Max Capital Group (MXGL) reported third quarter operating earnings of 92 cents per share, beating the Zacks Consensus Estimate of 76 cents per share. Last year the company reported a loss of $2.57 per share. Results were helped by positive underwriting performance from all the business segments, driven by the expansion of Max’s newer specialty underwriting platforms in the U.S. and at Lloyd’s and a benign hurricane season. 

Gross premiums written for the quarter were $265.9 million ($265.7 million from Property and Casualty (P&C) and $0.2 million from Life and Annuity), compared with $206.3 million solely from P&C business in the prior-year period. The increase was due to contribution from Max at Lloyd’s segment, U.S. Specialty and modest growth in each of the company’s other property and casualty segments. 

Net premiums earned increased 46.9% year-over-year to $208.0 million. On a consolidated basis, the company reported a combined ratio of 90.9%, compared with 99.0% in the prior-year period. The combined ratio was 80.2% for insurance and 94.9% for reinsurance, 99.7% for U.S. specialty, and 84.2% for Max at Lloyd’s. 

Net investment income decreased 5.4% to $42.8 million year-over-year. The decrease was principally attributed to lower yields on cash and fixed maturity investments. Net gains on alternative investments for the reported quarter were $23.3 million, compared to a loss of $80.0 million in the prior year quarter. The rate of return was 3.94%, compared to 3.14% in the prior year period. 

The diluted book value was $26.54 per share at Sep. 30, 2009, compared with $21.88 per share last year. Annualized net operating return on equity (ROE) was 14.8% compared with negative return of 41.9% in the prior-year quarter. Debt to capital ratios has moderated at 5.6% from a high of 10.5% last year. 

Max Capital has a diversified book of insurance and reinsurance products, consistently producing solid operating results, and has effective risk management controls in place. Its book of business, which predominately contains long-tailed casualty lines, is fully supported by an excellent level of risk-based capitalization. We also praise management’s planned reduction of the riskier alternative investment portfolio. However, there runs an execution risk from its growing diversified specialty product strategy. We believe that a disciplined underwriting approach in this competitive market rate environment will help Max to return to overall profitability. We maintain a Neutral recommendation on the shares.
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