Max Re's announcement that independent auditors are reviewing three finite retrocessional contracts, which could possibly reduce fourth-quarter retained earnings by up to $50 million, most likely won't affect the company's ratings, according to an industry analyst.

Hamilton, Bermuda-based Max Re Capital Ltd. announced Friday that the Audit and Risk Management Committee of its board of directors initiated, with the assistance of outside advisors, a review of the contracts written in 2001 and 2003.

The aim of the review is to determine whether the company properly accounted for them--principally with respect to whether they contain sufficient risk transfer to meet the requirements of Financial Accounting Standard No. 113, the company said.

In connection with the internal review, the Audit and Risk Management Committee also voluntarily contacted the Securities and Exchange Commission, according to Max Re.

Brian R. Meredith, an analyst with Bank of America Securities, LLC, issued a report today stating that, "Importantly, it appears that the ratings agencies do not intend to take a ratings action in response to Max Re's review."

He continued, "Any adverse actions by the ratings agencies could potentially have hurt the company's business opportunities at July 1, 2006 renewals. Max Re is rated "A minus" by A.M. Best, the minimum rating, in our view, to be an accepted reinsurance market."

Max Re said that as a result of the investigation of the contracts, the company "may be, but has not yet determined whether it will be, required to restate its financial statements for the years ending Dec. 31, 2001 through 2005."

Although the allocation among the periods would have to be determined, Max Re said it believes that the cumulative adjustment from the contracts would be a reduction to retained earnings at December 31, 2005 of not more than $50 million, or approximately 4 percent of shareholders' equity.

Mr. Meredith noted in the report that "the biggest risks at this point, in our view, are actions by the SEC, and/or a management shake-up as a result of the review."

He said Bank of America is maintaining its "buy rating" and "$30 price target." Assuming the company maintains its status quo, he said, "we believe Max Re is one of the better positioned companies to take advantage of the dislocation in the wind-exposed property reinsurance market at June 1 and July 1, 2006 renewals."

Max Re Capital Ltd. through its principal operating subsidiaries--Max Re Ltd., Max Insurance Europe Limited and Max Re Europe Limited--offers customized insurance and reinsurance solutions to property and casualty insurers, life and health insurers, and large corporations.

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