NOTE 1. Basis of Presentation and 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 and affiliates in Bermuda, the United Kingdom (the “U.K.”) and the United States (the “U.S.”), collectively “Montpelier,” provides customized and innovative insurance and reinsurance solutions to the global market. Through its affiliates in Bermuda, the Company provides institutional and retail investors with direct access to the global property catastrophe reinsurance market. The Company’s headquarters and principal executive offices are located at Montpelier House, 94 Pitts Bay Road, Pembroke, Bermuda HM 08.

The unaudited consolidated financial statements incorporated in this report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the U.S. (“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. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the “SEC”). In the opinion of management, these interim consolidated 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 consolidated financial statements may not be indicative of financial results for the full year. The December 31, 2013 condensed balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP.

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 these interim 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.

Reportable Segments

The Company currently operates through three reportable segments: Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance.

Each of the Company’s segments represents a separate underwriting platform through which Montpelier writes insurance and reinsurance business. The Company’s segment disclosures provided herein present the operations of Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance prior to the effects of certain inter-segment reinsurance agreements among them.

Detailed financial information about each of the Company’s reportable segments for the periods presented herein is presented in Note 8. The activities of the Company, certain intermediate holding and service companies, intercompany eliminations relating to certain inter-segment reinsurance agreements and support services and the business retained upon the Company’s 2011 sale (the “MUSIC Sale”) of Montpelier U.S. Insurance Company (“MUSIC”) to Selective Insurance Group, Inc. (“Selective”), collectively referred to as “Corporate and Other”, are also presented in Note 8.

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

Montpelier Bermuda

The Montpelier Bermuda segment consists of the assets and operations of Montpelier Reinsurance Ltd. (“Montpelier Re”).

Montpelier Re, the Company’s wholly-owned operating subsidiary based in Pembroke, Bermuda, is registered as a Bermuda Class 4 insurer. Montpelier Re seeks to identify and underwrite insurance and reinsurance opportunities by combining underwriting experience with proprietary risk pricing and capital allocation models and catastrophe modeling tools. Montpelier Re focuses on writing short-tail U.S. and international catastrophe treaty reinsurance on both an excess-of-loss and proportional basis. Montpelier Re also writes specialty treaty reinsurance, including casualty, aviation, space, personal accident, workers’ compensation catastrophe, political violence and terrorism classes of business, as well as insurance and facultative reinsurance business.

Montpelier at Lloyd’s

The Montpelier at Lloyd’s segment consists of the collective assets and operations of Montpelier Syndicate 5151 (“Syndicate 5151”), Montpelier Capital Limited (“MCL”), Montpelier at Lloyd’s Limited (“MAL”), Montpelier Underwriting Services Limited (“MUSL”) and Montpelier Underwriting Inc. (“MUI”).

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 U.K. subsidiary based in London, serves as Syndicate 5151’s corporate underwriting member at Lloyd’s.

MAL, the Company’s wholly-owned Lloyd’s Managing Agent based in London, manages Syndicate 5151.

MUSL, the Company’s wholly-owned U.K. subsidiary based in London, provides support services to Syndicate 5151, MAL and MCL.

MUI, the Company’s wholly-owned subsidiary based in Woburn, Massachusetts serves as a Lloyd’s Coverholder, meaning that it is authorized to enter into insurance and reinsurance contracts and/or issue documentation on behalf of Syndicate 5151. MUI underwrites reinsurance business through managing general agents and intermediaries.

Collateralized Reinsurance

The Collateralized Reinsurance segment, which Montpelier markets under the name Blue Capital_ (Blue Capital is a registered trademark of the Company), was launched in 2012 as an asset management platform offering a range of property catastrophe reinsurance-linked investment products to institutional and retail investors. Blue Capital_ differentiates itself by providing institutional and retail investors with the opportunity to directly invest in global property catastrophe reinsurance risks.

The Collateralized Reinsurance segment consists of the assets and operations of Blue Water Re Ltd. (“Blue Water Re”), Blue Water Master Fund Ltd. (the “Master Fund”), Blue Capital Management Ltd. (“BCML”), Blue Capital Insurance Managers Ltd. (“BCIML”) and the operating subsidiaries of Blue Capital Reinsurance Holdings Ltd. (“BCRH”).

Blue Water Re is a wholly-owned Bermuda-based special purpose insurance vehicle that provides collateralized property catastrophe reinsurance coverage and related products. Blue Water Re was established in November 2011 and commenced its operations in June 2012.

The Master Fund is an exempted mutual fund segregated accounts company which was incorporated in Bermuda in December 2011. The Master Fund has various segregated accounts, including the BCAP Mid Vol Fund cell (the “Mid Vol Cell”), the Blue Capital Low Volatility Strategy cell (the “Low Vol Cell”) and the Blue Capital Global Reinsurance SA-I cell (the “BCGR Cell”) (collectively, the “Cells”).

The Cells may invest in: (i) fully-collateralized property catastrophe reinsurance contracts by subscribing for non-voting redeemable preference shares issued by Blue Water Re, with each series of such preference shares linked to a specific reinsurance contract with a third-party ceding company; and (ii) various insurance-linked securities issued by entities other than Blue Water Re.

