UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2014

OR

oTRANSITION 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 August 1, 2014, the registrant had 45,721,116 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 June 30, 2014 and December 31, 2013 (Unaudited)	3
	Consolidated Statements of Operations and Comprehensive Income for the Three and Six Month Periods Ended June 30, 2014 and 2013 (Unaudited)	4
	Consolidated Statements of Shareholders’ Equity for the Six Month Periods Ended June 30, 2014 and 2013 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2014 and 2013 (Unaudited)	6
	Notes to Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	53
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	86
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	87
Item 1A.	Risk Factors	87
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	87
Item 3.	Defaults Upon Senior Securities	87
Item 4.	Mine Safety Disclosures	87
Item 5.	Other Information	87
Item 6.	Exhibits	88
SIGNATURES		88

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED BALANCE SHEETS

Unaudited

	June 30,			December 31,
(In millions of U.S. dollars, except share amounts)	2014			2013
Assets
Fixed maturity investments, at fair value (amortized cost: $2,252.9 and $2,421.9)	$	2,289.1		$	2,430.8
Equity securities, at fair value (cost: $146.9 and $106.6)	163.2			117.3
Other investments (cost: $379.4 and $77.7)	381.4			78.8
Total investments	2,833.7			2,626.9
Cash and cash equivalents	544.9			468.4
Restricted cash	52.4			133.7
Reinsurance recoverable on unpaid losses	57.4			63.6
Reinsurance recoverable on paid losses	6.8			3.6
Insurance and reinsurance premiums receivable	333.6			203.4
Unearned reinsurance premiums ceded	52.0			22.6
Deferred insurance and reinsurance acquisition costs	68.1			51.5
Accrued investment income	14.7			15.0
Amounts receivable under reverse repurchase agreements	56.3			80.8
Unsettled sales of investments	232.7			58.8
Other assets	31.1			30.2
Total Assets	$	4,283.7		$	3,758.5
Liabilities
Loss and loss adjustment expense reserves	$	861.9		$	881.6
Debt	399.2			399.2
Unearned insurance and reinsurance premiums	433.2			276.7
Insurance and reinsurance balances payable	76.3			43.3
Amounts payable under repurchase agreements	71.5			—
Investment securities sold short, at fair value	234.1			155.6
Unsettled purchases of investments	235.4			58.8
Accounts payable, accrued expenses and other liabilities	49.6			56.3
Total Liabilities	2,361.2			1,871.5
Commitments and Contingent Liabilities (See Note 10)	—			—
Shareholders’ Equity
Non-cumulative preferred shares (“Preferred Shares”) - issued 6,000,000 shares	150.0			150.0
Common Shares, at par value - issued 47,967,660 and 50,462,839 shares	0.1			0.1
Additional paid-in capital	829.7			900.5
Common Shares held in treasury, at cost: 1,792,963 and 1,188,674 shares	(40.0		)	(18.9		)
Retained earnings	729.0			612.8
Accumulated other comprehensive loss	(1.0		)	(2.4		)
Total Shareholders’ Equity available to the Company	1,667.8			1,642.1
Non-controlling interests	254.7			244.9
Total Shareholders’ Equity	1,922.5			1,887.0
Total Liabilities and Shareholders’ Equity	$	4,283.7		$	3,758.5

See Notes to Consolidated Financial Statements

3

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Unaudited

	Three Month Periods						Six Month Periods
	Ended June 30,						Ended June 30,
(In millions of U.S. dollars, except per share amounts)	2014			2013			2014			2013
Revenues
Gross insurance and reinsurance premiums written	$	239.0		$	242.7		$	512.5		$	503.9
Ceded reinsurance premiums	(34.1		)	(44.9		)	(70.5		)	(80.1		)
Net insurance and reinsurance premiums written	204.9			197.8			442.0			423.8
Change in net unearned insurance and reinsurance premiums	(42.3		)	(58.9		)	(122.6		)	(125.2		)
Net insurance and reinsurance premiums earned	162.6			138.9			319.4			298.6
Net investment income	12.4			16.7			25.3			33.1
Net realized and unrealized investment gains (losses)	19.8			(61.2		)	42.5			(61.9		)
Net foreign currency gains (losses)	(8.8		)	(5.3		)	(10.6		)	15.8
Net losses from derivative instruments	(11.2		)	(12.2		)	(16.3		)	(7.6		)
Other revenue	0.7			—			1.0			—
Total revenues	175.5			76.9			361.3			278.0
Expenses
Underwriting expenses:
Loss and loss adjustment expenses	66.5			46.8			93.9			97.4
Insurance and reinsurance acquisition costs	29.4			22.6			54.2			44.7
General and administrative expenses	28.9			26.4			55.7			53.3
Non-underwriting expenses:
Interest and other financing expenses	4.7			4.7			9.4			9.4
Other expenses	1.0			—			1.0			—
Total expenses	130.5			100.5			214.2			204.8
Income (loss) before income taxes	45.0			(23.6		)	147.1			73.2
Income tax benefit (provision)	(0.2		)	0.4			(0.1		)	0.2
Net income (loss)	44.8			(23.2		)	147.0			73.4
Net income attributable to non-controlling interests	(4.3		)	(0.7		)	(13.3		)	(1.9		)
Net income (loss) available to the Company	40.5			(23.9		)	133.7			71.5
Dividends declared on Preferred Shares	(3.4		)	(3.4		)	(6.7		)	(6.7		)
Net income (loss) available to the Company’s common shareholders	$	37.1		$	(27.3	)	$	127.0		$	64.8
Net income (loss)	$	44.8		$	(23.2	)	$	147.0		73.4
Net change in foreign currency translation	1.2			0.3			1.4			(3.2		)
Comprehensive income (loss)	46.0			(22.9		)	148.4			70.2
Net income attributable to non-controlling interest	(4.3		)	(0.7		)	(13.3		)	(1.9		)
Comprehensive income (loss) available to the Company	$	41.7		$	(23.6	)	$	135.1		$	68.3
Per share data:
Basic and diluted earnings (loss) per Common Share	$	0.78		$	(0.52	)	$	2.63		$	1.19
Dividends declared per Common Share	0.125			0.115			0.25			0.23

See Notes to Consolidated Financial Statements

4

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Six Month Periods Ended June 30, 2014 and 2013

Unaudited

																	Accum.
	Total					Common		Additional			Common						other			Non-
	shareholders’			Preferred		Shares, at		paid-in			Shares held			Retained			comprehensive			controlling
(In millions of U.S. dollars)	equity			Shares		par value		capital			in treasury			earnings			loss			interests
Opening balances at January 1, 2014	$	1,887.0		$	150.0	$	0.1	$	900.5		$	(18.9	)	$	612.8		$	(2.4	)	$	244.9
Net income	147.0			—		—		—			—			133.7			—			13.3
Net change in foreign currency translation	1.4			—		—		—			—			—			1.4			—
Repurchases of Common Shares	(96.4		)	—		—		(70.7		)	(25.7		)	—			—			—
Issuances of Common Shares from treasury	—			—		—		(5.5		)	4.6			0.9			—			—
Expense recognized for RSUs	7.1			—		—		7.1			—			—			—			—
RSUs withheld for income taxes	(1.8		)	—		—		(1.8		)	—			—			—			—
Purchases of non-controlling interests	(1.7		)	—		—		0.1			—			—			—			(1.8		)
Net contributions from non-controlling interests	2.1			—		—		—			—			—			—			2.1
Dividends declared - non-controlling interests	(3.8		)	—		—		—			—			—			—			(3.8		)
Dividends declared - Common Shares	(11.7		)	—		—		—			—			(11.7		)	—			—
Dividends declared - Preferred Shares	(6.7		)	—		—		—			—			(6.7		)	—			—
Ending balances at June 30, 2014	$	1,922.5		$	150.0	$	0.1	$	829.7		$	(40.0	)	$	729.0		$	(1.0	)	$	254.7

																	Accum.
	Total					Common		Additional			Common						other			Non-
	shareholders’			Preferred		Shares, at		paid-in			Shares held			Retained			comprehensive			controlling
(In millions of U.S. dollars)	equity			Shares		par value		capital			in treasury			earnings			loss			interests
Opening balances at January 1, 2013	$	1,629.4		$	150.0	$	0.1	$	1,056.0		$	(23.1	)	$	449.7		$	(3.3	)	$	—
Net income	73.4			—		—		—			—			71.5			—			1.9
Net change in foreign currency translation	(3.2		)	—		—		—			—			—			(3.2		)	—
Repurchases of Common Shares	(113.6		)	—		—		(113.6		)	—			—			—			—
Issuances of Common Shares from treasury	—			—		—		(4.9		)	4.9			—			—			—
Expense recognized for RSUs	6.8			—		—		6.8			—			—			—			—
RSUs withheld for income taxes	(2.1		)	—		—		(2.1		)	—			—			—			—
Net contributions from non-controlling interests	97.4			—		—		—			—			—			—			97.4
Dividends declared - Common Shares	(12.1		)	—		—		—			—			(12.1		)	—			—
Dividends declared - Preferred Shares	(6.7		)	—		—		—			—			(6.7		)	—			—
Ending balances at June 30, 2013	$	1,669.3		$	150.0	$	0.1	$	942.2		$	(18.2	)	$	502.4		$	(6.5	)	$	99.3

See Notes to Consolidated Financial Statements

5

MONTPELIER RE HOLDINGS LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

	Six Month Periods
	Ended June 30,
(In millions of U.S. dollars)	2014			2013
Cash flows from operations:
Net income	$	147.0		$	73.4
Charges (credits) to reconcile net income to net cash and cash equivalents provided from operations:
Net realized and unrealized investment (gains) losses	(42.5		)	61.9
Net amortization and depreciation of assets and liabilities	6.8			5.3
Expense recognized for RSUs	7.1			6.8
Net change in:
Loss and loss adjustment expense reserves	(31.0		)	(84.9		)
Reinsurance recoverable on paid and unpaid losses	11.9			(14.1		)
Unearned insurance and reinsurance premiums	151.3			152.5
Insurance and reinsurance balances payable	29.9			38.8
Unearned reinsurance premiums ceded	(28.7		)	(27.3		)
Deferred insurance and reinsurance acquisition costs	(15.4		)	(13.9		)
Insurance and reinsurance premiums receivable	(126.7		)	(125.7		)
Other assets	0.2			(3.8		)
Accounts payable, accrued expenses and other liabilities	(15.5		)	1.2
Other	12.1			(11.8		)
Net cash and cash equivalents provided from operations	106.5			58.4
Cash flows from investing activities:
Purchases of fixed maturity investments	(3,794.5		)	(2,911.7		)
Purchases of equity securities	(334.4		)	(154.5		)
Purchases of other investments	(568.8		)	—
Sales, maturities, calls and pay downs of fixed maturity investments	4,073.8			3,060.8
Sales of equity securities	275.5			90.6
Sales and redemptions of other investments	270.3			67.1
Settlements of investment-related derivative instruments	(8.7		)	(7.8		)
Net investments in reverse repurchase agreements	28.9			45.0
Net change in restricted cash	81.7			(45.9		)
Payments of accrued investment performance fees	(4.1		)	(6.4		)
Acquisitions of capitalized assets	(0.7		)	(0.6		)
Net cash and cash equivalents provided from investing activities	19.0			136.6
Cash flows from financing activities:
Repurchases of Common Shares	(93.7		)	(114.7		)
Net contributions from non-controlling interests	2.1			97.4
Purchases of non-controlling interests	(1.4		)	—
Net proceeds from repurchase agreements	59.7			—
Dividends paid - non-controlling interests	(1.9		)	—
Dividends paid - Common Shares	(12.1		)	(12.6		)
Dividends paid - Preferred Shares	(6.6		)	(6.6		)
Net cash and cash equivalents used for financing activities	(53.9		)	(36.5		)
Effect of foreign currency exchange rate fluctuations on cash and cash equivalents	4.9			(5.6		)
Net increase in cash and cash equivalents during the period	76.5			152.9
Cash and cash equivalents - beginning of year	468.4			283.4
Cash and cash equivalents - end of period	$	544.9		$	436.3

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.  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. Certain prior period amounts have been reclassified to conform with the current period presentation.

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 quota share 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 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.

7

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”).

8

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 June 30, 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 June 30, 2014 and December 31, 2013, Montpelier Re owned 29.6% and 28.6% of BCRH’s outstanding common shares, respectively.

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 June 30, 2014 and December 31, 2013, Montpelier Re owned 27.8% and 28.9% of the BCGR Listed Fund’s ordinary shares, respectively.

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) Cladium, Inc. (“Cladium”), a wholly-owned Florida-based managing general agency that was acquired by Montpelier on May 19, 2014; (iii) intercompany eliminations relating to inter-segment reinsurance agreements; and (iv) the business retained upon the MUSIC Sale (“MUSIC Run-Off”).

9

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 June 30, 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.

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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 June 30, 2014	Opening Rate  January 1, 2013	Closing Rate June 30, 2013
British Pound (GBP)	1.6559	1.7103	1.6234	1.5212

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 $544.9 million at June 30, 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) $421.4 million earmarked for, and held in, trusts supporting the Company’s Collateralized Reinsurance operations; (ii) $74.2 million held by Montpelier’s investment advisors; (iii) $32.7 million held for operating expenses, including a provision for losses that may become due for payment on short notice; and (iv) $16.6 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 $52.4 million at June 30, 2014 consisted of $39.5 million of collateral supporting investment securities sold short and open derivative positions and $12.9 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 reported within net realized and unrealized investment gains (losses) on the Company’s Consolidated Statement of Operations and Comprehensive Income.

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 investment funds, limited partnership interests, 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

11

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.  Montpelier incurred (reversed) performance fees related to investments of $0.6 million and $(0.1) million during the three month periods ended June 30, 2014 and 2013, respectively, and $2.1 million and $0.8 million during the six month periods ended June 30, 2014 and 2013, respectively.  Montpelier incurred (reversed) performance fees related to investment-related derivatives of $(0.5) million during each of the three month periods ended June 30, 2014 and 2013, and $(1.2) million and $(0.2) million during the six month periods ended June 30, 2014 and 2013, 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 June 30, 2014 and December 31, 2013, Montpelier had amounts payable under repurchase agreements of $71.5 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 June 30, 2014 and December 31, 2013, Montpelier had amounts receivable under reverse repurchase agreements of $56.3 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 June 30, 2014, the Company’s $3.2 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. 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.  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 June 30, 2014 and December 31, 2013, funds withheld balances of $6.2 million and $8.2 million, respectively, were recorded within other assets on the Company’s Consolidated Balance Sheets.

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Non-Controlling Interests

The following table summarizes the movements in non-controlling interests during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,					Six Month Periods Ended June 30,
	2014			2013		2014			2013
Non-controlling interests - beginning	$	252.2		$	32.6	$	244.9		$	—
Income attributable to third-party investments in the BCGR Cell	3.4			0.7		8.1			1.9
Income attributable to third-party investments in BCRH	0.9			—		5.2			—
Net income attributable to non-controlling interests	4.3			0.7		13.3			1.9
Net third-party investment in the BCGR Cell	1.9			66.0		2.1			97.4
Purchases of BCRH common shares by the Company	(1.8		)	—		(1.8		)	—
Net third-party investments in non-controlling interests	0.1			66.0		0.3			97.4
Dividends declared by BCRH attributable to non-controlling interests	(1.9		)	—		(3.8		)	—
Non-controlling interests - ending	$	254.7		$	99.3	$	254.7		$	99.3

NOTE 2.  Loss and LAE Reserve Movements

The following table summarizes Montpelier’s loss and LAE reserve movements for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
	2014			2013			2014			2013
Gross unpaid loss and LAE reserves - beginning	$	839.1		$	1,035.3		$	881.6		$	1,112.4
Reinsurance recoverable on unpaid losses - beginning	(55.0		)	(86.6		)	(63.6		)	(102.7		)
Net unpaid loss and LAE reserves - beginning	784.1			948.7			818.0			1,009.7
Losses and LAE incurred:
Current year losses	104.0			94.5			166.6			163.5
Prior year losses	(37.5		)	(47.7		)	(72.7		)	(66.1		)
Total incurred losses and LAE	66.5			46.8			93.9			97.4
Net foreign currency translation movements on loss and LAE reserves	9.1			1.4			11.2			(21.3		)
Losses and LAE paid and approved for payment:
Current year losses	(8.9		)	(10.0		)	(11.2		)	(14.6		)
Prior year losses	(46.3		)	(63.5		)	(107.4		)	(147.8		)
Total losses and LAE paid and approved for payment	(55.2		)	(73.5		)	(118.6		)	(162.4		)
Net unpaid loss and LAE reserves - ending	804.5			923.4			804.5			923.4
Reinsurance recoverable on unpaid losses - ending	57.4			80.3			57.4			80.3
Gross unpaid loss and LAE reserves - ending	$	861.9		$	1,003.7		$	861.9		$	1,003.7

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 six month periods ended June 30, 2014

During the second quarter of 2014, Montpelier experienced $37.5 million in net favorable development on prior year loss and LAE reserves relating to the following events and factors:

·2012 windstorm Sandy ($3.7 million decrease),

·IBNR reductions associated with medical malpractice business ($3.5 million decrease),

·A casualty loss from 2010 ($2.7 million increase),

·2011 Thai floods ($2.3 million decrease),

·2013 U.S. crop losses ($1.3 million decrease),

·An engineering loss from 2013 ($1.1 million decrease),

·2005 hurricanes ($1.0 million decrease), and

·2011 Japan earthquake ($1.0 million decrease).

In addition to the foregoing, claims reported to Montpelier during the second quarter of 2014 indicated that IBNR for natural catastrophe losses it initially recorded during 2013 exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by $7.2 million.

The remaining net favorable development on prior year loss and LAE reserves recognized during the second quarter of 2014 related to several smaller adjustments made across multiple classes of business.

During the six month period ended June 30, 2014, Montpelier experienced $72.7 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 six month period ended June 30, 2014 also included the following events and factors recognized during the first quarter of 2014:

·A casualty claim incurred during 2012 ($3.6 million increase),

·2011 New Zealand earthquakes ($3.2 million decrease),

·2005 U.S. Hurricanes ($2.5 million decrease),

·2008 Hurricane Gustav ($2.2 million decrease),

·2011 Thai floods ($1.5 million decrease),

·2011 Japanese earthquake ($1.2 million decrease),

·2012 Italian earthquake ($1.2 million decrease), and

·2010 Chilean earthquake ($1.1 million decrease).

In addition to the foregoing, claims reported to Montpelier during the first quarter of 2014 indicated that IBNR for losses it initially recorded during prior years exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves as follows:

·Natural catastrophe losses initially recorded during 2013 ($9.8 million decrease), and

·Property and Specialty Individual Risk and Other Property Specialty - Treaty losses recorded during multiple prior years at Montpelier at Lloyd’s (decreases of $5.8 million and $2.3 million, respectively).

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The remaining net favorable development on prior year loss and LAE reserves recognized during the first quarter of 2014 related to several smaller adjustments made across multiple classes of business.

Prior Year Loss and LAE Development — three and six month periods ended June 30, 2013

During the second quarter of 2013, Montpelier experienced $47.7 million in net favorable development on prior year loss and LAE reserves.  This net favorable development related to the following events and factors:

·IBNR reductions associated with medical malpractice business ($7.1 million decrease),

·The commutation/settlement of several prior year contracts ($5.4 million decrease),

·2011 Japan earthquake ($4.7 million decrease),

·2012 windstorm Sandy ($4.4 million decrease), and

·2012 Costa Concordia accident ($2.2 million decrease).

In addition to the foregoing, claims reported to Montpelier during the second quarter of 2013 indicated that IBNR for natural catastrophe losses it initially recorded during 2012 (excluding windstorm Sandy) exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by a further $7.5  million during the second quarter of 2013.

The remaining net favorable development on prior year loss and LAE reserves recognized during the second quarter of 2013 related to several smaller adjustments made across multiple classes of business.

During the six month period ended June 30, 2013, Montpelier experienced $66.1 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 six month period ended June 30, 2013 also included the following events and factors recognized during the first quarter of 2013:

·A settlement associated with the 2010 Deepwater Horizon oil rig explosion and fire ($5.0 million decrease),

·2011 Japanese earthquake ($3.6 million decrease),

·2011 fire at a Texas fuel storage facility ($2.6 million increase),

·2007 fire at a Chilean power plant ($2.5 million increase),

·2005 Hurricanes ($1.9 million decrease), and

·2011 Georgia weather events ($1.6 million decrease).

In addition to the foregoing, claims reported to Montpelier during the first quarter of 2013 indicated that IBNR for natural catastrophe losses it initially recorded during 2012 exceeded the extent of losses that actually occurred, and consequently Montpelier decreased its loss and LAE reserves by a further $11.9 million during the first quarter of 2013.

The remaining net favorable development on prior year loss and LAE reserves recognized during the first quarter of 2013 related to several smaller adjustments made across multiple classes of business.

Impact of Foreign Currency Transaction Gains and Losses on Prior Year Loss and LAE Reserves

Montpelier’s prior year losses and LAE incurred include foreign currency transaction gains (losses) relating to its prior year loss and LAE reserves of $4.5 million and $6.1 million during the three month periods ended June 30, 2014 and 2013, respectively, and $5.0 million and $(6.7) million during the six month periods ended June 30, 2014 and 2013, respectively. Since these foreign currency transaction gains (losses) are reported as decreases (increases) in Montpelier’s losses and LAE incurred, they have a direct impact on its underwriting results and its underwriting ratios.

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Impact of Foreign Currency Translation Gains and Losses on Loss and LAE Reserves

Montpelier’s loss and LAE reserves include foreign currency translation gains (losses) of $(9.1) million and $(1.4) million during the three month periods ended June 30, 2014 and 2013, respectively, and $(11.2) million and $21.3  million during the six month periods ended June 30, 2014 and 2013, respectively.  Since these foreign currency translation gains (losses) are reported as decreases (increases) in Montpelier’s net change in foreign currency translation, which is a component of its comprehensive income or loss, they have no impact on its underwriting results or its underwriting ratios.

NOTE 3.  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 bases consistent with those used in accounting for the underlying premiums assumed, and are reported as reductions of net premiums written and earned.  Certain of Montpelier’s assumed pro-rata contracts incorporate reinsurance protection provided by third-party reinsurers that inures to Montpelier’s benefit.  These inuring reinsurance premiums are reported as reductions in gross premiums written and net premiums earned.

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 $20.9 million and $32.1 million for the three month periods ended June 30, 2014 and 2013, respectively, and $41.7 million and $53.0 million for the six month periods ended June 30, 2014 and 2013, respectively.  Net increases in estimated ultimate reinsurance recoveries included in loss and LAE were $9.4 million and $22.3 million for the three month periods ended June 30, 2014 and 2013, respectively, and $6.0 million and $12.1 million for the six month periods ended June 30, 2014 and 2013, 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 typically 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 and unpaid losses at June 30, 2014 and December 31, 2013 are as follows:

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	June 30, 2014				December 31, 2013
Rating	Amount		% of Total		Amount		% of Total
A+	$	4.0	58	%	$	0.7	19	%
A	1.6		24		1.4		39
A-	0.4		6		—		—
Unrated by A.M. Best	0.8		12		1.5		42
Total reinsurance recoverable on paid losses	$	6.8	100	%	$	3.6	100	%

	June 30, 2014				December 31, 2013
Rating	Amount		% of Total		Amount		% of Total
A++	$	0.3	1	%	—		—	%
A+	27.9		49		$	28.6	45	%
A	20.2		35		20.2		32
A-	2.4		4		4.2		6
Unrated by A.M. Best	6.6		11		10.6		17
Total reinsurance recoverable on unpaid losses	$	57.4	100	%	$	63.6	100	%

Montpelier’s unrated reinsurance recoverables as of June 30, 2014 and December 31, 2013 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) subsequently entered run-off but 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, and are reflected in, Montpelier’s net loss and LAE reserves.

As of June 30, 2014, Montpelier had no ongoing material insurance or reinsurance contract disputes.

NOTE 4.  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:

	June 30, 2014				December 31, 2013
	Cost or AmortizedCost		FairValue		Cost or Amortized Cost		Fair Value
Fixed maturity investments:
Corporate debt securities	$	911.1	$	929.2	$	886.7	$	906.8
Debt securities issued/sponsored by the U.S. Treasury and its agencies	419.2		420.8		533.0		524.5
Residential mortgage-backed securities	347.7		352.3		430.3		423.5
Debt securities issued by non-U.S. governments and their agencies	142.5		145.5		109.6		108.2
Commercial mortgage-backed securities	123.2		124.8		137.7		138.8
Debt securities issued by U.S. states and political subdivisions	38.3		42.3		47.2		47.1
Other debt obligations	270.9		274.2		277.4		281.9
Total fixed maturity investments	$	2,252.9	$	2,289.1	$	2,421.9	$	2,430.8
Equity securities:
Exchange-listed funds	$	128.3	$	143.8	$	84.5	$	95.2
Other	18.6		19.4		22.1		22.1
Total equity securities	$	146.9	$	163.2	$	106.6	$	117.3

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As a provider of insurance and reinsurance for natural and man-made catastrophes, Montpelier could be required to pay 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 June 30, 2014, Montpelier’s fixed maturities had an average credit quality of “A+” (Strong) by Standard & Poor’s (or an equivalent rating with another recognized rating agency) and an average duration of 1.8 years (inclusive of fixed maturity derivative and short positions).

As of June 30, 2014, 65% of Montpelier’s fixed maturity investments were either rated “A” (Strong) or better by Standard & Poor’s (or an equivalent rating with another recognized rating agency) or represented U.S. government or U.S. government-sponsored enterprise securities, 12% were rated “BBB” (Good) by Standard & Poor’s (or an equivalent rating with another recognized rating agency) and 23% were either unrated or rated below “BBB” (or an equivalent rating with another recognized rating agency).

In addition to the investment securities presented above, Montpelier had open short fixed maturity positions of $221.6 million and $130.0 million as of June 30, 2014 and December 31, 2013, respectively.  Montpelier also had open short equity and investment option and future positions of $12.5 million and $25.6 million at June 30, 2014 and December 31, 2013, respectively.  Net unrealized losses associated with Montpelier’s open short positions totaled $3.6 million and $2.4 million as of June 30, 2014 and December 31, 2013, respectively.

Other Investments

The table below shows the aggregate cost and carrying value of Montpelier’s other investments, by investment type, as of the dates indicated:

	June 30, 2014				December 31, 2013
	Cost		CarryingValue		Cost		Carrying Value
Other investments carried at net asset value:
Investment funds and limited partnership interests	$	372.5	$	372.5	$	70.1	$	70.1
Investment in the BCGR Listed Fund	2.1		2.1		2.4		2.4
Total other investments at net asset value	$	374.6	$	374.6	$	72.5	$	72.5
Other investments carried at fair value:
Derivative instruments	$	2.8	4.8		3.1		4.2
CAT Bonds	2.0		2.0		2.0		2.0
Limited partnership interests	—		—		0.1		0.1
Total other investments carried at fair value	$	4.8	$	6.8	$	5.2	$	6.3
Other investments	$	379.4	$	381.4	$	77.7	$	78.8

Montpelier’s investments in investment funds and limited partnership interests 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.

Net appreciation or depreciation in the value of Montpelier’s investments in investment funds, limited partnerships, the BCGR Listed Fund and CAT Bonds is reported as net realized and unrealized investment gains (losses) on the Company’s Consolidated Statements of Operations and Comprehensive Income. Net appreciation or depreciation on Montpelier’s derivative instruments is reported as net income (loss) from derivative instruments.

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

·Highly-rated government bond markets, using fixed maturities and derivatives to take long and short positions,

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

·Public and private equity securities, derivative instruments and currency exposures, and

·Small growth-oriented businesses.

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The majority of Montpelier’s interests in investment funds and limited partnerships carried at net asset value can be redeemed or sold without penalty within 45 days.  Redemptions of the remaining interests are subject to early termination fees and liquidity constraints.  Montpelier does not expect to redeem a significant portion of any of these investments during the next twelve months.

Montpelier’s investment in the BCGR Listed Fund at June 30, 2014 and December 31, 2013 represents the amount of its investment in the BCGR Listed Fund that had not been deployed into the BCGR Cell as of those dates.

Montpelier’s derivative instruments carried as other investments consisted of the Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts, Investment Options and Futures and the LIBOR Swap as of June 30, 2014 and December 31, 2013.  See Note 6.

