I N S U R A N C E / R E I N S U R A N C E B E R M U D A I R E L A N D U N I T E D S T A T E S MAX CAPITAL GROUP LTD. Nasdaq: MXGL Investor Presentation Quarter Ended – September 30, 2008 Exhibit 99.2 |
2 INFORMATION CONCERNING FORWARD LOOKING STATEMENTS This presentation includes statements about future economic performance, finances, expectations, plans and prospects of the Company that constitute forward-looking statements for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those suggested by such statements. For further information regarding cautionary statements and factors affecting future results, please refer to the Company’s most recent Annual Report on Form 10-K , Quarterly Reports on Form 10-Q filed subsequent to the Annual Report and other documents filed by the Company with the SEC. The Company undertakes no obligation to update or revise publicly any forward-looking statement whether as a result of new information, future developments or otherwise. |
3 Max Capital Today Global underwriter of specialty insurance and reinsurance focused on risk adjusted returns and book value growth Operating subsidiaries in Bermuda, Ireland and United States Agreement to acquire Lloyd’s insurance operation announced July 2008 – closing expected in Nov. 2008 Highly experienced management and underwriting teams with proven track record through all market cycles Diversified business mix balanced between insurance and reinsurance, long and short tail exposures and geographic spread of risk Growth through deliberate expansion of product lines with experienced teams Strategic initiatives focus on value creation through all product cycles Portfolio approach to risk through integration of asset / liabilities for all transactions Culture focused on risk and capital management Custom pricing models for each class of business with emphasis on ROE $1.3 billion of shareholders’ equity at September 30, 2008 |
4 Third Quarter 2008 Highlights 2008 Underwriting remains on plan Max Specialty GPW: $53 million (YTD: $134 million) Net favorable development on prior period reserves of $52 million (YTD: $89 million) Hurricane Gustav and Ike net loss estimate of $50 million Total Investment Portfolio Return: Alternative Investments Return: HFRI Fund of Fund Index return: Target allocation to alternative investments reduced to 15% of invested assets (Range 10% - 20%) $8 million returned to Shareholders $3 million Share Repurchases (YTD: $106 million) $5 million Dividend (YTD: $15 million) Corporate Operations Agreement to acquire Lloyd’s operation announced July 2008 -2.83% -12.99% -9.63% (YTD: -2.17%) (YTD: -11.98%) (YTD: -11.84%) |
5 Strategic Diversification & Expansion Of The Company 2003 Structured & Alternative Life & Annuity Insurance Reinsurance Specialty MDS allocation % 0 200 400 600 800 1,000 1,200 1,400 2003 2004 2005 2006 2007 2008 Plan 32.2% 31.5% 31.8% 29.1% 23.5% 20.7% 0% 5% 10% 15% 20% 25% 30% 35% 40% 18.5% 2004 2006 2007 2008 2005 Casualty Insurance Bermuda / Dublin Property Insurance Property / Cat Reinsurance $23.50 / share Common Offering U.S. E&S insurance Max USA $100m Senior Debt Issue U.S. admitted insurance company Lloyd’s operation acquisition agreement |
6 Identifying & Recruiting “Franchise Players” Has Been Instrumental In Our Success Experienced & highly quantitative underwriting teams Lead underwriters average over 20 years in the business High percentage of employees hold professional designations 2004 Property 2003 Excess Liability Professional Liability Medical Malpractice Reinsurance 2005 Property / Property - Cat Reinsurance 2006 Aviation 2007 U.S. Excess & Surplus Property Ocean Cargo / Inland Marine U.S. Casualty Multi – peril crop 2008 Lloyd’s* Accident / Health Reinsurance Financial Institutions Professional Indemnity Property * Approvals pending |