As of March 31, 2014 and December 31, 2013, Montpelier Re was the sole investor in the Mid Vol Cell and the Low Vol Cell.

BCML and BCIML (collectively the “Managers”) are wholly-owned Bermuda-based subsidiaries which provide investment and insurance management services to: (i) Blue Water Re; (ii) various segregated accounts of the Master Fund, including the Cells; and (iii) BCRH and its subsidiaries.

BCRH is a Bermuda-based exempted limited liability holding company which provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its wholly-owned Bermuda-based subsidiaries Blue Capital Re Ltd. (“Blue Capital Re”) and Blue Capital Re ILS Ltd. (“Blue Capital Re ILS”). The underwriting decisions and operations of BCRH and its subsidiaries are managed by BCML and BCIML, and each uses Montpelier’s reinsurance underwriting expertise and infrastructure to conduct its business. BCRH commenced its operations in November 2013 and its common shares are listed on the New York Stock Exchange, under the symbol BCRH, and the Bermuda Stock Exchange, under the symbol BCRH.BH. As of March 31, 2014 and December 31, 2013, Montpelier Re owned 28.6% of BCRH’s outstanding common shares.

BCRH is considered a “variable interest entity” under GAAP and the Company has determined that it is BCRH’s primary beneficiary. As a result, the Company fully consolidates the assets, liabilities and operations of BCRH and its subsidiaries within its consolidated financial statements and Collateralized Reinsurance segment disclosures. The interests in BCRH and its subsidiaries that the Company fully consolidates which are attributable to third-party investors are reported within the Company’s consolidated financial statements as non-controlling interests. See “Non-Controlling Interests” in this Note 1.

Blue Capital Global Reinsurance Fund Limited (the “BCGR Listed Fund”) is a closed-ended mutual fund incorporated in Bermuda that serves as the feeder fund for the BCGR Cell. The BCGR Listed Fund commenced its operations in October 2012 and its ordinary shares are listed on the Specialist Fund Market of the London Stock Exchange, under the symbol BCGR, and on the Bermuda Stock Exchange, under the symbol BCGR.BH. As of March 31, 2014 and December 31, 2013, Montpelier Re owned 28.9% of the BCGR Listed Fund’s ordinary shares.

The BCGR Listed Fund is considered a “voting interest entity” under GAAP and, since Montpelier Re owns less than 50% of its outstanding ordinary shares, the Company does not consolidate the assets, liabilities or operations of the BCGR Listed Fund within either its consolidated financial statements or its Collateralized Reinsurance segment disclosures. However, the BCGR Cell and Blue Water Re are considered variable interest entities under GAAP and the Company has determined that it is these entities’ primary beneficiary. Therefore, as funds held in the BCGR Listed Fund are deployed into the BCGR Cell, and ultimately into Blue Water Re, they are included in the Company’s consolidated financial statements and Collateralized Reinsurance segment disclosures. Conversely, as funds previously deployed by the BCGR Listed Fund and the BCGR Cell into Blue Water Re are returned to the BCGR Listed Fund, they are no longer included in the Company’s consolidated financial statements or its Collateralized Reinsurance segment disclosures.

The interests in the BCGR Cell and Blue Water Re that the Company fully consolidates which are attributable to third- party investors are reported within the Company’s consolidated financial statements as non-controlling interests. See “Non-Controlling Interests” in this Note 1.

Corporate and Other

The Company’s Corporate and Other activities consist of the assets and operations of: (i) the Company and certain of its intermediate holding and service and support companies, including Montpelier Technical Resources Ltd. (“MTR”); (ii) intercompany eliminations relating to certain inter-segment reinsurance agreements; and (iii) the business retained upon the MUSIC Sale (“MUSIC Run-Off”).

Prior to 2014, the Company presented its MUSIC Run-Off operations as a separate reportable segment. Beginning in 2014, the Company revised its reportable segments to present its former MUSIC Run-Off operations within Corporate and Other. For the periods presented in this report, the operations of MUSIC Run-Off were not material to Montpelier’s consolidated financial results and all such periods have been restated to conform with the current presentation.

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

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 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 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

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

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

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.

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 March 31, 2014 and December 31, 2013, funds withheld balances of $7.5 million and $8.2 million, respectively, were recorded within other assets on the Company’s consolidated balance sheets.

Non-Controlling Interests

The following table summarizes the movements in the non-controlling interests balance during the three month periods ended March 31, 2014 and 2013:

	Three Month Periods
	Ended March 31,
	2014			2013
Non-controlling interests - beginning	$	244.9		$	—
Income attributable to third-party investments in the BCGR Cell	4.7			1.2
Income attributable to third-party investments in BCRH	4.3			—
Net income attributable to non-controlling interests	9.0			1.2
Third-party investment in the BCGR Cell	0.2			31.4
Dividends declared by BCRH attributable to non-controlling interests	(1.9		)	—
Non-controlling interests - ending	$	252.2		$	32.6