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 consolidated 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 June 30, 2014 and December 31, 2013:

	June 30, 2014
	Level 1		Level 2		Level 3		Total
Fixed maturity investments:
Corporate debt securities	$	—	$	905.2	$	24.0	$	929.2
Debt securities issued/sponsored by the U.S. Treasury and its agencies	344.0		76.8		—		420.8
Residential mortgage-backed securities	—		352.3		—		352.3
Debt securities issued by non-U.S. governments and their agencies	—		145.5		—		145.5
Commercial mortgage-backed securities	—		124.8		—		124.8
Debt securities issued by U.S. states and political subdivisions	—		42.3		—		42.3
Other debt obligations	—		254.6		19.6		274.2
Total fixed maturity investments	$	344.0	$	1,901.5	$	43.6	$	2,289.1
Equity securities:
Exchange-listed funds	$	143.8	$	—	$	—	$	143.8
Other	19.4		—		—		19.4
Total equity securities	$	163.2	$	—	$	—	$	163.2
Other investments carried at fair value	$	—	$	6.8	$	—	$	6.8
Total investments carried at fair value	$	507.2	$	1,908.3	$	43.6	$	2,459.1
Other investments carried at net asset value	$	—	$	363.7	$	10.9	$	374.6
Total investments	$	507.2	$	2,272.0	$	54.5	$	2,833.7

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	December 31, 2013
	Level 1		Level 2		Level 3		Total
Fixed maturity investments:
Corporate debt securities	$	—	$	896.8	$	10.0	$	906.8
Debt securities issued/sponsored by the U.S. Treasury and its agencies	430.7		93.8		—		524.5
Residential mortgage-backed securities	—		423.5		—		423.5
Commercial mortgage-backed securities	—		138.8		—		138.8
Debt securities issued by non-U.S. governments and their agencies	—		108.2		—		108.2
Debt securities issued by U.S. states and political subdivisions	—		47.1		—		47.1
Other debt obligations	—		263.6		18.3		281.9
Total fixed maturity investments	$	430.7	$	1,971.8	$	28.3	$	2,430.8
Equity securities:
Exchange-listed funds	$	95.2	$	—	$	—	$	95.2
Other	21.9		—		0.2		22.1
Total equity securities	$	117.1	$	—	$	0.2	$	117.3
Other investments carried at fair value	$	—	$	6.2	$	0.1	$	6.3
Total investments carried at fair value	$	547.8	$	1,978.0	$	28.6	$	2,554.4
Other investments carried at net asset value	$	—	$	61.5	$	11.0	$	72.5
Total investments	$	547.8	$	2,039.5	$	39.6	$	2,626.9

Level 1 Securities

Montpelier’s investments classified as Level 1 as of June 30, 2014 and December 31, 2013, consisted of U.S. Treasuries and long equity positions that are publicly listed and/or actively traded in an established market.  In addition, as of June 30, 2014 and December 31, 2013, approximately 14% and 33%, respectively, of Montpelier’s open short fixed maturity positions, and substantially all of Montpelier’s short equity positions, were valued on the basis of Level 1 inputs.

Level 2 Securities

For Montpelier’s investments classified as Level 2 as of June 30, 2014 and December 31, 2013,  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 June 30, 2014 and December 31, 2013, approximately 86% and 63%, respectively, of Montpelier’s open short fixed maturity positions were 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.

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.

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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.

Other investments.  Montpelier’s Level 2 other investments carried at fair value consist of publicly traded derivative instruments and CAT bonds.  Montpelier’s Level 2 other investments carried at net asset value represent investments in open-ended funds and limited partnerships whose carrying values are based on net asset values provided by the relevant investment managers.

There were no transfers between Levels 1 and 2 during each of the periods presented.

Level 3 Securities

Montpelier’s investments classified as Level 3 as of June 30, 2014 and December 31, 2013 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.  In addition, as of June 30, 2014 and December 31, 2013, approximately zero and 4%, respectively, of Montpelier’s open short fixed maturity positions were valued on the basis of Level 3 inputs.

Further details for selected investment types follow:

Corporate debt securities.  Montpelier’s Level 3 corporate debt securities represent: (i) bank loans that are priced using non-binding broker quotes that cannot be corroborated with other externally obtained information; and (ii) debt instruments issued by private entities.

Other debt obligations.  Montpelier’s Level 3 other debt obligations represent tranches of collateralized loan obligations that are priced using non-binding broker quotes which may not be corroborated with other externally obtained information.

Other investments.  Montpelier’s Level 3 other investments include certain investments in investment funds and limited partnerships which cannot be readily redeemed, and whose values are based on net asset values obtained from the investment manager or general partner of the respective entity.

As of June 30, 2014 and December 31, 2013, the Company’s Level 3 investments measured at fair value represented 1.8% and 1.1% of its total investments measured at fair value, respectively.  As of June 30, 2014 and December 31, 2013, the Company’s total Level 3 investments represented 1.9% and 1.5% of its total investments, respectively.

The following tables reconcile the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six month periods ended June 30, 2014:

	Three Month Period Ended June 30, 2014
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains		Net unrealized gains		Net transfers out		Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	8.1	$	19.1	$	(3.2	)	$	—	$	—	$	—	$	24.0
Other debt obligations	16.1		4.4		(1.4		)	0.1		0.4		—		19.6
Total fixed maturity investments	24.2		23.5		(4.6		)	0.1		0.4		—		43.6
Equity investments	0.2		—		(0.6		)	0.4		—		—		—
Other investments	—		—		—			—		—		—		—
Total Level 3 investments at fair value	$	24.4	$	23.5	$	(5.2	)	$	0.5	$	0.4	$	—	$	43.6

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	Six Month Period Ended June 30, 2014
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains		Net unrealized gains (losses)			Net transfers out			Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	10.0	$	19.9	$	(5.6	)	$	0.1	$	(0.1	)	$	(0.3	)	$	24.0
Other debt obligations	18.3		8.6		(6.6		)	0.2		0.5			(1.4		)	19.6
Total fixed maturity investments	28.3		28.5		(12.2		)	0.3		0.4			(1.7		)	43.6
Equity investments	0.2		—		(0.6		)	0.4		—			—			—
Other investments	0.1		—		(0.1		)	—		—			—			—
Total Level 3 investments at fair value	$	28.6	$	28.5	$	(12.9	)	$	0.7	$	0.4		$	(1.7	)	$	43.6

The following tables reconcile the beginning and ending balances for all investments measured at fair value on a recurring basis using Level 3 inputs during the three and six month periods ended June 30, 2013:

	Three Month Period Ended June 30, 2013
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains (losses)			Net unrealized gains (losses)		Net transfers out		Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	3.1	$	1.3	$	(0.2	)	$	—		$	—	$	—	$	4.2
Other debt obligations	18.8		10.4		(1.5		)	—			0.8		—		28.5
Total fixed maturity investments	21.9		11.7		(1.7		)	—			0.8		—		32.7
Other investments	1.2		—		(0.7		)	(0.5		)	0.7		—		0.7
Total Level 3 investments at fair value	$	23.1	$	11.7	$	(2.4	)	$	(0.5	)	$	1.5	$	—	$	33.4

	Six Month Period Ended June 30, 2013
	Beginning Level 3 balance		Purchases		Sales and maturities			Net realized gains (losses)			Net unrealized gains (losses)			Net transfers out			Ending Level 3 balance
Fixed maturity investments:
Corporate debt securities	$	95.4	$	9.0	$	(25.5	)	$	(4.2	)	$	10.4		$	(80.9	)	$	4.2
Other debt obligations	16.2		29.9		(6.0		)	—			1.2			(12.8		)	28.5
Total fixed maturity investments	111.6		38.9		(31.5		)	(4.2		)	11.6			(93.7		)	32.7
Other investments	12.7		—		(11.6		)	1.5			(1.9		)	—			0.7
Total Level 3 investments at fair value	$	124.3	$	38.9	$	(43.1	)	$	(2.7	)	$	9.7		$	(93.7	)	$	33.4

During the six month period ended June 30, 2014, the transfers out of Level 3 investments were not significant.  During the six month period ended June 30, 2013, Montpelier transferred most of its bank loans from Level 3 to Level 2, reflecting a gradual shift toward holdings that are more broadly syndicated than had previously been the case.  Additionally, during the first quarter of 2013, Montpelier increased its reliance on pricing services that based their valuations of bank loans on actual transactions, as opposed to non-binding broker quotes. There were no transfers of Level 3 investments during the three month periods ended June 30, 2014 and 2013.

Changes in Carrying Value

Changes in the carrying value of Montpelier’s investment portfolio and its short investment positions for the three and six month periods ended June 30, 2014 and 2013, consisted of the following:

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	Net Realized Gains (Losses) on Investments			Net Unrealized Gains (Losses) on Investments			Net Foreign Exchange and Income (Expense) From Certain Derivatives (1)			Total Changes in Carrying Value Reflected in Revenues
Three Month Period Ended June 30, 2014:
Fixed maturity investments	$	6.2		$	6.5		$	(2.8	)	$	9.9
Equity securities	(0.8		)	7.0			2.5			8.7
Other investments	0.1			0.8			(10.1		)	(9.2		)
Three Month Period Ended June 30, 2013:
Fixed maturity investments	$	10.5		$	(68.8	)	$	(0.2	)	$	(58.5	)
Equity securities	0.3			(2.6		)	(0.9		)	(3.2		)
Other investments	(3.9		)	3.3			(10.3		)	(10.9		)

	Net Realized Gains (Losses) on Investments			Net Unrealized Gains (Losses) on Investments			Net Foreign Exchange and Income (Expense) From Certain Derivatives (1)			Total Changes in Carrying Value Reflected in Revenues
Six Month Period Ended June 30, 2014:
Fixed maturity investments	$	2.7		$	25.3		$	0.4		$	28.4
Equity securities	2.1			7.7			0.7			10.5
Other investments	0.6			4.1			(13.3		)	(8.6		)
Six Month Period Ended June 30, 2013:
Fixed maturity investments	$	21.9		$	(83.3	)	$	(4.0	)	$	(65.4	)
Equity securities	0.6			(1.8		)	(2.0		)	(3.2		)
Other investments	(6.5		)	7.2			(4.7		)	(4.0		)

(1)Represents net realized and unrealized foreign currency gains and losses from investments and income and losses from the following derivative instruments: (i) Foreign Exchange Contracts;  (ii) Credit Derivatives; (iii) Interest Rate Contracts; (iv) Investment Options and Futures; and (v) the LIBOR Swap (see Notes 5 and 6).  These derivatives are carried at fair value within other investments on the Company’s Consolidated Balance Sheets.

Net Investment Income

Montpelier’s net investment income for the three and six month periods ended June 30, 2014 and 2013 consisted of the following:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
	2014			2013			2014			2013
Fixed maturity investments	$	13.8		$	18.7		$	28.5		$	36.7
Cash and cash equivalents	0.1			0.1			0.1			0.2
Equity securities	0.8			—			1.4			0.2
Other investments	—			—			—			0.1
Total investment income	14.7			18.8			30.0			37.2
Investment expenses	(2.3		)	(2.1		)	(4.7		)	(4.1		)
Net investment income	$	12.4		$	16.7		$	25.3		$	33.1

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Investment Assets Held in Trust

Blue Water Re, which commenced its operations in June 2012, does not operate with a financial strength rating and, instead, fully collateralizes its reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Water Re (the “Blue Water Trusts”) for the benefit of ceding companies.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the Blue Water Trusts was $391.7 million and $164.7 million, respectively, which met the minimum values required on those dates.

Blue Capital Re, which commenced its operations in November 2013, does not operate with a financial strength rating and, instead, fully collateralizes its reinsurance obligations through cash and cash equivalents held in trust funds established by Blue Capital Re (the “Blue Capital Re Trusts”) for the benefit of ceding companies.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the Blue Capital Trusts was $20.6 million and zero, respectively, which met the minimum values required on those dates.

In 2011 Montpelier Re entered into a Reinsurance Trust (the “MUSIC Trust”). The MUSIC Trust was established as a means of providing statutory credit to MUSIC in support of the business Montpelier retained in connection with the MUSIC Sale.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the MUSIC Trust was $26.8 million and $32.0 million, respectively, which met the minimum value required on those dates.

In 2010 Montpelier Re entered into a Multi-Beneficiary U.S. Reinsurance Trust (the “Reinsurance Trust”) for the benefit of certain of its U.S. cedants. The Reinsurance Trust was established as a means of providing statutory credit to Montpelier Re’s cedants. Montpelier Re has been granted authorized or trusteed reinsurer status in all U.S. states and the District of Columbia.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the Reinsurance Trust was $340.6 million and $337.7 million, respectively, which met the minimum value required on those dates.

In 2011 Montpelier Re established a second Multi-Beneficiary Reinsurance Trust (the “FL Trust”) in connection with a reduction in its Florida’s collateral requirements.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the FL Trust was $26.3 million and $26.1 million, respectively, which met the minimum value required on those dates.

In 2010 Montpelier entered into a Lloyd’s Deposit Trust Deed (the “Lloyd’s Capital Trust”) in order to meet MCL’s ongoing funds at Lloyd’s (“FAL”) requirements.  The minimum value of cash and investments held by the Lloyd’s Capital Trust is determined on the basis of MCL’s Individual Capital Assessment, which is used to determine the required amount of FAL. As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the Lloyd’s Capital Trust was $207.9 million and $160.2 million, respectively, which met the minimum value required on those dates.

Premiums received by Syndicate 5151 are required to be received into the Lloyd’s Premiums Trust Funds (the “Premiums Trust Funds”). Under the Premiums Trust Funds’ deeds, assets may only be used for the payment of claims and valid expenses for a stated period of time.  See Note 11.  As of June 30, 2014 and December 31, 2013, the fair value of all assets held in the Premiums Trust Funds was $288.8 million and $326.4 million, respectively.

Montpelier’s investment assets held in trust appear on the Company’s Consolidated Balance Sheets as cash and cash equivalents, investments and accrued investment income, as appropriate.

Sales and Maturities of Investments

Sales of investments totaled $4,374.4 million and $2,973.6 million for the six month periods ended June 30, 2014 and 2013, respectively.  Maturities, calls and paydowns of investments totaled $245.2 million and $244.9 million for the six month periods ended June 30, 2014 and 2013, respectively. There were no non-cash exchanges or involuntary sales of investment securities during the periods presented.

24

Pending Securities Litigation

During 2011 Montpelier Re was named in a series of lawsuits filed by a group of plaintiffs in their capacity as trustees for senior debt issued by the Tribune Company (“Tribune”) on behalf of various senior debt holders. Montpelier Re, along with thousands of other named defendants, formerly owned Tribune common shares and tendered such common shares pursuant to a 2007 leveraged buyout led by Tribune management (the “Tribune LBO”). Tribune subsequently filed for bankruptcy protection at the end of 2008 and emerged from bankruptcy on December 31, 2012.

The plaintiffs are suing all tendering shareholders, including Montpelier Re, on the grounds of fraudulent conveyance and seek recovery of the proceeds received pursuant to the Tribune LBO on the basis that the transaction was undertaken without fair consideration and left Tribune insolvent. The various lawsuits are still pending and, in December 2011, were consolidated in the Federal District Court for the Southern District of New York by the U.S. Judicial Panel on Multidistrict Litigation.

Montpelier Re was also named in a similar suit filed by the Official Committee of Unsecured Creditors in the Tribune bankruptcy case. This suit was filed in the U.S. Bankruptcy Court for the District of Delaware and also asserts a fraudulent conveyance claim involving the Tribune LBO.

In the event that the plaintiffs in these suits were to fully prevail, Montpelier Re would have to return the $4.4 million in cash proceeds it received in connection with the Tribune common shares tendered pursuant to the Tribune LBO.

NOTE 5.  Debt, Credit Facilities and Trust Arrangements

Senior Unsecured Debt Due 2022 (“Senior Notes”)

On October 5, 2012, the Company issued $300.0 million in principal amount of Senior Notes. The Senior Notes bear interest at a fixed rate of 4.70% per annum, payable semi-annually in arrears on April 15 and October 15 of each year and were issued at a price of 99.682% of their principal amount, providing an effective yield to investors of 4.74%. The Senior Notes are scheduled to mature on October 15, 2022, and do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere. The Company may redeem the Senior Notes at any time, in whole or in part, at a “make-whole” redemption price, plus accrued and unpaid interest.

The net proceeds from the issuance of the Senior Notes, after deducting the issuance discount and debt issuance costs, were $296.4 million. The debt issuance costs of $2.7 million associated with the Senior Notes have been capitalized within other assets in the Company’s Consolidated Balance Sheets and will be amortized over the life of the Senior Notes.

The carrying value of the Senior Notes at June 30, 2014 and December 31, 2013, was $299.2 million.

The Company incurred interest expense on the Senior Notes of $3.5 million and $7.0 million during each of the three and six month periods ended June 30, 2014 and 2013, respectively. The Company paid interest on the Senior Notes of $7.0 million and $7.4 million during the six month periods ended June 30, 2014 and 2013, respectively.

Trust Preferred Securities

In January 2006 the Company, through Montpelier Capital Trust III, participated in a private placement of $100.0 million of capital securities (the “Trust Preferred Securities”). The Trust Preferred Securities mature on March 30, 2036, are redeemable at Montpelier Capital Trust III’s option at par, and require quarterly distributions of interest to the holders. The Trust Preferred Securities bear interest at a floating rate equal to the 3-month LIBOR plus 380 basis points, reset quarterly.  This floating rate varied from 4.03% to 4.05% and from 4.07% to 4.11% during the six month periods ended June 30, 2014 and 2013, respectively.

The Trust Preferred Securities do not contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which the Company or any of its subsidiaries must adhere.

25

The Company incurred and paid interest on the Trust Preferred Securities of $1.0 million and $2.0 million during the three and six month periods ended June 30, 2014, respectively.  The Company incurred and paid interest on the Trust Preferred Securities of $1.0 million and $2.1 million during the three and six month periods ended June 30, 2013, respectively.

LIBOR Swap

On February 7, 2012, the Company entered into a five-year swap agreement with a third-party (the “LIBOR Swap”) which will result in the future net cash flows in connection with the Trust Preferred Securities, for the five-year period beginning March 30, 2012, being the same as if these securities bore interest at a fixed rate of 4.905%, provided the Company holds the LIBOR Swap to its maturity. Net realized and unrealized gains and losses associated with the LIBOR Swap are reported within net income (loss) from derivative instruments on the Company’s Consolidated Statements of Operations and Comprehensive Income, as opposed to interest and financing expenses.  The fair value of the LIBOR Swap is derived based on other observable (Level 2) inputs. See Note 6.

Credit Agreements

On May 2, 2014, BCRH entered into a 364-day unsecured credit agreement (the “BCRH Credit Agreement”) which permits it to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company serves as a guarantor for the BCRH Credit Agreement and is entitled to receive an annual guarantee fee from BCRH equal to 0.125% of the facility’s total capacity. See Note 14.

The BCRH Credit Agreement contains covenants that limits BCRH’s and, to a lesser extent, the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. If BCRH or the Company were to fail to comply with any of these covenants, the issuer of the BCRH Credit Agreement could revoke the facility and exercise remedies against BCRH or the Company.

As of June 30, 2014, BCRH and the Company were in compliance with each of the covenants associated with the BCRH Credit Agreement.

BCRH incurred $0.1 million in non-recurring fees in establishing the BCRH Credit Facility and is subject to an ongoing annual commitment and administrative fee of 0.375% of the facility’s total capacity.  As of June 30, 2014, there were no borrowings made under the BCRH Credit Agreement.

On May 15, 2014, the BCGR Listed Fund entered into a 364-day unsecured credit agreement (the “BCGR Credit Agreement”) which permits it to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company serves as a guarantor for the BCGR Credit Agreement and is entitled to receive an annual guarantee fee from the BCGR Listed Fund equal to 0.125% of the facility’s total capacity.

The BCGR Credit Agreement contains covenants that limits the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. If the Company were to fail to comply with any of these covenants, the issuer of the BCGR Credit Agreement could revoke the facility and exercise remedies against the Company.

As of June 30, 2014, the Company was in compliance with each of the covenants associated with the BCGR Credit Agreement.

As of June 30, 2014, there were no borrowings made under the BCGR Credit Agreement.

Letter of Credit Facilities

Montpelier Re maintains letter of credit facilities and provides letters of credit to third parties as a means of providing collateral and/or statutory credit in varying amounts to certain of its cedants. These letter of credit facilities were secured by collateral accounts containing cash and investments totaling $31.8 million and $32.0 million as of June 30, 2014 and December 31, 2013, respectively. The following table outlines these facilities as of June 30, 2014:

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Table of Contents Secured Operational Letter of Credit Facilities	Total Capacity		Amount Drawn		Expiry Date
Bilateral Facility	$	75.0	$	18.9	None
Four Year Committed Facility	75.0		3.4		Oct. 2016

The agreements governing these letter of credit facilities contain covenants that limit Montpelier’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain burdensome agreements.  In addition, the secured facilities require the Company to maintain debt leverage of no greater than 30% and Montpelier Re to maintain an A.M. Best financial strength rating of no less than “B++.”  If the Company or Montpelier Re were to fail to comply with these covenants or fail to meet these financial ratios, the lenders could revoke the facilities and exercise remedies against the collateral.  As of June 30, 2014 and December 31, 2013, the Company and Montpelier Re were in compliance with all covenants.

Montpelier Re’s Bilateral Facility, which has a capacity of $75.0 million, is subject to an annual commitment fee of 0.45% on drawn balances.  As of June 30, 2014, there were $18.9 million in outstanding letters of credit drawn under this facility.

Montpelier Re’s Four Year Committed Facility, which has a capacity of $75.0 million, is subject to an annual commitment fee of between 0.25% and 0.35% on drawn balances (depending on the type of collateral provided) and 0.125% on undrawn balances. As of June 30, 2014, there were $3.4 million in outstanding letters of credit drawn under this facility.

Trust Arrangements

Blue Water Re and Blue Capital Re have each established trusts as a means of providing collateralized reinsurance protection to its cedants.

Montpelier Re has established the MUSIC Trust as a means of providing statutory credit to MUSIC.

Montpelier Re has established the Reinsurance Trust as a means of providing statutory credit to certain of Montpelier Re’s U.S. cedants.

Montpelier Re has established the FL Trust in connection with its reduced collateral requirements to cedants domiciled in Florida.

Montpelier has established the Lloyd’s Capital Trust in order to meet MCL’s ongoing FAL requirements.

Syndicate 5151’s premium receipts are required to be received into the Premiums Trust Funds.

See Note 4 for further information regarding the aforementioned trust agreements.

NOTE 6.  Derivative Instruments

Montpelier enters into derivative instruments from time to time in order to manage certain of its business risks and to supplement its investing and underwriting activities.

Foreign currency risk, specifically Montpelier’s risk associated with making claim payments in foreign currencies, is managed through the use of foreign currency exchange agreements (“Foreign Exchange Contracts”).

As an extension of Montpelier’s investing activities, certain of its investment managers have entered into credit derivative arrangements (“Credit Derivatives”), interest rate contracts (“Interest Rate Contracts”) and investment options and futures (“Investment Options and Futures”), as well as Foreign Exchange Contracts.

As a means of managing its underwriting risk, Montpelier has entered into ILW swap contracts (the “Outward ILW Swaps”), which provide reinsurance-like protection for specific loss events associated with certain lines of its business.

As an extension of its underwriting activities, Montpelier has sold ILW protection (the “Inward ILW Swap”), which provide reinsurance-like protection to third parties for specific loss events associated with certain lines of business.

27

In order to fix the future net cash flows associated with its Trust Preferred Securities to be a set amount each period, the Company entered into the LIBOR Swap.  See Note 5.

Montpelier uses an independent service provider for assistance with its derivative accounting function.  This service provider, as well as Montpelier’s investment managers, use pricing services and brokers to assist with the determination of the fair value of the Credit Derivatives, the Interest Rate Contracts, the Investment Options and Futures and certain of the Foreign Exchange Contracts. Montpelier reviews these values as it is ultimately management’s responsibility to ensure that the fair values reflected in the Company’s consolidated financial statements are appropriate.

For the remaining Foreign Exchange Contracts and the LIBOR swap, Montpelier determines the fair values on the basis of information received from counterparties and verification by reference to published rates.  The Outward ILW Swaps and the Inward ILW Swap are valued on the basis of models developed by Montpelier.

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 derivatives. There have been no significant changes in the Company’s use of valuation techniques or related inputs during the periods presented.

None of Montpelier’s derivatives are formally designated as hedging instruments.

The following tables present the fair values, notional values and balance sheet location of Montpelier’s derivative instruments recorded at June 30, 2014 and December 31, 2013 and the net income (loss) from such derivative instruments during the three and six month periods ended June 30, 2014 and 2013:

		June 30, 2014				December 31, 2013
Derivative Instrument	Balance SheetLocation	FairValue			Notional Units	Fair Value			Notional Units
Foreign Exchange Contracts:
U.S. Dollars purchased	Other Investments	$	(2.9	)	332	$	0.6		288
U.S. Dollars sold	Other Investments	1.8			237	(0.1		)	279
Cross-currency	Other Investments	—			123	0.4			84
Credit Derivatives	Other Investments	(1.2		)	223	(0.2		)	231
Interest Rate Contracts	Other Investments	4.9			4,083	1.5			2,806
Investment Options and Futures - long	Other Investments	2.9			2,152	3.8			6,627
Investment Options and Futures - short	Other Liabilities	—			2,268	(1.3		)	1,748
LIBOR Swap	Other Investments	(0.7		)	100	(0.5		)	100
Outward ILW Swaps	Other Assets	3.5			36	0.2			3
Inward ILW Swap	Other Liabilities	(1.3		)	10	(1.5		)	10

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
Income (Loss) From Derivative Instruments:	2014			2013			2014			2013
Foreign Exchange Contracts - underwriting activities	$	(0.1	)	$	(6.1	)	$	1.8		$	(10.2	)
Foreign Exchange Contracts - investing activities	(1.8		)	3.6			(7.4		)	6.5
Credit Derivatives	(2.3		)	(3.8		)	(5.2		)	(4.3		)
Interest Rate Contracts	(0.9		)	(3.8		)	1.6			1.2
Investment Options and Futures	(5.4		)	(3.1		)	(6.2		)	(1.6		)
LIBOR Swap	(0.2		)	1.5			(0.4		)	1.4
Outward ILW Swaps	(0.6		)	(0.5		)	(0.7		)	(0.6		)
Inward ILW Swap	0.1			—			0.2			—
Net losses from derivative instruments	$	(11.2	)	$	(12.2	)	$	(16.3	)	$	(7.6	)

28

A description of each of Montpelier’s derivative instrument activities follows:

Foreign Exchange Contracts

From time to time Montpelier, either directly through its investment managers or otherwise, enters into foreign currency agreements which constitute obligations to buy or sell specified currencies at future dates at prices set at the inception of each contract. Montpelier enters into these agreements in connection with both its underwriting and investing activities.

Foreign Exchange Contracts designed to protect Montpelier’s insurance and reinsurance balances against movements in foreign currency exchange rates do not eliminate fluctuations in the actual value of Montpelier’s assets and liabilities denominated in foreign currencies; rather, they provide an offsetting benefit or detriment against such exchange rate movements. Foreign Exchange Contracts related to Montpelier’s investing activities are designed to either protect Montpelier’s cash and invested assets from movements in foreign currency exchange rates or to enhance Montpelier’s investment performance.

The fair value of the Foreign Exchange Contracts is derived based on other observable (Level 2) inputs.

Credit Derivatives

From time to time Montpelier’s investment managers enter into various credit derivative instruments in the form of either: (i) index positions; or (ii) instruments whose values are derived from the credit risk associated with underlying bonds, loans or other financial instruments.  In such transactions, Montpelier is effectively the buyer or seller of credit protection, depending on the specific instrument. When Montpelier is buying credit protection, the value of its derivative position increases (or decreases) when the associated credit risk of the instrument increases (or decreases). Conversely, when Montpelier is selling credit protection, the value of its derivative position decreases (or increases) when the associated credit risk of the instrument increases (or decreases).

The fair value of the Credit Derivatives is derived based on other observable (Level 2) inputs.

Interest Rate Contracts

From time to time Montpelier’s investment managers enter into various interest rate derivative instruments whose value is based on the right to pay or receive a notional amount of money at a given interest rate. These instruments are either used to limit Montpelier’s exposure to fluctuations in specified interest rates or to address an anticipated change in interest rates.

The fair value of the Interest Rate Contracts is derived based on other observable (Level 2) inputs.

Investment Options and Futures

From time to time Montpelier enters into various exchange-traded investment options and futures as part of its investing strategy.

The fair value of the Investment Options and Futures was derived based on other observable (Level 2) inputs.

Outward ILW Swaps

In June 2014 the BCGR Cell and Blue Capital Re ILS collectively entered into an ILW swap (the “Blue Capital Outward ILW Swap”) with a third-party in order to purchase protection against U.S. wind exposures from June 2014 to December 2014. In return for a total fixed payment of $2.3 million, the BCGR Cell and Blue Capital Re ILS are entitled to receive a floating payment in the event of certain losses incurred by the insurance industry as a whole. The maximum total recovery to the BCGR Cell and Blue Capital Re ILS under the Blue Capital Outward ILW Swap is $12.5 million.  Through June 30, 2014, Montpelier was not aware of any industry loss event occurring that would have triggered a recovery under the Blue Capital Outward ILW Swap.

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During the second quarter of 2014, Montpelier Re entered into four ILW Swaps (the “2014 Japan Wind Swaps”) with third-parties in order to purchase protection against its Japanese wind and flood exposures.  The inceptions dates of the Japan Wind Swaps range from April 1 to May 20, 2014, and the expiration dates range from November 30 to December 15, 2014.  In return for fixed payments totalling $1.7 million, Montpelier Re is entitled to receive floating payments in the event of certain losses incurred by the insurance industry as a whole.  The maximum recovery to Montpelier Re under each Japan Wind Swap is $5.0 million, representing a maximum total recovery of $20.0 million. Through June 30, 2014, Montpelier was not aware of any industry loss event occurring which would have triggered a payment to Montpelier Re under the 2014 Japan Wind Swaps.

