Max Re has again demonstrated its ability to tweak its strategy by diversifying into property catastrophe reinsurance at a time when the market for such coverage is experiencing strong demand, and therefore attractive premium rates.

The move represents a conscious decision that saw the 'top line' of Max Re's income statement, its gross premiums written, decline in the first quarter of 2006, during which the company recorded record net income of $72.9 million. "The decision was to effectively diversify into more property- and property cat-oriented covers," explained chairman, president and chief executive officer of Max Re Capital Ltd. (Max Re's parent), Robert Cooney. "The contracts themselves tend to be smaller, in terms of limits and premium, than many of the casualty contracts we have historically written," he added.

"In the first quarter, we shed some business in lines that we had been in for a while, that we felt was marginally priced," Mr. Cooney continued. "We hope that given a very favourable environment for pricing property- and catastrophe-related risk, the margins will be better for us than would have been the case, had we not reallocated our capital in this way."

Max Re's top line was down by 44 percent in the first quarter of 2006, as the company made the switch, "but we think the underwriting profitability will be equal to or greater than that which we have achieved in the past," Mr. Cooney said. He added that Max Re has always focused on "the bottom line" or net income, rather than "the top line" or gross premiums written.

In professional lines of coverage, such as directors' and officers' (D&O), which can protect individuals and companies, pricing has been under pressure, having come full circle from the time a few years ago when, with WorldComm and Enron in the headlines, D&O cover was scarce, and therefore comparatively well-priced.

"Some of the contracts we did not renew were large, but we felt did not represent the best use of our capital," Mr. Cooney said.

Unlike many of the companies formed in Bermuda in 2001 and 2005, Max Re has been less heavily weighted towards the short-tail lines, such as property-exposed business.

"In a sense, we have been quite the opposite of those companies," Mr. Cooney said. "So the idea of diversifying our portfolio at this time made sense as a strategic move to build a property business in a favourable environment."

Two years ago, Max Re changed its main direction from finite or structured reinsurance to traditional reinsurance. This year's change, though less dramatic, continues a strategy of flexibility that has served the company well.

Max Re created a wave earlier this year over some timing adjustments in its financial statements. Those who only read the headlines would have seen news of an "$18 million restatement" of earnings, but the reality was a little less dramatic than that number might sound.

"Like all reinsurers, we routinely look back at contracts to ensure that they are properly reserved," Mr. Cooney explained. "In this case, the question arose internally whether there was sufficient risk transfer in three transactions to justify accounting for them as reinsurance, or in this case, retrocessional contracts.

"It's a question of judgment, and five years after the fact, you have more knowledge than you did when you recorded them. We felt that a thorough review was called for, and our Audit Committee elected to make the review truly independent by engaging outside legal counsel, who themselves engaged accountants and actuaries."

The investigation endorsed the original accounting decisions with respect to risk transfer, giving Max Re a clean sheet on the transactions. "However," Mr. Cooney said, "when you carry through an investigation such as this, other, technical issues can arise. We felt that we had discovered some questions."

GAAP accounting and FASB rules called for a change, in part because some contracts were not signed until later than they might have been. Contracts are sometimes bound and sealed shortly after the coverage begins, "but in this case, the lag was a little too long, and we wanted to do the right thing," Mr. Cooney said.

The outcome was that the results for the company's 2001 through 2005 fiscal years were restated, with the cumulative effect of reducing shareholders' equity at December 31, 2005 by $18.3 million ? a relatively immaterial amount in the context of Max Re Capital's shareholders' equity at March 31, 2006 of $1.224 billion.

"The irony is that those earnings will be recaptured (by the company) in future periods," Mr. Cooney said.

When asked if the process distracting, Mr. Cooney agreed, adding: "It took a lot of time and effort, particularly for our accounting and financial group. We kept the rating agencies appraised, Best and Fitch.

"They have not taken any action. We're hopeful that what we've done is above and beyond, in terms of accounting integrity."