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

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

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

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

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

The name Alterra, which Mr. Becker said means “high ground,” was chosen to signify the security of the combined enterprise, he explained.

Separately, Harbor Point, a “Class of 2005″ Bermuda reinsurer created in the wake of Hurricanes Katrina, Rita and Wilma, reported $1.9 billion in shareholders' equity at year-end 2009, while Max, a 10-year-old specialty insurer and reinsurer, had $1.6 billion.

At the close of the definitive amalgamation agreement, which was unanimously 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 company to declare a special cash dividend of $2.50 per share.

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

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

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

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

THE COMBINATION

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

In 2009, Harbor Point reported $607.5 million in gross written premiums, with 36 percent coming from property business, 49 percent from casualty business and 15 percent coming from specialty reinsurance businesses like marine, offshore energy and aviation.

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

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

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

Max also writes a book of global insurance from its Bermuda and Dublin platforms (mainly for Fortune 1000 customers in lines like professional liability, excess casualty, property and aviation), representing 31 percent of its overall 2009 premiums. Additional insurance premiums come from a U.S. specialty platform, where a surplus lines business launched in 2007 contributed 21 percent of the 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 the Lloyd's business was property treaty reinsurance.

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

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

According to statistics on shareholders' equity compiled by NU (using financial information reported on Highline Data's online service, “Analyst PRO”), the combination of Max Capital and Harbor Point would position Alterra as the 11th-largest publicly traded Bermuda company, behind Allied World and ahead of Endurance Specialty Holdings.

LOOKING BACK

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

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

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

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

Max Capital was originally launched as Max Re in 2000, with a model focused on writing finite casualty reinsurance contracts. A few years later, post-9/11 price hikes and increased buyer appetite for more traditional risk-transfer products prompted the company to grow 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 clients facing market challenges–subsequently growing the insurance book in lines such as medical malpractice, products and professional liability, and then launching an aviation unit in Dublin.

While still more concentrated on long-tail casualty, after four hurricanes in 2004 Max Re executives in place at the time set out to take advantage of an improving property market and started slowly building a property treaty reinsurance practice–accelerating the strategy after Katrina.

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

Last year, Max was engaged in a public battle with two “Class of 2005″ companies–Validus Holdings and Flagstone Reinsurance Holdings–to acquire IPC Re. IPC, a monoline property-catastrophe reinsurer, ultimately went to Validus for nearly $2 billion in early June.

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

Special Reports /

Max Capital, Harbor Point Agree To Merge

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