7 Operating Strategy Focused on niches / specialties Opportunities that reward our specialized knowledge and relationships Marketing and distribution efforts that emphasize building brand awareness Dedication to customer service Expand E&S lines business in the U.S. and through Lloyd’s Manage property catastrophe aggregate exposure on a 1:250 year basis not to exceed 25% of beginning year equity 2008 Target – less than 20% Target product classes where we can invest resources and “intellectual capital,” which leads to long–term franchise value Strong balance sheet supported by prudent reserving practices Maintain financial strength ratings and pursue an upgrade Reinsurance purchased to manage exposures and pricing cycles State-of-the-art systems, risk controls Capital allocated to maximize return on every transaction Specialty Lines Underwriting Operations Diversified Product Offering Enterprise Risk Management |
8 Seek to achieve high quality, stable and consistent ROEs Target ROE of 15% over the market cycle Compound annual ROE of 11.3% over last 5 years Book value has grown 28% over last 60 months Lower volatility of ROE Do well in the good years - 15% to 20% ROE Have a positive ROE in the bad years Our most highly respected and valued competitors have high Sharpe ratios Willing to trade some expected ROE for lower volatility of ROE Financial Objective: Grow Book Value / Create Shareholder Value Our risk/reward profile is consistent with the profile of our strongest peer performers Annual Data 2003 to 2007 plus 2008 Q2 annualized 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 0% 5% 10% 15% 20% 25% 30% 35% Std Deviation of ROE ACGL AXS ACE PRE MXGL TRH RE ENH RNR AWH AHL XL IPCR MRH PTP |
9 5 Years Of Growth: Annualized ROE of 11.3% Return on Shareholders’ Equity Book Value Per Share 17.0% 0.9% 16.8% 20.4% -1.3% $20.45 $20.16 $23.06 $27.54 $22.77 -5% 0% 5% 10% 15% 20% 25% 2004 2005* 2006 2007 Rolling 12 months at Sept. 30/08 $0 $5 $10 $15 $20 $25 $30 * Year of Hurricanes KRW. Max was one of the few insurance/reinsurance companies among its peers that were profitable in 2005. |
10 Efficient Capital Management Dividends Repurchases ($ in thousands) Strong and flexible capital structure 2005: $258 million Equity Offering -launched Property Cat Reinsurance Operations 2007: Max USA $100 million Senior Debt Offering - launched U.S. Excess and Surplus Lines Insurance Company 2008: Max Capital £90 million LOC Facility – Funds at Lloyd’s for pending Lloyd’s Underwriting platform Manage exposures to preserve capital Opportunistic share repurchases $73.4 million of Repurchase Authorization as of September 30, 2008 Increased dividends each year since inception ($ in thousands) Dividends $ 66,914 Share Repurchases 253,924 Total $320,838 2003- 2008 Summary $3,788 $5,487 $8,955 $14,273 $19,164 $15,247 $3,095 $4,850 $7,360 $17,624 $114,755 $106,240 $0 $25,000 $50,000 $75,000 $100,000 $125,000 $150,000 2003 2004 2005 2006 2007 YTD 2008 |
11 Property Casualty Insurance Reinsurance Diversified Premium Mix: A Key Differentiator Source: Merrill Lynch: Note: Based on YTD 30-June-08 property and casualty gross premiums written. Certain allocations have been estimated. Incumbent (Re) Insurers Class of 2001 Class of 2005 Max Capital Group Ltd. FSR IPCR VR Lancashire MRH PTP AWH RNR AHL ENH ACGL AXS PRE TRH RE ORH XL ACE |
12 Non-recurring additional premiums on prior years’ contracts of $182 million Total P&C Insurance / Reinsurance excluding Alternative Risk and non- recurring additional premiums on prior years’ contracts (year-on-year change) Included in 2004 P&C Reinsurance is GPW of $248m related to Alternative Risk business Diversified Revenue Sources / Product Lines Revenue not dependent on single source Capital & risk allocated rationally P&C Annual Gross Premiums Written ($ in millions) 0 100 200 300 400 500 600 700 800 900 1000 $831 $931 $820 $776 $788 Plan $895 (+17%) (-16%) (-5%) (+19% to Plan) 2004 2005 2006 2007 2008 YTD Actual and Plan Max Specialty P&C Insurance P&C Reinsurance |
