Approximately $100m of rated debt affected
Moody's Investors Service has affirmed the A3 insurance financial strength rating of Max Bermuda Ltd, as well as the Baa2 issuer rating of Max Capital Group Ltd ("Max Capital") and the Baa2 senior unsecured debt rating of Max USA Holdings Ltd (guaranteed by Max Capital). In the same action, Moody's changed the outlook on the ratings to negative from stable. These actions follow the company's announcement that it has entered into a definitive agreement to purchase Imagine Group (UK) Limited ("Imagine") for approximately £11m. In addition, Max Capital will replace letters of credit totaling approximately £90m that an affiliate of Imagine has provided to fund Imagine Lloyd's syndicate commitments.
Primarily through Lloyd's Syndicates 1400, 2525 and 2526, Imagine writes property catastrophe excess of loss, pro rata treaty and risk excess of loss reinsurance, accident and health, employers' liability, public liability, professional indemnity, and medical malpractice and other professional liability insurance with a combined stamp capacity for 2008 of approximately £200m.
According to Moody's, the affirmation of Max Capital's ratings reflects the group's diversified business platform of reinsurance and insurance across both property/casualty and life/annuity insurance sectors, its profitable operations that have enabled it to build capital internally, the overall quality and returns of its investment portfolio, and its good equity capitalization. The company's products are distributed through a reasonably diversified panel of brokers, thereby mitigating the likelihood of disruption in its business relationships. Tempering these positive considerations are the company's still limited operating history in some of its principal property and liability-based lines of business, and risks associated with expanding operations in the excess and surplus lines (E&S) segment in the coming years through its recently-launched US operations, given a generally weakening pricing environment in this historically volatile segment of the insurance market.
Max Capital Group Ltd expanded its underwriting of catastrophe-exposed property insurance and reinsurance following the natural catastrophes of 2005. Other risks include potential increased competition from larger and more diversified players in the commercial and specialty insurance and reinsurance space, and volatility associated with the company's alternative investment portfolio, which consists primarily of a diversified mix of equity/hedge fund strategies.
The rating agency noted that the acquisition of Imagine will enhance Max Capital's market presence by giving it access to broad licenses available through Lloyd's as well as business written in the Lloyd's market. The change to a negative outlook, however, primarily reflects incremental pressure on the company's financial flexibility that arises as a result of capital at the Lloyd's operations that will be funded primarily through letters of credit - which Moody's views as leverage - as well as pressure on prospective profitability in light of the current industrywide down-cycle. Furthermore, the company's catastrophe exposure will increase moderately with the assumption of in-force business.
Moody's noted that Syndicate 1400, Imagine's principal operating unit, experienced sizeable losses in 2004 and 2005, but has performed better recently, although its operations have yet to prove themselves in a cyclical downturn. Moody's added that, as with all such transactions, a level of execution and integration risk also exists. Lastly, though the acquisition of Imagine will enhance Max Capital's market presence, Moody's noted that the build-out and growth of Max Capital's various operating platforms has lagged that of some of its Bermuda-based peers.
With respect to ratings expectations for Max Capital, Moody's noted that over the near-to-medium term, a failure to successfully manage the current industry down-cycle, outsized growth in business generated by its Lloyds operations (exceeding 15% of the combined group's premium base over the coming 2 years), and/or significantly increased underwriting or financial leverage could lead to a downgrade. Conversely, strong earnings performance with interest coverage in excess of 4x, financial leverage remaining below 25%, and improved financial flexibility, could return the outlook to stable.
The last rating action on Max Capital was in April 2007, when Moody's assigned initial ratings to Max Capital Group Ltd and certain of its subsidiaries.
The following ratings have been affirmed with a negative outlook:
Max Bermuda Ltd. -- insurance financial strength at A3;
Max Capital Group Ltd. -- issuer rating at Baa2;
Max USA Holdings Ltd. -- backed senior unsecured at Baa2.
Max Capital Group Ltd is a Bermuda-based provider of specialty property and casualty insurance and reinsurance. For the first quarter of 2008, Max Capital Group reported gross premiums written of $307m and net income available to common shareholders of $8m, as compared with $214m and $80m, respectively, in the first quarter of 2007. As of March 31, 2008, shareholders' equity was $1.51bn.