XL Capital could reasonably be expected to make a full recovery from its problems related to its beleaguered bond insurer affiliate Security Capital Assurance (SCA), according a financial analyst who covers the company for credit rating agency AM Best.

But Neal Enriquez, one of the senior financial analysts who covers the Bermuda-based insurer for the Oldwick, New Jersey-based firm, said he expected XL to take further charges related to SCA. And how long the problem lingered would depend on how aggressive XL was in tackling it, he added.

"If they can put the SCA issue to rest and I think it's reasonable to expect that they will be able to do that then they could come back stronger," Mr. Enriquez told The Royal Gazette in an interview yesterday.

Asked how long he believed the SCA problems would continue to plague XL, the analyst said: "It depends on how aggressive the company is in dealing with it. It could take a conservative approach and negotiate further, or it could take a full charge now."

That may be the tough choice faced by XL chief executive officer Michael McGavick, who succeeded company veteran and current chairman Brian O'Hara in May this year, and who has vowed to make resolving the SCA problem his top priority.

Investors' concern over the global insurer's exposure to Bermuda-based SCA's business has been reflected over the past week as XL's share price plunged to $18.42 on Monday its lowest closing price since 1995. However, in New York Stock Exchange trading yesterday, the stock mounted something of a recovery, rising 11 percent to $20.43.

Last week, rating agencies S&P and Fitch both put XL's ratings under a negative outlook, citing the company's SCA exposure, in terms of reinsurance and guarantees.

Like other financial guarantors, Bermuda-based SCA has experienced problems because the value of mortgage-backed securities it insures have plunged in value during the wave of mortgage and loan defaults that has swept the US during the sub-prime mortgage crisis.

XL's share price plunged to a 13-week low earlier this week and although it recovered to climb above $20 yesterday, it is still more than 75 percent down on its 52-week high of $84.90.

The languishing stock price has raised the potential for a takeover but that scenario was described as "unlikely" by AM Best vice-president Robert DeRose, primarily because of the scale of the financial resources needed to take over the global insurer.

XL posted a loss of $1.06 billion in the fourth quarter of last year after taking a charges "related to credit market conditions" totalling $1.5 billion, more than $900 million of which was related to XL's investment in and reinsurance of SCA. XL has since written down the value of its 46-percent stake in SCA to zero.

The insurance giant has stated that its remaining exposure to SCA lies in reinsurance agreements relating to business written by SCA before it floated on the stock market in 2006. That business included virtually none of the sub-prime mortgage-linked collateralised debt obligations (CDOs) that caused SCA's problems.

AM Best downgraded XL's financial strength rating from A+ to A in January this year. "That rating action was really based on what we believe related to enterprise risk management issues," Mr. Enriquez said yesterday. "And also the potential for further earnings charges, which probably will develop over the medium term. That exposure primarily will relate to the reinsurance exposure to SCA and the guarantees provided."

On AM Best's scale, XL's A rating, with stable outlook, is categorised as "excellent". And Mr. Enriquez stressed that "XL's underlying businesses are sound". The company's property and casualty core business has remained profitable throughout the SCA episode.