13 P&C Insurance: Bermuda / Dublin Niche-Oriented Focus Target: Working layer excess business Larger customer - Fortune 1000 Customer-oriented approach: Responsive and innovative Consider toughest classes of business Offer multi-year programs Flexible in program attachment points Work with all leading brokers Underwritten in Bermuda and Dublin Sub-prime related reserves - approximately $20 million Combined ratio: YTD 2008: 90% 2007: 86% Gross Premiums Written Rolling 12 Months at September 30, 2008 $375 million By Exposure Aviation 13% Excess Liability 32% Professional Liability 42% Property 13% |
14 P&C Reinsurance: Bermuda / Dublin Diversification & Flexibility Emphasized Target: Working layer excess business / quota share business Specialty / niche focus Customer-oriented approach: Quick turnaround Line-specific expertise Net line underwriter (stability of capacity) Cross-class capability Modeling and structuring capabilities Work with all leading brokers Underwritten in Bermuda and Dublin Combined ratio: YTD 2008: 2007: By Exposure Gross Premiums Written Rolling 12 Months at September 30, 2008 $414 million Agriculture 20% Aviation 7% General Liability 2% Medical Malpractice 16% Other 2% Professional Liability 6% Property 23% Marine & Energy 5% Whole Account 3% Workers Compensation 16% 82% 84% |
15 U.S.- Based Growth Initiative: Max Specialty Insurance Company / Max America Insurance Company Commenced operations in 2007: Nationwide underwriter of excess and surplus lines niches based in Richmond, VA Delaware licensed and approved on a non- admitted basis in 49 other states Brokerage and Contract Binding operations Select group of national brokers and regional MGA’s with 20+ years relationships Current Products Property-cat & non-cat Umbrella / xs Liability Inland Marine / Ocean Cargo (New 2008) Specialty Casualty (New 2008) 90 employees / 6 U.S. locations Long-term underwriting objectives: Products priced and underwritten so net incurred loss ratios approximate 55% Expense ratio: approximately 35% Combined ratio: approximately 85% June 2008: Max America Insurance Company acquired U.S. admitted insurance company licensed in all 50 states Gross Premiums Written Rolling 12 Months at September 30, 2008 $161 million By Exposure Property 49% General casualty 34% Marine 17% |
16 Life Reinsurance: Long-Tail, Reserve Buy-Out Business Specialize in: Investment spread business In force, closed / ring-fenced books Mortality, morbidity & longevity Predictable cash flows Asset heavy – no interest sensitive liabilities Strategy: Leveraging underwriting skills with low volatility alternative investments Focus on closed block reserve buy-out transactions Almost no IBNR Differentiated by: Detailed data focus Strong actuarial analysis Bermuda efficiencies Gross Premiums Written Reserves & Deposits 9/30/2008 $1.3 billion Number of Deals Written 2008 YTD And Plan 0 50 100 150 200 250 300 350 2004 2005 2006 2007 $212 $275 $45 $302 3 3 1 6 US$ Millions $150 1 Annuity 73% Life 15% Health 12% |
17 Max at Lloyd’s Ltd.: Access to Direct & Reinsurance Markets Worldwide Max entered into an agreement to acquire Imagine Group (UK) Limited (“Imagine Lloyd’s”) from Imagine Insurance Company Limited (“Imagine”) Subject to various regulatory approvals Key acquisition terms Max to replace Imagine Lloyd’s letters of credit totaling approximately £90 million that fund Lloyd’s syndicate commitments Imagine to provide 70% quota share reinsurance in respect of Syndicate 1400 for the 2007 and 2008 years of account until December 31, 2008. The liability of Imagine in respect of any one year of account under this reinsurance arrangement is limited to 150% of net premiums earned Manages £198.8 million of capacity for 2008, of which 69% is capitalized by Imagine Group (UK) Limited (Imagine) and 31% is capitalized by third party names Offices in London, Copenhagen and Tokyo Total staff of approximately 85 Anticipated transaction will close in Q4-2008 Transaction expected to be accretive to 2009 results |
