Fitch Affirms Max Re Ratings

September 20, 2005

Fitch Ratings announced that it has affirmed the “A” insurer financial strength ratings of Max Re Ltd. and its Dublin-based subsidiaries, Max Re Europe Ltd. and Max Insurance Europe Ltd. Fitch also affirmed the “BBB” long-term issuer rating of Max Re Capital Ltd., the Bermuda-based holding company of Max Re Ltd. The outlook on all the ratings is stable.

“The ratings reflect Max Re’s disciplined and flexible approach to underwriting risks, limited investment portfolio downside risk, and favorable parent company financial flexibility,” said the announcement. “Partially offsetting these positives is the execution risk derived from Max Re’s shift in product strategy and an overall higher investment risk strategy compared with the industry and its peers.”

Fitch’s analysis noted: “Max Re has been in business for over five years, having commenced operations in January 2000, and thus Fitch views the company as being reasonably seasoned. However, the company’s business mix has shifted over time from its original product strategy that emphasized life and annuity transactions and property/casualty structured transactions. Since that time, as a result of changing market conditions that have shifted expected returns on capital, Max Re has migrated its strategy to a property/casualty focus, with an emphasis on traditional reinsurance and insurance business, principally in long-tail casualty lines.

“While Fitch recognizes the benefits of Max Re’s strategy of maintaining underwriting flexibility to take advantage of industry trends that are providing the best opportunity for returns on capital, it also creates additional execution risk. Fitch expects Max Re to maintain its disciplined underwriting approach in the softening environment through the continued use of its sophisticated models and structuring of every contract with loss caps and aggregate limits. Fitch’s ratings also reflect its view that the company’s reserves will prove to be adequate, particularly in the long-tail casualty insurance/reinsurance lines that the company started writing in the past few years.

“Max Re’s primary differentiator is its investment strategy, which strives to achieve higher risk-adjusted returns through allocating between 25 percent and 50 percent of the total investment portfolio to alternative investments (32 percent as of June 30, 2005) and between 50 percent and 75 percent of the overall portfolio to cash and fixed-maturity investments (68 percent as of June 30, 2005). The investment portfolio has consistently produced positive returns, albeit at levels less than those initially expected, demonstrating its limited downside. Thus far in 2005, hedge funds have had a difficult year as various market factors have dampened returns, with Max Re posting an alternative investment yield of 1.46 percent through the first six months of 2005.”

Fitch also indicated that the ratings “take into consideration the company’s estimated losses of $60 million to $90 million from Hurricane Katrina, which are within Fitch’s expectations for a single event loss exposure relative to capital. Max Re had shareholders’ equity of $1.025 billion at June 30, 2005, a 27 percent increase from year-end 2003.”

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