The 2014 Japan Wind Swaps are a renewal of former ILW Swaps (the “2013 Japan Wind Swaps”) which covered Montpelier Re’s Japanese wind and flood exposures from April 1, 2013 to December 15, 2013.  The 2013 Japan Wind Swaps incorporated fixed payments totalling $2.0 million and the same floating payments as those associated with the 2014 Japan Wind Swaps, and expired without any payment to Montpelier Re.

In July 2013 Syndicate 5151 entered into an ILW Swap (the “2013 Engineering Swap”) with a third-party in order to purchase protection against its construction and engineering exposures from July 1, 2013 to June 30, 2014.  In return for a fixed payment of $0.3 million, Syndicate 5151 is entitled to receive a floating payment in the event of certain losses incurred by the insurance industry as a whole. The maximum recovery to Syndicate 5151 under the 2013 Engineering Swap is $3.0 million.  Through June 30, 2014, Montpelier was not aware of any industry loss event occurring which would have triggered a payment to Syndicate 5151 under the 2013 Engineering Swap.

The 2013 Engineering Swap is a renewal of a former ILW Swap (the “2012 Engineering Swap”) which covered Syndicate 5151’s construction and engineering exposures from June 11, 2012 to June 30, 2013.  The 2012 Engineering Swap incorporated the same fixed and floating payments as those associated with the 2013 Engineering Swap, and expired without any payment to Syndicate 5151.

In June 2013 Blue Water Re entered into an ILW Swap (the “Blue Water Re Swap”) with a third party in order to purchase protection against its Florida wind exposures from June 1, 2013 to December 31, 2013.  In return for a fixed payment of $0.5 million, Blue Water Re was entitled to receive a floating payment in the event of losses incurred by the insurance industry as a whole.  The maximum recovery to Blue Water Re was $5.0 million.  The Blue Water Re Swap expired without any payment to Blue Water Re.

The fair values of Outward ILW Swaps are derived based on unobservable (Level 3) inputs.

Inward ILW Swap

In December 2013 Blue Capital Re ILS entered into an ILW swap (the “ILW Swap”) with a third-party under which qualifying loss payments are triggered by reference to the level of losses incurred by the insurance industry as a whole, rather than by losses incurred by the insured.  In return for a fixed payment of $1.5 million, Blue Capital Re ILS is required to make a floating-rate payment in the event of certain losses incurred from specified natural catastrophes in the U.S., Europe, Japan, Australia and New Zealand from November 2013 to December 2014. Blue Capital Re ILS’s maximum payment obligation under the ILW Swap is $10.0 million. Through June 30, 2014, Blue Capital Re ILS was not aware of any industry loss event occurring that would have triggered a payment obligation under the ILW Swap.

The fair value of Inward ILW Swap is derived based on unobservable (Level 3) inputs.

NOTE 7.  Shareholders’ Equity

The Company’s share capital consists of Preferred Shares and Common Shares, each with a 1/6 cent par value per share.  Holders of Preferred Shares have no voting rights with respect to matters that generally require the approval of voting shareholders but are entitled to vote in certain extraordinary instances, separately as a single class. Holders of Common Shares are entitled to one vote for each share held, subject to any voting limitations imposed by the Company’s Bye-Laws.

30

Preferred Shares

As of June 30, 2014 and December 31, 2013, there were 6.0 million Preferred Shares outstanding with a liquidation preference of $25.00 per share representing $150.0 million in face value. The Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities. Except in certain limited circumstances, the Preferred Shares are not redeemable prior to May 10, 2016.  After that date, the Company may redeem at its option, in whole or in part, the Preferred Shares at a price of $25.00 per share plus any declared and unpaid dividends.

Dividends on Preferred Shares are non-cumulative. Consequently, holders of Preferred Shares will be entitled to receive cash dividends only when, as and if declared by the Company’s Board of Directors (the “Board”) or by a duly authorized committee of the Board, quarterly in arrears on the 15th day of January, April, July and October of each year. These dividends will accrue with respect to a particular dividend period, on the liquidation preference amount of $25.00 per share at an annual rate of 8.875%. So long as any Preferred Shares remain outstanding, no dividend shall be paid or declared on Common Shares or any other securities ranking junior to Preferred Shares (other than a dividend payable solely in Common Shares or in other junior securities), unless the full dividend for the latest completed dividend period on all outstanding Preferred Shares has been declared and paid or otherwise provided for.

Common Shares

The following table summarizes the Company’s Common Share activities during the six month periods ended June 30, 2014 and 2013:

	Six Month Periods Ended June 30,
(in Common Shares)	2014		2013
Beginning Common Shares outstanding	49,274,165		55,269,690
Acquisitions of Common Shares:
Common Shares repurchased and retired	(2,495,179	)	(4,527,795	)
Common Shares repurchased and placed in treasury	(861,417	)	—
Issuances of Common Shares:
Issuances in satisfaction of vested Restricted Share Unit (“RSU”) obligations	257,128		278,212
Ending Common Shares outstanding	46,174,697		51,020,107

As of June 30, 2014, the Company had 46,174,697 Common Shares outstanding consisting of 47,967,660 Common Shares issued less 1,792,963 Common Shares held in treasury. As of December 31, 2013, the Company had 49,274,165 Common Shares outstanding consisting of 50,462,839 Common Shares issued less 1,188,674 Common Shares held in treasury.

2014 Common Share activity

The Company repurchased 3,356,596 Common Shares during the first half of 2014 pursuant to a publicly announced share repurchase program at an average price of $28.73 per share. Of these Common Shares repurchased during the first half of 2014, 2,495,179 Common Shares were retired and 861,417 Common Shares were placed in the Company’s treasury for re-issuance to employees and directors in satisfaction of existing and future share-based obligations.

The Company issued 257,128 Common Shares to employees in satisfaction of vested RSU obligations during the first half of 2014. See Note 12. The Common Shares were issued from the Company’s treasury resulting in a net gain on issuance of $0.9 million, which was recorded as an increase to retained earnings.

2013 Common Share activity

The Company repurchased 4,058,573 Common Shares pursuant to a publicly announced share repurchase program at an average price of $25.16 per share during the first half of 2013. These Common Shares were retired.

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On March 7, 2013, the Board authorized the private purchase of 469,222 Common Shares from Mr. Thomas G.S. Busher, the Company’s former Chief Operating Officer and Head of European Operations, in connection with his planned retirement on December 31, 2013.  The price paid to Mr. Busher was $24.62 per share, which was $0.63 less than the market price (as per the New York Stock Exchange) at the time the agreement was reached. These Common Shares were retired. See Note 14.

The Company issued 278,212 Common Shares to employees in satisfaction of vested RSU obligations during the first half of 2013. See Note 12. The Common Shares were issued from the Company’s treasury resulting in a net loss on issuance of $0.5 million, which was recorded as a decrease to additional paid-in capital.

Common Share Repurchase Authorization

As of June 30, 2014,  the Company had a remaining Common Share repurchase authorization of $171.2 million. Common Shares may be purchased in the open market or through privately negotiated transactions. There is no stated expiration date associated with the Company’s Common Share repurchase authorization.

Common and Preferred Share Dividends Declared and Paid

The Company declared cash dividends per Common Share of $0.125 and $0.115 during the three month periods ended June 30, 2014 and 2013, respectively, and $0.25 and $0.23 during the six month periods ended June 30, 2014 and 2013, respectively.  The total amount of dividends paid to holders of Common Shares during the six month periods ended June 30, 2014 and 2013 was $12.1 million and $12.6 million, respectively. As of June 30, 2014 and December 31, 2013, the Company had $5.8 million and $6.2 million, respectively, of dividends payable to holders of Common Shares.

The Company declared cash dividends per Preferred Share totaling $0.555 during each of the three month periods ended June 30, 2014 and 2013, respectively and $1.109 during each of the six month periods ended June 30, 2014 and 2013, respectively.  The total amount of dividends paid to holders of Preferred Shares during each of the six month periods ended June 30, 2014 and 2013, was $6.6 million.  As of June 30, 2014 and December 31, 2013, the Company had $3.4 million and $3.3 million of dividends payable to holders of Preferred Shares, respectively.

The dividends payable to holders of Common Shares and Preferred Shares as of June 30, 2014 and December 31, 2013, are included within accounts payable, accrued expenses and other liabilities on the Company’s Consolidated Balance Sheets.

NOTE 8.  Segment Reporting

The Company currently operates through three reportable segments: Montpelier Bermuda, Montpelier at Lloyd’s, and Collateralized Reinsurance.   Each segment constitutes a separate underwriting platform through which Montpelier writes insurance and reinsurance business. The Company’s segment disclosures present the operations of these underwriting platforms prior to the effects of certain inter-segment quota share reinsurance agreements among them.

The Company has made its segment determination based on consideration of the following criteria: (i) the nature of the business activities of each of the Company’s subsidiaries and affiliates; (ii) the manner in which the Company’s subsidiaries and affiliates are organized; and (iii) the organization of information provided to the Board and senior management.

The Company and certain intermediate holding and service companies, intercompany eliminations relating to inter-segment reinsurance agreements and the business retained upon the MUSIC Sale are collectively referred to as “Corporate and Other.”

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The following table summarizes Montpelier’s identifiable assets by segment as of June 30, 2014 and December 31, 2013:

	June 30,2014		December 31,2013
Montpelier Bermuda	$	3,253.0	$	2,773.9
Montpelier at Lloyd’s	533.4		543.4
Collateralized Reinsurance	450.9		394.4
Corporate and Other, including inter-segment eliminations	46.4		46.8
Total assets	$	4,283.7	$	3,758.5

A summary of Montpelier’s consolidated statements of operations by segment for the three month periods ended June 30, 2014 and 2013 follows:

Three Month Period EndedJune 30, 2014	MontpelierBermuda			Montpelier at Lloyd’s			Collateralized Reinsurance			Corporateand Other			Total
Gross premiums written	$	148.9		$	68.6		$	29.7		$	(8.2	)	$	239.0
Ceded reinsurance premiums	(36.7		)	(5.6		)	—			8.2			(34.1		)
Net premiums written	112.2			63.0			29.7			—			204.9
Change in net unearned premiums	(29.5		)	(2.9		)	(9.8		)	(0.1		)	(42.3		)
Net premiums earned	82.7			60.1			19.9			(0.1		)	162.6
Loss and LAE	(30.1		)	(27.3		)	(8.3		)	(0.8		)	(66.5		)
Acquisition costs	(10.6		)	(16.2		)	(2.6		)	—			(29.4		)
General and administrative expenses	(8.5		)	(9.8		)	(1.7		)	(8.9		)	(28.9		)
Underwriting income	33.5			6.8			7.3			(9.8		)	37.8
Net investment income	11.0			1.2			0.1			0.1			12.4
Other expenses	(0.2		)	—			(0.1		)	—			(0.3		)
Net investment and foreign exchange gains	21.6			(10.9		)	—			0.3			11.0
Net losses from derivative instruments	(10.6		)	(0.1		)	—			(0.5		)	(11.2		)
Interest and other financing expenses	(0.1		)	(0.1		)	—			(4.5		)	(4.7		)
Income before income taxes	$	55.2		$	(3.1	)	$	7.3		$	(14.4	)	$	45.0

Three Month Period EndedJune 30, 2013	MontpelierBermuda			Montpelier at Lloyd’s			Collateralized Reinsurance			Corporateand Other			Total
Gross premiums written	$	160.6		$	58.9		$	22.6		$	0.6		$	242.7
Ceded reinsurance premiums	(32.3		)	(9.3		)	(3.0		)	(0.3		)	(44.9		)
Net premiums written	128.3			49.6			19.6			0.3			197.8
Change in net unearned premiums	(44.2		)	(0.6		)	(14.1		)	—			(58.9		)
Net premiums earned	84.1			49.0			5.5			0.3			138.9
Loss and LAE	(18.9		)	(25.4		)	(2.0		)	(0.5		)	(46.8		)
Acquisition costs	(10.0		)	(11.9		)	(0.6		)	(0.1		)	(22.6		)
General and administrative expenses	(8.6		)	(7.9		)	(0.9		)	(9.0		)	(26.4		)
Underwriting income	46.6			3.8			2.0			(9.3		)	43.1
Net investment income	15.2			1.3			—			0.2			16.7
Other revenue	(0.7		)	(0.2		)	0.2			0.7			—
Net investment and foreign exchange losses	(61.0		)	(4.7		)	—			(0.8		)	(66.5		)
Net losses from derivative instruments	(14.2		)	0.5			—			1.5			(12.2		)
Interest and other financing expenses	—			(0.5		)	—			(4.2		)	(4.7		)
Loss before income taxes	$	(14.1	)	$	0.2		$	2.2		$	(11.9	)	$	(23.6	)

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A summary of Montpelier’s consolidated statements of operations by segment for the six month periods ended June 30, 2014 and 2013 follows:

Six Month Period EndedJune 30, 2014	MontpelierBermuda			Montpelier at Lloyd’s			Collateralized Reinsurance			Corporateand Other			Total
Gross premiums written	$	322.8		$	142.7		$	63.7		$	(16.7	)	$	512.5
Ceded reinsurance premiums	(72.9		)	(14.3		)	—			16.7			(70.5		)
Net premiums written	249.9			128.4			63.7			—			442.0
Change in net unearned premiums	(86.9		)	(12.2		)	(23.4		)	(0.1		)	(122.6		)
Net premiums earned	163.0			116.2			40.3			(0.1		)	319.4
Loss and LAE	(30.0		)	(54.0		)	(9.1		)	(0.8		)	(93.9		)
Acquisition costs	(18.7		)	(29.1		)	(6.4		)	—			(54.2		)
General and administrative expenses	(17.2		)	(18.6		)	(3.2		)	(16.7		)	(55.7		)
Underwriting income	97.1			14.5			21.6			(17.6		)	115.6
Net investment income	22.4			2.3			0.2			0.4			25.3
Other revenue	(0.2		)	—			(0.1		)	0.3			—
Net investment and foreign exchange gains	45.4			(13.6		)	—			0.1			31.9
Net losses from derivative instruments	(15.6		)	(0.2		)	0.1			(0.6		)	(16.3		)
Interest and other financing expenses	(0.1		)	(0.1		)	—			(9.2		)	(9.4		)
Income before income taxes	$	149.0		$	2.9		$	21.8		$	(26.6	)	$	147.1

Six Month Period EndedJune 30, 2013	MontpelierBermuda			Montpelier at Lloyd’s			Collateralized Reinsurance			Corporateand Other			Total
Gross premiums written	$	336.5		$	128.7		$	37.2		$	1.5		$	503.9
Ceded reinsurance premiums	(58.2		)	(18.0		)	(3.0		)	(0.9		)	(80.1		)
Net premiums written	278.3			110.7			34.2			0.6			423.8
Change in net unearned premiums	(93.0		)	(7.3		)	(24.9		)	—			(125.2		)
Net premiums earned	185.3			103.4			9.3			0.6			298.6
Loss and LAE	(26.2		)	(68.5		)	(2.0		)	(0.7		)	(97.4		)
Acquisition costs	(18.8		)	(24.8		)	(0.9		)	(0.2		)	(44.7		)
General and administrative expenses	(17.8		)	(16.2		)	(1.6		)	(17.7		)	(53.3		)
Underwriting income	122.5			(6.1		)	4.8			(18.0		)	103.2
Net investment income	30.0			2.7			—			0.4			33.1
Other revenue	—			—			0.7			(0.7		)	—
Net investment and foreign exchange losses	(69.1		)	25.1			—			(2.1		)	(46.1		)
Net losses from derivative instruments	(6.7		)	(2.3		)	—			1.4			(7.6		)
Interest and other financing expenses	(0.1		)	(1.0		)	—			(8.3		)	(9.4		)
Income before income taxes	$	76.6		$	18.4		$	5.5		$	(27.3	)	$	73.2

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Gross Written Premiums By Line of Business and Geography

The following tables present Montpelier’s gross premiums written, by line of business and reportable segment, during the three month periods ended June 30, 2014 and 2013:

Three Month Period Ended June 30, 2014	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	101.4	$	0.1	$	29.7	$	(8.1	)	$	123.1
Property Specialty - Treaty	14.0		0.2		—		—			14.2
Other Specialty - Treaty	21.0		22.9		—		(0.1		)	43.8
Property and Specialty Individual Risk	12.5		45.4		—		—			57.9
Total gross premiums written	$	148.9	$	68.6	$	29.7	$	(8.2	)	$	239.0

Three Month Period Ended June 30, 2013	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	120.0	$	0.9	$	22.6	$	0.3		$	143.8
Property Specialty - Treaty	12.0		0.4		—		0.1			12.5
Other Specialty - Treaty	16.2		15.4		—		(0.1		)	31.5
Property and Specialty Individual Risk	12.4		42.2		—		0.3			54.9
Total gross premiums written	$	160.6	$	58.9	$	22.6	$	0.6		$	242.7

(1)Represents: (i) for 2014 and 2013, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier at Lloyd’s; (ii) for 2014, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Collateralized Reinsurance; and (iii) for 2013, premiums written within the Company’s former MUSIC Run-Off segment.

Montpelier seeks to diversify its exposures across geographic zones around the world in order to obtain a prudent spread of risk. The spread of these exposures is also a function of market conditions and opportunities.

Montpelier monitors its geographic exposures on a company-wide basis, rather than by segment. The following table sets forth a breakdown of Montpelier’s gross premiums written by geographic area of risks insured:

	Three Month Periods Ended June 30,
	2014				2013
U.S. and Canada	$	153.0	64	%	$	162.2	67	%
Worldwide (1)	54.0		23		45.1		18
Japan	11.7		5		17.0		7
U.K. and Ireland	2.5		1		4.3		2
Worldwide, excluding U.S. and Canada (2)	2.5		1		4.2		2
Western Europe, excluding the U.K. and Ireland	2.4		1		1.4		1
Other	12.9		5		8.5		3
Total gross premiums written	$	239.0	100	%	$	242.7	100	%

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

(2)“Worldwide, excluding U.S. and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the U.S. and Canada.

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The following tables present Montpelier’s gross premiums written, by line of business and reportable segment, during the six month periods ended June 30, 2014 and 2013:

Six Month Period Ended June 30, 2014	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	222.3	$	3.0	$	63.7	$	(16.2	)	$	272.8
Property Specialty - Treaty	31.6		1.5		—		—			33.1
Other Specialty - Treaty	49.4		44.5		—		(0.5		)	93.4
Property and Specialty Individual Risk	19.5		93.7		—		—			113.2
Total gross premiums written	$	322.8	$	142.7	$	63.7	$	(16.7	)	$	512.5

Six Month Period Ended June 30, 2013	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	243.2	$	4.2	$	37.2	$	0.9		$	285.5
Property Specialty - Treaty	24.0		3.0		—		0.1			27.1
Other Specialty - Treaty	46.9		35.3		—		(0.1		)	82.1
Property and Specialty Individual Risk	22.4		86.2		—		0.6			109.2
Total gross premiums written	$	336.5	$	128.7	$	37.2	$	1.5		$	503.9

(1)Represents: (i) for 2014 and 2013, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier at Lloyd’s; (ii) for 2014, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Collateralized Reinsurance; and (iii) for 2013, premiums written within the Company’s former MUSIC Run-Off segment.

The following table sets forth a breakdown of Montpelier’s gross premiums written by geographic area of risks insured:

	Six Month Periods Ended June 30,
	2014				2013
U.S. and Canada	$	269.2	53	%	$	282.0	56	%
Worldwide (1)	138.2		27		112.0		22
Western Europe, excluding the U.K. and Ireland	29.7		6		26.6		5
Worldwide, excluding U.S. and Canada (2)	22.0		4		27.0		5
Japan	13.5		3		19.1		4
U.K. and Ireland	11.8		2		14.1		3
Other	28.1		5		23.1		5
Total gross premiums written	$	512.5	100	%	$	503.9	100	%

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

(2)“Worldwide, excluding U.S. and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the U.S. and Canada.

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Net Earned Premiums By Line of Business and Geography

The following tables present Montpelier’s net earned premiums, by line of business and reportable segment, during the three month periods ended June 30, 2014 and 2013:

Three Month Period Ended June 30, 2014	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	45.6	$	0.6	$	19.9	$	(0.1	)	$	66.0
Property Specialty - Treaty	15.1		0.8		—		0.1			16.0
Other Specialty - Treaty	16.0		23.8		—		(0.1		)	39.7
Property and Specialty Individual Risk	6.0		34.9		—		—			40.9
Total net earned premiums	$	82.7	$	60.1	$	19.9	$	(0.1	)	$	162.6

Three Month Period Ended June 30, 2013	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	59.2	$	1.5	$	5.5	$	0.2		$	66.4
Property Specialty - Treaty	11.7		1.7		—		(0.3		)	13.1
Other Specialty - Treaty	10.4		17.3		—		—			27.7
Property and Specialty Individual Risk	2.8		28.5		—		0.4			31.7
Total net earned premiums	$	84.1	$	49.0	$	5.5	$	0.3		$	138.9

(1)Represents: (i) for 2014 and 2013, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier at Lloyd’s; and (ii) for 2013, premiums earned within the Company’s former MUSIC Run-Off segment.

The following table sets forth a breakdown of Montpelier’s net earned premiums by geographic area of risks insured:

	Three Month Periods Ended June 30,
	2014				2013
U.S. and Canada	$	78.9	49	%	$	81.6	59	%
Worldwide (1)	47.3		29		22.3		16
Western Europe, excluding the U.K. and Ireland	8.9		5		7.6		5
Worldwide, excluding U.S. and Canada (2)	7.5		5		8.7		6
Japan	5.2		3		5.6		4
U.K. and Ireland	4.5		3		5.3		4
Other	10.3		6		7.8		6
Total net earned premiums	$	162.6	100	%	$	138.9	100	%

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

(2)“Worldwide, excluding U.S. and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the U.S. and Canada.

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The following tables present Montpelier’s net earned premiums, by line of business and reportable segment, during the six month periods ended June 30, 2014 and 2013:

Six Month Period Ended June 30, 2014	MontpelierBermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	92.3	$	1.6	$	40.3	$	(0.3	)	$	133.9
Property Specialty - Treaty	28.4		1.8		—		0.1			30.3
Other Specialty - Treaty	30.8		44.8		—		(0.1		)	75.5
Property and Specialty Individual Risk	11.5		68.0		—		0.2			79.7
Total net earned premiums	$	163.0	$	116.2	$	40.3	$	(0.1	)	$	319.4

Six Month Period Ended June 30, 2013	Montpelier Bermuda		Montpelier at Lloyd’s		Collateralized Reinsurance		Corporate andOther (1)			Total
Property Catastrophe - Treaty	$	121.2	$	1.6	$	9.3	$	0.8		$	132.9
Property Specialty - Treaty	23.1		3.1		—		(0.3		)	25.9
Other Specialty - Treaty	29.3		39.3		—		—			68.6
Property and Specialty Individual Risk	11.7		59.4		—		0.1			71.2
Total net earned premiums	$	185.3	$	103.4	$	9.3	$	0.6		$	298.6

(1)Represents: (i) for 2014 and 2013, the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier at Lloyd’s; and (ii) for 2013, premiums earned within the Company’s former MUSIC Run-Off segment.

The following table sets forth a breakdown of Montpelier’s net earned premiums by geographic area of risks insured:

	Six Month Periods Ended June 30,
	2014				2013
U.S. and Canada	$	163.0	51	%	$	170.8	57	%
Worldwide (1)	88.0		27		52.1		17
Western Europe, excluding the U.K. and Ireland	18.1		6		16.4		5
Worldwide, excluding U.S. and Canada (2)	11.7		4		16.6		6
Japan	10.6		3		11.7		4
U.K. and Ireland	9.2		3		10.9		4
Other	18.8		6		20.1		7
Total net earned premiums	$	319.4	100	%	$	298.6	100	%

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

(2)“Worldwide, excluding U.S. and Canada” comprises insurance and reinsurance contracts that insure or reinsure risks in more than one geographic area but specifically exclude the U.S. and Canada.

NOTE 9.  Basic and Diluted Earnings Per Common Share

The Company applies the two-class method of calculating its earnings per Common Share. In applying the two-class method, the Company’s outstanding RSUs are considered to be participating securities.  See Note 12.  For all periods presented, the two-class method was used to determine basic and diluted earnings per Common Share since this method yielded a more dilutive result than the treasury stock method.

For purposes of determining basic and diluted earnings per Common Share, a portion of net income is allocated to outstanding RSUs which serves to reduce the Company’s earnings per Common Share numerators. Net losses are not allocated to outstanding RSUs and, therefore, do not impact the Company’s loss per Common Share numerators in the event of a loss per Common Share.

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The following table outlines the Company’s computation of its basic and diluted earnings (loss) per Common Share for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
	2014			2013			2014			2013
Net income (loss) available to the Company’s common shareholders	$	37.1		$	(27.3	)	$	127.0		$	64.8
Less: net earnings allocated to participating securities	(1.0		)	—			(3.8		)	(1.3		)
Earnings per Common Share numerator	$	36.1		$	(27.3	)	$	123.2		$	63.5
Average Common Shares outstanding (in millions of shares)	46.3			52.1			46.9			53.3
Basic and diluted earnings (loss) per Common Share	$	0.78		$	(0.52	)	$	2.63		$	1.19

NOTE 10.  Commitments and Contingent Liabilities

Commitments

As of June 30, 2014, Montpelier had an unfunded commitment to invest $7.7 million into a private investment fund.

Montpelier’s letter of credit facilities and trust arrangements are secured by collateral accounts containing cash, cash equivalents and investments that are required to be maintained at specified levels. See Note 5.

BCRH and/or its subsidiaries are parties to the Investment Management Agreement, the Underwriting and Insurance Management Agreement and the Administrative Services Agreement. See Note 14.

Lloyd’s New Central Fund

The Lloyd’s New Central Fund is available to satisfy claims if a member of Lloyd’s is unable to meet its obligations to policyholders. The Lloyd’s New Central Fund is funded by an annual levy imposed on members which is determined annually by Lloyd’s as a percentage of each member’s written premiums (0.5% with respect to 2014 and 2013).  In addition, the Council of Lloyd’s has power to call on members to make an additional contribution to the Lloyd’s New Central Fund of up to 3.0% of their underwriting capacity each year should it decide that such additional contributions are necessary. Montpelier currently estimates that its 2014 obligation to the Lloyd’s New Central Fund will be approximately $1.1 million.

Lloyd’s also imposes other charges on its members and the syndicates on which they participate, including an annual subscription charge (0.5% of written premiums with respect to 2014 and 2013) and an overseas business charge, levied as a percentage of gross international premiums (defined as business outside the U.K. and the Channel Islands), with the percentage depending on the type of business written. Lloyd’s also has power to impose additional charges under Lloyd’s Powers of Charging Byelaw.  Montpelier currently estimates that its 2014 obligation to Lloyd’s for such charges will be approximately $2.9 million.

Litigation

Montpelier is subject to litigation and arbitration proceedings in the normal course of its business.  Such proceedings often involve insurance or reinsurance contract disputes which are typical for the insurance and reinsurance industry.  Montpelier’s estimates of possible losses incurred in connection with such legal proceedings are provided for as loss and loss adjustment expenses on its Consolidated Statements of Operations and Comprehensive Income and are included within loss and loss adjustment expense reserves on its Consolidated Balance Sheets.

During 2011, Montpelier Re was named in a series of lawsuits filed by a group of plaintiffs in their capacity as trustees for senior debt issued by Tribune on behalf of various senior debt holders.  See Note 4.

Other than the Tribune litigation referred to above, Montpelier had no other unresolved legal proceedings, other than those in the normal course of its business, at June 30, 2014.

39

Concentrations of Credit and Counterparty Risk

Financial instruments which potentially subject Montpelier to significant concentrations of credit risk consist principally of investment securities, insurance and reinsurance balances receivable and reinsurance recoverables as described below.

Montpelier’s investment guidelines prohibit it from owning an undue concentration of a single issue or issuer, other than U.S.-backed securities, and it did not own an aggregate fixed maturity investment in a single entity, other than securities issued by the U.S. government and U.S. government-sponsored enterprises, in excess of 10% of the Company’s common shareholders’ equity at June 30, 2014 or December 31, 2013.

In accordance with its investment controls and guidelines, Montpelier routinely monitors the credit quality of its fixed maturity investments, including those involving investments in: (i) European sovereign nations; (ii) U.S. state and local municipalities, Alternative A, subprime and commercial mortgage-backed securities; (iii) non-agency collateralized residential mortgage obligations; and (iv) those securities that benefit from credit enhancements provided by third-party financial guarantors.

Montpelier’s derivative instruments are subject to counterparty risk. Montpelier routinely monitors this risk in accordance with the Company’s Derivative Use Plan.

Montpelier underwrites the majority of its business through independent insurance and reinsurance brokers. Credit risk exists to the extent that any of these brokers may be unable to fulfill their contractual obligations to Montpelier.  For example, Montpelier is frequently required to pay amounts owed on claims under policies to brokers, and these brokers, in turn, pay these amounts to the ceding companies that have reinsured a portion of their liabilities with Montpelier. In some jurisdictions, if a broker fails to make such a payment, Montpelier might remain liable to the ceding company for the deficiency. In addition, in certain jurisdictions, when the ceding company pays premiums for these policies to brokers, these premiums are considered to have been paid and the ceding insurer is no longer liable to Montpelier for those amounts, whether or not the premiums have actually been received.

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.

Under Montpelier’s reinsurance security policy, reinsurers are typically 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 collateralized up to policy limits, net of any premiums owed.  Montpelier monitors the financial condition and ratings of its reinsurers on an ongoing basis.