18 Imagine Group (UK) Limited – Organizational Structure Imagine Syndicate Management Limited Syndicate 1400 Active Underwriter Matthew Petzold Property catastrophe 54% Accident & health 28% Financial institutions 18% Total 100% £125.0m Imagine owned £125.0 (100%) Independent 0.0 (0%) Total £125.0 (100%) Syndicate 2525 Active Underwriter David Dale Public liability 50% Employers’ liability 50% Total 100% £42.0m Imagine owned £0.9 (2%) Independent 41.1 (98%) Total £42.0 (100%) Syndicate 2526 Active Underwriter Andy Doré Professional indemnity 92% Medical Malpractice 8% Total 100% £31.8m Imagine owned £11.6 (36%) Independent 20.2 (64%) Total £31.8 (100%) 2008 Product Focus 2008 Capacity 2008 Capacity Provider Iain Bremner — Managing Director Lance Gibbins — Finance Director Matthew Petzold — Underwriting Director Imagine Underwriting Services Limited Imagine Group (UK) Limited |
19 2008 Projected Gross Premiums Written - £77.5 million Professional Indemnity / Medical Malpractice, 18% Employers' Public Liability, 1% Property Catastrophe, 44% Financial Institutions, 14% Accident & Health, 23% By Line of Business Syndicate 2526 18% Syndicate 2525 1% Syndicate 1400 81% By Syndicate By Geography North America 29% Europe exc. UK 12% UK 27% Japan 8% Caribbean 5% Other 19% Insurance 34% Reinsurance 66% By Contract Type |
20 (£ in millions, 2008 projected) Imagine Group (UK) Limited - Financial Summary (UK GAAP pro forma unaudited; excludes discontinued lines of business) 2006 2007 2008P Gross premiums written £68.8 £76.3 £77.5 (Imagine's share of syndicate business) Net premiums written 49.7 63.3 64.3 Net premiums earned 42.0 60.5 67.8 Loss and loss adjustment expenses 10.9 20.5 30.0 Policy acquisition costs 7.2 12.9 15.9 Operating expenses 13.6 15.5 14.1 Total expenses 31.7 48.9 60.0 Underwriting income £10.3 £11.6 £7.8 Loss ratio 26.0% 33.9% 44.2% Expense ratio 49.5% 46.9% 44.2% Combined ratio 75.5% 80.8% 88.4% Years Ended Dec 31, |
21 Max Capital’s invested assets allocation As of September 30, 2008, 81% allocated to high-grade (A and above) fixed income securities and 19% to a highly-diversified, un-leveraged alternative investments portfolio Commencing October 1, 2008, 80-90% allocation target for high-grade, fixed income securities and 10-20% allocation target for alternative investments This mix is generally expected to provide a smoothing effect to total portfolio returns Max Capital’s alternative investments allocation, while historically beneficial from a book value growth and income perspective, adds quarterly volatility to Max Capital’s financial statements Volatility is higher over any short term period but tends to dissipate over longer term Volatility results from the necessity of recording changes in market value of the alternative investments portfolio through income rather than through equity Diversified And Strategic Asset Allocation 0% 5% 10% 15% 20% 25% 30% 35% Investment Portfolio: Traditional Alternative Allocation Target Opportunistic Distressed Diversified Equity Long / Short Event Driven Arbitrage Global Macro Credit Long / Short Emerging Markets Fixed Income Arbitrage Tsy / Agy Aaa Aa Baa 81% 19% 85% 15% A |
