Max Capital Group Sends New-Year Letter to Company's Shareholders, Employees and Other Stakeholders
January 23, 2009
CEO W. Marston (Marty) Becker Reviews Key Results and Accomplishments in 2008, Outlook for 2009
Terrific Operating Year Overshadowed by Unprecedented Investment Volatility; Projects Strong Performance in 2009
HAMILTON,
The full text of Mr. Becker's letter reads as follows:
To All Max Shareholders, Employees and Other Stakeholders:
As we turn the page from 2008 to 2009, I'd like to update you on
In 2008, Max experienced a terrific operating year overshadowed by unprecedented investment volatility. The Company benefited from favorable operating performance from its underwriting units.
- Gross premiums written (GPW) totaled approximately
$1,255 million including approximately$240 million of closed-book life reinsurance premium. Growth in property/casualty written premium over the prior year was approximately 31%, largely as a result of the expansion of our US operations and diversification into new lines of business. - Max's
Bermuda andDublin specialty insurance and reinsurance platforms continued to operate at a very attractive combined ratio (CR) of approximately 88%. Losses for Hurricanes Gustav and Ike amounted to approximately$50 million , net of reinstatement provisions. - Max Specialty, the US excess & surplus lines platform established in
2007, demonstrated the strength of its team's distribution relationships
and produced GPW of approximately
$195 million at an attractive loss ratio on this predominately short tail business of approximately 70%. The CR remains high at approximately 139%, as Max Specialty continues to have its earned premium grow into its initial expense base. - Max added its fourth key underwriting platform with the fourth quarter
acquisition of a
Lloyd's managing agent, Max atLloyd's , which manages three syndicates atLloyd's . This entry into the world's most famous specialty marketplace is a terrific complement to the Company's existing specialty insurance and reinsurance businesses, and is expected to be accretive to Max in 2009. As prices for insurance and reinsurance currently appear to be shifting in favor of vendors, we believe the acquisition of Max atLloyd's was particularly well-timed. - Max again demonstrated its underwriting risk assessment competency in a
year that set some new records for the number and frequency of
catastrophe property losses. The Company's property claims were within
our expectations for hurricane-related activity, and our loss estimates
for Hurricanes Gustav and Ike continue to develop within the originally
projected range at a time when many peers are increasing their original
loss estimates. As a specialty insurance and reinsurance company, Max
has a more diverse underwriting portfolio with less exposure to property
catastrophe risk than many of its peers. This balanced business mix
helped to limit Max's losses from Hurricanes Gustav and Ike to
approximately 3% of shareholders' equity at
June 30, 2008
Importantly, all of this progress took place during a year that was generally considered to be a "soft" pricing year for insurance and reinsurance.
Clearly overshadowing operating fundamentals was the turmoil in the financial markets. Here too, we believe Max's investment portfolio performed well relative to many of our competitors. In absolute terms, however, it was distortive to the Company's financial performance and obscured encouraging operating results.
- At year-end 2008, approximately 86% of Max's investment portfolio was in high quality investment grade bonds or cash, while the Company's alternative investments, a diverse portfolio of hedge funds, represented approximately 14% of invested assets. Total investment return for the year was approximately negative 1.1%.
- We believe Max has traditionally run a slightly more conservative fixed income portfolio than many in its peer group, as it was assuming more potential risk on its alternative investments. This conservatism served the Company well in 2008 during a period of significant volatility in the fixed income world.
- Max's alternative investment portfolio had a negative return for the
year of approximately 20%. This result compares to the
HFRI Fund of Funds Composite Index return of negative 20.7%. While perhaps an acceptable relative performance, the negative return and volatility of this portfolio was significantly worse than had previously been modeled. Although 2008 was the first year in the Company's history that saw negative returns on our alternative investment portfolio, given Max's growing platform of operating units and emerging underwriting opportunities, we made the decision to reduce the alternative investments from 15% to 25% of invested assets to between 10% and 15%. With redemptions already requested, the Company estimates alternative investments will be 12% or below of total invested assets byMarch 31, 2009 . The lower allocation to alternative investments is expected to reduce the volatility of quarterly results. - In accordance with the Company's accounting policy, unrealized mark-to-market gains and losses emanating from its alternative investment portfolio are recorded through net income, rather than as an adjustment to book value through other comprehensive income.
With Max's alternative investments at approximately 20% of invested
assets for most of 2008, the negative mark-to-market on this component
of the Company's investment portfolio amounted to approximately
Among the most encouraging endorsements Max received in 2008 on our
continued progress were the affirmations we received in the last four
months of the year from each of our rating agencies. Not only were our
ratings affirmed, but
While Max won't release full year 2008 results until
Looking Ahead--Max's Investment Allocation
Max is now a great deal more than the organization that was formed in
As we near Max's 10th Anniversary, Max is today recognized as
a skilled underwriter of specialty insurance and reinsurance risks,
operating globally through four distinctive underwriting platforms. The
Company currently has underwriting facilities in
The transformation of our underwriting enterprise has accelerated greatly in recent years. Simultaneously, there has been continuous reassessment of the Company's investment approach and a determination to effect certain reductions in the holdings of alternative investments relative to total invested assets and shareholders' equity. This year's investment volatility had a detrimental impact on an otherwise very consistent track record of financial performance. Such results exhort the further significant reduction in alternative investments that is planned and underway. Max is committed to limiting its exposure to investment risk to a level that is no longer a material outlier relative to the investment allocations of its peer group. The Company expects to be able to deploy more of its capital in profitable underwriting activities, as opportunities arise.
