IPC Holdings Post Strong Earnings

IPC Holdings’ (IPCR) announced its second-quarter financial results after the markets closed on July 23. Earnings of $3.11 per common share were well ahead of both the Street's estimate and our expectations, driven by a significantly better-than-expected loss ratio in the quarter.

From a "catastrophe" perspective, the second quarter was a quiet one. Premium writings were also up in the quarter, driven by rate increases.

For the quarter, the company reported net income of $173.9 million or $3.11 per common share, compared to $47.5 million, or $0.78 per common share, in the year-ago period. Operating EPS for the quarter was $1.72 versus $1.62, a year earlier.

Gross premiums writings were up 21.2% year-over-year, driven by new business and improvements in pricing which more than offset the business which was not renewed. Management said that price increases were on an average 5% to 15% in the quarter.

The company reported a combined ratio (the percentage of premiums an insurer has to pay out in claims and expenses) of 23.6% versus 10.2% last year. Losses of $11.1 million during the current period, including $9.1 million from the Air France crash, were offset by $19.5 million of favorable reserve development. However, the expense ratio was adversely impacted by increased expenses related to costs associated with its ongoing merger negotiations.

While investment income was down 9.0% in the quarter primarily due to lower yields from a conservative investment portfolio, we note that the company has recognized a net gain of $77.4 million from investments in the quarter from its fixed maturity investments, equity investments in mutual funds and a fund of hedge funds due to improved market conditions. This compares with a net loss of $50.9 million in the prior-year period.

Also, diluted book value per share grew 8.6% from last quarter to $35.90, reflecting the operating profit and large investment gains.

The merger agreement with Validus Holdings (VR - Snapshot Report) remains on course and is expected to close in September this year. The company has gathered much enthusiasm in the reinsurance market following the termination of its merger agreement with Max Capital Group Ltd. (MXGL - Analyst Report) and its recently announced proposed amalgamation with Validus.

We think that the strong quarterly performance of IPCR will help accomplish the proposed merger with Validus smoothly. The combined entity is believed to have a strategic and profitable diversification into multiple short tail lines with favorable rate trends.

IPCR has built a track record of strong underwriting results while maintaining a strong balance sheet and ROE. Though the company should benefit from hardening of rates in 2009, we expect investment income to remain restricted in the short term. As such, we are reiterating our Hold recommendation on the shares of IPCR.