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

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

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

The structured transactions–large portfolio transfers and aggregate stop-loss covers, for example, which Max Re materials commonly refer to as alternative risk-transfer reinsurance products–were not only fairly predictable, with low levels of volatility, but generated good cash flow from long-duration liabilities.

“We were going to take more risk investing,” he said, noting that Max Re had a more diversified investment strategy than traditional insurers, putting money into higher yielding assets–including a fund of funds with an array of different hedge fund strategies. Since “we were not taking a lot of risk on the liability side, we felt that our overall aggregate risk would be manageable–it's just that we felt we'd get paid better to take investment risk.”

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

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

During the second quarter last year, Mr. Cooney told investors listening to an earnings conference call that “the complexion of earnings has changed. Our underwriting results are really driving profitability.”

The positive news about underwriting results can be traced, in part, to the fact that Max Re, though not a class of 2001 or 2005 start-up, saw an opportunity to reshape its business model after 9/11 and after the four hurricanes of 2004.

The company that started out with a plan to have 70 percent of its business in life and annuity, 30 percent in finite and structured in 1999, wrote only traditional business in 2005–roughly 40 percent p-c reinsurance, 30 percent insurance and 30 percent life, with a growing book of short-tail p-c business making up nearly 20 percent of its writings overall.

By the end of the third quarter, Max Re was one of only three publicly traded Bermuda companies that didn't record its nine-month 2005 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 take too much credit for being lucky. Still, he noted that while Max Re's hurricane damage was disappointing ($112 million, after taxes, through nine months), it wasn't surprising given the number and severity of storms. “While we had an earnings event, it didn't impair our capital,” he said, attributing the result to a risk management strategy that built a layer of conservatism on top of cat model outputs.

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

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

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

Hedge fund returns, near 20 percent in the 1990s, fell to around 10 percent, he said, explaining why the pursuit of traditional underwriting 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 most profitable.”

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

According to Mr. Cooney, market acceptance in the property area hasn't been difficult. Brokers who had existing relationships for other lines welcome new capacity from an established player, he said, also noting recent hires of two well-known property underwriters–James Winn, who was most recently North American Treaty underwriter for Limit Syndicate 566 at Lloyd's, and Peta White, who hails from the international unit of ACE Tempest Re.

Like other executives queried in Bermuda, Mr. Cooney found the cat-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 saw little movement, although he said international renewals are less Jan. 1-focused.

He believes rate pressure will build later this year, since some reinsurers already filled critical cat-zone aggregates, potentially creating a demand-supply imbalance that will push prices up. He said new rating agency capital requirements will become clearer as well, further increasing demand.

As for Max Re's own rating, Mr. Cooney believes his company deserves an upgrade of its “A-minus” A.M. Best rating. “We've been at the A-plus capital level for five years, but we still have our original rating,” he said. “It's frustrating when we're more diversified, we make a lot of profits, and we've [launched] new businesses without any hiccups.”

With the prospect of another bad hurricane season on the horizon, he understands that rating firms will remain cautious and are unlikely to dole out upgrades. But “I'd argue that we're a lot stronger company now than when we launched with less than $500 million 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 time when hedge fund partnerships were less common than today. (Hedge funds are sponsoring at least three new reinsurers–Flagstone Re, New Castle Re and Lancashire. Moore Capital put money into Lancashire this time around.)

Max Re's market capitalization is now $1.5 billion. With an initial public offering in 2001, Moore's relative ownership has come down, but the partnership has worked well, Mr. Cooney said. In particular, Max Re has used Moore as its fund-of-funds advisor and manager.

The diversified fund of funds, with 10 or 11 different styles of alternate investments, has averaged an 8.5 percent return over five years, he reported. “There's a perception that hedge funds are volatile, but if you construct a portfolio with noncorrelating strategies, you can get a predictable return,” he said, noting the standard deviation for Max Re's fund of funds is lower than its double-A fixed bond fund.

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

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

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

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