NOTE 11. Regulation and Capital Requirements

Insurance and reinsurance entities are highly regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another with reinsurers generally subject to less regulation than primary insurers. Montpelier Re, Blue Water Re and Blue Capital Re are regulated by the Bermuda Monetary Authority (the “BMA”). MAL is subject to regulation by the Prudential Regulation Authority (the “PRA”) and the Financial Conduct Authority (the “FCA”), each of which are the successors to the former U.K. Financial Services Authority.  MAL and MCL are regulated by Lloyd’s.  MUI is subject to approval by Lloyd’s as a Coverholder for Syndicate 5151.

40

Bermuda

Montpelier Re

Montpelier Re is registered under The Insurance Act 1978 of Bermuda and related regulations, as amended (the “Insurance Act”) as a Class 4 insurer. Under the Insurance Act, Class 4 insurers are required to annually prepare and file statutory and GAAP financial statements and a statutory financial return. The Insurance Act also requires Montpelier Re to maintain minimum levels of statutory net assets (“Statutory Capital and Surplus”), to maintain minimum liquidity ratios and to meet minimum solvency margins.  Failure to meet such requirements may subject an entity to regulatory actions by the BMA. For all periods presented herein, Montpelier Re believes that it has satisfied these requirements.

The Bermuda risk-based regulatory capital adequacy and solvency requirements implemented with effect from December 31, 2008 (termed the Bermuda Solvency Capital Requirement or “BSCR”), provide a risk-based capital model as a tool to assist the BMA both in measuring risk and in determining appropriate levels of capitalization. The BSCR employs a standard mathematical model that correlates the risk underwritten by Bermuda insurers and reinsurers to the capital that is dedicated to their business. The framework that has been developed applies a standard measurement format to the risk associated with an insurer’s or reinsurer’s assets, liabilities and premiums, including a formula to take account of the catastrophe risk exposure.  Montpelier Re is only required to supply its BSCR annually, which is due to the BMA on or before April 30.

As of December 31, 2013, Montpelier Re’s Statutory Capital and Surplus was $1,844.7 million. The principal differences between Montpelier Re’s Statutory Capital and Surplus and its net assets determined in accordance with GAAP include statutory deductions for deferred acquisition costs, fixed assets and investment securities held in trust for the benefit of MCL through the Lloyd’s Capital Trust. Such differences totaled $184.2 million at December 31, 2013.

For the year ended December 31, 2013, Montpelier Re’s Statutory Capital and Surplus of $1,844.7 million comfortably exceeded its 2013 BSCR of $549.0 million.  Montpelier Re’s 2013 statutory net income was $298.4 million.

Where an insurer or reinsurer believes that its own means of measuring risk and determining appropriate levels of capital better reflects the inherent risk of its business, it may apply to the BMA for approval to use its internal capital model in substitution for the BSCR model. Montpelier Re has not yet submitted its internal model to the BMA for approval.

The Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by Montpelier Re.  The declaration of dividends in any year which would exceed 25% of its prior year-end Statutory Capital and Surplus requires the approval of the BMA.  Additionally, annual distributions that would result in a reduction of the prior year-end balance of statutory capital (defined as an insurer’s Statutory Capital and Surplus less its statutory earnings retained) by more than 15% also requires the approval of the BMA.

The Insurance Act also provides a minimum liquidity ratio and requires general business insurers and reinsurers to maintain the value of their relevant assets at not less than 75% of the amount of their relevant liabilities.  Montpelier Re exceeded its minimum liquidity requirements at December 31, 2013 by $2,670.9 million.

With respect to the year ended December 31, 2014, Montpelier Re has the ability to dividend up to $461.2 million without BMA approval.  No dividends were declared or paid by Montpelier Re during the six month period ended June 30, 2014.

Blue Water Re

Blue Water Re is registered with the BMA as a Special Purpose Insurer, meaning that its insurance and reinsurance contracts must be fully-collateralized and the parties to the transactions must be sophisticated. Special Purpose Insurers benefit from an expedited application process, less regulatory stringency and minimal capital and surplus requirements.

41

Blue Water Re is required to notify the BMA of each reinsurance contract it writes.  Further, Blue Water Re is not required to prepare and file statutory financial statements or statutory financial returns annually with the BMA.  However, Blue Water Re is required to prepare and file annual audited GAAP financial statements with the BMA.

Blue Water Re is not subject to the BMA’s BSCR requirements. However, the Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by Blue Water Re. If Blue Water Re were to fail to meet its minimum solvency margin on the last day of any financial year, it would be prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA.

There is no minimum solvency margin or liquidity ratio that must be maintained by Blue Water Re provided that the value of its GAAP assets exceed the value of its GAAP liabilities, meaning that it may dividend and/or distribute all of its net assets to its parent at any time without BMA approval.  As of June 30, 2014, Blue Water Re’s assets exceeded the value of its liabilities by $224.2 million.  Blue Water Re did not declare or pay any dividends during the during the six month period ended June 30, 2014.

Blue Capital Re

Blue Capital Re is registered with the BMA as a Class 3A insurer.  As a result of the approvals received from the BMA and the terms of Blue Capital Re’s business plan, Blue Capital Re’s reinsurance contracts must be fully-collateralized.  Further, Blue Capital Re is not required to prepare and file statutory financial statements or statutory financial returns annually with the BMA. However, beginning in 2014, Blue Capital Re is required to prepare and file annual audited GAAP financial statements with the BMA.

Blue Capital Re received an exemption from the BSCR requirements for 2013 and currently expects to receive a similar exemption for 2014.  However, the Insurance Act limits the maximum amount of annual dividends and distributions that may be paid by Blue Capital Re and provides that the value of the assets of an insurer must exceed the value of its liabilities by an amount greater than its prescribed minimum solvency margin.  If Blue Capital Re were to fail to meet its minimum solvency margin on the last day of any financial year, it would be prohibited from declaring or paying any dividends during the next financial year without the approval of the BMA. Blue Capital Re’s minimum solvency margin has been set by the BMA to be $1.0 million at all times.

The Insurance Act also provides a minimum liquidity ratio and requires general business insurers and reinsurers to maintain the value of their relevant assets at not less than 75% of the amount of their relevant liabilities.

As of June 30, 2014, the value of Blue Capital Re’s assets exceeded the value of its liabilities and its minimum solvency margin by $168.4 million, and it comfortably met its minimum liquidity ratio requirements at such date.

Blue Capital Re may dividend all of its retained earnings to its parent at any time without BMA approval.  As of June 30, 2014, Blue Capital Re had retained earnings of $9.4 million.

Blue Capital Re may not reduce its total capital by 15% or more, as set out in its previous year’s financial statements, unless it has received the prior approval of the BMA. Total capital consists of the insurer’s paid in share capital, its contributed surplus (sometimes called additional paid in capital) and any other fixed capital designated by the BMA as capital.  With respect to the year ended December 31, 2014, Blue Capital Re has the ability to distribute up to $24.0 million of its total capital to its parent without BMA approval.

Blue Capital Re did not declare or pay any dividends during the during the six month period ended June 30, 2014.

BCML and BCIML

BCML and BCIML are each licensed and supervised by the BMA as an investment manager and an insurance agent/manager, respectively.  Neither BCML nor BCIML are subject to any material minimum solvency requirements.

Montpelier Group

The BMA serves as Montpelier’s group supervisor and has designated Montpelier Re as Montpelier’s designated insurer.

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Pursuant to its powers under the Insurance Act, the BMA maintains a register of particulars for every insurance group for which it acts as the group supervisor detailing, among other things, the names and addresses of the designated insurer; each member company of the insurance group falling within the scope of group supervision; the principal representative of the insurance group in Bermuda; other competent authorities supervising other member companies of the insurance group; and the insurance group auditors. The designated insurer must notify the BMA of any changes to the above details entered on the register of an insurance group.

As group supervisor, the BMA performs a number of supervisory functions including: (i) coordinating the gathering and dissemination of information which is of importance for the supervisory task of other competent authorities; (ii) carrying out a supervisory review and assessment of the insurance group; (iii) carrying out an assessment of the insurance group’s compliance with the rules on solvency, risk concentration, intra-group transactions and good governance procedures; (iv) planning and coordinating, with other competent authorities, supervisory activities in respect of the insurance group, both as a going concern and in emergency situations; (v) coordinating any enforcement action that may need to be taken against the insurance group or any of its members; and (vi) planning and coordinating meetings of colleges of supervisors (consisting of insurance regulators) in order to facilitate the carrying out of the functions described above.

In carrying out its functions, the BMA may make rules for: (i) assessing the financial situation and the solvency position of the insurance group and its members; and (ii) regulating intra-group transactions, risk concentration, governance procedures, risk management and regulatory reporting and disclosure.

Other international supervisory authorities are not, at the current time, under any obligation to accept or otherwise rely on the BMA’s determination that it is acting as group supervisor, rather the BMA’s decision defines the scope and extent of the BMA’s interest in Montpelier’s operations group-wide.

The Bermuda Companies Act 1981 (the “Companies Act”)

The Companies Act also limits the Company’s, BCRH’s, Montpelier Re’s, Blue Water Re’s and Blue Capital Re’s ability to pay dividends and/or distributions to its shareholders in that neither the Company, BCRH, Montpelier Re, Blue Water Re nor Blue Capital Re is permitted to declare or pay a dividend or make a distribution out of its contributed surplus, if it is, or would after the payment be, unable to pay its liabilities as they become due, or if the realizable value of its assets would be less than its liabilities.

U.K.

Montpelier participates in the Lloyd’s market through Syndicate 5151, which is managed by MAL and is capitalized through MCL.  MAL is regulated by the PRA and the FCA and is also subject to the oversight of the Council of Lloyd’s.

The PRA, which is a subsidiary of the Bank of England, is responsible for promoting the stable and prudent operation of the U.K. financial system through regulation of all deposit-taking institutions, insurers, Lloyd’s managing agents, and investment banks. The PRA has the responsibility for promoting the safety and soundness of Lloyd’s and its members taken together, including the Lloyd’s New Central Fund, and the prudential regulation of managing agents.

The FCA is responsible for regulation of conduct in financial markets and the infrastructure that supports those markets. The FCA also has responsibility for the prudential regulation of firms that do not fall under the PRA’s scope. The FCA regulates Lloyd’s and its managing agents and, on a prudential and conduct basis, its members’ agents, advisors and brokers. Particular conduct issues include the management of the auction whereby members can buy and sell syndicate capacity and the handling of policyholders’ complaints.

The PRA and the FCA form a supervisory college for Lloyd’s and maintain cooperation arrangements with Lloyd’s in support of their activities. They also have powers of direction over Lloyd’s and consult with each other in the exercise of such powers.

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The Council of Lloyd’s is responsible under the Lloyd’s Act 1982 for the management and supervision of Lloyd’s, including its members, syndicates and managing agents, and has rule-making and enforcement powers. The Council of Lloyd’s may discharge some of its functions directly by making decisions and issuing resolutions, requirements, rules and byelaws. Other decisions are delegated to the Lloyd’s Franchise Board and associated committees. The PRA and FCA, when relevant, coordinate with each other and Lloyd’s over its use of enforcement powers.

MAL, as a Lloyd’s Managing Agent, is subject to capital requirements and minimum solvency tests established by Lloyd’s and the PRA.  MAL’s statutory net assets, as reported to Lloyd’s as of December 31, 2013, totaled $1.2 million.  MAL’s restricted net assets (the amount of its statutory net assets that were not available to dividend or distribute to its parent without Lloyds’ approval) at December 31, 2013 totaled $0.9 million.  Any amount of MAL’s statutory net assets in excess of its net restricted assets may be distributed to its parent without Lloyds’ approval.

MCL, Syndicate 5151’s corporate underwriting member at Lloyd’s, provides 100% of the stamp capacity of Syndicate 5151. Stamp capacity is a measure of the amount of premium a syndicate is authorized to write by Lloyd’s. Syndicate 5151’s stamp capacity for 2014 is £180 million.

As the corporate underwriting member of Lloyd’s, MCL is bound by the rules of Lloyd’s, which are prescribed by Byelaws and Requirements made by the Council of Lloyd’s under powers conferred by the Lloyd’s Act 1982. These rules, among other matters, prescribe MCL’s membership subscription, the level of its contribution to the Lloyd’s New Central Fund and the assets it must deposit with Lloyd’s in support of its underwriting. The Council of Lloyd’s has broad powers to sanction breaches of its rules, including the power to restrict or prohibit a member’s participation in Lloyd’s syndicates.

At the syndicate level, managing agents are required to calculate the capital resources requirement of the members of each syndicate they manage. In the case of Syndicate 5151’s 2012 underwriting year of account, MAL carried out a syndicate Individual Capital Assessment (“ICA”) according to detailed rules prescribed by the PRA under the Individual Capital Adequacy Standards regime in force. In the case of Syndicate 5151’s 2013 underwriting year of account, MAL carried out a Solvency Capital Requirement (“SCR”) assessment in addition to the ICA, utilizing the Syndicate’s own internal model according to Solvency 2 principles, which was subsequently reconciled to the ICA.

Both the ICA and SCR evaluate the risks faced by the syndicate, including insurance risk, operational risk, market risk, credit risk, liquidity risk and group risk, and assess the amount of capital that syndicate members should hold against those risks.

Lloyd’s reviews each syndicate’s SCR annually and may challenge it.  In order to ensure that Lloyd’s aggregate capital is maintained at a high enough level to support its overall security rating, Lloyd’s adds an uplift to the overall market capital resources requirement produced by the SCR, and each syndicate is allocated its proportion of the uplift.  The aggregate amount is known as a syndicate’s Economic Capital Assessment, which is used by Lloyd’s to determine the syndicate’s required FAL.

MCL is required to deposit cash, securities or letters of credit (or a combination of these assets) with Lloyd’s in order to satisfy its FAL requirements, which are met through the Lloyd’s Capital Trust. The assets held in the Lloyd’s Capital Trust are provided by Montpelier Re.

MCL’s combined statutory net assets of $160.2 million at December 31, 2013, which include the assets held in the Lloyd’s Capital Trust, exceeded MCL’s restricted net assets (the amount of its combined statutory net assets that were not available to dividend or distribute to its parent without Lloyds’ approval) of $156.3 million at such date.  Any amount of MCL’s combined statutory net assets in excess of its restricted net assets may be distributed to its parent, subject to passing a Lloyd’s release test.

MCL’s net income, as reported to Lloyd’s for the year ended December 31, 2013, was $23.2 million.

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Premiums received by Syndicate 5151 are received into the Premiums Trust Funds.  Under the Premiums Trust Funds’ deeds, assets may only be used for the payment of claims and valid expenses. Profits held within the Premiums Trust Funds, including investment income earned thereon, may be distributed to MCL annually, subject to meeting Lloyd’s requirements.  Premiums Trust Fund assets not required to meet cash calls and/or loss payments may also be used towards MCL’s ongoing capital requirements.  Upon the closing of an open underwriting year, normally after three years, all undistributed profits held within the Premiums Trust Funds applicable to the closed underwriting year may be distributed to MCL.

As of June 30, 2014, Syndicate 5151 held $254.8 million in investment securities (including accrued interest) and $34.0 million in cash and cash equivalents (including restricted cash), within the Premiums Trust Funds.  As of December 31, 2013, Syndicate 5151 held $293.3 million in investment securities (including accrued interest) and $33.1 million in cash and cash equivalents (including restricted cash), within the Premiums Trust Funds.

NOTE 12.  Share-Based Compensation

Share-Based Compensation Based on the Company’s Common Shares

At the discretion of the Board’s Compensation and Nominating Committee (the “Compensation Committee”), incentive awards, the value of which are based on Common Shares, may be made to eligible employees, consultants and non-employee directors of the Company and its subsidiaries. For the periods presented, Montpelier’s share-based incentive awards consisted solely of RSUs.

RSUs are phantom (as opposed to actual) Common Shares which, depending on the individual award, vest in equal tranches over a one to five-year period, subject to the recipient maintaining a continuous relationship with Montpelier through the applicable vesting date. RSUs are payable in Common Shares upon vesting (the amount of which may be reduced by applicable statutory income tax withholdings at the recipient’s option). RSUs do not require the payment of an exercise price and are not entitled to voting rights, but they are entitled to receive payments equivalent to any dividends and distributions declared on the Common Shares underlying the RSUs.

The Company currently uses variable RSUs (“Variable RSUs”) as the principal component of its ongoing long-term incentive compensation for participating employees. Variable RSUs are awarded based on Company performance during the first year of the applicable performance period (the “Initial RSU Period”) and are earned ratably each year based on continued employment over a four year vesting period.  Since the number of RSUs to be awarded is dependent upon Company performance during the Initial RSU Period, the number of RSUs estimated to be awarded for that cycle may fluctuate throughout the Initial RSU Period.

The number of Variable RSUs expected to be formally awarded to employees is subject to the Company’s increase in its fully converted book value per Common Share (“FCBVPCS”). FCBVPCS is computed by dividing the Company’s common shareholders’ equity available to the Company by the sum of its ending Common Shares and unvested RSUs outstanding. The Company’s calculation of the growth in FCBVPCS represents the increase in its FCBVPCS during the Initial RSU Period, after taking into account dividends on Common Shares declared during such period.

The Company also uses fixed RSUs (“Fixed RSUs”) as a supplemental component of its ongoing long-term incentive compensation for certain employees and its non-employee directors.  Unlike Variable RSUs, the number of Fixed RSUs is fixed on the grant date. Fixed RSUs are typically granted for the following purposes: (i) to induce individuals to join Montpelier; (ii) to retain certain key employees; (iii) to reward employees for exhibiting outstanding individual performance; and (iv) as remuneration to non-management members of the Board. Additionally, when the actual number of Variable RSUs to be awarded in any given year has been formally determined, they are effectively converted into Fixed RSUs.

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As of June 30, 2014, the Company’s Variable RSUs outstanding consisted of those for the 2014 to 2017 cycle.  The number of Variable RSUs to be awarded for this cycle will be determined based on the Company’s actual 2014 increase in its FCBVPCS versus a target increase in FCBVPCS of 10.0% (“Target”).  If Target is achieved, the Company would expect to grant 494,340 Variable RSUs to participants.  At an increase in FCBVPCS of 3.0% or less (“Threshold”), the Company would not expect to grant any Variable RSUs to participants, and at an increase in FCBVPCS of 17.0% or more (“Maximum”), the Company would expect to grant 988,680 Variable RSUs to participants.

The following table summarizes the Company’s RSU activity for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,
	2014					2013
	RSUsOutstanding		Unamortized Grant Date Fair Value			RSUs Outstanding		Unamortized Grant Date Fair Value
Beginning of period	1,589,510		$	21.9		1,486,305		$	17.7
Fixed RSUs Awarded	29,000		1.0			29,000		0.7
Change in Variable RSUs projected for the 2014-2017 cycle	49,442		1.3			—
Change in Variable RSUs projected for the 2013-2016 cycle	—		—			37,807		0.8
RSU payments	(21,250	)	—			(29,100	)	—
RSU forfeitures	(2,500	)	(0.1		)	(3,250	)	—
RSU expense recognized	—		(4.1		)	—		(3.5		)
End of period	1,644,202		$	20.0		1,520,762		$	15.7

	Six Month Periods Ended June 30,
	2014					2013
	RSUsOutstanding		Unamortized Grant Date Fair Value			RSUs Outstanding		Unamortized Grant Date Fair Value
Beginning of period	1,448,374		$	12.2		1,327,041		$	10.3
Fixed RSUs Awarded	49,000		1.5			29,000		0.7
Variable RSUs projected to be awarded for the 2014-2017 cycle	543,782		14.8			—		—
Variable RSUs projected to be awarded for the 2013-2016 cycle	—		—			536,761		11.5
Change in Variable RSUs projected for the 2013-2016 cycle	(17,263	)	(0.3		)	—		—
RSU payments	(321,650	)	—			(358,753	)	—
RSU forfeitures	(58,041	)	(1.1		)	(13,287	)	—
RSU expense recognized	—		(7.1		)	—		(6.8		)
End of period	1,644,202		$	20.0		1,520,762		$	15.7

RSU Awards and Payments - three and six month periods ended June 30, 2014

During the three month period ended June 30, 2014, the Company awarded a total of 29,000 Fixed RSUs to its non-management directors. Of the total Fixed RSUs awarded during that period, 25,000 RSUs were awarded for a one-year cycle and 4,000 RSUs were awarded for a two-year cycle.

During the six month period ended June 30, 2014, the Company awarded a total of 49,000 Fixed RSUs to its non-management directors and certain employees. Of the total Fixed RSUs awarded during that period, 30,000 RSUs were awarded for a one-year cycle, 4,000 RSUs were awarded for a two-year cycle, 11,000 RSUs were awarded for a three-year cycle and 4,000 RSUs were awarded for a five-year cycle.

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On the basis of the Company’s forecasted increase in its FCBVPCS for 2014, the Company anticipated issuing 543,782 Variable RSUs for the 2014-2017 award cycle as of June 30, 2014, or 110% of the in force Target RSUs for that cycle at that time.

During the three month period ended June 30, 2014, the Company paid out 21,250 vested RSUs and withheld, at the recipient’s election, 500 RSUs in satisfaction of statutory income tax liabilities.  As a result, the Company issued 20,750 Common Shares from its treasury.  See Note 7.  The fair value of the RSUs paid out during the three month period ended June 30, 2014, was $0.7 million.

During the six month period ended June 30, 2014, the Company paid out 321,650 vested RSUs and withheld, at the recipient’s election, 64,522 RSUs in satisfaction of statutory income tax liabilities.  As a result, the Company issued 257,128 Common Shares from its treasury.  See Note 7.  The fair value of the RSUs paid out during the six month period ended June 30, 2014, was $9.3 million.

None of the outstanding RSUs at June 30, 2014 were vested.

RSU Awards and Payments - three and six month periods ended June 30, 2013

On May 17, 2013, the Board approved a new service agreement with Christopher L. Harris, the Company’s President and Chief Executive Officer (the “Service Agreement”).  Pursuant to the Service Agreement, among other things, Mr. Harris agreed to a voluntary reduction in his annual base salary (and his cash bonus opportunity thereon)  from $900,000 to $750,000, in exchange for the additional Fixed and Variable RSU awards described below, each effective as of June 1, 2013.

During the three month period ended June 30, 2013, the Company awarded a total of 29,000 Fixed RSUs to its non-management directors and Mr. Harris.  Of the total Fixed RSUs awarded during that period, 18,000 RSUs represented annual one-year Fixed RSU awards to incumbent directors, 6,000 RSUs represented a one-time three-year Fixed RSU award to a newly-appointed director and 5,000 RSUs represented an annual one-year Fixed RSU award to Mr. Harris pursuant to the Service Agreement.

On the basis of the Company’s forecasted increase in its FCBVPCS for 2013, the Company anticipated issuing 536,731 Variable RSUs for the 2013-2016 award cycle as of June 30, 2013, or 100% of the in force Target RSUs for that cycle at that time. During the second quarter of 2013, the Company awarded an additional 37,807 Variable RSUs (at Target) to its employees for the 2013-2016 award cycle, which included 34,931 Variable RSUs (at Target) awarded to Mr. Harris pursuant to the Service Agreement.

During the three month period ended June 30, 2013, the Company paid out 29,100 vested RSUs and withheld, at the recipient’s election, 3,015 RSUs in satisfaction of statutory income tax liabilities.  As a result, the Company issued 26,085 Common Shares from its treasury.  See Note 7.  The fair value of the RSUs paid out during the second quarter of 2013 was $0.7 million.

During the six month period ended June 30, 2013, the Company paid out 358,753 vested RSUs and withheld, at the recipient’s election, 80,541 RSUs in satisfaction of statutory income tax liabilities.  As a result, the Company issued 278,212 Common Shares from its treasury.  See Note 7.  The fair value of the RSUs paid out during the first half of 2013 was $9.2 million.

None of the outstanding RSUs as of June 30, 2013 were vested.

RSU Forfeitures, Forfeiture Assumptions and Other RSU Adjustments

For the periods presented, the Company assumed a zero to 6.4% forfeiture rate depending on the nature and term of individual awards and past experience. The Company’s forfeiture assumptions serve to reduce the unamortized grant date fair value of outstanding RSUs as well as the associated RSU expense.  As RSUs are actually forfeited, the number of RSUs outstanding is reduced and the remaining unamortized grant date fair value is compared to assumed forfeiture levels.  True-up adjustments are made as deemed necessary.

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The Company revises its expected RSU forfeiture assumptions in light of actual forfeitures experienced.  As a result, the Company reduced the unamortized grant date fair value of its RSUs outstanding during the three and six month periods ended June 30, 2014 by $0.1 million and $1.1 million, respectively. No revisions were required during the three and six month periods ended June 30, 2013.

In connection with the planned retirement of Mr. Busher on December 31, 2013, the Company agreed to accelerate the vesting of certain of his RSU awards. See Note 14. The acceleration of the vesting of Mr. Busher’s outstanding RSUs awards resulted in the Company recognizing $0.3 million and $0.7 million of RSU expense in the three and six month periods ended June 30, 2013, respectively, which would have otherwise been recognized in future periods.

RSUs Outstanding at June 30, 2014

The following table summarizes all RSUs outstanding and the unamortized grant date fair value of such RSUs at June 30, 2014 for each award cycle:

Award Date and Cycle	RSUs Outstanding	Unamortized Grant Date Fair Value
Three-year RSU awards granted in 2011	10,000	$	—
Five-year RSU awards granted in 2011	14,000	0.1
Three-year RSU awards granted in 2012	2,000	—
Four-year RSU awards granted in 2012	444,212	2.0
Five-year RSU awards granted in 2012	6,800	0.1
Three-year RSU awards granted in 2013	10,000	0.1
Four-year RSU awards granted in 2013	566,908	5.6
One-year RSU awards granted in 2014	27,500	0.7
Two-year RSU awards granted in 2014	4,000	0.1
Three-year RSU awards granted in 2014	11,000	0.2
Four-year RSU awards granted in 2014 (those awards in their Initial Award Period)	543,782	11.0
Five-year RSU awards granted in 2014	4,000	0.1
Total RSUs outstanding at June 30, 2014	1,644,202	$	20.0

The Company expects to incur future RSU expense associated with its currently outstanding RSUs of $7.8 million, $7.9 million, $3.3 million and $1.0 million during 2014, 2015, 2016 and 2017 & beyond, respectively.

Share-Based Compensation Based on BCRH common shares (“BCRH Common Shares”)

At the discretion of BCRH’s Compensation and Nominating Committee, incentive awards, the value of which are based on BCRH Common Shares, may be made to BCRH’s directors, future employees and consultants.

BCRH’s 2013 Long-Term Incentive Plan (the “2013 BCRH LTIP”), which was adopted by BCRH’s board of directors on September 27, 2013, permits the issuance of up to one percent of the aggregate BCRH Common Shares outstanding (at the time of grant) to participants.

Incentive awards that may be granted under the 2013 BCRH LTIP include RSUs (“BCRH RSUs”), restricted BCRH Common Shares, incentive share options (on a limited basis), non-qualified share options, share appreciation rights, deferred share units, performance compensation awards, performance units, cash incentive awards and other equity-based and equity-related awards.

In June 2014, BCRH awarded a total of 7,000 BCRH RSUs to its directors. The BCRH RSUs awarded earn ratably each year based on continued service as a director over a three-year vesting period. The grant date fair value of the BCRH RSUs awarded was $0.1 million. In determining the grant date fair value associated with the BCRH RSUs awarded, BCRH assumed a forfeiture rate of zero.  This forfeiture assumption may be adjusted, if necessary, based on future experience.

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During the three and six month periods ended June 30, 2014, BCRH recognized less than $0.1 million of BCRH RSU expense.  BCRH expects to incur future RSU expense associated with its currently outstanding BCRH RSUs of less than $0.1 million during each of 2014, 2015, 2016 and 2017.

As of December 31, 2013, there were no incentive awards outstanding under the 2013 BCRH LTIP.

NOTE 13.  Income Taxes

The Company is domiciled in Bermuda and has subsidiaries domiciled in several countries, primarily Bermuda, the U.K. and the U.S. The Company, BCRH, Montpelier Re, Blue Water Re and Blue Capital Re intend to conduct substantially all of their operations in Bermuda in a manner such that it is improbable that they would be subject to direct taxation in the U.K. or the U.S. However, because there is no definitive authority regarding activities that constitute taxable activities in the U.K. or the U.S., there can be no assurance that those jurisdictions will not contend, perhaps successfully, that the Company, BCRH, Montpelier Re, Blue Water Re and/or Blue Capital Re is engaged in a trade or business in the U.S. and is therefore subject to taxation. In that event, those entities would be subject to U.K. income taxes, or U.S. income and branch profits taxes, on income that is connected with or attributable to such activities unless the corporation is entitled to relief under an applicable tax treaty.

The Company has subsidiaries domiciled in the U.K. and the U.S. which are subject to the respective foreign and/or federal income taxes in those jurisdictions. The Company’s U.S.- domiciled subsidiaries are also subject to state and local income taxes. The provision for U.S. federal income taxes has been determined under the principles of the consolidated tax provisions of the U.S. Internal Revenue Code and Regulations.

The Company has no current intention, or liquidity need, to repatriate any earnings from its U.K. and U.S. operations to Bermuda.  Additionally, the Company’s current structure is such that any distributions of earnings from its subsidiaries outside of Bermuda would not subject Montpelier to a significant amount of incremental taxation.

