Bermuda-based insurer Axis Capital Holdings Ltd. said the company's liability on a derivative contract tied to mortality rates increased by about $136 million in the third quarter.

The insurer is reviewing its legal rights under the contract, Axis said yesterday in a statement distributed by Business Wire.

Axis said the item was expected to be reported within 'Other Insurance Related Loss'. "There is considerable uncertainty with respect to the measurement of fair value for this contract at this time," Axis said in a statement released last night.

Settlement under the terms of this contract is not due to be made until 2017 and the net derivative liability of $229 million recorded at September 30, 2009 would represent nearly a full loss to the contract. Axis added that its net losses for the quarter is expected to include approximately $260 million in other-than-temporary impairment (OTTI) losses from medium-term note investments in its fixed maturity portfolio for which the company no longer expects full recovery.

The company said any recovery of value in future periods would accrete to shareholders' equity.

Axis added that the OTTI losses have no impact on diluted book value per common share at September 30, 2009 or operating income for the quarter. Additionally, Axis expects diluted book value per common share to increase approximately 10 percent for the third quarter of 2009 to approximately $31.50 per common share.

The company estimates its total capitalisation at September 30, 2009 will be approximately $5.9 billion - up by almost $1 billion in the year to date - including $5.4 billion of shareholders' equity and $0.5 billion of long-term debt.