K. 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 currency 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 or loss.

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

Currency	Opening Rate January 1, 2014	Closing Rate March 31, 2014	Opening Rate January 1, 2013	Closing Rate March 31, 2013
British Pound (GBP)	1.6559	1.6665	1.6234	1.5178

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 currency transaction gains and losses arising from these activities are reported as a component of net income in the period in which they arise.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents of $747.4 million at March 31, 2014, consisting of unrestricted cash and fixed income investments with maturities of less than three months (as measured from the date of purchase), were comprised of: (i) $336.3 million earmarked for, and held in, trusts supporting the Company’s Collateralized Reinsurance operations; (ii) $365.6 million held by Montpelier’s investment advisors; (iii) $30.6 million held for operating expenses, including a provision for losses that may become due for payment on short notice; and (iv) $14.9 million held for other obligations and contingencies. Cash and cash equivalents of $468.4 million at December 31, 2013, consisting of unrestricted cash and fixed income investments with maturities of less than three months (as measured from the date of purchase), were comprised of: (i) $314.6 million earmarked for, and held in, trusts supporting the Company’s Collateralized Reinsurance operations; (ii) $120.9 million held by Montpelier’s investment advisors; (iii) $28.0 million held for operating expenses, including a provision for losses that may become due for payment on short notice; and (iv) $4.9 million held for other obligations and contingencies.

Restricted Cash

Restricted Cash

Restricted cash of $74.5 million at March 31, 2014 consisted of $60.3 million of collateral supporting investment securities sold short and open derivative positions and $14.2 million of foreign deposit accounts held at Lloyd’s. Restricted cash of $133.7 million at December 31, 2013 consisted of $121.1 million of collateral supporting investment securities sold short and open derivative positions and $12.6 million of foreign deposit accounts held at Lloyd’s.

Investments

Investments

Montpelier’s fixed maturity investments, equity securities and investment securities sold short 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) on the Company’s consolidated statement of operations.

Substantially all of Montpelier’s other investments are valued based on the equity method of accounting (which is based on underlying net asset values) and consist of investments in limited partnership interests and private investment funds, the BCGR Listed Fund, event-linked securities whose principal and interest are forgiven if specific events occur (“CAT Bonds”) and certain derivative instruments.  See Notes 4 and 6.

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 a 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 balance sheet 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.

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 or losses and net income or loss from derivative instruments are presented net of any associated performance fees.  During the three month periods ended March 31, 2014 and 2013, Montpelier incurred performance fees related to investments of $1.5 million and $0.9 million, respectively.  During the three month periods ended March 31, 2014 and 2013 Montpelier incurred (reversed) performance fees related to investment-related derivative instruments of $(0.7) million and $0.3 million, respectively.

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.

Repurchase and Reverse Repurchase Agreements

Repurchase and Reverse Repurchase Agreements

In connection with Montpelier’s investing activities, certain of its investment managers have entered into repurchase and reverse repurchase agreements in order to enhance Montpelier’s investment performance.

A repurchase agreement, which is essentially a form of short-term borrowing, involves the sale of an investment security to a third-party buyer with the proviso that the seller (Montpelier in this instance) will repurchase the same security from the same party for an agreed-upon price on a specified future date.  As of March 31, 2014 and December 31, 2013, Montpelier had amounts payable under repurchase agreements of $402.7 million and zero, respectively.  In accordance with GAAP, investment securities sold under repurchase agreements continue to be reflected in Montpelier’s consolidated balance sheets.

A reverse repurchase agreement, which is essentially a form of short-term lending, involves the purchase of an investment security from a third-party seller with the proviso that the buyer (Montpelier in this instance) will sell the same security to the same party for an agreed-upon price on a specified future date.  As of March 31, 2014 and December 31, 2013, Montpelier had amounts receivable under reverse repurchase agreements of $121.5 million and $80.8 million, respectively.  In accordance with GAAP, investment securities purchased under reverse repurchase agreements are not reflected in Montpelier’s consolidated balance sheets.

Common Shares Held in Treasury

Common Shares Held in Treasury

The Company’s common shares (“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 March 31, 2014, the Company’s $3.1 million inception to-date loss from issuances of its treasury shares has been recorded as a reduction to retained earnings on the Company’s consolidated balance sheet for that period. As of December 31, 2013, the Company’s $4.1 million inception to-date loss from issuances of its treasury shares has been recorded as a reduction to retained earnings on the Company’s consolidated balance sheet for that period.  See Note 7.