Two Bermuda-based companies, Max Capital Group and Harbor PointLtd., agreed to merge last week, creating a global insurance andreinsurance enterprise with total capital of $3 billion.

Terms of the deal, valued at $3.5 billion, call for an exchangeof stock and the payment of a $300 million special dividend to allshareholders of the combined company at the close of thedeal.

Executives pointed to size of the capital base of the combinedcompany, to be named Alterra Capital Holdings, as a key benefit ofthe deal, while also highlighting the diversity of the combinedbusinesses–geographically and by product type.

W. Marston Becker, chair and chief executive officer of Max, whowill become president and CEO of Alterra, said in a statement thathaving a $3 billion capital base “in a market that values strengthand size as a sign of franchise safety and sustainability [means]Alterra will be well positioned to take full advantage ofprofitable growth opportunities in the property and casualtyinsurance and reinsurance markets.”

During an investor conference call, John Berger, director, CEOand president of Harbor Point, who will become CEO of reinsuranceoperations for Alterra, noted that the combined company will have“a bigger clout in the [reinsurance] marketplace” than either hadon its own, enabling Alterra “to be a more substantial player onattractive programs.”

The name Alterra, which Mr. Becker said means “high ground,” waschosen to signify the security of the combined enterprise, heexplained.

Separately, Harbor Point, a “Class of 2005″ Bermuda reinsurercreated in the wake of Hurricanes Katrina, Rita and Wilma, reported$1.9 billion in shareholders' equity at year-end 2009, while Max, a10-year-old specialty insurer and reinsurer, had $1.6 billion.

At the close of the definitive amalgamation agreement, which wasunanimously approved by the boards of directors of both companies(and already has approval from the largest shareholders of both),Max and Harbor Point intend for the board of the combined companyto declare a special cash dividend of $2.50 per share.

The dividend, amounting to roughly $300 million, and a $250million goodwill write-off will bring the capital position of thecombined company down to the $3.0 billion figure.

During the investor conference call, the two CEOs highlightedthe strengths that the other organization brings to the deal. Mr.Becker made note of more than two decades of experience the HarborPoint team has in the reinsurance market, while Mr. Bergercommented on Max's product diversification and global reach.

“Gaining access to Max's primary insurance business as well astheir Lloyd's, U.S. E&S [excess and surplus lines], Europeanand Latin American platforms is truly a unique opportunity for us,”Mr. Berger said.

“The combination of our companies will produce a highly diverseportfolio of specialty insurance and reinsurance business,including a mix of long- and short-tail lines,” he said, notingthis should mean that Alterra will have less volatile underwritingresults than either of its individual component companies.

THE COMBINATION

Actually, both companies individually wrote roughly 50 percentof their premiums in short-tail lines and 50 percent in long-taillines in 2009, but Harbor Point's book was–as it has beenthroughout its history–100 percent reinsurance.

In 2009, Harbor Point reported $607.5 million in gross writtenpremiums, with 36 percent coming from property business, 49 percentfrom casualty business and 15 percent coming from specialtyreinsurance businesses like marine, offshore energy andaviation.

Harbor Point has a relatively high proportion of long-tailcasualty reinsurance when compared to other “Class of 2005″reinsurers. Unlike the others, which started from scratch, HarborPoint started with a ready-made book of business–taking over aportfolio with a lot of U.S. casualty business from Chubb Rethrough the purchase of renewal rights.

Max recorded $1.3 billion in gross reinsurance premiums writtenfrom the group's Bermuda and Dublin platforms last year, a bookthat Mr. Berger sees as complementary to Harbor Point's.

He said Max's focus has been on “smaller, more targetedspecialty cedents, which will fit well with Harbor Point'slarger-account client base.”

Max also writes a book of global insurance from its Bermuda andDublin platforms (mainly for Fortune 1000 customers in lines likeprofessional liability, excess casualty, property and aviation),representing 31 percent of its overall 2009 premiums. Additionalinsurance premiums come from a U.S. specialty platform, where asurplus lines business launched in 2007 contributed 21 percent ofthe overall premium volume in 2009.

Max's business at Lloyd's, added through a 2008 acquisition,contributed less than 9 percent to the total. Nearly half of theLloyd's business was property treaty reinsurance.

Putting the two together results in an overall book of $2.0billion in gross premiums, which is more heavily weighted towardreinsurance lines–62 percent (including a small book of lifereinsurance from Max).

Geographically, the bulk of the business will be from NorthAmerica–78 percent.

According to statistics on shareholders' equity compiled byNU (using financial information reported on HighlineData's online service, “Analyst PRO”), the combination of MaxCapital and Harbor Point would position Alterra as the 11th-largestpublicly traded Bermuda company, behind Allied World and ahead ofEndurance Specialty Holdings.

LOOKING BACK

Harbor Point was set up in late October 2005 with $1.5 billionof initial capital coming from Trident III, L.P., (a private equityfund managed by Stone Point Capital, a Greenwich, Conn.-basedglobal private equity firm), The Chubb Corp. and J.P. MorganPartners, and an “A” rating from A.M. Best.

Officially opening its doors on Dec. 15, 2005 with a team ofsenior people averaging somewhere between 20 and 25 years in thebusiness, Mr. Berger told NU that the company would seekto take advantage of favorable conditions in theproperty-catastrophe business at the time.

The plan was to quickly grow a cat-exposed reinsurance book thathad only been 5 percent of Chubb Re's portfolio to 15-to-20 percentunder the Harbor Point banner.

In 2006, Harbor Point also opened a London branch to take onsome specialty reinsurance business as well.

Max Capital was originally launched as Max Re in 2000, with amodel focused on writing finite casualty reinsurance contracts. Afew years later, post-9/11 price hikes and increased buyer appetitefor more traditional risk-transfer products prompted the company togrow a more traditional casualty reinsurance book.

Within two years, the company added insurance to the mix,targeting areas where it said it could offer solutions to clientsfacing market challenges–subsequently growing the insurance book inlines such as medical malpractice, products and professionalliability, and then launching an aviation unit in Dublin.

While still more concentrated on long-tail casualty, after fourhurricanes in 2004 Max Re executives in place at the time set outto take advantage of an improving property market and startedslowly building a property treaty reinsurance practice–acceleratingthe strategy after Katrina.

Diversifying further, in mid-December 2006, Max Re announced itsplan to launch a new U.S. E&S subsidiary–Max SpecialtyInsurance Company. And in July 2007 Max Capital announced it wouldacquire Imagine Group (UK) Ltd., a Lloyd's insurance operation.

Last year, Max was engaged in a public battle with two “Class of2005″ companies–Validus Holdings and Flagstone ReinsuranceHoldings–to acquire IPC Re. IPC, a monoline property-catastrophereinsurer, ultimately went to Validus for nearly $2 billion inearly June.

(Validus CEO Ed Noonan gave his views on M&A activityrecently. See related article “Is U.S. Casualty Next For Validus?”at www.property-casualty.com)