During the three month periods ended June 30, 2014 and 2013, Montpelier recorded an income tax benefit (provision) of $(0.2) million and $0.4 million, respectively.  During the six month periods ended June 30, 2014 and 2013, Montpelier recorded an income tax benefit (provision) of $(0.1) million and $0.2 million, respectively.  During each of these periods, Montpelier’s income tax movements were associated primarily with its U.K. operations.

During each of the six month periods ended June 30, 2013 and 2014, Montpelier paid $0.1 million in income taxes.

Bermuda

The Company and its Bermuda-domiciled subsidiaries have received an assurance from the Bermuda government exempting them from all local income, withholding and capital gains taxes until March 31, 2035. At the present time, no such taxes are levied in Bermuda.  During the three month periods ended June 30, 2014 and 2013, these companies had pretax income (losses) of $37.8 million and $(21.1) million, respectively, and during the six month periods ended June 30, 2014 and 2013, these companies had pretax income of $143.0 million and $63.0 million, respectively.

United Kingdom

MCL, MAL, MUSL and their parent, Montpelier Holdings Limited, are subject to U.K. income taxes. During the three month periods ended June 30, 2014 and 2013, these companies had pretax income (losses) of $6.8 million and $(2.5) million, respectively, and during the six month periods ended June 30, 2014 and 2013, these companies had pretax income of $3.9 million and $10.2 million, respectively. Of these U.K. entities, only MCL remains in a cumulative net operating loss position. Although net operating losses ordinarily give rise to deferred tax assets, due to the uncertainty at this time as to whether MCL will generate sufficient taxable income in future periods to utilize such assets, as of June 30, 2014 and December 31, 2013, Montpelier has established U.K. deferred tax asset valuation allowances of $1.3 million and $3.1 million, respectively, against its existing U.K. gross deferred tax assets of $1.8 million and $3.6 million, respectively.

The cumulative net operating loss associated with MCL’s operations may be carried forward to offset future taxable income generated by that entity and do not expire with time.

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The pretax income associated with any of these U.K. entities is generally taxable to Montpelier unless: (i) that entity has prior year net operating losses that may be utilized to fully or partially offset its current income tax liability; or (ii) another entity within Montpelier’s U.K. group of companies experiences a current year pretax loss which is eligible to be used to fully or partially offset any other entity’s current income tax liability (“Group Relief”).

During the three and six month periods ending June 30, 2014, the entities within Montpelier’s U.K. group generated net pretax income which arose primarily from MCL.  During such periods, MCL was able to fully utilize its cumulative net operating loss, while other entities within the Montpelier U.K. group (those other than MCL) recorded income tax provisions of $0.2 million and $0.1 million, respectively.

During the three month period ending June 30, 2013, the entities within Montpelier’s U.K. group generated a net pretax loss and recorded an income tax benefit of $0.4 million.  During the six month period ending June 30, 2013, the entities within Montpelier’s U.K. group generated net pretax income which arose from MCL. During that period, MCL was able to fully utilize its cumulative net operating loss, while the other entities within the Montpelier U.K. group (those other than MCL) recorded an income tax benefit of $0.2 million.

United States

MUI, MTR, Cladium and their parent, Montpelier Re U.S. Holdings Ltd., are subject to U.S. Federal income tax but are currently in a cumulative net operating loss position. During the three month periods ended June 30, 2014 and 2013, these companies had pretax income of $0.4 million and zero million, respectively, and during the six month periods ended June 30, 2014 and 2013, these companies had pretax income of $0.2 million and zero million, respectively. Although cumulative net operating losses ordinarily give rise to deferred tax assets, due to the uncertainty at this time as to whether such operations will generate sufficient taxable income in future periods to utilize such assets, Montpelier has established an offsetting U.S. deferred tax asset valuation allowance against its existing gross deferred tax asset of $13.7 million and $13.8 million at June 30, 2014 and December 31, 2013, respectively.

The net operating losses associated with the Company’s U.S.-based operations may be carried forward to offset future taxable income in that jurisdiction and will begin to expire in 2027.

The Company’s U.S.-based operations are also subject to state and local income taxes.

NOTE 14.  Related Party Transactions

Management Transition

On December 31, 2013, Mr. Busher retired from his role as the Company’s Chief Operating Officer and Head of European Operations. Mr. Busher continues to serve as a director and the non-executive Chairman of the Board of Directors of MAL.

In order to promote a smooth transition of Mr. Busher’s duties and responsibilities, the Company entered into a transition letter with him on February 21, 2013 pursuant to which he agreed to: (i) retire from the Board, effective May 17, 2013, the end of his existing term as a Class B director, (ii) transition his executive roles with the Company during 2013, and (iii) retire as Chief Operating Officer and Head of European Operations on December 31, 2013 (the date Mr. Busher’s service agreement expired).

Pursuant to the transition letter, Mr. Busher waived all rights to severance and other termination payments set forth in his service agreement, including any entitlement to payments upon expiration or non-renewal of his service agreement.  In consideration for Mr. Busher’s waiver of these and other rights under his service agreement, as well as his release of any claims against the Company and his continued compliance with the restrictive covenants contained in his service agreement, the Company agreed to the following treatment of his outstanding RSUs awards: (i) the RSUs that were originally granted to Mr. Busher pursuant to the 2010-2013 and 2012-2015 Variable RSU cycles, which were scheduled to vest on December 15, 2013, were vested fully on March 15, 2013; (ii) the RSUs that were originally granted to Mr. Busher as part of the 2012-2015 Variable RSU cycle, which were scheduled to vest on December 15, 2014 or later, were vested fully on December 15, 2013; and (iii) the RSUs that were granted to Mr. Busher as part of the 2013-2016 Variable RSU cycle, which were scheduled to vest on December 15, 2014 or later, vested fully on March 14, 2014. See Note 12.

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In connection with Mr. Busher’s planned retirement, on March 7, 2013 he sold 469,222 Common Shares to the Company in a private transaction.  The price negotiated and paid to Mr. Busher was $24.62 per share, which was $0.63 less than the market price (as per the New York Stock Exchange) at the time the agreement was reached.

BCRH

BCRH provides fully-collateralized property catastrophe reinsurance and invests in various insurance-linked securities through its subsidiaries Blue Capital Re and Blue Capital Re ILS. BCRH commenced its operations in November 2013 and, pursuant to an initial public offering (the “IPO”), its common shares are listed on the New York Stock Exchange and the Bermuda Stock Exchange.  As of June 30, 2014 and December 31, 2013, Montpelier Re owned 29.6% and 28.6% of BCRH’s outstanding common shares, respectively.

In connection with the IPO, during the fourth quarter of 2013 Montpelier: (i) reimbursed BCRH for the underwriting discount it incurred, which was equal to 5% of the gross proceeds it received from third parties ($6.2 million); (ii) paid a structuring fee to a third-party equal to 1% of the gross proceeds BCRH received from third parties ($1.3 million); and (iii) paid $0.9 million of BCRH’s offering expenses (representing BCRH’s offering expenses in excess of $1.0 million).

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.  In addition, Blue Water Re, the Company’s wholly-owned special purpose insurance vehicle, is a significant source of reinsurance business for BCRH.

Mr. William Pollett, the Company’s Chief Corporate Development and Strategy Officer and Treasurer, serves as a director and the Chief Executive Officer of BCRH and Mr. Michael Paquette, the Company’s Chief Financial Officer, serves as BCRH’s interim Chief Financial Officer.  Further, Mr. Christopher Harris, the Company’s Chief Executive Officer, serves as Chairman of BCRH.

Montpelier provides services to BCRH and its subsidiaries through the following arrangements:

BW Retrocessional Agreement. Through a retrocessional contract dated December 31, 2013 (the “BW Retrocessional Contract”), between Blue Capital Re and Blue Water Re, Blue Water Re has the option to cede to Blue Capital Re up to 100% of its participation in the ceded reinsurance business it writes, provided that such business is in accordance with Blue Capital Re’s underwriting guidelines. Pursuant to the BW Retrocessional Contract, Blue Capital Re may participate in: (i) retrocessional, quota share or other agreements between Blue Water Re and Montpelier Re or other third-party reinsurers, which provides it with the opportunity to participate in a diversified portfolio of risks on a proportional basis; and (ii) fronting agreements between Blue Water Re and Montpelier Re or other well capitalized third-party rated reinsurers, which allows Blue Capital Re to transact business with counterparties who prefer to enter into contracts with rated reinsurers.

Investment Management Agreement.  On November 12, 2013, BCRH entered into an Investment Management Agreement with BCML (the “Investment Management Agreement”). Pursuant to the terms of the Investment Management Agreement, BCML has full discretionary authority, including the delegation of the provision of its services, to manage BCRH’s assets, subject to its underwriting guidelines, the terms of the Investment Management Agreement and the oversight of BCRH’s board of directors.

Underwriting and Insurance Management Agreement.  On November 12, 2013, BCRH, Blue Capital Re and BCIML entered into an Underwriting and Insurance Management Agreement (the “Underwriting and Insurance Management Agreement”).  Pursuant to the Underwriting and Insurance Management Agreement, BCIML provides underwriting, risk management, claims management, ceded retrocession agreements management, and actuarial and reinsurance accounting services to Blue Capital Re. BCIML has full discretionary authority to manage the underwriting decisions of Blue Capital Re, subject to Blue Capital Re’s underwriting guidelines, the terms of the Underwriting and Insurance Management Agreement and the oversight of the BCRH’s board of directors.

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Administrative Services Agreement.  On November 12, 2013, BCRH entered into an Administrative Services Agreement with BCML (the “Administrative Services Agreement”). Pursuant to the terms of the Administrative Services Agreement, BCML provides BCRH with support services, including the services of Messrs. Pollett, and Paquette, as well as finance and accounting, claims management and policy wording, modeling software licenses, office space, information technology, human resources and administrative support.

BCRH and its subsidiaries may not terminate the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement for five years after the completion of the IPO, whether or not the Managers’ performance results are satisfactory. Upon any termination or non-renewal of either of the Investment Management Agreement or the Underwriting and Insurance Management Agreement (other than for a material breach by, or the insolvency of, the applicable Manager), BCRH and/or its subsidiaries must pay a one-time termination fee to the Managers, as applicable, equal to 5% of its GAAP shareholders’ equity, calculated as of the most recently completed quarter prior to the date of termination (approximately $8.8 million as of June 30, 2014).

BCRH Credit Agreement.  The Company serves as a guarantor for the BCRH Credit Agreement and is entitled to an annual fee equal to 0.125% of the facility’s total capacity. See Note 5.

On a stand-alone basis, any fees incurred pursuant to the Investment Management Agreement, the Underwriting and Insurance Management Agreement or the Administrative Services Agreement, including any fees triggered upon termination or non-renewal of any of them, represent expenses to BCRH and /or its subsidiaries and revenues to the Managers. On a consolidated basis, the portion of such fees incurred by BCRH’s non-controlling interests pursuant to these agreements represent a decrease to the net income attributable to non-controlling interests on the Company’s Consolidated Statement of Operations and Comprehensive Income, thereby increasing the net income and comprehensive income available to the Company.

During the three and six month periods ended June 30, 2014, Montpelier earned $0.6 million and $1.3 million, respectively, pursuant to services it provided to BCRH and its subsidiaries under the Investment Management Agreement and $0.2 million and $0.3 million, respectively, under the Administrative Services Agreement. During the three and six month periods ended June 30, 2014, Montpelier earned less than $0.1 million pursuant to: (i) the Underwriting and Insurance Management Agreement; and (ii) its role as a guarantor for the BCRH Credit Agreement.

As of June 30, 2014 and December 31, 2013, BCRH and its subsidiaries owed Montpelier $1.6 million and $0.5 million, respectively, for the services performed pursuant to the aforementioned agreements.

NOTE 15.  Fair Value of Financial Instruments

GAAP requires disclosure of fair value information for certain financial instruments.  For those financial instruments in which quoted market prices are not available, fair values are estimated by discounting future cash flows using current market rates or quoted market prices for similar obligations.  Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. Montpelier carries its assets and liabilities that constitute financial instruments on its Consolidated Balance Sheets at fair value with the exception of the Senior Notes, Trust Preferred Securities and other investments carried at net asset value.

At June 30, 2014 and December 31, 2013, the fair value of the Senior Notes (based on quoted market prices, which represent Level 2 inputs) was $314.0 million and $303.2 million, respectively, which compared to a carrying value of $299.2 million. See Note 5.

At June 30, 2014 and December 31, 2013, the fair value of the Trust Preferred Securities (based on quoted market prices for similar securities, which represent Level 2 inputs) was $93.3 million and $89.5 million, respectively, which compared to a carrying value of $100.0 million. See Note 5.

At June 30, 2014 and December 31, 2013, the fair value and net asset value of Montpelier’s other investments carried on the Company’s Consolidated Balance Sheets were approximately the same. See Note 4.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

General

The following is a discussion and analysis of our results of operations for the three and six month periods ended June 30, 2014 and 2013, and our financial condition as of June 30, 2014 and December 31, 2013.  This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and related notes thereto included in Part I, Item 1 of this report and with our audited consolidated financial statements and related notes thereto contained in the 2013 Form 10-K, as filed with the SEC.

This Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. federal securities laws, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, that are not historical facts, including statements about our beliefs and expectations. These statements are based upon current plans, estimates and projections. Forward-looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and various risk factors, many of which are outside our control. See Item 1A “Risk Factors” contained in the 2013 Form 10-K, as filed with the SEC, for specific important factors that could cause actual results to differ materially from those contained in forward looking statements. In particular, statements using words such as “may,” “should,” “estimate,” “expect,” “anticipate,” “intend,” “believe,” “predict,” “potential,” or words of similar meaning generally involve forward-looking statements.

Important events and uncertainties that could cause our results, future dividends on, or repurchases of, Common Shares or Preferred Shares to change include, but are not limited to: market conditions affecting the prices of our Common Shares or Preferred Shares; the possibility of severe or unanticipated losses from natural or man-made catastrophes, including those that may result from changes in climate conditions, including, but not limited to, global temperatures and expected sea levels; the effectiveness of our loss limitation methods; our dependence on principal employees; our ability to effectively execute the business plans of the Company, its subsidiaries and any new ventures that it may enter into; the cyclical nature of the insurance and reinsurance business; the levels of new and renewal business achieved; opportunities to increase writings in our core property and specialty insurance and reinsurance lines of business and in specific areas of the casualty reinsurance market and our ability to capitalize on those opportunities; the sensitivity of our business to financial strength ratings established by independent rating agencies; the inherent uncertainty of our risk management processes, which is subject to, among other things, industry loss estimates and estimates generated by modeling techniques; the accuracy of written premium estimates reported by cedants and brokers on pro-rata contracts and certain excess-of-loss contracts where a deposit or minimum premium is not specified in the contract; the inherent uncertainties of establishing reserves for loss and loss adjustment expenses, including our dependency on the loss information we receive from cedants and brokers; unanticipated adjustments to premium estimates; changes in the availability, cost or quality of reinsurance or retrocessional coverage; changes in general economic and financial market conditions; changes in and the impact of governmental legislation or regulation, including changes in tax laws in the jurisdictions where we conduct business; the amount and timing of reinsurance recoverables and reimbursements we actually receive from our reinsurers; the overall level of competition, and the related demand and supply dynamics in our markets relating to growing capital levels in our industry; declining demand due to increased retentions by cedants and other factors; the impact of terrorist activities on the Company and the economy; rating agency policies and practices; unexpected developments concerning the small number of insurance and reinsurance brokers upon whom we rely for a large portion of revenues; our dependence as a holding company upon dividends or distributions from our operating subsidiaries; and the impact of foreign currency and interest rate fluctuations.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

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A widely-used measure of relative underwriting performance for an insurance or reinsurance company is the combined ratio. Our combined ratio is calculated by adding: (i) the ratio of incurred losses and LAE to earned premiums (known as the “loss and LAE ratio”); (ii) the ratio of acquisition costs to earned premiums (known as the “acquisition cost ratio”); and (iii) the ratio of general and administrative expenses to earned premiums (known as the “general and administrative expense ratio”), with each component determined in accordance with GAAP (the “GAAP combined ratio”).  A GAAP combined ratio under 100% indicates that an insurance or reinsurance company is generating an underwriting profit.  A GAAP combined ratio over 100% indicates that an insurance or reinsurance company is generating an underwriting loss.

Overview

Summary Financial Results

Three Month Periods Ended June 30, 2014 and 2013

We ended the second quarter of 2014 with a FCBVPCS of $31.74, an increase of 2.8% for the quarter after taking into account dividends declared on Common Shares during the period. The increase in our FCBVPCS incorporated positive contributions from both our underwriting and investing operations.  Our comprehensive income available to the Company for the second quarter of 2014 was $41.7 million and our GAAP combined ratio was 76.7%.

Our underwriting results for the second quarter of 2014 included $23.5 million of net losses from European windstorm Ela and U.S. tornadoes (not including the benefit of reinstatement premiums), and benefitted from $37.5 million of net prior year favorable loss reserve development. Our investment results for the second quarter of 2014 included $19.8 million of net realized and unrealized investment gains, which were comprised of $12.7 million in net gains from fixed maturity investments, $6.2 million in net gains from equity securities and $0.9 million in net gains from other investments.

We ended the second quarter of 2013 with a FCBVPCS of $27.03, a decrease of 1.3% for the quarter after taking into account dividends declared on Common Shares during the period.  The decrease in our FCBVPCS was primarily the result of net realized and unrealized investment losses, partially offset by solid underwriting results. Our comprehensive loss available to the Company for the second quarter of 2013 was $23.6 million and our GAAP combined ratio was 69.0%.

Our underwriting results for the second quarter of 2013 included $26.3 million of net losses from flooding in Europe and Canada, and U.S. tornadoes (not including the benefit of reinstatement premiums), and benefitted from $47.7 million of net prior year favorable loss reserve development. Our investment results for the second quarter of 2013 included $61.2 million of net realized and unrealized investment losses, which were comprised of $58.3 million in net losses from fixed maturity investments, $2.3 million in net losses from equity securities and $0.6 million in net losses from other investments.

Six Month Periods Ended June 30, 2014 and 2013

We experienced an increase in FCBVPCS of 8.7% during the first half of 2014 after taking into account dividends declared on Common Shares during the period. The increase in our FCBVPCS was primarily the result of solid underwriting and investment results.  Our comprehensive income available to the Company for the first half of 2014 was $135.1 million and our GAAP combined ratio was 63.8%.

Our underwriting results for the first half of 2014 contained no significant net catastrophe losses other than the second quarter losses noted above, and benefitted from $72.7 million of net prior year favorable loss reserve development. Our investment results for the first half of 2014 included $42.5 million of net realized and unrealized investment gains, which were comprised of $28.0 million in net gains from fixed maturity investments, $9.8 million in net gains from equity securities and $4.7 million in net gains from other investments.

We experienced an increase in FCBVPCS of 4.3% during the first half of 2013 after taking into account dividends declared on Common Shares during the period. The increase in our FCBVPCS was primarily the result of solid underwriting results, partially offset by net realized and unrealized investment losses.  Our comprehensive income available to the Company for the first half of 2013 was $68.3 million and our GAAP combined ratio was 65.5%.

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Our underwriting results for the first half of 2013 contained no significant net catastrophe losses other than the second quarter losses noted above, and benefitted from $66.1 million in net prior year favorable loss reserve development.  Our investment results for the first half of 2013 included $61.9 million of net realized and unrealized investment losses which were comprised of $61.4 million in net losses from fixed maturity investments, $1.2 million in net losses from equity securities and $0.7 million in net gains from other investments.

Book Value Per Common Share

The following table presents our computation of book value per Common Share (“BVPCS”) and FCBVPCS as of selected balance sheet dates:

	June 30, 2014			March 31, 2014			Dec. 31, 2013			June 30, 2013
Book value numerator (in millions):
Total Shareholders’ Equity available to the Company	$	1,667.8		$	1,657.2		$	1,642.1		$	1,570.0
Less: Preferred Shareholders’ Equity	(150.0		)	(150.0		)	(150.0		)	(150.0		)
[A] Common Shareholders’ Equity available to the Company	$	1,517.8		$	1,507.2		$	1,492.1		$	1,420.0
Book value denominators (in thousands):
[B] Common Shares outstanding	46,175			47,018			49,274			51,020
RSUs outstanding	1,644			1,589			1,449			1,521
[C] Common Shares and RSUs outstanding	47,819			48,607			50,723			52,541
BVPCS [A] / [B]	$	32.87		$	32.05		$	30.28		$	27.83
FCBVPCS [A] / [C]	31.74			31.01			29.42			27.03
Increase in FCBVPCS: (1)
From March 31, 2014	2.8		%
From December 31, 2013	8.7		%
From June 30, 2013	19.4		%

(1)Computed as the change in FCBVPCS after taking into account dividends declared on Common Shares of $0.125, $0.25 and $0.49 during the three, six and twelve month periods ended June 30, 2014, respectively.

Our computations of FCBVPCS and the increase in FCBVPCS are non-GAAP measures which we believe are important to our investors, analysts and other interested parties who benefit from having an objective and consistent basis for comparison with other companies within our industry.

The Company’s increase in FCBVPCS serves as the performance measure for both the portion of our annual employee cash bonuses that are based on Company performance and for our Variable RSU awards in the Initial RSU Period. We believe that this performance measure: (i) directly aligns our interests and motivations with those of our stakeholders; and (ii) provides our employees with the ability to easily understand, and identify with, their incentive hurdle, and allows our stakeholders to easily track the Company’s performance with respect to this goal, since we present our calculations of FCBVPCS and the increase in our FCBVPCS in our quarterly earnings releases and our annual and quarterly filings with the SEC.

Executive Overview

We provide customized and innovative insurance and reinsurance solutions to the global market through our underwriting platforms in Bermuda, the U.K. and the U.S. Through our affiliates in Bermuda, we also provide institutional and retail investors with the opportunity to directly invest in global property catastrophe reinsurance risks.

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During the six month period ended June 30, 2014, each of our operating segments, Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance, have executed well with combined ratios of 41%, 87% and 46%, respectively.  Overall, we achieved an 8.7% increase in our FCBVPCS for the period while returning $108.1 million to holders of Common Shares through share repurchases and dividends.

BCRH, our newest Collateralized Reinsurance vehicle which is traded on the New York Stock Exchange, has had a profitable initial six months of operations, achieving a 4.1% increase in its FCBVPCS for the period, including dividends declared. BCRH and its subsidiaries have further expanded our presence in the collateralized reinsurance market. Our total capital under the management of Blue Capital® currently stands at $615 million, enabling us to provide a broader product mix and increased line sizes to select clients.

We experienced increased competition during the January 1, June 1 and July 1, 2014 renewal seasons, particularly within our Property Catastrophe-Treaty and Property Specialty-Treaty classes, due to an increase in industry capacity from both: (i) new sources of capital flowing into property catastrophe reinsurance; and (ii) relatively light industry catastrophe losses experienced over the past several quarters. Through July 1, our internal calculations indicate an average renewal price index of approximately minus 12% for Montpelier Bermuda and minus 1% for Montpelier at Lloyd’s, year-to-date.

Looking ahead, despite the competitive market conditions we currently face, through our efforts thus far in 2014 we believe that we have: (i) benefitted from a strong business flow with established relationships; (ii) strengthened our relationships with key business partners; and (iii) expanded our product mix.  As a result, with our strong consolidated balance sheet, disciplined underwriting and specialist approach, we are positioned to perform well in 2014 and beyond. Further, at current risk exposure levels, we believe we have retained the ability to quickly adapt and respond to new market opportunities while continuing our strategic focus on property, marine and other short-tail lines.

Third-Party Fees and Expense Reimbursements

We have entered into specialized quota share reinsurance contracts with unaffiliated third-parties with respect to a portion of Montpelier Re’s Property Catastrophe - Treaty book of business, under which we are eligible to receive override and profit commissions.

We record the override and profit commissions associated with these specialized quota share reinsurance contracts (when earned) as a reduction to our acquisition costs which, in turn, reduces our acquisition cost and overall combined ratios. These benefits to us totaled $1.5 million during each of the three month periods ended June 30, 2014 and 2013, and totaled $4.2 million and $4.8 million during the six month periods ended June 30, 2014 and 2013, respectively.

We have also entered into similar intercompany quota share reinsurance contracts with certain of our affiliates, under which we are eligible to receive override and profit commissions, and we have been contracted to manage all, or substantially all, of the net assets of BCRH and the BCGR Listed Fund, under which we are entitled to receive fronting fees, management and performance fees and expense reimbursements.

Because the results of BCRH and the BCGR Cell are fully consolidated in our consolidated statements of operations and comprehensive income, we record these benefits (when earned) as decreases to the net income attributable to non-controlling interests, thereby increasing the net income and comprehensive income available to the Company. These benefits to us totaled $1.5 million and $0.2 million during the three month periods ended June 30, 2014 and 2013, respectively, and $3.6 million and $0.4 million during the six month periods ended June 30, 2014 and 2013, respectively.

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Natural Catastrophe Risk Management

We insure and reinsure exposures throughout the world against various natural catastrophe perils.  We manage our exposure to these perils using a combination of methods, including underwriting judgment, CATM® (our proprietary risk management system), third-party models and third-party protection such as ceded reinsurance and derivative instrument protections.

Our multi-tiered risk management approach focuses on tracking exposed contract limits, estimating the potential impact of a single natural catastrophe event and simulating our yearly net operating result to reflect an aggregation of modeled underwriting, investment and other risks. Management routinely seeks to refine and improve our risk management system and the Board regularly reviews the outputs from this process.

The following discussion should be read in conjunction with Item 1A “Risk Factors” included in the 2013 Form 10-K, as filed with the SEC, in particular the specific risk factor entitled “Our stated catastrophe and enterprise-wide risk management exposures are based on estimates and judgments which are subject to significant uncertainties.”

Exposure Management

We monitor our net reinsurance treaty contract limits that we believe are exposed to a single natural catastrophe occurrence within certain broadly defined major catastrophe zones.  We provide these limits as a measure of our relative potential loss exposure across major zones in the event a natural catastrophe occurs.

Our June 1, 2014 net reinsurance treaty limits by zone were as follows:

Net Reinsurance Treaty Limits by Zone (1)

	Treaty Limits		Percentage of June 30, 2014
	(Millions)		Shareholders’ Equity Available to the Company
U.S. Hurricane:
Mid-Atlantic hurricane	$	525	31	%
Florida hurricane	434		26	%
Northeast hurricane	405		24	%
Gulf hurricane	383		23	%
Hawaii hurricane	141		8	%
U.S. Earthquake:
New Madrid earthquake	$	550	33	%
California earthquake	358		21	%
Northwest earthquake	352		21	%
European Windstorm:
Western European windstorm	$	473	28	%
U.K. & Ireland windstorm	398		24	%
Scandinavia windstorm	171		10	%
Other Countries:
Japan earthquake	$	292	18	%
Canada earthquake	267		16	%
Australia earthquake	253		15	%
Australia cyclone	249		15	%
New Zealand earthquake	174		10	%
Turkey earthquake	174		10	%
Chile earthquake	155		9	%
Japan windstorm	117		7	%

(1)For purposes of this presentation, “Mid-Atlantic” includes Georgia, South Carolina, North Carolina, Virginia, West Virginia, Maryland, Delaware, Pennsylvania, New Jersey and the District of Columbia; “Northeast” includes New York, Connecticut, Rhode Island, Massachusetts, New Hampshire, Vermont and Maine; “Gulf” includes Texas, Louisiana, Mississippi and Alabama; “New Madrid” includes Missouri, Tennessee, Arkansas, Illinois, Kentucky, Indiana, Ohio and Michigan; “Northwest” includes Washington and Oregon; “Western European” includes France, Belgium, Netherlands, Luxembourg, Germany, Switzerland and Austria; and “Scandinavia” includes Denmark, Norway and Sweden.

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The treaty limits presented are shown net of any ceded reinsurance or other third-party protection we purchase but have not been reduced by any reinstatement premiums.  The treaty limits include all business coded as property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance and event-linked derivative securities.  The treaty limits also include those exposures we have assumed through our investments in BCRH and the BCGR Listed Fund, but exclude those exposures attributable to non-controlling interests. The treaty limits do not include individual risk business and other reinsurance classes.

For U.S. earthquake, the regional limits shown are for earthquake ground motion damage only, i.e., excluding limits for contracts that do not specifically cover earthquake damage but may provide coverage for fire following an earthquake event.  Contracts that provide coverage for multiple regions are included in the totals for each potentially exposed zone; therefore, the limits for a single multi-zone policy may be included within several different zone limits.

These treaty limits are a snapshot of our exposure as of June 1, 2014.  As of that date, New Madrid earthquake represented our largest concentration of net reinsurance treaty limits among the selected zones.  The relative comparison between zones and the absolute level of exposure may change materially at any time due to changes in the composition of our portfolio and changes in our ceded reinsurance program.

Single Event Losses

For certain defined natural catastrophe region and peril combinations, we assess the probability and likely magnitude of losses using a combination of industry third-party models, CATM® and underwriting judgment.  We attempt to model the projected net impact from a single event, taking into account contributions from property catastrophe reinsurance (including retrocessional business), property pro-rata reinsurance, workers compensation catastrophe reinsurance, event-linked derivative securities and individual risk business, offset by the net benefit of any reinsurance or derivative protections we purchase and the benefit of reinstatement premiums.

