Can the Max Capital/Harbor Point ‘merger of equals’ really be as straightforward as the phrase implies? Global Reinsurance meets the two chief execs who will soon have the answer

Round-up, round-up, it’s what you’ve all been waiting for. This year’s M&A activity got off to a late but welcome start with the announcement of a deal between Max Capital and Harbor Point.

And not just any old deal: this transaction – which will result in a new, publicly traded entity called Alterra, with a little over the magic $3bn in capital – is being billed as a ‘merger of equals’. Cue wry smiles from the sceptics at the back of the room.

But no, it really is, according to Max chief Marty Becker and Harbor Point boss John Berger. GR caught up with them just a week after the announcement, during last month’s World Insurance Forum in Bermuda. The pair said they’d work well together too, and produce a company focused on disciplined underwriting as it waits for the market to turn.

The history

Both companies have been around the block a few times. Max really made its name as a big player last year, when it had a starring role in the saga surrounding the takeover of IPC, which eventually went to hostile bidder Validus after it elbowed accepted suitor Max out of the way. Is this a better deal?

“This is a totally different transaction,” Becker says with strained patience. “IPC was a company that had put itself up for sale, and it was really just trying to determine who was the best partner for it to come together with.

“We were interested purely because of the enhanced scale it would have given the organisation. As an underwriter, IPC only wrote property cat business, which we already write, so we weren’t picking up significant new lines or territories, or intellectual capital. The Harbor Point transaction is a much more strategic transaction.”

Harbor Point itself is no wallflower, having been linked with, well, just about everyone, with the most famous rumour being the suggestion of a three-way deal with Ariel Re and Montpelier Re, which dominated dinner table talk at Monte Carlo last year.

Berger has run the company since its formation as Chubb Re in 1998, steering it through the subsequent sale to Stone Point Capital and the establishment of its own brand in 2005. He admits that a merger has never been far from his mind.

“From the beginning we always seemed to be having a conversation with someone about merging,” he muses now, in his waterfront office. “Although bigger doesn’t necessarily mean better, if you’re good and big, that’s better than being good and small. So we had been in conversations with many companies, many of them not that serious. A lot of times it just broke down on valuation.”

The rumours

So what about that Monte chatter? “There was never any talk; that was pure rumour,” he insists. So where did this persistent story come from? “Apparently a very, very well-known private equity guy said at dinner: ‘Boy, it would make sense if those three companies got together,’ and that was the foundation of it I think.

“We were in Monte Carlo, and everyone goes ‘wow, this three-way rumour’, and I go, ‘no, it’s going to be an eight-way merger and there’s only going to be five companies left in Bermuda and we’re going to have $12bn’, and everyone’s like, ‘oh, just shut up’.

“This is a small industry, it’s a small place and there are always rumours.”

Well, that’s pretty emphatic, so we’ll leave it there, unless anyone can prove different. But given both companies’ rather rocky histories in this area, what made them decide to finally throw their lot in with one another?

“I’ve known the Max people for a long time: we reinsure them, we have a very high opinion of them, and Marty and I have been having a conversation for a couple of years asking: ‘Well, what would this look like?’” says Berger, a friendly and smiling character less well-known in the press than his counterpart, Becker. “This time it happened.”

And Becker: “It’s being done simply because we both view the transaction as making each of our respective organisations better and going to the next step, as opposed to a transaction that one of us felt was necessary or had to be done.”

The logistics

So let’s get down to brass tacks: what does the deal look like? Following the merger, Harbor Point shareholders will own 52% of the combined company, with Max shareholders owning the remaining 48%. Max has a market cap of about $1.3bn, and Harbor Point $1.63. In 2009, Max reported net income of $246m, with Harbor Point posting $250m. Max is the more diversified company, with insurance and reinsurance operations and four operating platforms, including Lloyd’s, while Harbor Point is solely a reinsurance outfit.

Under the terms of this merger of equals, Becker becomes president and chief executive of the resulting company, while Berger becomes chief executive of the combined reinsurance division, accounting for about 60% of the company, vice-chairman of the board and chairman of the underwriting committee.

“I gave up being CEO; everybody loses a little bit,” admits Berger with engaging candour. “As Marty would say, if it’s a merger of equals and you don’t feel like your life is changing, it’s not a merger of equals.”

The personalities

There has been some bar-room chatter about the very different styles that Becker and Berger bring to the table. Becker is a well-known face, quick to comment, slick and smooth. Berger is seen more as the technical brains behind the operation. So how will they get on?

Becker bristles a little at the question “Can there be a merger of equals?”, firing back with: “Well, we’ll find out.” Max chief financial officer Joe Roberts steps in: “We’re looking at two different types of people. John is a reinsurance underwriter who has been doing that for many, many years. That’s what his skill set is and he’s extremely good at it; one of the best in the business, if not the best.

“Marty brings a discipline of pulling people together, working across multiple platforms, all pulling in the same direction. I see a real difference between the styles in terms of what John is bringing to the table, which is pure underwriting discipline and leadership, and Marty, which is a leader of businesses.”

The two speak warmly of each other, with Becker praising Berger as an “icon in the reinsurance space”, and Berger saying: “People ask me if I’m happy. Well, it was my idea; no one held a gun to my head.”

The future

Management aside, Alterra will look pretty similar to simply Harbor Point plus Max. Both chief executives emphasise that this is not an expense play, and any cost savings will be minimal. The new reinsurance business will boast an excess and surplus lines platform in North America, a Dublin business, a box in Lloyd’s and, of course, the Bermuda operation. In line with Max and Harbor Point’s existing cultures, it will be looking for disciplined underwriting, with scant growth forecast in the current market.

“The goal is to be a very disciplined operation and hopefully by having all the platforms and all the different markets, you can be a good disciplined underwriter and still find enough good things to utilise your capital,” Berger says.

The move to be publicly traded will provide new pressures, as well as benefits; investors, for example, have an obvious exit. Shareholders will vote on the transaction in the second quarter of this year, but are widely expected to give it the green light.

On paper, this is a perfect deal. But as the rest of the market ponders M&A, it will be watching closely to see whether this merger of equals can really turn out to be more than a pleasing platitude. GR