During 2009, Max's strategy in relation to its investment grade fixed income portfolio is expected to remain unchanged. This orientation towards the higher quality assets has served the Company well.
The strategy for the remaining alternative investments, or any other non-investment grade securities portfolio that Max may develop, is intended to change to better serve the Company's business position today, versus our historical model. If one looks at Max's peer group with comparable or better historical ROEs, most have between 7% and 15% of invested assets in something other than investment grade bonds. The type of assets varies between lower quality bonds, high yield, convertible bonds, private equities, long equities and hedge funds. Mark-to-market changes in respect of all of these asset classes, except for private equities and hedge funds, are often recorded as a direct adjustment to book value, and also carry a lower capital charge from the rating agencies. As a percent of shareholders' equity, such investments typically total between 15% and 40% of each company's total equity. These peer firms are also typically writing at a higher ratio of GPW to surplus than Max has done historically. With the global investment volatility in 2008, Max's shareholders have been affected disproportionately as investor concerns flared over nearly every asset class in the last two quarters of 2008. On an actual book value basis, Max has weathered this period remarkably well, given its asset mix and intentional strategy of greater invested assets/equity than most peer companies.
Given the relative attractiveness of current investment market conditions for some asset classes, Max's non-investment grade portfolio can be expected to encompass a variety of assets beyond hedge funds. Max intends to continue to have a relatively higher level of invested assets to surplus than its peers. This typically is a rewarding strategy and is reflective of the Company's underwriting business mix.
These adjustments will likely take most of the 2009 calendar year to
complete. The timing, however, is opportune as the underwriting markets
in 2009 look to be better than in 2008, and the changes are expected to
increase the Company's ability to write premium on existing surplus by
as much as
Our view of 2009
Most every recent article about our industry has highlighted the
likelihood of an improved underwriting environment in 2009, and we agree
with this outlook. The current financial crisis has affected the
insurance industry in a number of ways. Investment losses by many
insurance companies have been so severe that overall capacity was
significantly curtailed in 2008, a year that also saw high catastrophe
losses and the downfall of some major insurance franchises. This
combination of factors, as well as the extraordinary tightening of
credit markets that is likely to limit capital investment in 2009,
points to the development of an improved pricing environment for
insurance companies. Our view is that the pricing improvements will
occur first in the shorter tail lines (property, aviation, etc.), and
then, as the year progresses, migrate to some of the longer-tail
casualty lines of business. Max's renewals at
Max has a proven record of attracting strong underwriting teams to its
organization. In 2009, adding depth and diversification to our various
platforms will continue to be a focus - particularly for Max at
CRs for Max's property and casualty business are expected to improve.
One must remember, however, that premiums from 2008, when pricing was
not as attractive as anticipated for 2009, will continue to be earned in
2009. Additionally, our expense ratio will remain slightly elevated as
we grow into our US and
We continue to be focused on a business model that delivers a consistent
15% ROE. In better markets, we hope to exceed this, and, in softer
pricing cycles, we may be slightly below. The diversity of our business
is designed for consistency of result. We will give further guidance for
2009 during our earnings call on
Today, Max is very well-positioned to take advantage of the emerging opportunities in our industry. With its global reach and insurance and reinsurance capabilities, the Company can effectively allocate capital to those segments of the market that will provide the highest returns. Max's business mix and investment mix provide the potential for this to be a very good year for our shareholders.
We are pleased with our operational progress in 2008 and look forward with you to a very successful 2009.
Very truly yours,
W. Marston (Marty) Becker
Chairman & Chief Executive Officer
Hamilton,
In presenting the Company's results, management has included and discussed net operating loss per diluted share and net operating return on average shareholders' equity. Such measures are "non-GAAP financial measures" as defined in Regulation G. Net operating loss consists of net loss excluding after-tax realized gains or losses on fixed maturities. Net operating return on average shareholders' equity consists of the ratio of net operating income or loss to the average of the beginning and ending shareholders' equity. Management believes that these non-GAAP financial measures, which may be defined differently by other companies, allow for a more complete understanding of the Company's business. These measures, however, should not be viewed as a substitute for those determined in accordance with GAAP.
This release includes statements about future economic performance,
finances, expectations, plans and prospects of
CONTACT:
1-441-293-8800
Executive Vice President
jim.tees@maxcapservices.com
or
Roanne Kulakoff
1-212-521-4837
roanne-kulakoff@kekst.com
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