To an outside observer, Bermuda-based Max Re's move to create a U.S. excess and surplus lines insurance platform may seem like the third transformation of a company originally formed to underwrite finite reinsurance products exclusively.

But to Marty Becker, chairman and chief executive, the move to E&S insurance--after a changeover from a structured reinsurance focus to a more traditional property-casualty book--is just another step in the company's natural evolution.

"It's certainly not a change of strategy or direction--just an additional building block on that strategy," he said during a recent interview, highlighting the specialized nature of products offered by Max Re throughout its history.

Max Re was originally launched in 2000 with a model focused on writing finite casualty reinsurance contracts. A few years later, post-9/11 price hikes and increased buyer appetite for more traditional risk-transfer products prompted the company to grow a more traditional casualty reinsurance book.

Two years later, the company also started writing insurance, targeting areas where it said it could offer solutions to clients facing market challenges--subsequently growing the insurance book in lines like medical malpractice, product and professional liability, and more recently launching an aviation unit in Dublin.

While still more concentrated on long-tail casualty, after four hurricanes in 2004, Max Re executives in place at the time set out to take advantage of an improving property market and started slowly building a property treaty reinsurance practice--accelerating the strategy after Hurricane Katrina.

In mid-December last year, Max Re Capital announced its plan to launch a new U.S. E&S subsidiary--Max Specialty Insurance Company--targeting a start date in the first quarter of 2007. The company will be based in Richmond, Va., and will have offices in Atlanta, San Francisco and Philadelphia, Max Re said.

Mr. Becker, who has held leadership roles at various reinsurance companies, also has a long history in the specialty lines arena, serving as vice chairman and a director of Royal & SunAlliance USA in 2000, and for five years prior to that, in leadership roles--including chairman and CEO--of Orion Capital Corp.

He was appointed CEO of Max Re in mid-November, replacing Robert Cooney, who resigned when the company announced an internal investigation of some finite reinsurance contracts.

Asked if his grounding in the specialty market is the impetus for Max Re's E&S launch, Mr. Becker responded: "I would say it differently. We are already in specialty lines. That is what we write in Bermuda and the United Kingdom. My background in specialty lines is a natural fit."

More serendipitous, he said, was the coming together of Max Re and a team of 30 E&S professionals, led by industry veteran Stephen Vaccaro Jr., who will serve as Max Specialty's president and CEO. Mr. Vaccaro, with over 30 years of experience under his belt, headed Essex Insurance, a Markel affiliate, from 1993 to 2004.

Mr. Vaccaro had independently organized a team, which was in the process of raising capital to start their own company before meeting up with Max Re. Separately, Max Re executives had been vocal over the last year about their desire to enter the U.S. surplus lines marketplace on a long-term basis, Mr. Vaccaro noted. "Bob Cooney and Marty Becker approached me and were very motivated to form a partnership," he said.

Strategically, Mr. Becker viewed a U.S. platform as Max's next step for offensive and defensive reasons, he said. "We have some existing insurance customers who would like a U.S. piece of paper as opposed to a Bermuda piece of paper. At the same time, the United States is the world's largest market. You need to have a U.S. platform."

Mr. Becker went on to clarify that starting up an E&S business was not a secondary motivation to launching a U.S. platform. "I would say it was part of the equation. What Max writes today, if we were in the United States would typically be E&S business. We are a specialty and niche underwriter," he said, characterizing the foray into E&S as a "natural fit" with Max's culture and historical expansion.

According to Mr. Vaccaro, Max Specialty will operate across two divisions--a brokerage division and a managing general agency division--offering property, inland marine, casualty, broker casualty, excess and umbrella products.

On the broker side, average premiums will be roughly $50,000, while average premiums for MGA business will be in the $2,500-to-$5,000 range, he said, distinguishing both areas of the business from specialty business that's currently written by Max Re. Historically, Max Re has focused on large, Fortune 1000-type accounts as a niche.

Max Specialty's profile "is more of the 'under-the-radar' E&S business," he said. "So it should complement and add more diversification to Max as a corporation."

Also complementary are the cultures of the Max Specialty team that's been assembled and Max Re's existing one, according to Mr. Vaccaro. Illustrative of the Max Re culture, he said, are features like a prudent use of property limits.

"My feeling--and I've always done it this way--is you don't have to put up $50 million in limits. You put up $2.5- or $5 million, and use it very aggressively--not from a pricing standpoint, but a marketing standpoint," he said, explaining that it should be used so that brokers will know "they can pretty much count on our $5 million" if it fits within the company's underwriting appetite.