The projected single event net impact figures also include those single event exposures we have assumed through our investments in BCRH and the BCGR Listed Fund, but exclude those exposures attributable to non-controlling interests.

There is no single standard methodology or set of assumptions utilized industry-wide in estimating property catastrophe losses.  As a result, it may be difficult to accurately compare estimates of risk exposure among different insurance and reinsurance companies, due to, among other things, differences in modeling, modeling assumptions, portfolio composition and concentrations, and selected event scenarios.

The table below details the projected net impact from single event losses as of June 1, 2014 for selected zones at selected return period levels using AIR Worldwide Corporation’s CLASIC/2 model version 15.0, one of several industry-recognized third-party vendor models.  It is important to note that each catastrophe model contains its own assumptions as to the frequency and severity of loss events, and results may vary significantly from model to model.

Since we utilize a combination of third-party models, CATM® and underwriting judgement to project the net impact from single event losses, our internal projections may be higher or lower than those presented in the table below.

Net Impact From Single Event Losses by Return Period (in years) (1)

	Net Impact				Percentage of June 30, 2014
	(Millions)				Shareholders’ Equity Available to the Company
	100-year		250-year		100-year		250-year
U.S. Hurricane	$	294	$	347	18	%	21	%
European windstorm	235		298		14	%	18	%
U.S. Earthquake	184		270		11	%	16	%

(1)A “100-year” return period can also be referred to as the 1.0% occurrence exceedance probability (“OEP”), meaning there is a 1.0% chance in any given year that this level will be exceeded.  A “250-year” return period can also be referred to as the 0.4% OEP, meaning there is a 0.4% chance in any given year that this level will be exceeded.

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As of June 1, 2014, our three largest modeled exposures to a single event loss at a 250-year return period were U.S. Hurricane, European windstorm and U.S. Earthquake.

Our projections of the net impact from single event losses may vary considerably within a particular territory depending on the specific characteristics of the event.  This is particularly true for the direct insurance and facultative reinsurance portfolio we underwrite. For example, our projected net impact from a large European windstorm may differ materially depending on whether the majority of loss comes from the U.K. & Ireland or from Continental Europe.

Given the limited availability of reliable historical data, there is a great deal of uncertainty with regard to the accuracy of any catastrophe model, especially when contemplating longer return periods.

Our single event loss estimates represent snapshots as of June 1, 2014.  The composition of our in-force portfolio may change materially at any time due to the acceptance of new policies, the expiration of existing policies, losses incurred, and changes in our ceded reinsurance and derivative protections.

Annual Operating Result

In addition to monitoring treaty contract limits and single event accumulation potential, we attempt to simulate our annual operating result to reflect an aggregation of modeled underwriting, investment and other risks.  This approach estimates a net operating result over simulated twelve month periods, including contributions from certain variables such as aggregate premiums, losses, expenses and investment results.

We view this approach as a supplement to our single event stress test as it allows for multiple losses from both natural catastrophe and other circumstances and attempts to take into account certain risks that are unrelated to our underwriting activities.  Through our modeling, we endeavor to take into account many risks that we face as an enterprise.  However, by the very nature of the insurance and reinsurance business, and due to limitations associated with the use of models in general, our simulated result does not cover every potential risk.

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Consolidated Results of Operations

Our consolidated financial results for the three and six month periods ended June 30, 2014 and 2013 were as follows:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Gross insurance and reinsurance premiums written	$	239.0		$	242.7		$	512.5		$	503.9
Ceded reinsurance premiums	(34.1		)	(44.9		)	(70.5		)	(80.1		)
Net insurance and reinsurance premiums written	204.9			197.8			442.0			423.8
Change in net unearned insurance and reinsurance premiums	(42.3		)	(58.9		)	(122.6		)	(125.2		)
Net insurance and reinsurance premiums earned	162.6			138.9			319.4			298.6
Net investment income	12.4			16.7			25.3			33.1
Net realized and unrealized investment gains (losses)	19.8			(61.2		)	42.5			(61.9		)
Net foreign currency gains (losses)	(8.8		)	(5.3		)	(10.6		)	15.8
Net losses from derivative instruments	(11.2		)	(12.2		)	(16.3		)	(7.6		)
Other revenue	0.7			—			1.0			—
Total revenues	175.5			76.9			361.3			278.0
Underwriting expenses:
Loss and LAE — current year losses	104.0			94.5			166.6			163.5
Loss and LAE — prior year losses	(37.5		)	(47.7		)	(72.7		)	(66.1		)
Insurance and reinsurance acquisition costs	29.4			22.6			54.2			44.7
General and administrative expenses	28.9			26.4			55.7			53.3
Non-underwriting expenses:
Interest and other financing expenses	4.7			4.7			9.4			9.4
Other expenses	1.0			—			1.0			—
Total expenses	130.5			100.5			214.2			204.8
Income (loss) before income taxes	45.0			(23.6		)	147.1			73.2
Income tax benefit (provision)	(0.2		)	0.4			(0.1		)	0.2
Net income (loss)	44.8			(23.2		)	147.0			73.4
Net income attributable to non-controlling interest	(4.3		)	(0.7		)	(13.3		)	(1.9		)
Net income (loss) available to the Company	40.5			(23.9		)	133.7			71.5
Dividends declared on Preferred Shares	(3.4		)	(3.4		)	(6.7		)	(6.7		)
Net income (loss) available to the Company’s common shareholders	$	37.1		$	(27.3	)	$	127.0		$	64.8
Net income (loss)	$	44.8		$	(23.2	)	$	147.0		$	73.4
Net change in foreign currency translation	1.2			0.3			1.4			(3.2		)
Comprehensive income (loss)	46.0			(22.9		)	148.4			70.2
Net income attributable to non-controlling interest	(4.3		)	(0.7		)	(13.3		)	(1.9		)
Comprehensive income (loss) available to the Company	$	41.7		$	(23.6	)	$	135.1		$	68.3
Loss and LAE ratio	40.8		%	33.7		%	29.4		%	32.6		%
Acquisition cost ratio	18.1		%	16.3		%	17.0		%	15.0		%
General and administrative expense ratio	17.8		%	19.0		%	17.4		%	17.9		%
GAAP combined ratio	76.7		%	69.0		%	63.8		%	65.5		%

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I. Review of Underwriting Results - by Segment

We currently operate through three reportable segments: Montpelier Bermuda, Montpelier at Lloyd’s and Collateralized Reinsurance.  Each of our segments represents a separate underwriting platform through which we write, or formerly wrote, insurance and reinsurance business.  Our segment disclosures provided herein present the operations of each segment prior to the effects of intercompany quota share reinsurance agreements among them.

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 herein.

MONTPELIER BERMUDA

Underwriting results for Montpelier Bermuda for the three and six month periods ended June 30, 2014 and 2013 were as follows:

	Three Month Periods						Six Month Periods
	Ended Jule 30,						Ended June 30,
($ in millions)	2014			2013			2014			2013
Gross premiums written	$	148.9		$	160.6		$	322.8		$	336.5
Ceded reinsurance premiums	(36.7		)	(32.3		)	(72.9		)	(58.2		)
Net premiums written	112.2			128.3			249.9			278.3
Change in net unearned premiums	(29.5		)	(44.2		)	(86.9		)	(93.0		)
Net premiums earned	82.7			84.1			163.0			185.3
Loss and LAE - current year losses	(53.4		)	(52.6		)	(79.3		)	(85.9		)
Loss and LAE - prior year losses	23.3			33.7			49.3			59.7
Acquisition costs	(10.6		)	(10.0		)	(18.7		)	(18.8		)
General and administrative expenses	(8.5		)	(8.6		)	(17.2		)	(17.8		)
Underwriting income	$	33.5		$	46.6		$	97.1		$	122.5
Loss and LAE ratio	36.4		%	22.4		%	18.4		%	14.2		%
Acquisition cost ratio	12.8		%	11.9		%	11.5		%	10.1		%
General and administrative expense ratio	10.2		%	10.3		%	10.7		%	9.6		%
GAAP combined ratio	59.4		%	44.6		%	40.6		%	33.9		%

Gross and Net Premiums Written

The following table summarizes Montpelier Bermuda’s premium writings, by line of business, for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods  Ended June 30,
($ in millions)	2014					2013
Property Catastrophe - Treaty	$	101.4		68	%	$	120.0		75	%
Property Specialty - Treaty	14.0			10		12.0			7
Other Specialty - Treaty	21.0			14		16.2			10
Property and Specialty Individual Risk	12.5			8		12.4			8
Gross premiums written	148.9			100	%	160.6			100	%
Ceded reinsurance premiums	(36.7		)			(32.3		)
Net premiums written	$	112.2				$	128.3

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	Six Month Periods  Ended June 30,
($ in millions)	2014					2013
Property Catastrophe - Treaty	$	222.3		69	%	$	243.2		72	%
Property Specialty - Treaty	31.6			10		24.0			7
Other Specialty - Treaty	49.4			15		46.9			14
Property and Specialty Individual Risk	19.5			6		22.4			7
Gross premiums written	322.8			100	%	336.5			100	%
Ceded reinsurance premiums	(72.9		)			(58.2		)
Net premiums written	$	249.9				$	278.3

Note - Montpelier Bermuda’s gross and net premiums written during the periods presented include amounts assumed from Montpelier at Lloyd’s.  Montpelier Bermuda’s reinsurance premiums ceded during the 2014 periods include amounts ceded to Collateralized Reinsurance. These inter-segment reinsurance agreements are eliminated in consolidation.  See “Corporate and Other” under this Item 2.

Gross premiums written within Montpelier Bermuda decreased 7% and 4% during the three month and six month periods ended June 30, 2014, respectively, as compared to the comparable 2013 periods. These reductions were primarily the result of pricing reductions in the Property Catastrophe - Treaty line of business, which led to decreased premium on certain renewed contracts, as well as the non-renewal of other programs.

Reinsurance premiums ceded by Montpelier Bermuda during the three month periods ended June 30, 2014 and 2013 were $36.7 million and $32.3 million, respectively, and $72.9 million and $58.2 million during the six month periods ended June 30, 2014 and 2013, respectively. The increase in Montpelier Bermuda’s reinsurance premiums ceded during each of the 2014 periods presented was primarily the result of more Property Catastrophe - Treaty business being ceded on a pro-rata basis, both to the Company’s Collateralized Reinsurance segment and to third parties.

Montpelier Bermuda purchases reinsurance in the normal course of its business in order to manage its exposures.  The amount and type of reinsurance that Montpelier Bermuda purchases is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross premiums written during a particular period. Other factors affect Montpelier Bermuda’s appetite and capacity to write and retain risk. These factors include the impact of changes in frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, evolving industry-wide capital requirements, increased competition, market conditions and other considerations.

All of Montpelier Bermuda’s reinsurance purchases to date have represented prospective cover; that is, reinsurance has been purchased to protect Montpelier Bermuda against the risk of future losses as opposed to covering losses that have already occurred but have not been paid.  Montpelier Bermuda purchases: (i) excess-of-loss reinsurance covering one or more lines of its business; (ii) quota share reinsurance with respect to specific lines of its business; and (iii) industry loss warranty policies which provide coverage for certain losses provided they are triggered by events exceeding a specified industry loss size.

Net premiums written and earned by Montpelier Bermuda included increases (decreases) due to reinstatements of $2.8 million and $(0.8) million, during the three month periods ended June 30, 2014 and 2013, respectively, and $2.7 million and $1.4 million, during the six month periods ended June 30, 2014 and 2013, respectively.

Net Premiums Earned

Net premiums earned by Montpelier Bermuda were $82.7 million and $84.1 million during the three month periods ended June 30, 2014 and 2013, respectively, and $163.0 million and $185.3 million during the six month periods ended June 30, 2014 and 2013, respectively.  Net premiums earned are primarily a function of the amount and timing of net premiums previously written.

Loss and LAE Reserve Movements

The following table summarizes Montpelier Bermuda’s loss and LAE reserve movements for the three and six month periods ended June 30, 2014 and 2013:

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	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
(Millions)	2014			2013			2014			2013
Gross unpaid loss and LAE reserves - beginning	$	478.9		$	679.6		$	520.9		$	728.2
Reinsurance recoverable on unpaid losses - beginning	(44.4		)	(76.6		)	(48.7		)	(87.7		)
Net unpaid loss and LAE reserves - beginning	434.5			603.0			472.2			640.5
Losses and LAE incurred:
Current year losses	53.4			52.6			79.3			85.9
Prior year losses	(23.3		)	(33.7		)	(49.3		)	(59.7		)
Total losses and LAE incurred	30.1			18.9			30.0			26.2
Losses and LAE paid and approved for payment	(28.1		)	(44.9		)	(65.7		)	(89.7		)
Net unpaid loss and LAE reserves - ending	436.5			577.0			436.5			577.0
Reinsurance recoverable on unpaid losses - ending	51.1			63.1			51.1			63.1
Gross unpaid loss and LAE reserves - ending	$	487.6		$	640.1		$	487.6		$	640.1

Note - Montpelier Bermuda’s ending reinsurance recoverable on unpaid losses at June 30, 2014, March 31, 2014 and December 31, 2013, include amounts recoverable from our Collateralized Reinsurance segment of $5.3 million, $1.0 million and zero, respectively, pursuant to an inter-segment reinsurance arrangement which is eliminated in consolidation.

The following table summarizes Montpelier Bermuda’s net loss and LAE ratios for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
	2014		2013		2014		2013
Loss and LAE ratio - current year	64.6	%	62.5	%	48.6	%	46.4	%
Loss and LAE ratio - prior year	(28.2	)%	(40.1	)%	(30.2	)%	(32.2	)%
Loss and LAE ratio	36.4	%	22.4	%	18.4	%	14.2	%

Three month periods ended June 30, 2014 and 2013

Current Year Loss and LAE Events

During the three month periods ended June 30, 2014 and 2013, Montpelier Bermuda experienced $53.4 million and $52.6 million in current year net losses and LAE incurred, respectively. Montpelier Bermuda’s underwriting results for the 2014 period included $19.1 million of net losses from European Storm Ela and U.S. tornadoes.  Montpelier Bermuda’s underwriting results for the 2013 period included $22.7 million of net losses from flooding in Europe and Canada, and U.S. tornadoes.

Prior Year Loss and LAE Development

During the three month period ended June 30, 2014, Montpelier Bermuda experienced $23.3 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:

·IBNR reductions associated with medical malpractice business ($3.5 million decrease),

·A casualty loss from 2010 ($2.7 million increase),

·2012 windstorm Sandy ($2.1 million decrease),

·2013 U.S. crop losses ($1.3 million decrease), and

·2005 hurricanes ($1.0 million decrease).

In addition to the foregoing, claims reported to Montpelier Bermuda during the three month period ended June 30, 2014 indicated that IBNR for natural catastrophe losses it initially recorded during 2013 exceeded the extent of losses that actually occurred, and consequently Montpelier Bermuda decreased its loss and LAE reserves by $5.1 million.

63

During the three month period ended June 30, 2013, Montpelier Bermuda experienced $33.7 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:

·IBNR reductions associated with medical malpractice business ($7.1 million decrease),

·2012 windstorm Sandy ($4.3 million decrease),

·The commutation/settlement of four prior year contracts ($3.0 million decrease), and

·2011 Japan earthquake ($2.8 million decrease).

In addition to the foregoing, claims reported to Montpelier Bermuda during the three month period ended June 30, 2013 indicated that IBNR for natural catastrophe losses it initially recorded during 2012 (excluding windstorm Sandy) exceeded the extent of losses that actually occurred, and consequently Montpelier Bermuda decreased its loss and LAE reserves by a further $5.6 million.

Impact of Foreign Currency Transaction Gains and Losses on Prior Year Losses and LAE Incurred

Montpelier Bermuda’s prior year losses and LAE incurred were not significantly impacted by foreign currency movements during the three month period ended June 30, 2014. Montpelier Bermuda’s prior year losses and LAE incurred benefitted from $5.0 million in foreign currency transaction gains during the three month period ended June 30, 2013.

Since foreign currency transaction gains (losses) are reported as decreases (increases) in Montpelier Bermuda’s losses and LAE incurred, they have a direct impact on its reported underwriting results and its underwriting ratios.

Six month periods ended June 30, 2014 and 2013

Current Year Loss and LAE Events

During the six month periods ended June 30, 2014 and 2013, Montpelier Bermuda experienced $79.3 million and $85.9 million in current year net losses and LAE incurred, respectively.  Montpelier Bermuda’s underwriting results for the six month periods ended June 30, 2014 and 2013 contained no significant net catastrophe losses other than the second quarter losses noted above.

Prior Year Loss and LAE Development

During the six month period ended June 30, 2014, Montpelier Bermuda experienced $49.3 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 six month period ended June 30, 2014 also included the following events and factors recognized during the first quarter of 2014:

·A casualty claim incurred during 2012 ($3.6 million increase),

·2011 New Zealand earthquakes ($3.0 million decrease),

·2005 U.S. Hurricanes ($2.5 million decrease),

·2008 Hurricane Gustav ($2.2 million decrease),

·2011 Thai floods ($1.6 million decrease),

·2011 Japanese earthquake ($1.4 million decrease),

·2012 Italian earthquake ($1.2 million decrease), and

·2010 Chilean earthquake ($1.1 million decrease).

In addition to the foregoing, claims reported to Montpelier Bermuda during the first quarter of 2014 indicated that IBNR for natural catastrophe losses it initially recorded during 2013 exceeded the extent of losses that actually occurred, and consequently Montpelier Bermuda decreased its loss and LAE reserves by a further $9.3 million during the first quarter of 2014.

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During the six month period ended June 30, 2013, Montpelier Bermuda experienced $59.7 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 six month period ended June 30, 2013 also included the following events and factors recognized during the first quarter of 2013:

·A settlement associated with the 2010 Deepwater Horizon oil rig explosion and fire ($5.0 million decrease),

·2011 Japanese earthquake ($3.6 million decrease),

·2011 fire at a Texas fuel storage facility ($2.6 million increase),

·2007 fire at a Chilean power plant ($2.5 million increase),

·2005 Hurricanes ($1.9 million decrease), and

·2011 Georgia weather events ($1.6 million decrease).

In addition to the foregoing, claims reported to Montpelier Bermuda during the first quarter of 2013 indicated that IBNR for natural catastrophe losses it initially recorded during 2012 exceeded the extent of losses that actually occurred, and consequently Montpelier Bermuda decreased its loss and LAE reserves by a further $13.0  million during the first quarter of 2013.

Impact of Foreign Currency Transaction Gains and Losses on Prior Year Losses and LAE Incurred

Montpelier Bermuda’s prior year losses and LAE incurred were not significantly impacted by foreign currency movements during the six month period ended June 30, 2014.  Montpelier Bermuda’s prior year losses and LAE incurred benefitted from $6.9 million in foreign currency transaction gains during the six month period ended June 30, 2013.

Underwriting Expenses

The following table summarizes Montpelier Bermuda’s underwriting expenses for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Acquisition costs	$	10.6		$	10.0		$	18.7		$	18.8
Acquisition cost ratio	12.8		%	11.9		%	11.5		%	10.1		%
General and administrative expenses	$	8.5		$	8.6		$	17.2		$	17.8
General and administrative expense ratio	10.2		%	10.3		%	10.7		%	9.6		%

Acquisition costs include commissions, profit commissions, brokerage costs, and excise taxes, when applicable.  Profit commissions and brokerage costs can vary based on the nature of business produced. Commissions earned by Montpelier Bermuda from business that it cedes to reinsurers are recorded as reductions in its acquisition costs.

Profit commissions, which are accrued based on the estimated results of the subject contract, change as Montpelier Bermuda’s estimates of loss and LAE fluctuate.  Montpelier Bermuda pays profit commissions on certain assumed reinsurance contracts, and receives profit commissions on certain ceded reinsurance contracts. Only a few of Montpelier Bermuda’s assumed and ceded reinsurance contracts contain profit commission clauses and the terms of these profit commissions are specific to the individual contracts and vary as a percentage of the contract results.

Montpelier Bermuda recorded net profit commission expense (benefit) of $0.4 million and $(0.4) million during the three month periods ended June 30, 2014 and 2013, respectively, and $(1.4) million and $(2.8) million during the six month periods ended June 30, 2014 and 2013, respectively.

All other acquisition costs incurred by Montpelier Bermuda are generally driven by contract terms and are normally a set percentage of gross premiums written. Such acquisition costs consist of commission expenses incurred on assumed business less commission revenue earned on purchased reinsurance covers, all of which is earned over the same period that the corresponding premiums are expensed.

65

Montpelier Bermuda’s acquisition cost ratios for the three and six month periods ended June 30, 2014 were higher than those of the comparable 2013 periods, primarily as a result of: (i) increases in Montpelier Bermuda’s net earned premium represented by pro-rata contracts, which typically incorporate higher acquisition costs than excess-of-loss contracts; and (ii) the decreases in net profit commission benefits noted above.

The following table summarizes Montpelier Bermuda’s general and administrative expenses during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Operating expenses	$	5.9	$	6.7	$	12.7	$	13.9
Incentive compensation expenses	2.6		1.9		4.5		3.9
General and administrative expenses	$	8.5	$	8.6	$	17.2	$	17.8

The decreases in operating expenses incurred by Montpelier Bermuda during the three and six month periods ended June 30 2014, versus those of the comparable 2013 periods, were due primarily to a reduction in centrally managed information technology and risk management costs allocated to the Montpelier Bermuda segment.

Incentive compensation expenses recorded at Montpelier Bermuda consist of two independent components. The first component represents amounts that are not, or are no longer, dependent on Company performance, and consist of: (i) Fixed RSUs and Variable RSUs granted in prior years that have been effectively converted to Fixed RSUs; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.

Montpelier Bermuda’s incentive compensation expenses incurred during the three and six month periods ended June 30, 2014 increased over those of the comparable 2013 periods, primarily as a result of: (i) its 2014 accruals being provided at a higher projected payout level than that of the prior year; and (ii) a greater number of Fixed RSUs outstanding during the 2014 periods.

MONTPELIER AT LLOYD’S

Underwriting results for Montpelier at Lloyd’s for the three and six month periods ended June 30, 2014 and 2013 were as follows:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Gross premiums written	$	68.6		$	58.9		$	142.7		$	128.7
Ceded reinsurance premiums	(5.6		)	(9.3		)	(14.3		)	(18.0		)
Net premiums written	63.0			49.6			128.4			110.7
Change in net unearned premiums	(2.9		)	(0.6		)	(12.2		)	(7.3		)
Net premiums earned	60.1			49.0			116.2			103.4
Loss and LAE - current year losses	(42.3		)	(39.9		)	(78.0		)	(75.6		)
Loss and LAE - prior year losses	15.0			14.5			24.0			7.1
Acquisition costs	(16.2		)	(11.9		)	(29.1		)	(24.8		)
General and administrative expenses	(9.8		)	(7.9		)	(18.6		)	(16.2		)
Underwriting income (loss)	$	6.8		$	3.8		$	14.5		$	(6.1	)
Loss and LAE ratio	45.4		%	51.8		%	46.4		%	66.2		%
Acquisition cost ratio	27.0		%	24.3		%	25.0		%	24.0		%
General and administrative expense ratio	16.3		%	16.2		%	16.1		%	15.7		%
GAAP combined ratio	88.7		%	92.3		%	87.5		%	105.9		%

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Gross and Net Premiums Written

The following table summarize Montpelier at Lloyd’s premium writings, by line of business, for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,
($ in millions)	2014					2013
Property Catastrophe - Treaty	$	0.1		—	%	$	0.9		1	%
Property Specialty - Treaty	0.2			—		0.4			1
Other Specialty - Treaty	22.9			34		15.4			26
Property and Specialty Individual Risk	45.4			66		42.2			72
Gross premiums written	68.6			100	%	58.9			100	%
Reinsurance premiums ceded	(5.6		)			(9.3		)
Net premiums written	$	63.0				$	49.6

	Six Month Periods Ended June 30,
($ in millions)	2014					2013
Property Catastrophe - Treaty	$	3.0		2	%	$	4.2		3	%
Property Specialty - Treaty	1.5			1		3.0			2
Other Specialty - Treaty	44.5			31		35.3			28
Property and Specialty Individual Risk	93.7			66		86.2			67
Gross premiums written	142.7			100	%	128.7			100	%
Reinsurance premiums ceded	(14.3		)			(18.0		)
Net premiums written	$	128.4				$	110.7

Note - Montpelier at Lloyd’s reinsurance premiums ceded during the periods presented include amounts ceded to Montpelier Bermuda pursuant to inter-segment reinsurance agreements that are eliminated in consolidation.  See “Corporate and Other” under this Item 2.

Gross premiums written within Montpelier at Lloyd’s increased 16% and 11% during the three month and six month periods ended June 30, 2014, respectively, as compared to the comparable 2013 periods. These increases, which were mainly within Montpelier at Lloyd’s Other Specialty - Treaty and Property and Specialty Individual Risk lines, were primarily the result of an expansion of its direct property and casualty quota-share classes of business.

The reductions in reinsurance premiums ceded by Montpelier at Lloyd’s during the three and six months periods ended June 30, 2014, as compared to the comparable 2013 periods, were the result of a decrease in reinstatement and other premium ceded in connection with its Property and Specialty Individual Risk line of business.

Montpelier at Lloyd’s purchases reinsurance in the normal course of its business in order to manage its exposures.  The amount and type of reinsurance that Montpelier at Lloyd’s purchases is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross premiums written during a particular period. Other factors affect Montpelier at Lloyd’s appetite and capacity to write and retain risk. These include the impact of changes in frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, evolving industry-wide capital requirements, increased competition, market conditions and other considerations.

All of Montpelier at Lloyd’s reinsurance purchases to date have represented prospective cover; that is, reinsurance has been purchased to protect Montpelier at Lloyd’s against the risk of future losses as opposed to covering losses that have already occurred but have not been paid.  Montpelier at Lloyd’s purchases: (i) excess-of-loss reinsurance covering one or more lines of its business; and (ii) quota share reinsurance with respect to specific lines of its business.

Net premiums written and earned by Montpelier at Lloyd’s included increases (decreases) in reinstatements of $(0.7) million and $(3.3) million, respectively, during the three month periods ended June 30, 2014 and 2013, and $0.3 million and $(3.1) million during the six month periods ended June 30, 2014 and 2013, respectively.

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Net Premiums Earned

Net premiums earned at Montpelier at Lloyd’s were $60.1 million and $49.0 million during the three month periods ended June 30, 2014 and 2013, respectively, and $116.2 million and $103.4 million during the six month periods ended June 30, 2014 and 2013, respectively.  Net premiums earned are primarily a function of the amount and timing of net premiums previously written.

Loss and LAE Reserve Movements

The following table summarizes Montpelier at Lloyd’s loss and LAE reserve movements for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
(Millions)	2014			2013			2014			2013
Gross unpaid loss and LAE reserves - beginning	$	338.9		$	326.0		$	337.3		$	354.0
Reinsurance recoverable on unpaid losses - beginning	(19.3		)	(20.8		)	(23.3		)	(28.3		)
Net unpaid loss and LAE reserves - beginning	319.6			305.2			314.0			325.7
Losses and LAE incurred:
Current year losses	42.3			39.9			78.0			75.6
Prior year losses	(15.0		)	(14.5		)	(24.0		)	(7.1		)
Total losses and LAE incurred	27.3			25.4			54.0			68.5
Net foreign currency translation movements on loss and LAE reserves	9.1			1.4			11.2			(21.3		)
Losses and LAE paid and approved for payment	(23.5		)	(24.7		)	(46.7		)	(65.6		)
Net unpaid loss and LAE reserves - ending	332.5			307.3			332.5			307.3
Reinsurance recoverable on unpaid losses - ending	19.6			27.5			19.6			27.5
Gross unpaid loss and LAE reserves - ending	$	352.1		$	334.8		$	352.1		$	334.8

Note - Montpelier at Lloyd’s ending reinsurance recoverable on unpaid losses at June 30, 2014, March 31, 2014 and December 31, 2013, include amounts recoverable from Montpelier Bermuda of $8.0 million, $7.8 million and $8.4 million, respectively, pursuant to inter-segment reinsurance arrangements which are eliminated in consolidation.

The following table summarizes Montpelier at Lloyd’s net loss and LAE ratios for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
	2014		2013		2014		2013
Loss and LAE ratio - current year	70.4	%	81.4	%	67.1	%	73.1	%
Loss and LAE ratio - prior year	(25.0	)%	(29.6	)%	(20.7	)%	(6.9	)%
Loss and LAE ratio	45.4	%	51.8	%	46.4	%	66.2	%

Three month periods ended June 30, 2014 and 2013

Current Year Loss and LAE Events

During the three month periods ended June 30, 2014 and 2013, Montpelier at Lloyd’s experienced $42.3 million and $39.9 million in current year net losses and LAE incurred, respectively.  There were no individual loss events known to have a significant impact on Montpelier at Lloyd’s underwriting results for the 2014 period. Montpelier at Lloyd’s underwriting results for the 2013 period included $2.6 million of net losses from U.S. tornadoes.

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Prior Year Loss and LAE Development

During the three month period ended June 30, 2014, Montpelier at Lloyd’s experienced $15.0 million of net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:

·2012 windstorm Sandy: ($1.6 million decrease),

·2011 Thai floods ($1.5 million decrease), and

·An engineering loss from 2013 ($1.1 million decrease).

