Max Capital has revealed a negative return of approximately 20 percent on its alternative investment portfolio for 2008, prompting unrealised asset write-downs of around $233mn and a full-year loss and negative net operating return on average shareholders' equity of 11-12 percent.
In a letter to shareholders, Max chairman and chief executive Marty Becker described Max's alternative investment result as "significantly worse than had previously been modelled," adding that it had decided to reduce further its exposure to alternatives from 15-25 percent of invested assets at the start of the year to 10-15 percent.
But overall, Becker said the group had "a terrific operating year" and he was upbeat about 2009 trading prospects. The (re)insurer will have written gross premiums of $1,255mn in 2008 including approximately $240mn of closed-book life reinsurance income. Growth in property/casualty written premiums over the prior year was approximately 31 percent, largely as a result of the expansion of it US operations and diversification into new lines.
Bermuda and Dublin operations were running a healthy 88 percent combined ratio, and in contrast to the experience of many peers in recent weeks, the firm's $50mn net loss estimate for Hurricanes Gustav and Ike remained unchanged. However, a fly in the ointment was the $195mn gross premium in the Max specialty unit which, although producing an "attractive" loss ratio of approximately 70 percent, saw a high start-up expense base balloon the combined ratio to 139 percent.
Max was also bullish about the timing of its recent move into Lloyd's, saying it expected the purchase of Imagine's Lloyd's operations to be accretive in 2009, describing prices for insurance and reinsurance that currently "appear to be shifting in favour of vendors".
Looking ahead, Max reiterated its cross-cycle 15 percent return on equity target and pointed to increased rates in property lines and a stabilising casualty market as factors driving projected P&C gross written premium (GPW) growth of 21 percent to approximately $1,230mn.
For life, Max targeted gross writings of $150mn of GPW, although it cautioned that the "lumpy" nature of this business made it "challenging to budget volumes."
Predicting an expected total investment performance of negative 1.1 percent, Max said that at year-end 2008, approximately 86 percent of its investment portfolio was in "high quality investment grade bonds or cash", while its alternative investments, a diverse portfolio of hedge funds, represented approximately 14% of invested assets, in contrast to the average 20 percent allocation held over 2008.
However Max hailed the relative strength of its more conservative fixed income portfolio, describing it as serving the company well in 2008 during a period of "significant volatility in the fixed income world."