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Rating Action:

Moody's assigns Baa2 to senior notes guaranteed by Alterra Capital Holdings Limited

22 Sep 2010

New York, September 22, 2010 -- Moody's Investors Service has assigned a Baa2 rating and stable outlook to the proposed 10-year unsecured senior notes that will be issued by Alterra Finance LLC and guaranteed by Alterra Capital Holdings Limited (NASDAQ: ALTE , Baa2 long-term issuer rating, A3 insurance financial strength for Alterra Bermuda Limited, stable outlook). The size of issuance is expected to be between $200 to $400 million. These notes constitute a drawdown under Alterra's SEC shelf registration, for which Moody's has also assigned provisional ratings (complete list below).

RATINGS RATIONALE

The senior notes will be issued by Alterra Finance LLC, a U.S. taxpayer. Part of the proceeds from the debt issue will be used to repay a $200 million unsecured loan that is currently outstanding under the $850 million Harbor Point credit facility. Loan repayment will free up capacity for issuance of letters of credit, which are used to secure obligations to clients.

"The Baa2 rating on the senior notes is based on the full and unconditional guarantee provided by ALTE," said Kevin Lee, a senior credit officer at Moody's. The guarantee will be a senior unsecured obligation of ALTE. "Alterra Finance does not directly or indirectly own any subsidiaries that can provide credit support."

The Baa2 issuer rating on ALTE is based on its manageable debt leverage (c.12-17% pro forma at June 2010 based on $200-$400mn issuance; includes operating lease commitments and c.$79mn in uncollateralized letters of credit used to support Funds at Lloyd's commitments) and our expectation of ample credit support from the operating subsidiaries. Dividends from Alterra Bermuda Limited ("Alterra Bermuda"), which represents more than 90% of the group's net assets, is the main source of credit support for ALTE's debt obligations (including those it has guaranteed).

The A3 insurance financial strength rating of Alterra Bermuda is based on good product diversification, comfortable capital adequacy, generally stable and respectable operating returns, and manageable catastrophe exposure which would likely lessen the need to raise capital after a major catastrophe. (The sector's ability to raise equity capital remains unclear as nearly all Bermuda re/insurers have been trading below book value since December 2008.)

These strengths are tempered by a general weakening of industry reserve adequacy, uncertainty from newer platforms (US Specialty and Lloyd's), significant reliance on bank finance for letters of credit, and somewhat higher asset leverage than most Bermuda peers which means investment performance can have a material impact on results.

Moody's believes Alterra's reserve position is reasonable but remains circumspect about D&O/E&O financial crisis claims in the Harbor Point reinsurance portfolio. Given the relative size of Harbor Point's reserves however (former Harbor Point $0.7bn vs. former Max Capital $2.2bn, net of reinsurance recoverables at Dec 2009), any reserve deterioration from Harbor Point's business is unlikely to be a substantial swing factor.

Alterra Capital Holdings Limited (NASDAQ: ALTE) is a Bermuda holding company whose subsidiaries write specialty insurance and reinsurance from hubs in Bermuda, Dublin, U.S., Lloyd's and Latin America, among others. On May 12, 2010, Max Capital Group Ltd. merged with Harbor Point Limited to form Alterra Capital. The merger involved a stock for stock exchange essentially at tangible book value, followed by a $305mn special dividend to the combined shareholders. For H1 2010, the company reported gross premiums written of $770.1mn (vs. $830.8mn in H1 2009), net income of $139.8mn (vs. $88.3mn) and total shareholders' equity at June 2010 of $2,927.0mn (vs. $1,564.6mn at Dec 2009 because of the Harbor Point merger). Results of Harbor Point have been included from May 12, 2010 forward.

The last rating action on Alterra Capital occurred on March 4, 2010, when Moody's affirmed the ratings of Max Capital Group, Ltd. and changed the outlook to stable from negative following the announced merger with Harbor Point Limited.

The principal methodology used in rating Alterra Capital was Moody's Global Rating Methodology for Reinsurers rating methodology published in July 2008. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

The following ratings have been assigned with a stable outlook:

Alterra Finance LLC -- guaranteed senior unsecured debt at Baa2; provisional shelf ratings for guaranteed senior debt at (P)Baa2, guaranteed subordinated debt (P)Baa3;

Alterra Capital Holdings Limited -- provisional shelf ratings for senior debt at (P)Baa2, subordinated debt (P)Baa3 and preferred stock (P)Ba1;

Alterra Capital Trust I -- provisional shelf rating for guaranteed trust preferred securities at (P)Baa3.

The following ratings have been affirmed with a stable outlook:

Alterra Capital Holdings Limited -- issuer rating at Baa2;

Alterra USA Holdings Limited -- guaranteed senior unsecured debt at Baa2;

Alterra Bermuda Limited -- insurance financial strength at A3.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Kevin Lee
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Stanislas Rouyer
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

Moody's assigns Baa2 to senior notes guaranteed by Alterra Capital Holdings Limited
No Related Data.
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