XL Capital Ltd. announced last night that it expects to post a fourth-quarter loss of up to $1.2 billion, mostly due to costs related to its investment in a bond insurer Security Capital Assurance (SCA).

The insurer and reinsurer owns 46 percent of SCA and expects to take a charge of at least $550 million for the drop in the company's value.

In a statement released last night, XL said it would also set aside $300 million for claims on reinsurance obligations to SCA.

In all the company said it would take charges totalling between $1.5 billion and $1.7 billion "relating to credit market conditions" in its results for the last three months of last year.

However, a strong first three quarters means the company still expects to make a full-year profit of between $200 million and $400 million for 2007.

Three long-standing top executives have announced their intentions to step down in recent months. Chief executive officer Brian O'Hara will relinquish his post later this year, while Michael Esposito quit as XL chairman last month to concentrate on his duites as SCA chairman. XL's chief executive of insurance operations Clive Tobin will step down in April.

In New York trading yesterday, XL shares gained 13 percent continuing a rebound after they hit an eight-year low last Friday. SCA shares soared 76 percent, on reports that New York state insurance regulators were in talks with US banks to help beleaguered bond insurers to find new capital.

After the closing bell sounded on Wall Street, SCA, under pressure from Fitch Ratings to come up with $2 billion to keep its all-important AAA rating, said it would not raise the new capital.

Instead, SCA will try to reduce its risk through reinsurance, thereby reducing its needs for capital reserves to pay claims.

In after-hours trading, SCA dipped 10 percent to $3.40, as of 8.59 p.m. XL also pared some of its earlier gains after the bell as it dipped three percent to $44.85, as of 8.51 p.m.

Over the past 12 months, SCA shares have lost 86 percent of their value, while XL have lost 32 percent.

Losses on mortgage-related bonds have left bond insurers struggling to retain the AAA ratings they use to guarantee $2.4 trillion in assets. Ambac Financial Group Inc., the second- largest bond insurer after MBIA Inc., lost its AAA grade from Fitch this month on concern that claims will rise from bonds tied to sub-prime mortgages.

SCA, which has AAA ratings from Fitch, Standard & Poor's and Moody's Investors Service, is being scrutinised by all three rating companies for possible downgrade. Moody's last month said that it is reviewing XL's A3 senior debt and the Aa3 financial strength grade of its insurance units, because of financial ties to SCA.

In last night's statement XL said it expected to record in its fourth-quarter statements:

• A charge of at least $550 million with respect to XL's investment in SCA, which was carried at $670 million at September 30, 2007.

• A loss reserve of $300 million with respect to an excess of loss reinsurance agreement with SCA. This agreement has a single aggregate limit of $500 million and this reserve represents a full limit loss discounted for the expected timing of payments.

• Loss reserves of $30 million with respect to facultative reinsurance agreements between subsidiaries of XL and subsidiaries of SCA, discounted for the expected timing of payments.

l A charge of approximately $150 million to reduce the carrying value to zero of one of XL's publicly traded financial affiliates. This largely arises from expected mark-to-market adjustments related to this financial affiliate.

• Total net realised losses on investments of approximately $500 million, of which approximately $50 million arises from realised losses and the balance from an estimated charge for 'other than temporary impairments' related primarily to deterioration in structured credit assets.

XL said, excluding the above items, net income for the fourth quarter was between $425 million and $475 million.

XL, which is due to release its fourth-quarter results on February 5, will hold a conference call today, when top executives will face questions from shareholders, starting at 9.30 a.m. It will be webcast and later archived on the company's website, www.xlcapital.com.