Our investments during the year ended December 31, 2005 produced a total return of 3.66% compared to 5.63% for the year ended December 31, 2004. The cash and fixed maturities portfolio produced a total return of 3.83% during the year ended December 31, 2005 compared to 4.22% for the year ended December 31, 2004. The decrease in total return was driven by changes in market interest rates that led to a decrease in unrealized holding gains on fixed maturities, which are a component of accumulated other comprehensive income. During the year ended December 31, 2005, our alternative investments generated a 3.34% rate of return compared to an 8.23% rate of return for the year ended December 31, 2004. Our alternative investments owned by Max Re Diversified generated a 5.88% rate of return compared to 9.81% in 2004. In both years the return of the alternative investment portfolio has been negatively impacted by our private equity reinsurance investment in DaVinci, which experienced investment losses of approximately $34.0 million from Hurricane Katrina and other natural catastrophes in 2005 and approximately $15.0 million from hurricanes Charley, Frances, Ivan and Jeanne in 2004. DaVinci is a property catastrophe reinsurer and, therefore, it is expected that losses will be incurred during periods where there are severe or frequent catastrophes. In December 2005, DaVinci raised additional share capital and we chose not to participate in the transaction. As a result, our investment in DaVinci has declined to approximately 5% of its share capital at December 31, 2005.
The loss ratio (“loss ratio”) is calculated by dividing losses (shown as (b)) by net premium earned (shown as (a)).
Net premiums earned for property and casualty reinsurance decreased by 2.1% to $582.1 million for the year ended December 31, 2004 as compared to the year ended December 31, 2003. The decrease is correlated to the reduced gross premiums written during the same period.
Net income attributable to property and casualty reinsurance for the year ended December 31, 2004 was $23.7 million compared to a loss of $2.0 million for the year ended December 31, 2004. The increase in net income was principally attributable to a lower combined ratio due to reduced acquisition costs derived from a change in mix of property and casualty business written and earned.
Net gains on the alternative investment portfolio were $81.6 million, including a loss of $8.1 million from our private equity reinsurance investments, for the year ended December 31, 2004 compared to $124.0 million, including a gain of $12.1 million from our private equity reinsurance investments, for the year ended December 31, 2003. Returns in the investment markets were closer to long-term historic averages in 2004, with the Standard & Poors 500 Index up 10.87% in 2004 compared to 28.67% in 2003. Interest rates and credit spreads were relatively stable for the full year 2004. These market conditions resulted in a return of 9.81% for our Max Re Diversified fund of funds portfolio in 2004 compared to a return of 16.67% in 2003. In addition, we had a (11.06%) return from our private equity reinsurance investments in 2004 compared to a return of 15.81% in 2003. The decrease was principally attributable to losses from Hurricanes Charley, Frances, Ivan and Jeanne through our investment in DaVinci.