Bermuda business insurer XL Capital Ltd. last night posted a net loss of $11.4 million for the third quarter — primarily due to $310.8 million of realised investment losses.

But the company, which made a loss of more than $2.5 billion in a traumatic 2008, showed continuing signs of recovery with strong underwriting results, despite lower revenue, and a rocketing book value.

XL CEO Mike McGavick said the results were "encouraging" but conceded there were "areas for continued improvement".

The markets welcomed the news as XL shares rose 4.7 percent in after-hours trading, after having dipped 2.4 percent to $16.23 in regular trading.

In a conference call last night, XL's head of insurance operations, David Duclos, said the company received nine new claims tied to the Bernard Madoff fraud. He added that the company had "confidence" in the reserves it has to pay the claims.

XL sells coverage protecting clients from lawsuits. In July, XL revealed that it had received 36 Madoff-related claims.

The third-quarter net loss of $11.4 million, or three cents per share, compared to a loss of $1.65 billion, or $6.04 per share, in the same period of 2008, when the company took a charge of $1.4 billion to virtually eliminate its exposure to stricken bond insurer Syncora Holdings Ltd.

Book value climbed 26 percent during the July through September period to $23.84, as shareholders' equity increased from $7.5 billion to $9.2 billion.

XL achieved operating income of $306.4 million during the quarter on a combined ratio for its core property and casualty operations of 93.2 percent, meaning that the company spent 93.2 cents of each premium dollar on claims and expenses, compared to 106.3 cents in the third quarter of 2008.

The operating earnings were offset by XL's recognition of $310.8 million in after-tax other-than-temporary impairments of investments.

"We remain committed to an investment portfolio more properly suited to a P&C company, and have made significant strides over the past year to de-risk our portfolio in pursuit of that goal," Mr. McGavick said.

"On the positive side, our portfolio marks improved by $1.4 billion during the third quarter, and 54 percent of the $34.0 billion portfolio was in cash, government, government-related or government-supported securities at the end of the third quarter.

"Given the increased stability in the capital markets, we have selectively redeployed some of our cash and proceeds from sales and maturities into high quality assets, achieving new money yields of 3.9 percent."

The results showed that XL, which has scaled down some of its operations over the past year, is writing less business, as gross premiums written fell 16.6 percent to $1.58 billion from $1.9 billion in the third quarter of 2008.

"Although on target with our current guidance for the year, continuing this recovery means we must remain vigilant in the face of challenging pricing conditions," Mr. McGavick said.

"Pressures from the current economic environment and where we are in the underwriting cycle have not deterred us from seeking the right price regardless of the impact on top line. We will continue to do so."

Net investment income for the quarter was $327.1 million, compared to $436.3 million in the prior year period.

XL said a tightening of credit spreads over the past three months had helped reduce its net unrealised losses on investments to $1.5 billion at September 30, 2009, from $3.2 billion three months earlier.