Among Bermuda competitors, Max Re is in a class by itself. Not amember of the class of 1985, the class of 1993, the class of 2001or the class of 2005, the company, unlike other Bermuda reinsurers,was born and conceived during a soft insurance market.

“It was a very difficult underwriting environment,” recalled MaxRe President and Chief Executive Officer Robert Cooney during arecent interview with National Underwriter. “That has been borneout by the disappointing [industry] underwriting results from thelate 1990s, 2000, and even the first half of 2001,” he added,noting that Max Re raised capital at the end of 1999 and startedwriting in early 2000.

“It was a soft market, and the prospects of making underwritingprofits were pretty low in our opinion,” he said.

So why launch a new company with no natural or manmadecatastrophes propelling rates skyward–the environment that at leasttwo dozen others have tried to capitalize on in the history ofBermuda start-ups?

The Max Re team believed a reinsurance company could still beprofitable, but in the late-1990s market, it would have to be basedon a new model–one focused on structured or finite business, and ona nontraditional investment strategy.

“It wasn't a very good risk-return tradeoff to be putting downsignificant lines in directors and officers, general liability,medical malpractice, and all the casualty lines that we were goingto focus on for the property-casualty side,” he said, explainingthe focus on finite business, which included life and disabilityreinsurance.

“That's not to say there wasn't risk in those deals. They werestructured in a way that underwriting risk was capped–and in somecases, capped with a modest amount of risk transfer,” he added.“But if things went wrong, we wouldn't get badly hurt on theunderwriting side.”

The structured transactions–large portfolio transfers andaggregate stop-loss covers, for example, which Max Re materialscommonly refer to as alternative risk-transfer reinsuranceproducts–were not only fairly predictable, with low levels ofvolatility, but generated good cash flow from long-durationliabilities.

“We were going to take more risk investing,” he said, notingthat Max Re had a more diversified investment strategy thantraditional insurers, putting money into higher yieldingassets–including a fund of funds with an array of different hedgefund strategies. Since “we were not taking a lot of risk on theliability side, we felt that our overall aggregate risk would bemanageable–it's just that we felt we'd get paid better to takeinvestment risk.”

While a diversified investment strategy is still very much apart of the picture today, it has become more conservative as MaxRe simultaneously moved to take on more traditional, and morevolatile, property-casualty business–both reinsurance andinsurance. A hedge fund portfolio, once close to 70 percent ofinvested assets, is now about 28 percent.

“Today, we think we can get paid better to take our riskunderwriting,” Mr. Cooney said, noting that most assets are now infixed-income securities.

During the second quarter last year, Mr. Cooney told investorslistening to an earnings conference call that “the complexion ofearnings has changed. Our underwriting results are really drivingprofitability.”

The positive news about underwriting results can be traced, inpart, to the fact that Max Re, though not a class of 2001 or 2005start-up, saw an opportunity to reshape its business model after9/11 and after the four hurricanes of 2004.

The company that started out with a plan to have 70 percent ofits business in life and annuity, 30 percent in finite andstructured in 1999, wrote only traditional business in 2005–roughly40 percent p-c reinsurance, 30 percent insurance and 30 percentlife, with a growing book of short-tail p-c business making upnearly 20 percent of its writings overall.

By the end of the third quarter, Max Re was one of only threepublicly traded Bermuda companies that didn't record its nine-month2005 bottom line in red ink.

“We hadn't established a really big property portfolio when the[hurricane] losses hit,” said Mr. Cooney, who was unwilling to taketoo much credit for being lucky. Still, he noted that while MaxRe's hurricane damage was disappointing ($112 million, after taxes,through nine months), it wasn't surprising given the number andseverity of storms. “While we had an earnings event, it didn'timpair our capital,” he said, attributing the result to a riskmanagement strategy that built a layer of conservatism on top ofcat model outputs.

For Max Re, building a traditional property book has been partof an evolution from its prior ART focus.

The first catalyst to switch to more traditional risk-takingproducts was 9/11 “and the terrific price increases” that followed,he said. “We were doing business with cedents interested in buyingtraditional reinsurance….So we shifted to take on more risk in thesame [casualty] lines.”

