Max Capital Group will be positioned for an upgrade in about 18-24 months, says S&P

Standard & Poor's has revised its outlook on Max USA Holdings and Max Capital Group to positive from stable.

Standard & Poor's also said that it affirmed its 'BBB-' counterparty credit ratings on both companies.

Max USA Holdings is a wholly owned subsidiary of Max Capital Group Ltd. Max Capital enjoys a good competitive position as a diversified insurance and reinsurance company, adequate enterprise risk management, strong operating performance, and strong capitalisation.

Max Capital allocates about 20% of its total invested assets to hedge funds (alternative asset class); we expect this allocation to remain at 15%-25%, so its investments are a neutral rating factor at this time.

In contrast, negative factors to the rating are Max Capital's limited scale, somewhat high risk profile of underwriting difficult classes of casualty exposures, concentration within Fortune 1,000 accounts that will diminish in the future with the expansion of the US excess and surplus lines (E&S) business, and two restatements in 2006. However, Max Capital remediated and closed all pending matters with the SEC in 2007.

The positive outlook is based on our expectation that Max Capital Group will be positioned for an upgrade in about 18-24 months.

This is because the previously limiting and constraining characteristics to the rating--including a concentrated account profile in Fortune 1,000 companies, regulatory risk/subpoenas, and an outsourced life reinsurance claims function--have improved or been resolved.

The account profile through the reinsurance platform is focused on some regional market segments, and its US E&S platform will reduce Fortune 1,000 concentrations further. In addition, the company has resolved all matters with the SEC in 2007.

The positive outlook is also based on the view that Max Capital Group's competitive position is good and the company will decrease writings, cancel business, and maintain risk-tolerance levels as the casualty market softens. However, because of a focus on some difficult casualty classes of business, total volume is not as correlated with the overall pricing cycle as with some peers.

A combined ratio of less than 100%, leverage figures below 20%, strong earnings and strong capitalisation would all support an upgrade--as long as the company also maintains a good competitive position and minimal investment losses.

A revision of the outlook back to stable is possible if the allocation to alternative assets increases, the company has higher earnings volatility than expected or combined ratios above 100%, or the declining casualty prices significantly affect its competitive position.