Max Re shares drop on finite probe
Reinsurer says it may restate results from 2001-05
By Alistair Barr
March 27, 2006
SAN FRANCISCO (MarketWatch) -- Max Re Capital shares fell more than 5% Monday after the reinsurer said that an internal investigation into its finite-reinsurance accounting may lead to a restatement of results from 2001 to 2005.
The Bermuda-based company said late Friday that the audit and risk-management committee of its board of directors has started reviewing three finite contracts written in 2001 and 2003 to find out whether they transferred enough risk to count as bona-fide reinsurance.
The Max Re committee contacted the Securities and Exchange Commission as part of its probe, the company added.
Max Re also announced that it may have to restate results for 2001 through 2005, cutting earnings during those years by a total of as much as $50 million.
There is no clear definition of finite reinsurance, but generally it's a blend of traditional reinsurance and financing.
Regulators including New York Attorney General Eliot Spitzer and the SEC launched investigations in late 2004 and early 2005 into whether companies used finite reinsurance to manipulate their financial statements.
The probes precipitated the departure of longtime American International Group Chief Executive Maurice "Hank" Greenberg and forced AIG to restate several years of results.
Max Re shares dropped $1.28, or 5.4%, to $22.61 during afternoon trading Monday. Almost 3 million shares changed hands, about 16 times the average daily volume.
"Potential fines and/or management departures would be the absolute downside in a worst-case scenario, although we would view this risk as unlikely," Fox-Pitt, Kelton analyst Chris Wenzel wrote in a note to clients. "The market seems to be leaning more toward assuming the worst."
Max Re is careful about how it handles finite-reinsurance contracts and has its auditor, KPMG, independently review and document each transaction that significant limits the risk being transferred, Wenzel said.
"By having in place this set of procedures, for Max Re to have involved itself in an 'abusive' finite transaction would probably require willful misrepresentation and/or an omission of facts by an employee," the analyst added. "While we can't rule this out, it seems like the company's internal policies would help to insulate shareholders from rogue behavior by employees."
Fox-Pitt, Kelton makes a market in Max Re shares and helped the company sell securities to the public during the past year.
Alistair Barr is a reporter for MarketWatch in San Francisco.
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