I'm a sucker for a good turnaround story, and the wrath of hurricanes Kat-Rita last year produced more than a few candidates in the insurance sector. Today my eye is on XL Capital (NYSE:XL) -- an insurance and reinsurance company hoping to get itself back in the market's good graces after a rough patch of performance.

Though last year's hurricanes did this insurance company no favors, it had problems before that. In perhaps a clear case of how M&A sometimes means that you're buying somebody else's problems, XL had a tough outcome of a big deal years ago, ultimately needing to add quite a bit of capital to shore up reserves. Since then, other legacy issues and negative developments have proved problematic for the company and investors alike.

But here we have the new, and hopefully improved, XL Capital. Though not perfect, this first quarter was encouraging. Non-life premiums were down nearly 10% (more than 12% in reinsurance) in large part because of the company's plan to steer itself toward better risk management, but operating earnings were still 17% higher than the year-ago period.

Looking at the combined ratio, I see a good news / bad news sort of situation. For those unfamiliar with insurance terminology, the combined ratio is essentially a measure of underwriting profitability -- a ratio below 100 means you made a profit, above 100 means you didn't. This quarter was 89.6, which was slightly better than last year's 89.7. But this was a pretty mild quarter on the catastrophe front (parts of Europe notwithstanding), so I guess I hoped it would do a little better.

The question now: Can XL Capital keep this turnaround going? Improvements in rates are good news, but you never really know how good an insurance company is until trouble arrives -- and then it's a little too late to change anything.

Arch Capital (NASDAQ:ACGL) is still my favorite company in this market, and there are other turnaround stories to look at as well -- RenaissanceRe (NYSE:RNR) and Montpelier Re (NYSE:MRH), for instance. For my money, though, XL has the most interesting mix of risk/reward; Fools thinking about adding some insurance stocks might want to give it a look.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).