Results were helped by the 560-basis-point decrease in the combined ratio to 86.3%, mostly because of the lower loss ratio, which was partly offset by a slight uptick in the expense ratio. The loss ratio was pushed down by $124 million in favorable loss development.
XL's investment portfolio was a big topic of discussion because of rising interest rates and the subprime fallout. XL has been willing to place some big bets on alternative investments, including hedge and private equity funds, and those bets continued to pay off.
The rising interest rates resulted in a big $616 million net unrealized loss, about half of which was in the life insurance portfolio. Although unrealized losses are never a good thing, XL believes that its asset losses were duration-matched with liabilities, in which case unrealized losses won't have to be realized.
XL also spent quite a bit of time assuring analysts that its subprime exposure was in check. The total subprime exposure is $1.2 billion, or 3% of the total fixed-income portfolio. Of that $1.2 billion, $970 million was rated AA or AAA and $160 million was rated BBB-. Only $39 million and $26 million of the portfolio was affected by the recent ratings downgrades and negative watch actions, respectively.
XL also noted that competition continued to heat up, and pricing fell in the mid- to high single digits, something that Montpelier Re's
Montpelier Re is a recommendation in both our Motley Fool Hidden Gems small-cap service and our flagship Motley Fool Stock Advisor newsletter service. To learn more, take a free 30-day trial of either one today.
Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates your comments, concerns, and complaints. The Motley Fool has a disclosure policy.