We believe our fixed maturities investment portfolios weathered the investment storm reasonably well in 2008, with a net improvement during the year of $9.1 million in our net unrealized loss position and a total return of 4.66% including the return on cash. The credit quality of our fixed maturities investments remains high, with 69.9% of our fixed maturities at December 31, 2008 being held in government, agency or AAA-rated securities. We believe our conservative fixed maturities investment strategy has limited our exposure to date to writedowns on our fixed maturities investments. Writedowns for other than temporary impairments were $16.9 million for the year, of which $13.8 million was due to the bankruptcy of one major U.S. financial institution. At December 31, 2008, net unrealized losses on our available for sale securities were 0.4% of our available for sale fixed maturities portfolio. The fixed maturities portfolio in our Max at Lloyd’s segment is treated as a trading portfolio with all unrealized gains and losses recorded through net income.
Bornhuetter-Ferguson Paid Loss Method. The Bornhuetter-Ferguson paid loss method is a combination of the paid loss development method and the expected loss ratio method. The amount of losses yet to be paid is based upon the expected loss ratios. This method avoids some of the distortions that could result from a large development factor being applied to a small base of paid losses to calculate ultimate losses. This method will react slowly if actual paid loss experience develops differently than historical paid loss experience because of major changes in rate levels, retentions or deductibles, the forms and conditions of coverage, the types of risks covered or a variety of other factors.
Since the development of our life and annuity reinsurance reserves is based upon cash flow projection models, we must make estimates and assumptions based on cedant experience and industry mortality tables, longevity, expense and investment experience, including a provision for adverse deviation. The assumptions used to determine policy benefit reserves are best estimate assumptions that are determined at the inception of the contracts and are locked-in throughout the life of the contract unless a premium deficiency develops. We establish these estimates based upon transaction specific historical experience, information provided by the ceding company and industry experience studies. Actual results could differ materially from these estimates. As the experience on the contracts emerges, the assumptions are reviewed by management. We determine whether actual and anticipated experience indicates that existing policy reserves, together with the present value of future gross premiums, are sufficient to cover the present value of future benefits, settlement and maintenance costs and to recover unamortized acquisition costs. If such a review produces reserves in excess of those currently held then the lock-in assumptions are revised and a life and annuity benefit is recognized at that time.
Net investment income and gains on alternative investments. The overall performance of our fixed maturities portfolio and alternative investment portfolio is discussed within the corporate function results of operations as we manage investments for this segment on a consolidated basis with the Bermuda/Dublin insurance and life and annuity reinsurance segments.
Hurricane-related losses, net of reinsurance, of $47.0 million, which contributed 13.8 percentage points to the loss ratio;
General and administrative expenses. The increase in general and administrative expenses in each of 2008 and 2007 compared to the preceding year, resulted principally from additional claims and underwriting staff added over the course of 2008 and 2007 in order to service a growing base of clients and higher expense associated with the vesting of long-term stock-based compensation.
Our life and annuity reinsurance segment writes life and annuity reinsurance transactions when attractive opportunities arise. The nature of life and annuity reinsurance transactions that we consider results in a limited number of transactions actually bound with potentially large variations in quarterly and annual premium volume. Consequently, components of our underwriting results, such as premiums written, premiums earned and benefits can be volatile and, accordingly, period to period comparisons are not necessarily representative of future trends.
Claims and policy benefits. Claims and policy benefits relating to the life and annuity reinsurance segment were $301.5 million for the year ended December 31, 2008, of which $239.6 million related to the contracts incepting during the year, compared to claims and policy benefits of $345.6 million for the year ended December 31, 2007, of which $299.3 million related to the contracts incepting during the year. Excluding the contracts incepting during each year, benefits were $61.9 million for the year ended December 31, 2008 compared to $46.3 million for the year ended December 31, 2007. The increase reflects additional reinsured policy claims payments associated with the $238.4 million of reinsurance premiums written in the last quarter of 2007 and the $94.3 million of reinsurance premiums written in the first half of 2008.
Net investment income. The decrease in net investment income, which excludes realized gains and losses, was principally attributable to the decrease in interest rates on cash and cash equivalents and the increase in cash held for the year ended December 31, 2008 compared to the year ended December 31, 2007. The average annualized investment yield on the cash, fixed maturities and funds withheld by clients for the year ended December 31, 2008 was 4.35% compared to 4.96% for the year ended December 31, 2007. The balance of cash and cash equivalents increased significantly during 2008, increasing by $551.7 million to $949.4 million at December 31, 2008. This increase can be attributed principally to two factors, the desire to maintain high levels of liquidity in the current investment environment, and significant cash redemptions received from the alternative investment portfolio which has not been reinvested.
The majority of our alternative investment portfolio remains highly liquid and the imposition of gates by certain funds is not expected to significantly impact our cash flow needs or change our timetable for reducing our allocation to alternative investments. Based upon information provided by the fund managers, as of December 31, 2008, we estimate that over 87.0% of the underlying assets held by our alternative investment funds are traded securities or have broker quotes available. Typically, the imposition of a gate delays a portion of the requested redemption, with the remaining portion settled in cash shortly after the redemption date. Of our scheduled December 31, 2008 redemptions of $98.1 million, none of which are gated, $95.4 million were received in cash prior to February 19, 2009. The fair value of our holdings in funds with gates imposed as at December 31, 2008 were $42.7 million, and are included in the table below.
Although we believe that our significant cash balances, fixed maturities investments, and credit facilities provide sufficient liquidity to satisfy the claims of insureds and ceding clients, in the event that we were required to access assets invested in the alternative investments, our ability to do so may be impaired by these liquidity constraints. See “Risk Factors-Unexpected volatility or illiquidity associated with our alternative investment portfolio or in the financial markets could significantly and negatively affect our ability to conduct business.”
approximately $1,200.0 million in statutory capital and surplus and met all minimum solvency and liquidity requirements. Max Bermuda returned $221.5 million of capital and surplus to Max Capital during the year ended December 31, 2008.