Max Re's announcement that independent auditors are reviewing three finite retrocessional reinsurance 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 one leading analyst.
Hamilton, Bermuda-based Max Re Capital Ltd. announced on March 24 that the Audit and Risk Management Committee initiated by its board of directors, with the assistance of outside advisers, would review the questionable reinsurance contracts written in 2001 and 2003.
The aim of the review is to determine whether the company properly accounted for the finite re deals–principally whether they contain sufficient risk transfer to meet the requirements of Financial Accounting Standard No. 113, Max Re said.
In connection with the internal review, the committee also voluntarily contacted the U.S. Securities and Exchange Commission, according to Max Re.
"Importantly, it appears that the ratings agencies do not intend to take a ratings action in response to Max Re's review," noted a report by Brian R. Meredith, an analyst with Bank of America Securities.
"Any adverse actions by the ratings agencies could potentially have hurt the company's business opportunities at July 1, 2006 renewals," he added, noting that 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 finite re 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 the cumulative adjustment from the contracts would be "a reduction to retained earnings as of Dec. 31, 2005 of not more than $50 million, or approximately 4 percent of shareholders' equity."
"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," Mr. Meredith noted in his report.
He said Bank of America is maintaining its "buy rating" and "$30 price target." Assuming the company maintains its status quo, he added, "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 Ltd. and Max Re Europe Ltd.)–offers customized insurance and reinsurance solutions to property-casualty insurers, life and health carriers, and large corporations with captives or other self-insurance mechanisms in place.
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