A.M. Best Affirms Max Re ‘A-‘ (Excellent) Rating

November 19, 2002

A.M. Best Co. announced that it has affirmed the financial strength rating of A- (Excellent) of Bermuda-based Max Re Ltd., a wholly owned subsidiary of Max Re Capital, with a stable outlook.

Best’s report noted that the “rating reflects Max Re’s favorable risk-adjusted capitalization, experienced management team and integrated approach to asset liability management.” It also pointed out “management’s ability to leverage relationships with prominent life and non-life insurance organizations, which have contributed to the company’s market acceptance since its formation in 1999.”

“These advantages continue to support Max Re’s development,” said Best, but it also indicated that the company still faced challenges that most growing companies face in building scale, while mitigating the volatility inherent in its investment performance and “competing in a competitive and consolidating global reinsurance market.”

The report also noted that, while Max Re has maintained pricing discipline, its operating performance hasn’t met expectations, due mainly to lower than expected investment returns from its alternative asset portfolio, “which has compressed spreads in its structured reinsurance business.”

A.M. Best said it believed that “Max Re’s sophisticated modeling of underwriting and investment risks permits it to effectively optimize the use of capital and to match transactional cash flows.” It also indicated that the company was revising its strategy in view of recent developments to “write a greater percentage of traditional reinsurance business besides the current finite risk coverages that had been its exclusive focus.”

It “expects operating performance to improve as Max Re further deploys its capital base by capitalizing on price hardening in reinsurance rates during a favorable cycle of non-life underwriting.”

It also noted that “Max Re maintains strong risk-adjusted capitalization in the context of an unseasoned book of business, having benefited from Max Re Capital’s initial public offering in August 2001 that raised an additional $180 million of net proceeds. To date, Max Re has underwritten long-duration, low volatility liabilities balanced by an investment portfolio of 60%-65% high quality fixed income assets and 35%-40% of alternative assets managed by Moore Capital Management, Inc. Max Re plans to balance its expansion into traditional reinsurance products with an increased allocation of cash flow to fixed income assets.”

“A.M. Best believes Max Re’s operating leverage and its capacity to withstand potential volatility in investment returns without compromising policyholder security is adequate for its current rating level. Nevertheless, A.M. Best will continue to monitor Max Re’s risk management practices relative to its business plan and how changing market conditions influence these practices,” the announcement concluded.

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