S&P Affirms Alterra’s Ratings Following Max Cap, Harbor Point Merger

May 17, 2010

Standard & Poor’s Ratings Services said today that it affirmed its ‘BBB’ counterparty credit rating on Bermuda-based insurance and reinsurance holding company Alterra Capital Holdings Ltd., which was formerly known as Max Capital Group Ltd.

S&P also said that it has affirmed its ‘BBB’ counterparty credit ratings on Alterra Capital’s intermediary holding-company subsidiaries Alterra USA Holdings Ltd. (formerly Max USA Holdings Ltd.), Max Europe Holdings Ltd., and Max UK Holdings Ltd.”

In addition, S&P affirmed its ‘A-‘ counterparty credit and financial strength ratings on Alterra Capital’s operating subsidiaries: Alterra Insurance Ltd. (formerly Max Bermuda Ltd.), Max America Insurance Co., Max Specialty Insurance Co., Max Re Europe Ltd., Max Insurance Europe Ltd., Harbor Point Re Ltd., and Harbor Point Reinsurance US Inc.”

The outlook on all of these companies remains stable.

“These affirmations follow the completion of the previously announced merger of equals between Max Capital and Harbor Point Ltd.,” explained credit analyst Laline Carvalho. (Harbor Point Ltd. is a privately held company that was the ultimate parent for Harbor Point Re Ltd. and Harbor Point Reinsurance US Inc.) “The transaction has created a significantly larger insurance and reinsurance group (Alterra) with about $3 billion in shareholders’ equity and $2 billion in gross premium writings,” said S&P.

Among the positive factors of the transaction are “Alterra’s improved diversification by platform, product, and distribution channel,” the report continued. “In addition, the combination of Max’s reinsurance division with Harbor Point’s has significantly increased the merged group’s market presence in the reinsurance sector, strengthening its competitive position.

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

S&P did note, however, that there “is significant integration risk.” It pointed out that the “retention of key management and staff at Alterra will be an important element in the merger’s success, given both companies’ strong expertise. 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 is 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.”

In conclusion, S&P said: “We believe Alterra’s capital adequacy will be very strong range the next two years. Financial leverage will likely remain modest over the next year. We also expect that Alterra Capital’s consolidated earnings will remain strong and supportive of the ratings, with a combined ratio of 86 percent-92 percent and a return on revenue upwards of 15 percent over the next two to three years, assuming a normal level of catastrophe losses.”

Source: Standard & Poor’s

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