Max Capital, Harbor Point Merger Creates $3 Billion Company

NU Online News Service, March. 4, 10:03 a.m. EST

Two Bermuda-based companies, Max Capital Group and Harbor Point Limited, announced that they agreed to merge last night, 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. A.M. Best said the merger would enhance the operations of the two firms.

Executives at the two firms 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, chairman and chief executive officer of Max, who will become president and CEO of Alterra, said 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."

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

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, Max and Harbor Point intend for the board of directors of the combined company to declare a special cash dividend of $2.50 per share.

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

According to a joint announcement, under the amalgamation agreement, holders of stock in Harbor Point, a privately held company, will receive 3.7769 Max common shares for each Harbor Point share.

Following the merger, Harbor Point shareholders will own roughly 52 percent of Alterra, with Max shareholders owning about 48 percent.

John Berger, director, chief executive officer and president of Harbor Point, will become CEO of reinsurance operations for Alterra, as well as vice chairman of the board.

Mr. Berger remarked that, "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, "As a result, we expect that Alterra will have less volatile underwriting results than either of its individual components, as well as more flexibility to efficiently manage capital."

On an individual basis, both companies actually 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 formed in the wake of Hurricane Katrina.

Unlike the others, which started from scratch, Harbor Point started with a ready-made book of business--taking over a portfolio that had a lot of U.S. casualty business from Chubb (formerly written under the Chubb Re banner).

The bulk of the Harbor Point's casualty reinsurance business in 2009 was written on a quota-share basis, accounting for 42 percent of the reinsurance book overall, while most of the property business was property-catastrophe reinsurance.

For Max, which recorded $1.3 billion in gross written premiums last year, roughly 35 percent was working layer excess and quota share reinsurance (mainly in casualty and specialty lines) written from the group's Bermuda and Dublin platforms.

Michael O'Reilly, chairman of Harbor Point's board of directors and former vice chairman and chief financial officer of The Chubb Corporation, will be the non-executive Chairman of Alterra's board of directors.

Following the merger announcement A.M. Best placed Max Capital Group Ltd. and its subsidiaries' A minus (excellent) ratings "Under Review With Positive Implications."

The Oldwick, N.J.-based firm said the merger between Harbor Point and Max "will enhance the capacity and distribution capability of Harbor Point's products due to the complementary nature of MXGL's existing operating platforms. The combined organization will benefit from operating synergies, limited overlap in lines of business and improved diversification." Harbor Point''s A (excellent) rating was unaffected.