December 19, 2012 / 9:05 PM / 5 years ago

TEXT - S&P affirms Alterra Capital Holdings

6 Min Read

Overview
     -- Alterra Capital Holdings Ltd. and Markel Corp. have announced
their intention to merge.
     -- We believe the merger will result in a larger, more diversified entity 
by product and geography; however, it may also lead to integration risk due to 
the size of Alterra.
     -- We are affirming our 'BBB+' rating on Alterra and its intermediary 
holding company subsidiaries. At the same time, we are affirming our 'A' 
ratings on its operating subsidiaries.
     -- The stable outlook reflects our belief that, once the acquisition is 
complete, Alterra will continue to maintain very strong capital adequacy and 
earnings.

Rating Action
On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed its 'BBB+' 
counterparty credit ratings on Bermuda-based Alterra Capital Holdings Ltd. and 
its intermediary holding company subsidiaries. At the same time, we affirmed 
our 'A' counterparty credit and financial strength ratings on Alterra's 
operating companies (we refer to Alterra Capital Holdings Ltd. And its 
operating insurance and reinsurance subsidiaries collectively as Alterra). The 
outlook remains stable.

Rationale
The rating affirmations follow the announcement by Markel Corp. and Alterra 
that they have entered into a definitive merger agreement whereby Markel will 
acquire Alterra. In our opinion, the proposed combined entity will benefit 
from a larger and more-diversified business platform supported by continued 
strong operating performance at both companies, given their historical robust 
earnings and profitability versus peers. We expect the entire group to adopt 
Alterra's superior enterprise risk management and property catastrophe 
management, and that this will have a positive effect on the group's 
catastrophe management, risk controls, and strategic capital management. The 
ratings also consider the risk inherent in the integration of these two 
diversified insurance operations and their ability to successfully integrate 
Alterra's strengths while overcoming differences in corporate strategy and 
culture.

The counterparty credit rating on Alterra and insurer financial strength 
ratings on its operating insurance and reinsurance subsidiaries (collectively, 
Alterra) are based on the group's strong competitive position. Alterra's 
performance has been consistent with its financial strategy of lower 
volatility and above-average returns, and we believe that its enterprise risk 
management (ERM) approach has been the core function that created this 
performance and risk profile. Partly offsetting these positive factors are the 
potential pricing and reserving risks related to the group's significant 
long-tail casualty writings, especially in light of low interest rates, soft 
pricing, and the potential effects of inflation on the long-tail lines of 
business. The company is also exposed to losses stemming from weather-related 
and man-made catastrophes, which add earnings volatility. Alterra has a 
somewhat less global reach than certain other Bermuda-based insurers and 
reinsurers.

Outlook
The outlook is stable. We anticipate that, upon the successful completion of 
the acquisition, Alterra will continue to maintain very strong capital 
adequacy and earnings that will be a positive contribution to the group. For 
the first nine months of 2012, Alterra reported a combine ratio of about 97% 
and a return on revenue (ROR) of roughly 14%--in line with our expectations 
for the ratings. While both companies have a track record of successfully 
integrating smaller acquisitions, we note that Alterra's size may pose more 
integration risk. We expect the group to successfully institute best practices 
in reinsurance underwriting, property catastrophe management, and economic 
capital modeling across the new enterprise over time, but would like to see 
positive developments of the integration of ERM and underwriting best 
practices following the closing of the acquisition.

We could raise our ratings on Alterra, as part of the merged group, if we 
determine that the integration is successfully executed by sharing best 
practices across the new organization, resulting in a stronger business and 
financial profile. The ratings could come under pressure if the company 
experiences significant integration issues following the acquisition close, 
its capital adequacy deteriorates from current levels, or underwriting 
performance does not positively contribute to the group's financial risk 
profile.

Related Criteria And Research
Interactive Ratings Methodology, April 22, 2009

Ratings List
Ratings Affirmed

Alterra Capital Holdings Ltd.
Alterra USA Holdings Ltd.
Alterra Capital UK Ltd.
Alterra Capital Europe Ltd.
 Counterparty Credit Rating
  Local Currency                        BBB+/Stable/--     

Alterra America Insurance Co.
Alterra Reinsurance USA Inc.
Alterra Excess & Surplus Insurance Co.
Alterra Europe PLC
Alterra Bermuda Ltd.
 Counterparty Credit Rating
  Local Currency                        A/Stable/--        
 Financial Strength Rating
  Local Currency                        A/Stable/--        

Alterra Finance LLC
 Senior Unsecured                       BBB+               

Alterra USA Holdings Ltd.
 Senior Unsecured                       BBB+

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