That's a different approach from other Bermuda companies, which analyze their books of business on a portfolio basis-- paying attention to aggregate accumulations rather than understanding the characteristics of each individual risk, according to Mr. Vaccaro. "We analyze our business on a transactional basis as well as a portfolio basis. So we're much, much closer to the clients--our wholesalers," he said.

After decades in an insurance company environment, Mr. Vaccaro got even closer to the wholesale side of the business during a recent stint at American Wholesale Insurance Group, where he served as president of the Charlotte, N.C.-based wholesaler's specialty underwriting division after briefly retiring from Markel.

While his role was not one of a broker, but rather an underwriter within a wholesale brokerage, "it allowed me to learn firsthand the frustration that brokers have with the inconsistency of company markets--with companies entering into a class of business and then withdrawing."

Mr. Vaccaro, referring again to a transactional approach, said his team proactively manages underperforming classes of business. Instead of cancelling the entire class, "we go in and dissect the results" to find the piece that's causing a problem. "Rather than throw the baby out with the bathwater," he said, if, for example, the habitational class isn't making money, most of the time experienced underwriters "can find segments within that occupancy that are making money."

"Consistency is really developed through risk-by-risk underwriting," he said. "Rather than declining a risk for a producer, I'd offer an alternative," he added, noting there are multiple ways to offer solutions beyond price changes.

Mr. Vaccaro expects Max Specialty to work with "a very select group" of roughly 50 brokers--counting individuals rather than firms--from large national firms such as AmWINS, Crump, CRC, as well as some regional brokers that he's done business with for decades. The company will also work with 50-to-75 MGAs "strategically placed throughout the country," he said, describing the MGAs as "small-to-medium-sized, privately held, family run MGAs."

"To get an appointment with Max Specialty, it has to mean that we're a viable market--not number six on the speed dial," he said. "In exchange, we will protect that franchise and not appoint 10 or 15 agents or brokers in the same town," instead appointing two or three at most. "We want to partner with producers that will value the appointment, rather than just be another market they can use to place business."

On the MGA side, he said, Max Specialty's business plan does not support program business. He believes that many programs come to the E&S market after having written "too broadly and too cheaply" by standard lines companies, which ultimately cancel them. "And usually you have to take the good, the bad and the ugly on those programs," he said. "Program business takes away the ability to truly underwrite a risk," he said.

"Our success really hinges on transactions as opposed to blocks of business that you just take because they have a large premium base," he said. "We don't intend to be the largest. That's not what our plan is about. We plan to grow strategically in a controlled environment in very niche-driven lines and to be profitable."

In terms of mix of business, Mr. Vaccaro expects about 65-to-70 percent of Max Specialty's premiums to be in brokerage, with 50-to-60 percent of those premiums in property--the balance will be casualty.

"We're going to write catastrophe business, but it's not our intent to be a major cat writer," he said, noting that the brokerage division will also write non-cat property and inland marine.

As for the 30-to-35 percent of the company's volume that will be contract business, he speculated that 70 percent will be casualty and 30 percent property.

"Most every E&S company has a somewhat similar product mix," said Mr. Becker. "Differentiation in this world is primarily built on the following of your underwriters."

He continued: "An umbrella policy is an umbrella policy is an umbrella policy. Some people do it profitably and some people don't. It really becomes an execution equation as to the quality of the people you have doing that business."

Historically, he said, Max has embarked on its various expansion strategies over the years by recruiting talented individuals with a following, and then giving them the foundation--capital and licenses--to conduct their trades. "That is exactly what we're doing here," he said.

Eyeing a March 1 launch, or April at the latest, Mr. Vaccaro said the company is simply awaiting regulatory approval.

"They've been organizing for most of the past year," Mr. Becker noted, explaining why the team already has 30 people even though they don't yet have the ability to write business.

The size of the team is unusual for Max Re, which only had about 100 employees previously. Mr. Becker explained that a big team is needed because the U.S. E&S platform will have much smaller premiums per transaction than existing business done in Bermuda and Dublin. They will therefore handle more transactions, and it is more labor intensive, he said.

As for the timing of the launch during a softening market, both Mr. Vaccaro and Mr. Becker emphasize that this is a long-term play rather than an effort to seize any ripe market opportunity.

"What particularly comforts us in setting up this platform at this stage of the cycle is the fact that this team is quite experienced and profitably underwrote during the last soft market," Mr. Becker said. "That gives us confidence that we can navigate the current market and still be well positioned when the cycle inevitably changes."

Special Reports /

Max Re To Launch New U.S. Surplus Lines Player

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