Max Capital-Harbor Point to Merge

Yesterday, reinsurers Max Capital Group Ltd. (MXGL) and closely held Harbor Point announced their intention to merge. Upon doing so, both companies would dissolve and a new entity named Alterra Capital Holdings would be formed, with Harbor Point holding 52% ownership and Max Capital holding the rest. The new company will be listed on Nasdaq and trade under the ticker symbol ALTE.

The stock-for-stock merger will see Max Capital compensating the shareholders of Harbor Point with 3.7769 Max Capital shares for each Harbor Point share. The deal, which was under negotiation for months, has been described as the merger of equals as both the companies have the same values.

Upon the completion of the merger, $300 million of cash dividends is expected to be paid out to the shareholders of the combined company. This foretells the robust capital strength of the new company. 

The new company is expected to have $3.0 billion in shareholders’ equity along with $1.5 billion in net premiums, and a wider and established underwriting platform. Added benefits will be a more favorable asset leverage of 2.6X for Alterra Capital, compared to 3.4X and 1.4X for Max Capital and Harbor Point currently.

Total debt-to-capitalization ratio is expected to stay at 8.4%, lower than the 16.0% for the average peer group. Return on equity of 13% is expected by management. The 14-member board of directors of the new company will comprise an equal number of directors from each of the dissolving company.

Fitch views the merger optimistically, and is of the opinion that the transaction will give birth to a more diversified, multi-line reinsurance and insurance company. This move is in sync with Max Capital’s long-term strategy of diversifying its underwriting risk portfolio while reducing asset risk exposure.

Max Capital had returned to overall profitability in 2009, posting earnings of $3.62 per share, after suffering a loss of $2.54 per share in 2008 due to losses in its alternative investment portfolio. Return on equity improved considerably to 14.7% from a negative 10.0% in 2008. This merger will come after the failed attempt last year to buy Validus Holdings Ltd, which was ultimately acquired by IPC Holdings.

Harbor Point was founded in 2005 with backing from Stone Point Capital LLC, a Connecticut-based private equity and a group of investors of Chubb Corp. (CB - Analyst Report). It writes property, casualty and specialty reinsurance. When it was formed, it acquired the operations of Chubb Re, including the renewal rights to Chubb Re in force book of assumed reinsurance business.

Read the full analyst report on MXGL