Fitch Affirms Max Re ‘A’ Ratings

September 6, 2006

Fitch Ratings has affirmed the ‘A’ insurer financial strength ratings of Max Re Ltd. and its Dublin-based subsidiaries, Max Re Europe Limited and Max Insurance Europe Limited. Fitch also affirmed the ‘A-‘ issuer default rating of Max Re Capital Ltd., the Bermuda-based holding company of Max Re Ltd. The outlook on al of 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 Fitch. “Partially offsetting these positives is the execution risk derived from Max Re’s shift in product strategy, an overall higher investment risk strategy compared to the industry and peers and uncertainty surrounding a Securities and Exchange Commission (SEC) inquiry related to the company’s recent restatement.”

The bulletin notes: “Max Re has been in business for over six 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 traditional property/casualty reinsurance and insurance focus, principally in long-tail casualty lines, but also, more recently, in short-tail property and property catastrophe business.

“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 overall softening market environment, through the continued use of its sophisticated models and structuring of every contract with loss caps and aggregate limits.”

Fitch cited Max Re’s investment strategy as being a “primary differentiator” in regard to its ratings. The strategy “calls for between 60 percent and 80 percent of the overall portfolio to consist of traditional investments (70 percent as of June 30, 2006) and between 20 percent and 40 percent to consist of alternative investments (30 percent as of June 30, 2006), primarily hedge funds,” said Fitch. “The investment portfolio has consistently produced positive returns, albeit at levels less than those initially expected, demonstrating its limited downside.”

Fitch also commented as follows on Max Re’s earnings restatement and investigations by the Securities and Exchange Commission: “In May 2006, Max Re restated its financial results for the years 2001 through 2005 following an internal investigation by the company’s audit and risk management committee of three finite risk retrocessional contracts written in 2001 and 2003 that were found to be accounted for incorrectly. The cumulative effect of the restatement was to reduce year-end 2005 shareholders’ equity by $18.3 million, or about 1.5 percent. While the financial statement effect of the restatement was minor, it highlights the increased level of scrutiny surrounding the use of finite reinsurance.

“In connection with the internal investigation, the company voluntarily contacted the SEC in March 2006. Subsequently, in June 2006, Max Re received a request from the SEC to voluntarily provide certain information related to the restatement. Fitch views the restatement as unfortunate but not as a meaningful risk factor within the context of the current environment of corporate governance and Section 404 of the Sarbanes-Oxley Act. Fitch does not expect that the SEC inquiry will result in any significant restatement or negative impact to the company’s competitive position.”

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