Also not lost on Max Re management was the fact that theoriginal model was highly dependent on investment returns. “Youcould almost say we had one earnings engine–investment results,” hesaid, noting the investment climate changed in 2000 and 2001 in thewake of the WorldCom and Enron disasters. The stock market crashedand interest rates came down dramatically.

Hedge fund returns, near 20 percent in the 1990s, fell to around10 percent, he said, explaining why the pursuit of traditionalunderwriting margins grew desirable.

In addition to moving to a more traditional reinsurance book,Max Re got into insurance three years ago, Mr. Cooney said.“Insurance is our fastest growing business and probably our mostprofitable.”

While Max Re is still more concentrated on long-tail casualty,after four hurricanes in 2004, Max Re executives anticipated animproved property market, and started slowly building a propertypractice–accelerating the strategy after Katrina.

According to Mr. Cooney, market acceptance in the property areahasn't been difficult. Brokers who had existing relationships forother lines welcome new capacity from an established player, hesaid, also noting recent hires of two well-known propertyunderwriters–James Winn, who was most recently North AmericanTreaty underwriter for Limit Syndicate 566 at Lloyd's, and PetaWhite, who hails from the international unit of ACE Tempest Re.

Like other executives queried in Bermuda, Mr. Cooney found thecat-exposed U.S. market had the steepest rate hikes on Jan. 1,while increases for nonexposed U.S risks were only 10-to-15 percent(lagging expectations of 20-to-25 percent). European rates sawlittle movement, although he said international renewals are lessJan. 1-focused.

He believes rate pressure will build later this year, since somereinsurers already filled critical cat-zone aggregates, potentiallycreating a demand-supply imbalance that will push prices up. Hesaid new rating agency capital requirements will become clearer aswell, further increasing demand.

As for Max Re's own rating, Mr. Cooney believes his companydeserves an upgrade of its “A-minus” A.M. Best rating. “We've beenat the A-plus capital level for five years, but we still have ouroriginal rating,” he said. “It's frustrating when we're morediversified, we make a lot of profits, and we've [launched] newbusinesses without any hiccups.”

With the prospect of another bad hurricane season on thehorizon, he understands that rating firms will remain cautious andare unlikely to dole out upgrades. But “I'd argue that we're a lotstronger company now than when we launched with less than $500million in equity and no business.”

In fact, Max Re launched with $331 million from investors,including Moore Capital, a New York-based hedge fund, at a timewhen hedge fund partnerships were less common than today. (Hedgefunds are sponsoring at least three new reinsurers–Flagstone Re,New Castle Re and Lancashire. Moore Capital put money intoLancashire this time around.)

Max Re's market capitalization is now $1.5 billion. With aninitial public offering in 2001, Moore's relative ownership hascome down, but the partnership has worked well, Mr. Cooney said. Inparticular, Max Re has used Moore as its fund-of-funds advisor andmanager.

The diversified fund of funds, with 10 or 11 different styles ofalternate investments, has averaged an 8.5 percent return over fiveyears, he reported. “There's a perception that hedge funds arevolatile, but if you construct a portfolio with noncorrelatingstrategies, you can get a predictable return,” he said, noting thestandard deviation for Max Re's fund of funds is lower than itsdouble-A fixed bond fund.

Diversification on the underwriting side, too, has been animportant ingredient of Max Re's strategy. “We're not aproperty-only company. We're not a casualty-only company. Thatenables you to fare reasonably well, when bad things happen.”

Max Re still also has a life reinsurance book. Although thebusiness is lumpy, with a few large deals each averaging $100million in premium, the book grew last year, benefiting fromincreasing interest rates, Mr. Cooney said. (He explains that lifeinsurers are more willing to sell liabilities for a fixed pricebecause the sale price–centered on the present value ofliabilities–comes down as interest rates climb.)

Max Re also has an expense ratio advantage over competitors ofroughly three points–an edge Mr. Cooney attributes partly to MaxRe's early-2000 launch date. At that time, “we could put in thevery best technology, enabling us to process more business withfewer people.”

“Companies our size–writing $1.0-to-$1.2 billion inpremium–might have 400 people. We've got less than 100,” he said,noting that hiring fewer experienced people, and having just twooffices–one in Bermuda and one in Dublin–help lower the expenselevels. “Three points on $1 billion is still $30 million of extraearnings a year that goes right to our shareholders.”