Despite substantial catastrophe losses hitting its reinsurance results and "mindless and irrational" competition in the insurance market, Bermuda-based AXIS Capital Holdings reported a 13 percent jump in second-quarter net income.
Net income for second-quarter 2007 was $251.5 million, or $1.51 per share, compared with $223.4 million, or $1.37 per share.
For the first six months, net income was $479.2 million, or $2.88 per share, compared with $418.6 million, or $2.56 per share, for the first half of 2006.
While the company's reinsurance segment was impacted by $47 million in losses from floods in the United Kingdom and New South Wales, Australia, results in both the insurance and reinsurance segment benefited from favorable prior-period reserve development of $97 million in total.
"It is the substantial recalibration of our portfolio which has allowed us to absorb these [catastrophe] losses without significant impact," said John Charman, chief executive officer and president of AXIS Capital, during a conference call this morning, referring to loss mitigation activities undertaken by the company in the wake of the 2005 hurricanes.
Chief Financial Officer David Greenfield characterized the $47 million as a normal, expected level of catastrophe loss, cautioning investment analysts against making more favorable year-to-year comparisons by excluding the figure.
Reporting details of the favorable development, which shaved 14 points off AXIS's combined ratio of 75.4 for the quarter, Mr. Greenfield said most of the favorable development came from short-tailed lines of business, with the exception of the takedown of reserves related to one large professional liability claim that was successfully resolved in the quarter.
Mr. Charman pointed to improved underwriting and investment results to explain record net income results. He noted that the company recorded a "market-leading combined ratio" of 75.4, compared with 78.3 in last year's second quarter, and that investment income "contributed meaningfully" to the bottom line, jumping 24 percent to $113.7 million.
"There is no reason to expect anything less than strong book-value growth of the highest level from our activities throughout the rest of the year," he said, ending his opening remarks on what he termed a "positive note" after delivering a string of negative comments about the market.
Discussing the insurance market, Mr. Charman said the aggressive behavior "is behavior which we believe is irrational, and seems unmanaged and unmonitored." He later identified terrorism, aviation, non-U.S. property and non-cat property as the troublesome segments where AXIS will maintain a "cautious and defensive posture."
Mr. Charman was less critical of the behavior of "the established reinsurance marketplace," where he said overall discipline is being maintained "with some normal competitive wear on price."
Mr. Charman referred to the current soft market activity as "mindless," saying, "Even I find it difficult to comprehend given the substantial increased retention of risk in the insurance marketplace which we are witnessing among clients of our reinsurance operation."
Both Mr. Charman and Mr. Greenfield noted that AXIS has moved in the opposite direction–buying more reinsurance and reducing retentions on its insurance portfolio during the first half of the year–actions that resulted in an 8 percent drop in net written premiums overall to $755.3 million in the quarter.
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