S&P Affirms Max Capital and Harbor Point Ratings

March 4, 2010

Standard & Poor’s Ratings Services has affirmed its ‘BBB’ counterparty credit ratings on Bermuda-based insurance and reinsurance holding company Max Capital Group Ltd. and its intermediary holding-company subsidiaries: Max USA Holdings Ltd., Max Europe Holdings Ltd., and Max UK Holdings Ltd. S&¨also affirmed its ‘A-‘ counterparty credit and financial strength ratings on Max Capital’s operating insurance and reinsurance companies. The outlook remains stable.

At the same time S&P also affirmed its ‘A-‘ counterparty credit and financial strength ratings on Bermuda operating company Harbor Point Re Ltd. and its U.S. operating subsidiary, Harbor Point Reinsurance US Inc. The outlook on these companies also remains stable.

Credit analyst Laline Carvalho said S&P had affirmed the ratings following the “announcement by Max Capital and Harbor Point Ltd. that they have entered into a definitive amalgamation agreement for a merger of equals” [See IJ web site – https://www.insurancejournal.com/news/international/2010/03/04/107862.htm]. S&P added that it expects the transaction, which is subject to shareholder and regulatory approval, “will create a significantly larger insurance and reinsurance group with about $3 billion in shareholders’ equity and $2 billion in gross premium writings.”

S&P indicated that among the “positive factors of the expected transaction are the combined group’s improved diversification by platform, product, and distribution channel. In addition, the combination of Max’s reinsurance division with Harbor Point’s will significantly increase the merged group’s market presence in the reinsurance sector, strengthening its competitive position.

“Given the group’s ability to switch resources to more profitable lines among its reinsurance, property/casualty, and life divisions, Alterra will also benefit from greater flexibility to follow cycle-management strategies while reporting less volatility in premium writings. We expect that the group’s earnings volatility will decrease compared with Harbor Point’s stand-alone profile, given the greater diversification of earnings streams.”

However, S&P cited the “significant integration risk” as an offsetting factor. “In our opinion, retention of key management and staff at Alterra will be an important element in the merger’s success, given both companies’ strong expertise,” the report continued. “We also believe there is execution risk related to Alterra capitalizing on its enhanced competitive position to produce a stable platform with strong, high-quality earnings over the long run.

“Partially offsetting these concerns are the complementary nature of Max Capital and Harbor Point’s writings and client base, which should simplify the task of merging the books of business and help reduce any friction among management and staff at the merged organization.”

S&P noted that, following the merger, which the companies expect to take place in the second quarter of 2010, “we believe the pro forma consolidated group’s capital adequacy will be very strong and supportive of the ratings range, including the impact of an anticipated $300 million dividend to Alterra’s shareholders immediately following the closing of the transaction.

“We expect that capital adequacy will remain in the very strong range for at least the remainder of 2010 and in 2011. Pro forma financial leverage will likely be modest at approximately 9 percent at year-end 2009. We also expect that the merged group’s prospective consolidated earnings will remain strong and supportive of the ratings, assuming a normal level of catastrophe losses.”

Source: Standard & Poor’s – www.standardandpoors.com

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