22 Average quality of AA+ 80%+ of fixed income securities rated Aa or better Less than 2% rated Baa or below Approximately 50% of portfolio is Cash, Governments, Agencies, and Agency MBS Cash balance is approximately $650 million or 16% of the portfolio U.S. and G7 governments approximately $600 million or 15% of the portfolio U.S. Agencies approximately $250 million or 6% of the portfolio U.S. Agency MBS approximately $525 million or 13% of the portfolio Corporate Holdings are well diversified Approximately 35% of the portfolio Approximately 200 different corporate issuers Largest “Aa” issuer is less than 1% of the portfolio Largest “A” issuer is less than 0.5% of the portfolio No CDO’s, CLO’s, SIV’s or other highly structured securities High Quality Cash & Fixed Income Portfolio |
23 Remaining portfolio is high quality ABS, CMO and CMBS Holdings Almost all CMO holdings are rated AAA, with substantial portion being agency CMO’s Almost all CMBS holdings are rated AAA Principal losses, if any, are expected to be minimal based upon cash flow and stress testing ABS holdings are largely comprised of plain vanilla auto and credit cards Home equity ABS holdings amount to approximately $50 million (all Subprime and Alt – A) Subprime and Alt – A exposures are approximately $82 million book value 78% are AAA rated securities 2.0 year weighted average life Significant and growing over-collateralization (weighted average 40%) No principal losses are expected based upon cash flow and stress testing Unrealized loss of approximately $14 million Credit Risk Issues are relatively small at September 30, 2008 No Washington Mutual securities held $15 million Lehman bonds, fair value of $2 million ($13 million impairment charge) $13 million AIG related bonds, fair value of $10 million ($3 million unrealized loss) No equity, preferred, or equity linked securities in the portfolio Besides Lehman, only one security (a military housing bond) is in arrears on either principal or interest $3 million position, fair value of $2.3 million ($700 thousand loss) Limited Credit & Structure Risk |
24 5.7 12.3 9.3 27.3 67.8 7.7 3.7 27.0 2.1 40.5 8.6 5.0 32.2 2.5 48.3 6.1 - 3.4 9.5 34.0 2.4 1.6 18.0 2.5 24.5 Investments With Exposure To Sub-prime And Alt-A Assets with Subprime content Weighted AAA AAA AA A Amortized Fair Value ($ millions) Average Life Senior Junior Cost Subprime exposure by vintage year Pre-2005 3.5 $ 0.4 $ 5.8 $ - $ $ $ 2005 4.9 $ - $ 3.4 $ - $ $ $ 2006 1.6 $ 5.0 $ - $ 9.2 $ $ $ 2007 3.4 $ - $ - $ - $ $ $ Total Subprime exposure 2.4 $ 5.4 $ 9.2 $ 9.2 $ $ $ Alt-A exposure by vintage year Pre-2005 3.9 $ - $ - $ - $ 6.1 $ $ 2005 1.2 $ 17.3 $ - $ - $ 17.3 $ $ 2006 0.6 $ 6.8 $ - $ - $ 10.2 $ $ Total Alt-A exposure 1.5 $ 24.1 $ - $ - $ 33.6 $ $ Sub-prime and Alt-A exposure 2.0 $ 29.5 $ 9.2 $ 9.2 $ 81.9 $ $ Amortized Cost by Credit rating |
25 Core Investing Principles Diversification by strategy with concentration limits in any particular fund Rapid liquidity required Return objective – 300 bps over risk free rates with bond like volatility Rigorous manager selection and monitoring process Objectives of Revised Investment Guidelines Adopted October 2008 More balanced, market neutral / absolute return focus Lower volatility of monthly, quarterly and annual returns Lower probability of a drawdown below a fixed floor for any time period Higher degree of diversification in both the number of strategies employed and the number of underlying managers Lower correlation and / or exposure to relevant market factors Alternative Investment Portfolio |
