XL Capital reported a 44 percent increase in net income for the second quarter, with $124 million of prior-year favorable loss development giving a major boost to results.

The Bermuda-based insurer and reinsurer reported second-quarter net income of $544.5 million, or $3.00 per share, compared with $377.1 million, or $2.10 per share, for second-quarter 2006.

Property-casualty underwriting profit rose 59 percent, or $96 million, to $232 million, with the $124 million of favorable development more than offsetting $30 million of pre-tax losses incurred for catastrophes in the quarter--storms in Australia and flooding in the United Kingdom.

In second-quarter 2006, XL reported $8 million of reserve strengthening.

The second-quarter results were also enhanced by an $86 million increase, or 24 percent jump, in investment income to $232 million. In addition, realized investment gains were $18.3 million, compared with a loss of $63 million last year.

The $18.3 million gain included an $81.3 million gain related to XL's sale of shares in Security Capital Assurance Ltd., a financial guaranty company in which XL has a 46 percent stake.

During a conference call this morning, Fiona Luck, XL's chief of staff and interim chief financial officer, said the $81.3 million gain was partially offset by charges to write down impaired securities, including $35 million of charges for "triple-B" rated mortgage-backed and asset-backed securities affected by continued problems in the subprime lending market.

Although Ms. Luck said XL's exposure to subprime paper is roughly $1.2 billion, accounting for only 3 percent of the company's total fixed income portfolio, analysts repeatedly asked executives to provide information about this exposure on this morning's call.

Sarah Street, XL's chief investment officer, provided extensive portfolio details, revealing, for example, that nearly $1 billion of the $1.2 billion exposure consists of "triple-A" and "double-A" rated securities, while $160 million is rated "triple-B."

"In context of a $45 billion portfolio, we feel these levels are very manageable and will continue to monitor them closely," she said.

Responding to an analyst's question about whether subprime mortgages would create exposure to underwriting losses from XL's directors and officers liability book, Chief Operating Officer Henry Keeling said while there is potential exposure, "we think it would be handled within our normal level of losses."

In fact, earlier in the call, Mr. Keeling highlighted specialty professional lines as an area with very favorable loss trends overall.

Commenting on market conditions which impacted XL's premium growth in the quarter, Mr. Keeling said prices are "easing in the mid-to-high single digits" for most insurance lines, in the high single digits for casualty reinsurance, and dropped about 10 percent for property treaty reinsurance.

U.S. catastrophe reinsurance pricing "held up well through June 1 but saw significantly increased competition at July 1," he reported.

Overall, gross written property-casualty premiums for XL dropped 2.5 percent to $1.9 billion in the quarter, with reinsurance premiums dropping 13.1 percent to $1.2 billion and insurance premiums rising 2.1 percent to $526 million.

Life premiums jumped more than 20 percent to $235 million.

Noting that XL has a goal to responsibly grow its p-c insurance book in spite of market conditions, Mr. Keeling highlighted a commercial insurance joint venture with Banco Ita?, the second largest bank, among several growth initiatives. He said that if premiums from this venture had been included in second-quarter totals, XL would have posted 5 percent growth overall.

Special Reports /

XL Quarterly Net Up 44% On Investments, Low Losses

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