In addition to the foregoing, claims reported to Montpelier at Lloyd’s during the three month period ended June 30, 2014 indicated that IBNR for natural catastrophe losses it initially recorded during 2013 exceeded the extent of losses that actually occurred, and consequently Montpelier at Lloyd’s decreased its loss and LAE reserves by $2.1 million.

During the three month period ended June 30, 2013, Montpelier at Lloyd’s experienced $14.5 million in net favorable development on prior year loss and LAE reserves, which included loss reserve movements associated with:

·The settlement of a 2012 marine loss ($2.4 million decrease),

·2012 Costa Concordia accident ($2.2 million decrease), and

·2011 Japan earthquake ($1.9 million decrease).

In addition to the foregoing, claims reported to Montpelier at Lloyd’s during three month period ended June 30, 2013 indicated that IBNR for natural catastrophe losses it initially recorded during 2012 exceeded the extent of losses that actually occurred, and consequently Montpelier at Lloyd’s decreased its loss and LAE reserves by a further $1.9 million.

Impact of Foreign Currency Transaction Gains and Losses on Prior Year Loss and LAE Reserves

Montpelier at Lloyd’s prior year losses and LAE incurred included foreign currency transaction gains relating to its prior year loss and LAE reserves of $4.7 million and $1.1 million during the three month periods ended June 30, 2014 and 2013, respectively. Since these foreign currency transaction gains are reported as decreases in Montpelier’s losses and LAE incurred, they have a direct impact on its reported underwriting results and its underwriting ratios.

For the three month period ended June 30, 2014, Montpelier at Lloyd’s loss and LAE ratio of 45.4% (as well as its combined ratio of 88.7%) included a 7.8 percentage point benefit relating to net foreign currency transaction gains on its prior year loss and LAE reserves.  For the three month period ended June 30, 2013, Montpelier at Lloyd’s loss and LAE ratio of 51.8% (as well as its combined ratio of 92.3%) included a 2.2 percentage point benefit relating to net foreign currency transaction gains on its prior year loss and LAE reserves.

Since a significant portion of Montpelier at Lloyd’s loss and LAE reserves are denominated in U.S. dollars, changes in the value of the British pound (Montpelier at Lloyd’s functional currency) relative to the U.S. dollar generate foreign currency transaction gains or losses within its losses and LAE incurred upon the conversion of these U.S. dollar-denominated liabilities to British pounds. However, the subsequent translation of these liabilities back into U.S. dollars in consolidation generates substantially offsetting foreign currency translation gains and losses, which are recorded as part of comprehensive income. Therefore, in periods in which there are meaningful movements in the relative value of the British pound versus the U.S. dollar, the resulting impact to Montpelier at Lloyd’s losses and LAE incurred (as well as its loss and LAE and combined ratios) can significantly impact its reported underwriting performance without necessarily impacting the Company’s comprehensive income or shareholders’ equity.

Impact of Foreign Currency Translation Gains and Losses on Loss and LAE Reserves

Montpelier at Lloyd’s loss and LAE reserves included foreign currency translation losses of $9.1 million and $1.4 million during the three month periods ended June 30, 2014 and 2013, respectively.  Since these foreign currency translation losses are reported as increases in Montpelier at Lloyd’s net change in foreign currency translation, which is a component of its comprehensive income or loss, they have no impact on its reported underwriting results or its underwriting ratios.

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Six month periods ended June 30, 2014 and 2013

Current Year Loss and LAE Events

During the six month periods ended June 30, 2014 and 2013, Montpelier at Lloyd’s experienced $78.0 million and $75.6 million, respectively, in current year net losses and LAE incurred. Montpelier at Lloyd’s underwriting results for the six month periods ended June 30, 2014 and 2013 contained no individually significant net losses other than the 2013 second quarter losses noted above.

Prior Year Loss and LAE Development

During the six month period ended June 30, 2014, Montpelier at Lloyd’s experienced $24.0 million of net favorable development on prior year loss and LAE reserves. In addition to the 2014 second quarter items previously noted, the favorable development recognized during the period also included $9.0 million of net favorable development on prior year loss and LAE reserves during the first quarter of 2014, the majority of which represented net favorable development related to Property and Specialty Individual Risk and Other Property Specialty - Treaty losses recorded during multiple prior years (decreases of $5.8 million and $2.3 million, respectively).

During the six month periods ended June 30, 2013, Montpelier at Lloyd’s experienced $7.1 million in net favorable development on prior year loss and LAE reserves.  In addition to the 2013 second quarter items previously noted, the favorable development recognized during the period also included $7.4 million in net unfavorable development on prior year loss and LAE reserves during the first quarter of 2013, the majority of which represented: (i) adverse development consisting of $14.7 million of net foreign currency transaction losses; partially offset by (ii) $7.3 million of net favorable development, which reflected adjustments relating to multiple years and classes of business.

Impact of Foreign Currency Transaction Gains and Losses on Prior Year Loss and LAE Reserves

Montpelier at Lloyd’s prior year losses and LAE incurred included foreign currency transaction gains (losses) relating to its prior year loss and LAE reserves of $6.6 million and $(13.6) million during the six month periods ended June 30, 2014 and 2013, respectively.

For the six month period ended June 30, 2014, Montpelier at Lloyd’s loss and LAE ratio of 46.4% (as well as its combined ratio of 87.5%) included a 5.7 percentage point benefit relating to net foreign currency transaction gains on its prior year loss and LAE reserves. For the six month period ended June 30, 2013, Montpelier at Lloyd’s loss and LAE ratio of 66.2% (as well as its combined ratio of 105.9%) included a 13.2 percentage point increase relating to net foreign currency transaction losses on its prior year loss and LAE reserves.

Impact of Foreign Currency Translation Gains and Losses on Loss and LAE Reserves

Montpelier at Lloyd’s loss and LAE reserves included foreign currency translation gains (losses) of $(11.2) million and $21.3 million during the six month periods ended June 30, 2014 and 2013, respectively.

Underwriting Expenses

The following table summarizes Montpelier at Lloyd’s underwriting expenses for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Acquisition costs	$	16.2		$	11.9		$	29.1		$	24.8
Acquisition cost ratio	27.0		%	24.3		%	25.0		%	24.0		%
General and administrative expenses	$	9.8		$	7.9		$	18.6		$	16.2
General and administrative expense ratio	16.3		%	16.2		%	16.1		%	15.7		%

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Acquisition costs include commissions, profit commissions, brokerage costs, and excise taxes, when applicable.  Profit commissions and brokerage costs can vary based on the nature of business produced.  Commissions earned by Montpelier at Lloyd’s from business that it cedes to reinsurers are recorded as reductions in its acquisition costs.

Profit commissions, which are paid by assuming companies to ceding companies in the event of favorable loss experience, change as Montpelier at Lloyd’s estimates of loss and LAE fluctuate.  Profit commission increases totaled $1.0 million and $0.3 million for the three month periods ended June 30, 2014 and 2013, respectively, and $0.2 million and $0.9 million for the six month periods ended June 30, 2014 and 2013, respectively.

All other acquisition costs incurred by Montpelier at Lloyd’s are generally driven by contract terms and are normally a set percentage of gross premiums written. Such acquisition costs consist of commission expenses incurred on assumed business and commission revenue earned on purchased reinsurance covers, all of which is earned over the same period that the corresponding premiums are expensed.

The increase in Montpelier at Lloyd’s acquisition costs and acquisition cost ratio for the three and six month periods ended June 30, 2014, as compared to the comparable 2013 periods, is largely the result of increased writings of marine and casualty individual risk business. These classes of business are typically written at a higher acquisition cost ratio than most other classes of business written at Montpelier at Lloyd’s.

The following table summarizes Montpelier at Lloyd’s general and administrative expenses during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Operating expenses	$	7.2	$	6.2	$	14.1	$	13.1
Incentive compensation expenses	2.6		1.7		4.5		3.1
General and administrative expenses	$	9.8	$	7.9	$	18.6	$	16.2

The increase in Montpelier at Lloyd’s operating expenses incurred during the 2014 periods presented, versus those of the comparable 2013 periods, is primarily the result of an increase in personnel.

Incentive compensation expenses recorded at Montpelier at Lloyd’s consist of two independent components. The first component represents amounts that are not, or are no longer, dependent on Company performance, and consist of: (i) Fixed RSUs and Variable RSUs granted in prior years that have been effectively converted to Fixed RSUs; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.

Montpelier at Lloyd’s incentive compensation expenses incurred during the three and six month periods ended June 30, 2014 increased versus those of the comparable 2013 periods, as a result of an increase in personnel who are eligible to receive RSU awards, as well as its 2014 accruals being provided at a higher projected payout level than that of the prior year.

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COLLATERALIZED REINSURANCE

Underwriting results for the Collateralized Reinsurance segment for the three and six month periods ended June 30, 2014 and 2013 were as follows:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Gross premiums written	$	29.7		$	22.6		$	63.7		$	37.2
Ceded reinsurance premiums	—			(3.0		)	—			(3.0		)
Net premiums written	29.7			19.6			63.7			34.2
Change in net unearned premiums	(9.8		)	(14.1		)	(23.4		)	(24.9		)
Net premiums earned	19.9			5.5			40.3			9.3
Loss and LAE — current year losses	(8.3		)	(2.0		)	(9.3		)	(2.0		)
Loss and LAE — prior year losses	—			—			0.2			—
Acquisition costs	(2.6		)	(0.6		)	(6.4		)	(0.9		)
General and administrative expenses	(1.7		)	(0.9		)	(3.2		)	(1.6		)
Underwriting income	$	7.3		$	2.0		$	21.6		$	4.8
Loss and LAE ratio	41.7		%	36.4		%	22.6		%	21.5		%
Acquisition cost ratio	13.1		%	10.9		%	15.9		%	9.7		%
General and administrative expense ratio	8.5		%	16.3		%	7.9		%	17.2		%
GAAP combined ratio	63.3		%	63.6		%	46.4		%	48.4		%

Since the commencement of its operations in June 2012, the Collateralized Reinsurance segment has assumed natural catastrophe exposures from third-parties and Montpelier Re (pursuant to inter-segment reinsurance arrangements), all of which is reflected within the Property Catastrophe - Treaty line of business.

Gross premiums written within Collateralized Reinsurance increased 31% and 71% during the three month and six month periods ended June 30, 2014, respectively, as compared to the comparable 2013 periods. These increases reflect: (i) additional capital being deployed into Blue Water Re by the BCGR Listed Fund; and (ii) the operations of Blue Capital Re, which commenced its operations in November 2013.

During the three and six month periods ended June 30, 2014, the Collateralized Reinsurance segment did not cede any reinsurance premiums.  During the three and six month periods ended June 30, 2013, the Collateralized Reinsurance segment ceded $3.0 million of premiums to third party reinsurers.

The Collateralized Reinsurance segment purchases reinsurance in the normal course of its business in order to manage its exposures.  The amount and type of reinsurance that the Collateralized Reinsurance segment purchases is dependent on a variety of factors, including the cost of a particular reinsurance cover and the nature of its gross premiums written during a particular period. Other factors affect the Collateralized Reinsurance segment’s appetite and capacity to write and retain risk. These include the impact of changes in frequency and severity assumptions used in our models and the corresponding pricing required to meet our return targets, evolving industry-wide capital requirements, increased competition, market conditions and other considerations.

Net premiums earned by the Collateralized Reinsurance segment were $19.9 million and $5.5 million during the three month periods ended June 30, 2014 and 2013, respectively, and were $40.3 million and $9.3 million during the six month periods ended June 30, 2014 and 2013, respectively.  Premiums earned are primarily a function of the amount and timing of net premiums previously written.

Net reinstatement premiums written and earned by the Collateralized Reinsurance were not significant during any of the periods presented.

Loss and LAE Reserve Movements

The following table summarizes Collateralized Reinsurance’s loss and LAE reserve movements for the three and six month periods ended June 30, 2014 and 2013:

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	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
(Millions)	2014			2013			2014			2013
Gross and net unpaid loss and LAE reserves - beginning	$	1.5		$	—		$	0.6		$	—
Losses and LAE incurred:
Current year losses	8.3			2.0			9.3			2.0
Prior year losses	—			—			(0.2		)	—
Total losses and LAE incurred	8.3			2.0			9.1			2.0
Losses and LAE paid and approved for payment	(0.6		)	(0.4		)	(0.5		)	(0.4		)
Gross and net unpaid loss and LAE reserves - ending	$	9.2		$	1.6		$	9.2		$	1.6

Collateralized Reinsurance’s underwriting results for the three and six month periods ended June 30, 2014 included $4.4 million of net losses from European Storm Ela and U.S. tornadoes. There were no individual loss events known to have a significant impact on Collateralized Reinsurance’s underwriting results during the three and six month periods ended June 30, 2013.

Prior year loss and LAE development experienced by Collateralized Reinsurance was not significant during any of the periods presented.

Underwriting Expenses

The following table summarizes Collateralized Reinsurance’s underwriting expenses for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Acquisition costs	$	2.6		$	0.6		$	6.4		$	0.9
Acquisition cost ratio	13.1		%	10.9		%	15.9		%	9.7		%
General and administrative expenses	$	1.7		$	0.9		$	3.2		$	1.6
General and administrative expense ratio	8.5		%	16.3		%	7.9		%	17.2		%

Acquisition costs include commissions, profit commissions, brokerage costs, and excise taxes, when applicable.  Profit commissions and brokerage costs can vary based on the nature of business produced.  Profit commissions, which are paid by assuming companies to ceding companies in the event of a favorable loss experience, change as Collateralized Reinsurance’s estimates of loss and LAE fluctuate. Commissions earned by Collateralized Reinsurance from business that it cedes to reinsurers are recorded as reductions in its acquisition costs.

During the six month period ended June 30, 2014, the Collateralized Reinsurance segment incurred $0.9 million in profit commissions. No profit commissions were incurred during any of the other periods presented.

All other acquisition costs incurred by the Collateralized Reinsurance segment are generally driven by contract terms and are normally a set percentage of gross premiums written. Such acquisition costs consist of commission expenses incurred on assumed business less commission revenue earned on purchased reinsurance covers, all of which is earned over the same period that the corresponding premiums are expensed.

Collateralized Reinsurance’s acquisition cost ratios for the three and six month periods ended June 30, 2014 were higher than those of the comparable 2013 periods, primarily as a result of: (i) with respect to the three and six month periods ended June 30, 2014, premium written for the first time on a pro-rata basis (acquisition costs associated with pro-rata business are typically higher than those associated with excess-of-loss premium); and (ii) with respect to the six month period ended June 30, 2014, profit commissions incurred.

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The following table summarizes the Collateralized Reinsurance segment’s general and administrative expenses during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Operating expenses	$	1.1	$	0.8	$	2.1	$	1.5
Incentive compensation expenses	0.6		0.1		1.1		0.1
General and administrative expenses	$	1.7	$	0.9	$	3.2	$	1.6

The increase in the Collateralized Reinsurance segment’s operating expenses during the 2014 periods presented, versus those the comparable 2013 periods, relate primarily to third-party operating expenses incurred by BCRH and its subsidiaries.

Incentive compensation expenses recorded within the Collateralized Reinsurance segment during the periods presented represent those expenses relating to our dedicated Collateralized Reinsurance staff, as well as an allocation of a portion of those expenses relating to certain other staff within Montpelier that indirectly support our Collateralized Reinsurance operations.

CORPORATE AND OTHER

Corporate and Other, which collectively represents the Company, certain intermediate holding and service companies, the Company’s former MUSIC Run-Off segment, and eliminations relating to intercompany reinsurance and service charges, is not considered to be an operating segment. The underwriting losses generated by Corporate and Other principally reflect general and administrative expenses in support of our various operating companies.

Our Corporate and Other results for the three and six month periods ended June 30, 2014 and 2013 were as follows:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
(Millions)	2014			2013			2014			2013
Gross premiums written	$	(8.2	)	$	0.6		$	(16.7	)	$	1.5
Ceded reinsurance premiums	8.2			(0.3		)	16.7			(0.9		)
Net premiums written	—			0.3			—			0.6
Change in net unearned premiums	(0.1		)	—			(0.1		)	—
Net premiums earned	(0.1		)	0.3			(0.1		)	0.6
Loss and LAE — current year losses	—			—			—			—
Loss and LAE — prior year losses	(0.8		)	(0.5		)	(0.8		)	(0.7		)
Acquisition costs	—			(0.1		)	—			(0.2		)
General and administrative expenses	(8.9		)	(9.0		)	(16.7		)	(17.7		)
Underwriting loss	$	(9.8	)	$	(9.3	)	$	(17.6	)	$	(18.0	)

The premiums written within Corporate and Other represent: (i) the elimination of inter-segment reinsurance arrangements between Montpelier Bermuda and Montpelier Lloyd’s, and between Montpelier Bermuda and Collateralized Reinsurance, and (ii) premium adjustments relating to policies written by MUSIC on or prior to December 31, 2011, which were not significant during any of the periods presented.

The premium eliminations relating to inter-segment reinsurance arrangements recorded within Corporate and Other during the periods presented were as follows:

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	Three Month PeriodEnded June 30, 2014								Three Month Period Ended June 30, 2013
(Millions)	Grosspremiumswritten		Ceded reins. premiums			Net premiums written			Gross premiums written			Ceded reins. premiums		Net premiums written
Montpelier Bermuda	$	—	$	(8.2	)	$	(8.2	)	$	(0.3	)	$	—	$	(0.3	)
Montpelier at Lloyd’s	—		—			—			—			0.3		0.3
Collateralized Reinsurance	8.2		—			8.2			—			—		—
Total inter-segment premiums	$	8.2	$	(8.2	)	$	—		$	(0.3	)	$	0.3	$	—

	Six Month PeriodEnded June 30, 2014								Six Month Period Ended June 30, 2013
(Millions)	Grosspremiumswritten		Ceded reins. premiums			Net premiums written			Gross premiums written			Ceded reins. premiums		Net premiums written
Montpelier Bermuda	$	0.3	$	(16.4	)	$	(16.1	)	$	(0.9	)	$	—	$	(0.9	)
Montpelier at Lloyd’s	—		(0.3		)	(0.3		)	—			0.9		0.9
Collateralized Reinsurance	16.4		—			16.4			—			—		—
Total inter-segment premiums	$	16.7	$	(16.7	)	$	—		$	(0.9	)	$	0.9	$	—

The following table summarizes the general and administrative expenses of Corporate and Other during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Operating expenses	$	5.9	$	5.8	$	12.1	$	11.4
Incentive compensation expenses	3.0		3.2		4.6		6.3
General and administrative expenses	$	8.9	$	9.0	$	16.7	$	17.7

Operating expenses recorded within Corporate and Other include salaries and benefits, information technology costs, director fees, legal and consulting expenses, corporate insurance premiums, audit fees and fees associated with being a publicly traded company.

Operating expenses incurred during the three and six month periods ended June 30, 2014 were largely consistent with those incurred during the comparable 2013 periods.

Incentive compensation expenses recorded within Corporate and Other consist of two independent components. The first component represents amounts that are not, or are no longer, dependent on Company performance, and consist of: (i) Fixed RSUs and Variable RSUs granted in prior years that have been effectively converted to Fixed RSUs; and (ii) the portion of annual employee cash bonuses that is based on individual employee performance goals. The second component represents amounts that are entirely dependent on Company performance and consist of: (i) Variable RSUs in the Initial RSU Period; and (ii) the portion of annual employee cash bonuses that is based on Company performance.

Incentive compensation expenses incurred during the three month and six periods ended June 30, 2014 were less than those of the comparable 2013 periods, primarily as a result of incentive compensation expenses during the 2013 periods being adversely affected by the acceleration of Mr. Busher’s outstanding RSU award in connection with his retirement on December 31, 2013.  See Note 12 of the Notes to Consolidated Financial Statements. In addition, during the first quarter of 2014, Corporate and Other’s compensation expenses were reduced by: (i) the reversal of a 2013 over-accrual of Variable RSU and bonus expense; and (ii) an increase in RSU forfeitures.

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II. Review of Non-Underwriting Results - Consolidated

Net Investment Income and Total Return on Cash and Investments

The following table summarizes our net investment income and total return on cash and investments for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
($ in millions)	2014			2013			2014			2013
Investment income	$	14.7		$	18.8		$	30.0		$	37.2
Investment expenses	(2.3		)	(2.1		)	(4.7		)	(4.1		)
Net investment income	12.4			16.7			25.3			33.1
Net realized investment gains	5.5			6.9			5.4			16.0
Net unrealized investment gains (losses)	14.3			(68.1		)	37.1			(77.9		)
Net income (loss) from investment-related derivative instruments:
Foreign Exchange Contracts - investment activities	(1.8		)	3.6			(7.4		)	6.5
Credit Derivatives	(2.3		)	(3.8		)	(5.2		)	(4.3		)
Interest Rate Contracts	(0.9		)	(3.8		)	1.6			1.2
Investment Options and Futures	(5.4		)	(3.1		)	(6.2		)	(1.6		)
Net foreign currency transaction gains (losses) - investing activities	1.7			(1.5		)	3.5			(6.2		)
Total return on cash and investments ($)	$	23.5		$	(53.1	)	$	54.1		$	(33.2	)
Weighted average investment portfolio value including cash	$	3,178		$	3,053		$	3,174		$	3,083
Total investment return on cash and investments (%)	0.7		%	(1.7		)%	1.7		%	(1.1		)%
Weighted average investment portfolio value including cash, as adjusted (1)	$	2,758		$	2,910		$	2,761		$	2,969
Total investment return on cash and investments (%), as adjusted (1)	0.9		%	(1.8		)%	2.0		%	(1.1		)%

(1)Our weighted average investment portfolio and investment return calculations, as adjusted, exclude the cash, cash equivalents and short-term investments that relate to our Collateralized Reinsurance segment, which totaled $425.5 million and $193.6 million at June 30, 2014 and 2013, respectively.  These assets are earmarked for the benefit of our Collateralized Reinsurance segments cedants and counterparties and are not intended to provide Montpelier or its cedants and counterparties with any investment return.

Our total return on cash and investments during the 2014 periods presented were higher than those in the corresponding 2013 periods, due primarily to significantly higher net realized and unrealized gains experienced during the 2014 periods.

Our investment income decreased during the 2014 periods, versus the corresponding 2013 periods, due mainly to declines in the weighted average investment portfolio (when excluding the cash, cash equivalents and short-term investments that relate to our Collateralized Reinsurance segment).

Investment expenses incurred during the 2014 periods were higher than those incurred in the corresponding 2013 periods, due to changes in the allocation of invested balances among investment managers as well as an increase in fees relating to our use of investment-related derivative instruments.

During the three month period ended June 30, 2014, we experienced $19.8 million of net realized and unrealized investment gains consisting of $12.7 million in net gains from our fixed maturity portfolio, $6.2 million in net gains from our equity portfolio and $0.9 million in net gains from our other investments.  During the six month period ended June 30, 2014, we experienced $42.5 million of net realized and unrealized investment gains consisting of $28.0 million in net gains from our fixed maturity portfolio, $9.8 million in net gains from our equity portfolio and $4.7 million in net gains from our other investments.

The fixed maturity net gains we experienced during the 2014 periods were largely the result of a decline in the U.S. Treasury yield curve. The equity portfolio net gains we experienced during the 2014 periods followed a trend consistent with that of the U.S. equity market, as measured by the S&P 500. The other investment net gains we experienced during the 2014 periods related primarily to the performance of a limited partnership investment that invests in distressed debt instruments.

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During the three month period ended June 30, 2013, we experienced $61.2 million of net realized and unrealized investment losses consisting of $58.3 million in net losses from our fixed maturity portfolio, $2.3 million in net losses from our equity portfolio and $0.6 million in net losses from our other investments.  During the six month period ended June 30, 2013, we experienced $61.9 million of net realized and unrealized investment losses consisting of $61.4 million in net losses from our fixed maturity portfolio, $1.2 million in net losses from our equity portfolio and $0.7 million in net gains from our other investments.

The fixed maturity net losses we experienced during the 2013 periods were largely the result of an abrupt increase in market interest rates during the latter part of the second quarter.  The equity portfolio net losses we experienced during the 2013 periods followed a trend consistent with that of the U.S. equity market, as measured by the S&P 500, when considering that the majority of our equity securities were purchased in June 2013.  The other investment net gains and losses we experienced during the 2013 periods related primarily to the performance of a limited partnership investment that invests in distressed debt instruments.

Certain of our investment managers have entered into derivative contracts for investment purposes. Our total net income (loss) from investment-related derivative instruments was $(10.4) million and $(7.1) million during the three month periods ended June 30, 2014 and 2013, respectively, and $(17.2) million and $1.8 million during the six month periods ended June 30, 2014 and 2013, respectively.  Each of our investment-related derivative instruments is further described in Note 6 of the Notes to Consolidated Financial Statements.

During the three month periods ended June 30, 2014 and 2013, we experienced net foreign currency transaction gains (losses) on cash and investments (those in connection with our investing activities) of $1.7 million and $(1.5) million, respectively. During the six month periods ended June 30, 2014 and 2013, we experienced net foreign currency transaction gains (losses) on cash and investments (those in connection with our investing activities) of $3.5 million and $(6.2) million, respectively. These foreign currency transaction gains and losses represent foreign currency exchange fluctuations in the value of our non-U.S. dollar managed cash and investments.

As of June 30, 2014, December 31, 2013 and June 30, 2013, our Level 3 investments measured at fair value, as defined in GAAP, totaled $43.6 million (or 1.8%), $28.6 million (or 1.1%) and $33.4 million (or 1.3%) of our total invested assets measured at fair value, respectively. The increase in Level 3 investments from December 31, 2013 to June 30, 2014, reflects the purchase of an unsecured debt instrument issued by a private entity during the second quarter of 2014.

As of June 30, 2014, we held net sovereign, corporate and asset-backed fixed maturity investments with exposure to the Eurozone with a fair value of $200.0 million (amortized cost of $197.8 million). Of our total Eurozone holdings at June 30, 2014, $63.0 million (amortized cost $62.1 million) represented net debt obligations of financial corporations, with the balance representing net debt obligations of industrial and other non-financial corporations.

Net Foreign Currency Gains (Losses)

The following table summarizes the components of our consolidated net foreign currency gains (losses) for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,						Six Month Periods Ended June 30,
(Millions)	2014			2013			2014			2013
Net foreign currency transaction gains (losses) - investing activities	$	1.7		$	(1.5	)	$	3.5		$	(6.2	)
Net foreign currency transaction gains (losses) - other activities	(10.5		)	(3.8		)	(14.1		)	22.0
Net foreign currency gains (losses)	$	(8.8	)	$	(5.3	)	$	(10.6	)	$	15.8

See “Net Investment Income and Total Return on Cash and Investments” above for details of our net foreign currency transaction gains (losses) we experienced in connection with our investing activities during the periods presented.

The net foreign currency transaction gains (losses) we experienced in connection with our other activities represent net foreign currency gains and losses resulting from: (i) Montpelier Bermuda’s premiums receivable that are denominated in currencies other than the U.S. dollar (Montpelier Bermuda’s functional currency); and (ii) Montpelier at Lloyd’s assets and liabilities that are denominated in currencies other than the British pound (Montpelier at Lloyd’s functional currency),

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including those denominated in U.S. dollars. These net transaction gains and losses do not include: (i) fluctuations associated with Montpelier Bermuda’s and Montpelier at Lloyd’s losses and LAE, which we record as favorable or unfavorable loss reserve development; (ii) the income or loss associated with those Foreign Exchange Contracts we enter into in order to mitigate the financial effects of certain foreign currency exchange rate fluctuations, see “Net Losses From Derivative Instruments”; and (iii) any offsetting foreign currency translation gains and losses we recognize through our comprehensive income or loss associated with Montpelier at Lloyd’s assets and liabilities that are denominated in U.S. dollars.

The net foreign currency transaction gains (losses) we experienced during the periods presented associated with our other activities were primarily due to a strengthening (weakening) of the U.S. dollar against the British pound.

Net Losses From Derivative Instruments

Our consolidated net losses from derivative instruments were $11.2 million and $12.2 million during the three month periods ended June 30, 2014 and 2013, respectively, and $16.3 million and $7.6 million during the six month periods ended June 30, 2014 and 2013, respectively.  Each of our derivative instruments, as well as the net income and loss derived therefrom during the periods presented, is described in Note 6 of the Notes to Consolidated Financial Statements.

Other Revenue

Our consolidated other revenue of $0.7 million and $1.0 million for the three and six month periods ended June 30, 2014, respectively, represented non-underwriting income associated with Cladium and a minority investment in a specialty managing general agency.  Our consolidated other revenue for the three and six month periods ended June 30, 2013 each totaled less than $0.1 million.

Interest and Other Financing Expenses

The following table summarizes our consolidated interest and other financing expenses for the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Interest expense - Senior Notes	$	3.5	$	3.5	$	7.0	$	7.0
Interest expense - Trust Preferred Securities	1.0		1.0		2.0		2.1
Credit agreement and trust fees and amortization of debt issuance costs	0.2		0.2		0.4		0.3
Interest and other financing expenses	$	4.7	$	4.7	$	9.4	$	9.4

Our interest and other financing expenses during the three and six month periods ended June 30, 2014 were largely consistent with those of the corresponding 2013 periods. See Note 5 of the Notes to Consolidated Financial Statements.