26 Over multiple term time periods, Max Capital’s total investment portfolio compares favorably to other Benchmark Indices with lower volatility Max Capital’s alternative investments portfolio has contributed significantly to portfolio returns and book value growth Q3 2008 hedge fund returns were the worst since hedge fund industry record- keeping began Max Capital’s alternative investments portfolio, composed of an unleveraged diversified “fund-of-funds,” had a significant negative return for the quarter Risk Averse Enhanced Returns * Annualized Past performance should not be considered to be a reliable indicator of future performance Q3 2008 2008 YTD 2007 1/1/2007 - YTD Last 60 Months* Standard Deviation Max Capital Total -2.83% -2.17% 10.38% 7.99% 4.63% 2.92% Max Capital Fixed Income 0.31% 0.80% 5.11% 5.95% 3.53% 2.69% Max Capital AI Portfolio -12.99% -11.98% 16.97% 2.96% 4.95% 6.26% Fund of Funds Index -9.63% -11.84% 10.26% -2.80% 5.04% 5.70% S&P 500 -8.37% -19.29% 5.49% -14.85% 4.05% 10.32% High Yield -9.48% -10.60% 2.09% -8.73% 4.28% 6.27% 5 - 7 Year Corporate BBB -5.37% -5.30% 5.70% 0.10% 2.34% 4.28% 5 - 7 Year Corporate A -10.91% -11.00% 5.44% -6.16% 0.85% 6.08% ML Master -0.29% 1.03% 7.17% 8.28% 3.92% 3.18% |
27 Past performance should not be considered to be a reliable indicator of future performance. Supplemental Investment Data – September 30, 2008 |
28 Profitable Underwriting Trends Despite Hurricanes in 2005 P&C Combined Ratio Operating ROE Gross Premiums Written $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 2004 2005 2006 2007 Rolling 12 Months at 9/30/08 $1,044 Life $212 Life $275 Life $45 Life $302 Life $333 $1,246 $865 $1,078 $1,282 0% 2004 2005 2006 2007 Rolling 12 Months at 9/30/08 94% 106% 86% 88% 90% 20% 40% 60% 80% 100% 120% 2004 2005 2006 2007 $2.70 $0.19 $3.52 $4.81 $0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 Operating Earnings Per Share (Diluted) -$0.01 Rolling 12 Months at 9/30/08 2004 2005 2006 2007 Rolling 12 Months at 9/30/08 15.8% 1.0% 17.3% -0.02% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 20.7% |
29 A Growing, Global Insurance / Reinsurance Company *Operating Cash Flow for 2007 and prior years has been adjusted to conform with the current presentation $3,515 $4,223 $4,536 $5,123 $4,994 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 2004 2005 2006 2007 9/30/08 Invested Assets (Ratio to Shareholders’ Equity) ($ in millions) 2004* 2005* 2006* 2007* Rolling 12 months at 9/30/08 $799 $447 $273 $252 $380 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 Operating Cash Flow $903 $1,186 $1,390 $1,584 $1,274 0 200 400 600 800 1000 1200 1400 1600 1800 ($19.70) ($20.16) ($23.06) ($22.77) ($27.54) 2004 2005 2006 2007 9/30/08 Shareholders’ Equity (Book Value Per Share) 2004 2005 2006 2007 Rolling 12 Months at 9/30/08 $0.00 $0.05 $0.10 $0.15 $0.20 $0.25 $0.30 $0.35 $0.40 0.12 0.18 0.24 0.32 0.36 Dividends (3.9:1) (3.6:1) (3.3:1) (3.2:1) (3.9:1) |
30 Gross Premiums Written 882 $ 1,078 $ Net Premiums Earned 512 818 Net Investment Income 137 188 Net (Losses) Gains on Alternative Investments (145) 187 Net Realized Losses on Fixed Maturities (18) (4) Other Income 1 1 Total Revenues 487 1,190 Total Losses, Expenses & Taxes 568 887 Net (Loss) Income (81) $ 303 $ Property & Casualty Underwriting Loss Ratio 67% 64% Expense Ratio 22% 24% Combined Ratio 89% 88% YTD September 30, 2008 Results And 2007 Year - End Results December 31, 2007 ($ in millions) YTD September 30, 2008 |
31 Cash & Fixed Maturities 4,064 $ 4,061 $ Alternative Investments 930 1,062 Premium Receivables 505 433 Losses Recoverable 716 578 Other Assets 424 403 Total Assets 6,639 $ 6,537 $ Property & Casualty Losses 2,568 2,334 Life & Annuity Benefits 1,222 1,204 Deposit Liabilities 220 221 Funds Withheld 189 169 Unearned Premium 528 440 Bank Loan 295 330 Senior Notes 100 100 Other Liabilities 243 155 Total Liabilites 5,365 $ 4,953 $ Shareholders' Equity 1,274 1,584 6,639 $ 6,537 $ Strong Balance Sheet December 31, 2007 September 30, 2008 ($ in millions) |
I N S U R A N C E / R E I N S U R A N C E B E R M U D A I R E L A N D U N I T E D S T A T E S MAX CAPITAL GROUP LTD. Nasdaq: MXGL Investor Presentation Quarter Ended – September 30, 2008 |