Other Expenses

Our consolidated other expenses of $1.0 million for each of the three and six month periods ended June 30, 2014, consisted of: (i) $0.7 million of non-underwriting expenses associated with Cladium; and (ii) a $0.3 million provision for our ongoing obligations to Selective in connection with the MUSIC Sale. Our consolidated other expenses for the three and six month periods ended June 30, 2013 each totaled less than $0.1 million.

Income Tax Benefit (Provision)

We are domiciled in Bermuda and have subsidiaries that are domiciled in the U.S. and the U.K. At the present time, no income taxes are levied in Bermuda and the Company and its Bermuda-domiciled subsidiaries have received an assurance from the Bermuda Minister of Finance exempting them from all Bermuda-imposed income, withholding and capital gains taxes until March 31, 2035.

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During the three month periods ended June 30, 2014 and 2013, we recorded an income tax benefit (provision) of $(0.2) million and $0.4 million, respectively.  During the six month periods ended June 30, 2014 and 2013, we recorded an income tax benefit (provision) of $(0.1) million and $0.2 million, respectively.  During each of these periods, the income tax movements were associated primarily with our U.K. operations. See Note 13 of the Notes to Consolidated Financial Statements.

Our Bermuda operations are not subject to Bermuda income taxes.  During the three month periods ended June 30, 2014 and 2013, these operations had pretax income (losses) of $37.8 million and $(21.1) million, respectively, and during the six month periods ended June 30, 2014 and 2013, these operations had pretax income of $143.0 million and $63.0 million, respectively.

Our U.K. operations are subject to U.K. income taxes.  During the three month periods ended June 30, 2014 and 2013, these operations had pretax income (losses) of $6.8 million and $(2.5) million, respectively, and during the six month periods ended June 30, 2014 and 2013, these operations had pretax income of $3.9 million and $10.2 million, respectively. During the 2014 periods presented, those entities within our U.K. operations (those other than MCL which is currently in a cumulative loss net operating loss position) recorded income tax provisions of $0.2 million and $0.1 million, respectively. During the three and six month periods ending June 30, 2013, those entities within our U.K. operations (those other than MCL) recorded income tax benefits of $0.4 million and $0.2 million, respectively.

Our U.S. operations are subject to U.S. Federal income taxes but are currently in a cumulative net operating loss position.  During the three month periods ended June 30, 2014 and 2013, these operations had pretax income of $0.4 million and zero million, respectively, and during the six month periods ended June 30, 2014 and 2013, these operations had pretax income of $0.2 million and zero million, respectively.

Our U.S. operations are also subject to state and local income taxes, although such income taxes were less than $0.1 million during each of the periods presented.

Net Income Attributable to Non-Controlling Interests

The following table summarizes the net income attributable to non-controlling interests during the three and six month periods ended June 30, 2014 and 2013:

	Three Month Periods Ended June 30,				Six Month Periods Ended June 30,
(Millions)	2014		2013		2014		2013
Income attributable to third-party investments in the BCGR Cell	$	3.4	$	0.7	$	8.1	$	1.9
Income attributable to third-party investments in BCRH	0.9		—		5.2		—
Net income attributable to non-controlling interests	$	4.3	$	0.7	$	13.3	$	1.9

Dividends Declared on Preferred Shares

During each of the three and six month periods ended June 30, 2014 and 2013, we declared $3.4 million and $6.7 million of dividends on our Preferred Shares, respectively.

Liquidity and Capital Resources

Liquidity

The Company has no operations of its own and relies on dividends and distributions from its subsidiaries to pay its operating expenses, interest on debt, dividends to holders of Preferred Shares and Common Shares and to fund any Common Share repurchase activities. There are restrictions on the payment of dividends to the Company from its regulated operating and holding companies. See Note 11 of the Notes to Consolidated Financial Statements. Our Preferred Shares have a stated dividend rate of 8.875% per year and, beginning with our September 2014 declaration, we raised our quarterly regular Common Share dividend to $0.20 per share.  Any future determination to pay dividends to holders of Common Shares and Preferred Shares will, however, be at the discretion of the Board and will be dependent upon many factors, including our results of operations, cash flows, financial position, capital requirements, general business opportunities, and legal, tax, regulatory and contractual restrictions.

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The primary sources of cash for our regulated operating subsidiaries are premium collections, investment income, sales and maturities of investments and reinsurance recoveries.  The primary uses of cash for our operating subsidiaries are payments of losses and LAE, acquisition costs, operating expenses, ceded reinsurance, investment purchases and dividends and distributions paid to the Company.

As a provider of short-tail insurance and reinsurance, mainly from natural and man-made catastrophes, we could be required to pay significant losses on short notice. As a result, we have structured our fixed maturity investment portfolio with high-quality securities with a short average duration in order to reduce our sensitivity to interest rate fluctuations and to provide adequate liquidity for the settlement of our expected liabilities.  As of June 30, 2014, our fixed maturities had an average credit quality of “AA-” (Very Strong) from Standard & Poor’s and an average duration of 1.8 years (inclusive of our fixed maturity derivative and short positions).  If our calculations with respect to the timing of the payment of our liabilities are incorrect, or if we improperly structure our investment portfolios, we could be forced to liquidate our investments at inopportune times, potentially at a significant loss.

As of June 30, 2014, our sources of immediate and unencumbered liquidity consisted of: (i) $133.0 million of cash and cash equivalents; (ii) $220.6 million of highly liquid fixed maturity investments which currently trade at a very narrow bid-ask spread and whose proceeds are available within two business days; (iii) $143.8 million of publicly-traded equity securities whose proceeds are available within four business days; and (iv) $6.0 million of liquid fixed maturity investments which currently trade at a narrow bid-ask spread and whose proceeds are available within four business days.  Further, we believe that we have significant sources of additional liquidity within our fixed maturity investment portfolio, although the bid-ask spreads associated with such investment securities would likely be broader, perhaps significantly, than those with respect to the securities referred to above, particularly if a large individual investment were required to be liquidated in an expeditious manner.

The Company does not have a revolving credit facility for its own purposes because its current cash and cash equivalent balances and projected future cash flows from its operations are expected to be sufficient to cover its cash obligations under most loss scenarios through the foreseeable future.

On May 2, 2014, BCRH entered into the BCRH Credit Agreement which permits it to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company serves as a guarantor for the BCRH Credit Agreement and is entitled to receive an annual guarantee fee from BCRH equal to 0.125% of the facility’s total capacity. See Note 14.

The BCRH Credit Agreement contains covenants that limits BCRH’s and, to a lesser extent, the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. If BCRH or the Company were to fail to comply with any of these covenants, the issuer of the BCRH Credit Agreement could revoke the facility and exercise remedies against BCRH or the Company.

As of June 30, 2014, BCRH and the Company were in compliance with each of the covenants associated with the BCRH Credit Agreement.  As of June 30, 2014, there were no borrowings made under the BCRH Credit Agreement.

On May 15, 2014, the BCGR Listed Fund entered into the BCGR Credit Agreement which permits it to borrow up to $20.0 million on a revolving basis for working capital and general corporate purposes. The Company serves as a guarantor for the BCGR Credit Agreement and is entitled to receive an annual guarantee fee from the BCGR Listed Fund equal to 0.125% of the facility’s total capacity.

The BCGR Credit Agreement contains covenants that limits the Company’s ability, among other things, to grant liens on its assets, sell assets, merge or consolidate, incur debt and enter into certain transactions with affiliates. If the Company were to fail to comply with any of these covenants, the issuer of the BCGR Credit Agreement could revoke the facility and exercise remedies against the Company.

As of June 30, 2014, the Company was in compliance with each of the covenants associated with the BCGR Credit Agreement.  As of June 30, 2014, there were no borrowings made under the BCGR Credit Agreement.

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Capital Resources

The following table summarizes our capital structure as of June 30, 2014 and December 31, 2013:

	June 30,		Dec. 31,
(Millions)	2014		2013
Senior Notes, at face value	$	300.0	$	300.0
Trust Preferred Securities	100.0		100.0
Total Debt	$	400.0	$	400.0
Preferred Shareholders’ Equity available to the Company	150.0		150.0
Common Shareholders’ Equity available to the Company	1,517.8		1,492.1
Total Capital available to the Company	$	2,067.8	$	2,042.1

Our total capital increased by $25.7 million during the first six months of 2014 as a result of our recording comprehensive income available to the Company of $135.1 million, recognizing $5.3 million of additional paid-in capital through the amortization and issuances of share-based compensation, recognizing $0.1 million of additional paid-in capital from purchases of non-controlling interests, declaring $18.4 million in dividends to holders of Common Shares and Preferred Shares and repurchasing $96.4 million of Common Shares.

The 2022 Senior Notes bear interest at a fixed rate of 4.70% per annum, payable semi-annually in arrears on April 15 and October 15 of each year.  We may redeem the 2022 Senior Notes at any time, in whole or in part, at a “make-whole” redemption price, plus accrued and unpaid interest.

The Trust Preferred Securities mature on March 30, 2036, but are redeemable at our option at par. The Trust Preferred Securities bear interest at a floating rate of 3-month LIBOR plus 380 basis points, reset quarterly. We currently have no intention of redeeming the Trust Preferred Securities.

The LIBOR Swap, which we entered into in 2012, will result in the future net cash flows in connection with the Trust Preferred Securities, for the five-year period beginning March 30, 2012, being the same as if these securities bore interest at a fixed rate of 4.905%, provided we hold the LIBOR Swap to its maturity.

The Preferred Shares have no stated maturity, and are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities. Except in certain limited circumstances, the Preferred Shares are not redeemable prior to May 10, 2016.  After that date, we may redeem the Preferred Shares at our option, in whole or in part, at a price of $25.00 per share plus any declared and unpaid dividends.

None of the 2022 Senior Notes, the Trust Preferred Securities or the Preferred Shares contain any covenants regarding financial ratios or specified levels of net worth or liquidity to which we must adhere.

We may need to raise additional capital in the future, through the issuance of debt, equity or hybrid securities, in order to, among other things, write new business, incur and/or pay significant losses, respond to, or comply with, changes in the capital requirements that rating agencies or various regulatory bodies use to evaluate us, acquire new businesses, invest in existing businesses or refinance our existing obligations.

The issuance of any new debt, equity or hybrid financial instruments might contain terms and conditions that are more unfavorable to us, our existing shareholders and our debtholders than those contained within our current capital structure. More specifically, any new issuances of equity or hybrid securities could include the issuance of securities with rights, preferences and privileges that are senior or otherwise superior to those of our Common and Preferred Shares and could be dilutive to our existing holders of these equity securities.  Further, if we cannot obtain adequate capital on favorable terms or otherwise, our business, financial condition and operating results could be adversely affected.

Letter of Credit Facilities and Trusts

In the normal course of our business, we maintain letter of credit facilities and trust arrangements as a means of providing collateral and/or statutory credit to certain of our constituents. These facilities and arrangements are secured by collateral accounts and trusts containing cash, cash equivalents and investment securities.

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The agreements governing our letter of credit facilities contain covenants that limit our ability, among other things, to grant liens on our assets, sell our assets, merge or consolidate, incur debt and enter into certain agreements.  In addition, our committed letter of credit facility requires us to maintain a debt to capital ratio of no greater than 30% and for Montpelier Re to maintain an A.M. Best financial strength rating of no less than “B++.”  If we were to fail to comply with these covenants or fail to meet these financial ratios, the lenders could revoke these facilities and exercise remedies against our collateral.  As of June 30, 2014 and December 31, 2013, our debt to capital ratio (which, as defined in such agreement, is the amount of our senior unsecured debt outstanding divided by the sum of: (i) the amount of our total debt outstanding; and (ii) the amount of our total shareholders’ equity available to the Company, expressed as a percentage) was 14.5% and 14.7%, respectively, and Montpelier Re’s A.M. Best financial strength rating was “A” (with a stable outlook) as of both dates.

We established the Reinsurance Trust and the FL Trust as a means of providing statutory credit to Montpelier Re’s cedants and we established the Lloyd’s Capital Trust as a means of satisfying Lloyd’s capital requirements.  As a result of these and other trust arrangements we currently utilize, our ongoing reliance on letter of credit facilities has been significantly reduced. See Note 5 of the Notes to Consolidated Financial Statements.

Regulation and Capital Requirements

Our holding company and insurance and reinsurance operations are subject to regulation and capital requirements established by supervisors in multiple jurisdictions.  See Note 11 of the Notes to Consolidated Financial Statements for detailed information concerning our regulatory and capital requirements.

Financial Strength Ratings

Reinsurance contracts do not discharge ceding companies from their obligations to policyholders.  Therefore, ceding companies often require their reinsurers to have, and to maintain, strong financial strength ratings as assurance that their claims will be paid.  Montpelier Re and Syndicate 5151 (in common with all Lloyd’s syndicates) each have financial strength ratings from one or more independent rating agencies, including A.M. Best, Standard & Poor’s and Fitch Ratings Ltd., as outlined below.

The financial strength ratings of Montpelier Re and Syndicate 5151 are not evaluations directed to the investment community with regard to Common Shares, Preferred Shares or debt securities or a recommendation to buy, sell or hold such securities. Montpelier Re and Syndicate 5151’s financial strength ratings may be revised or revoked at the sole discretion of the independent rating agencies.

Montpelier Re

Montpelier Re is currently rated “A” by A.M. Best (Excellent, with a stable outlook), “A-” by Standard & Poor’s (Strong, with a stable outlook) and “A” by Fitch Ratings Ltd. (Strong, with a stable outlook).  “A” is the third highest of fifteen A.M. Best financial strength ratings, “A-” is the seventh highest of twenty-one Standard & Poor’s financial strength ratings and “A” is the sixth highest of twenty-four Fitch Ratings Ltd. financial strength ratings.

Montpelier Re’s ability to underwrite business is dependent upon its financial strength rating as evaluated by these independent rating agencies. In the event that Montpelier Re is downgraded below “A-” by A.M. Best or Standard & Poor’s, we believe our ability to write business through Montpelier Re would be adversely affected. In the normal course of business, we evaluate Montpelier Re’s capital needs to support the amount of business it writes in order to maintain its financial strength ratings.

A downgrade of Montpelier Re’s A.M. Best or Standard & Poor’s rating could also trigger provisions allowing some ceding companies to opt to cancel their reinsurance contracts with Montpelier Re. For the majority of contracts that incorporate rating provisions, a downgrade of below “A-” by A.M. Best, or below “A-” by Standard and Poor’s constitutes grounds for cancellation.  In the event of such a downgrade, we cannot predict whether or how many of our clients would actually exercise such cancellation rights or the extent to which any such cancellations would impact Montpelier Re and the Company.  See Item 1A “Risk Factors” contained in the 2013 Form 10-K, as filed with the SEC.

A downgrade of Montpelier Re’s A.M. Best financial strength rating below “B++,” would constitute an event of default under our secured letter of credit facilities.

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Syndicate 5151

Syndicate 5151, as is the case with all Lloyd’s syndicates, benefits from Lloyd’s central resources, including the Lloyd’s brand, its network of global licences and the Lloyd’s New Central Fund.  Pursuant to the byelaws of the Society of Lloyd’s, the Lloyd’s New Central Fund is obligated to meet any valid claim that cannot be met by the resources of the liable member. As all Lloyd’s policies are ultimately backed by this common security, the Lloyd’s single market rating is applied to all syndicates, including Syndicate 5151, equally.  Lloyd’s is currently rated “A” by A.M. Best (Excellent, with a stable outlook), “A+” by Standard & Poor’s (Strong, with a stable outlook) and “AA-” by Fitch Ratings Ltd. (Very Strong, with a stable outlook).  “A” is the third highest of fifteen A.M. Best financial strength ratings, “A+” is the fifth highest of twenty-one Standard & Poor’s financial strength ratings and “AA-” is the fourth highest of twenty-four Fitch Ratings Ltd. financial strength ratings.

A downgrade of Lloyd’s A.M. Best or Standard & Poor’s rating could also trigger provisions allowing some ceding companies to opt to cancel their reinsurance contracts with Syndicate 5151. For the majority of contracts that incorporate rating provisions, a downgrade of below “A-” by A.M. Best, or “A-” by Standard and Poor’s constitutes grounds for cancellation. In the event of such a downgrade, we cannot predict whether or how many of our clients would actually exercise such cancellation rights or the extent to which any such cancellations would impact Syndicate 5151 and the Company.  See Item 1A “Risk Factors” contained in the 2013 Form 10-K, as filed with the SEC.

Blue Water Re and Blue Capital Re

Blue Water Re and Blue Capital Re do not operate with a financial strength rating and, alternatively, each fully-collateralize their reinsurance obligations.

Enterprise Risk Management (“ERM”) Rating

Our ERM infrastructure consists of the methods and processes we utilize in order to prudently manage risk in the achievement of our objectives. We consider ERM to be a key process within our organization as it helps us to identify potential events that may affect us, to quantify, evaluate and manage the risks to which we are exposed, and to provide reasonable assurance regarding the achievement of our objectives. ERM is managed by our senior management under the oversight of the Board and is implemented by personnel across our organization.

Our current ERM rating, as issued by Standard & Poor’s, is “Strong”, which is the second highest of six Standard & Poor’s ERM ratings.

Off-Balance Sheet Arrangements

Our Foreign Exchange Contracts, Credit Derivatives, Interest Rate Contracts, Investment Options and Futures, certain of our ongoing obligations to Selective in connection with the MUSIC Sale and the Company’s guarantee of the BCGR Credit Agreement each constitute off-balance sheet arrangements.  Excluding these specific transactions, as of June 30, 2014, we were not subject to any off-balance sheet arrangement that we believe is material to our investors.

Cash Flows

We experienced net increases in our cash and cash equivalents of $76.5 million and $152.9 million during the six month periods ended June 30, 2014 and 2013, respectively.

We generated $106.5 million and $58.4 million of net cash and cash equivalents from our operations during the six month periods ended June 30, 2014 and 2013, respectively, which resulted primarily from our premiums received, net of acquisition costs, exceeding our net losses paid.  Montpelier’s net loss and LAE payments during the six month period ended June 30, 2014 were $118.6 million, versus $162.4 million during the comparable 2013 period.

Our investing activities provided net cash and cash equivalents of $19.0 million and $136.6 million during the six month periods ended June 30, 2014 and 2013, respectively.  The cash and cash equivalents provided from investing activities during the 2014 period primarily resulted from a decrease in restricted cash (which supports certain of our investment securities sold short, open derivative positions and Lloyd’s foreign deposit obligations).  The cash and cash equivalents provided from investing activities during the 2013 period primarily resulted from net sales of investment securities, whose proceeds were used primarily to: (i)  pay losses that became due during that period; and (ii) fund an increase in restricted cash.

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Our financing activities used net cash and cash equivalents of $53.9 million and $36.5 million during the six month periods ended June 30, 2014 and 2013, respectively. The increase in cash and cash equivalents used for financing activities experienced during the 2014 period is primarily due to a $95.3 million decrease in net contributions received from non-controlling interests, partially offset by $59.7 million of net proceeds received from repurchase agreements.

Detailed information regarding our cash flows for the six month periods ended June 30, 2014 and 2013, follows:

For the six month period ended June 30, 2014:

Our cash and cash equivalents provided from operations totaled $106.5 million.

Our cash and cash equivalents provided from investing activities totaled $19.0 million, resulting from the following:

·we paid $78.1 million in net purchases of investment securities,

·we paid $8.7 million in settlements of investment-related derivative instruments,

·we received $28.9 million pursuant to reverse repurchase agreements,

·we had a $81.7 million decrease in our restricted cash,

·we paid $4.1 million in investment performance fees, and

·we paid $0.7 million to acquire capitalized assets.

Our cash and cash equivalents used for financing activities totaled $53.9 million, resulting from the following:

·we paid $93.7 million to repurchase Common Shares,

·we received $2.1 million from third party investors in the BCGR Listed Fund,

·we paid $1.4 million for purchases of BCRH Common Shares made by the Company,

·we received $59.7 million pursuant to repurchase agreements,

·we paid $1.9 million in dividends to holders of BCRH Common Shares, and

·we paid $18.7 million in dividends to holders of Common Shares and Preferred Shares.

We also experienced a $4.9 million increase in the U.S. dollar value of our cash and cash equivalents due to foreign currency exchange rate fluctuations.

For the six month period ended June 30, 2013:

Our cash flows provided from operations totaled $58.4 million.

Our cash flows provided from investing activities totaled $136.6 million, resulting from the following:

·we received $152.3 million of investment securities,

·we paid $7.8 million in settlements of investment-related derivative instruments,

·we received $45.0 million pursuant to reverse repurchase agreements,

·we had a $45.9 million increase in our restricted cash,

·we paid $6.4 million in investment performance fees, and

·we paid $0.6 million to acquire capitalized assets.

Our cash flows used for financing activities totaled $36.5 million, resulting from the following:

·we paid $114.7 million to repurchase Common Shares,

·we received $97.4 million from non-controlling interests, and

·we paid $19.2 million in dividends to holders of Common Shares and Preferred Shares.

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We also experienced a $5.6 million decrease in the U.S. dollar value of our cash and cash equivalents due to foreign currency exchange rate fluctuations.

Credit Quality of Our Fixed Maturity Portfolio

The following table outlines the current Standard & Poor’s credit quality rating of our fixed maturities at June 30, 2014:

(Millions) Rating / Type	Fair Value at June 30, 2014
AAA	$	318.6
U.S. Government and agencies (AA+)	420.8
AA	427.2
A	324.6
BBB	276.8
Below BBB	450.4
Not rated	70.7
Total fixed maturities	$	2,289.1

Summary of Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported and disclosed amounts of our assets and liabilities as of the balance sheet dates and the reported amounts of our revenues and expenses during the reporting periods. We believe the items that require the most subjective and complex estimates are: (i) our loss and LAE reserves; (ii) our written and earned insurance and reinsurance premiums; (iii) our ceded reinsurance; and (iv) our share-based compensation. Our accounting policies for these items are of critical importance to our consolidated financial statements.

Loss and LAE Reserves

We did not make any significant changes in the assumptions or methodology we use in our reserving process during the three and six month periods ended June 30, 2014.  As of June 30, 2014 and December 31, 2013, our best estimate for gross unpaid loss and LAE reserves was $861.9 million and $881.6 million, respectively, and our best estimates for net unpaid loss and LAE reserves was $804.5 million and $818.0 million, respectively.  As of June 30, 2014 and December 31, 2013, IBNR represented 68% and 63% of our net unpaid loss and LAE reserves, respectively.

Our reserving methodology does not lend itself well to a statistical calculation of a range of estimates surrounding the best point estimate of our loss and loss adjustment expense reserves. Due to the low frequency and high severity nature of much of our business, our reserving methodology principally involves arriving at a specific point estimate for the ultimate expected loss on a contract by contract basis, and our aggregate loss reserves are the sum of the individual loss reserves established.  As of June 30, 2014, we estimate that a 15% change in our net unpaid loss and LAE reserves would result in an increase or decrease of our net income or loss and shareholders’ equity by approximately $120.7 million. The net income or loss and shareholders’ equity impact of the change in net reserves may be partially offset by adjustments to items such as reinstatement premiums, profit commissions, incentive compensation and income taxes.

Further information regarding our loss and LAE reserve estimates is included in the section entitled “Summary of Critical Accounting Estimates” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2013 Form 10-K, as filed with the SEC.

Written and Earned Insurance and Reinsurance Premiums

We did not make any significant changes in the manner in which we recognize our written and earned insurance and reinsurance premiums during the three and six month periods ended June 30, 2014.

Detailed information regarding our written and earned insurance and reinsurance premiums is included in the section entitled “Summary of Critical Accounting Estimates” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2013 Form 10-K, as filed with the SEC.

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Ceded Reinsurance

We did not make any significant changes in the manner in which we recognize our ceded reinsurance premiums during the three and six month periods ended June 30, 2014.

Detailed information regarding our ceded reinsurance estimates is included in the section entitled “Summary of Critical Accounting Estimates” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2013 Form 10-K, as filed with the SEC.

Share-Based Compensation

On the basis of the Company’s forecasted results for 2014, the Company anticipated issuing 543,782 Variable RSUs for the 2014-2017 award cycle as of June 30, 2014, or 110% of the Target Variable RSUs available for that cycle.  The actual number of Variable RSUs to be awarded for the 2014 - 2017 award cycle, if any, will not be finalized until approved by the Compensation Committee in the first quarter of 2015.  See Note 12 of the Notes to Consolidated Financial Statements.

If our results for the balance of 2014 were to develop unfavorably, resulting in a zero (0% of Target) payout for incentive compensation purposes, our share-based compensation accruals at June 30, 2014 would be $3.9 million redundant and the RSU expense that we would expect to incur in future periods would decrease from $20.1 million to $9.1 million.  Additionally, the Company’s total RSUs outstanding would decrease by 543,782 units.

If our results for the balance of 2014 were to develop favorably, resulting in a Target payout for incentive compensation purposes, our share-based compensation accruals at June 30, 2014 would be $0.4 million redundant and the RSU expense that we would expect to incur in future periods would decrease from $20.1 million to $19.1 million.  Additionally, the Company’s total RSUs outstanding would decrease by 49,442 units.

If our results for the balance of 2014 were to develop favorably, resulting in the maximum possible (200% of Target)  payout for incentive compensation purposes, our share-based compensation accruals at June 30, 2014 would be $3.2 million deficient and the RSU expense that we would expect to incur in future periods would increase from $20.1 million to $29.1 million.  Additionally, the Company’s total RSUs outstanding would increase by 444,898 units.

Further information regarding our share-based compensation estimates is included in the section entitled “Summary of Critical Accounting Estimates” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2013 Form 10-K, as filed with the SEC.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Refer to the 2013 Form 10-K, as filed with the SEC, and in particular Item 7A - “Quantitative and Qualitative Disclosures About Market Risk.”   As of June 30, 2014, there were no material changes to our market risks as described in the 2013 Form 10-K.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2014. Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in §§240.13a-15(e) and §§240.15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During the three month period ended June 30, 2014, there were no changes in the Company’s internal controls that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

We are subject to litigation and arbitration proceedings in the normal course of our business.  Such proceedings often involve insurance or reinsurance contract disputes, which are typical for the insurance and reinsurance industry.  Expected or actual reductions in our reinsurance recoveries due to insurance or reinsurance 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, and are reflected in, our net loss and LAE reserves.

Other than the Tribune litigation (which is disclosed in Note 4 of the Notes to Consolidated Financial Statements) and any disputes involving insurance or reinsurance contracts in the normal course of business, we had no other unresolved legal proceedings at June 30, 2014.

Item 1A.Risk Factors.

Factors that could cause our actual results to differ materially from those in this report are any of the risks described in Item 1A “Risk Factors”  included in the 2013 Form 10-K, as filed with the SEC.  Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition.

Additional risks not presently known to us or currently deemed immaterial may also impair our business or results of operations.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

(a)None.

(b)None.

(c)The following table provides information with respect to the Company’s repurchases of Common Shares during the three month period ended June 30, 2014:

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
April 1 - April 30, 2014	587,075	$	29.71	587,075
May 1 - May 31, 2014	179,636	30.98		179,636
June 1 - June 30, 2014	97,200	31.55		97,200
Total	863,911	$	30.18	863,911	$	171,176,256

(1)On November 14, 2013, the Board increased the Company’s existing total share repurchase authorization by $150.0 million to a total of $278.8 million, of which $171.2  million remained at June 30, 2014.  There is no stated expiration date associated with the Company’s Common Share repurchase authorization.

Item 3.Defaults Upon Senior Securities.

None.

Item 4.Mine Safety Disclosures.

Not applicable.

Item 5.Other Information.

None.

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Item 6.Exhibits.

The exhibits followed by an asterisk (*) indicate exhibits physically filed with this Quarterly Report on Form 10-Q. All other exhibit numbers indicate exhibits filed by incorporation by reference or otherwise.

Exhibit
Number	Description of Document
3.2	Amended and Restated Bye-Laws of the Company (incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on May 19, 2014).
10.1	Credit Agreement dated as of May 2, 2014, among BCRH (as Borrower), the Guarantors party thereto (as Guarantors), Royal Bank of Canada (as Administrative Agent), RBC Capital Markets (as Arranger) and the Lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 5, 2014).
10.2	Guarantee Agreement dated as of May 2, 2014, among the Company, and the other Guarantors party thereto and Royal Bank of Canada (as Administrative Agent) (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 5, 2014).
10.3	Credit Agreement dated as of May 15, 2014, among the BCGR Listed Fund, the Company (as the Guarantor) and Barclays Bank plc (as the Lender) (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2014).
10.4	Form of 2014 Restricted Share Unit Award Agreement under the Company’s 2012 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 19, 2014).
11	Statement Re: Computation of Per Share Earnings (included as Note 9 of the Notes to Consolidated Financial Statements).
31.1	Certification of Christopher L. Harris, Chief Executive Officer of Montpelier Re Holdings Ltd., pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. (*)
31.2	Certification of Michael S. Paquette, Chief Financial Officer of Montpelier Re Holdings Ltd., pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended. (*)
32	Certifications of Christopher L. Harris and Michael S. Paquette, Chief Executive Officer and Chief Financial Officer, respectively, of Montpelier Re Holdings Ltd., pursuant to 18 U.S.C. Section 1350. (*)
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Income; (iii) the Consolidated Statements of Shareholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. (*)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	MONTPELIER RE HOLDINGS LTD. (Registrant)
	By:	/s/   MICHAEL S. PAQUETTE
		Name:	Michael S. Paquette
		Title:	Executive Vice President and Chief Financial Officer
			(Principal Financial Officer)
August 7, 2014

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