Bermuda-based XL Capital Ltd last night revealed the price it will pay for extricating itself from its ill-fated foray into the financial guaranty business — a cool $1.9 billion.

Some of XL's employees, meanwhile, will pay with their jobs, as the company strives to slash operating costs.

The $1.9 billion is the approximate value of what XL has agreed to pay its affiliate Security Capital Assurance Ltd. (SCA) to terminate virtually all of the reinsurance contracts and guarantees with the bond insurer that have weighed heavily on XL over the past 12 months. During that year, the commercial insurer's share price has lost more than three quarters of its value.

The agreement includes $1.78 billion in cash, as well as eight million shares, and will cause the company to take a charge of around $1.5 billion against its third-quarter earnings.

Regulators the Bermuda Monetary Authority and New York State Insurance Superintendent Eric Dinallo have approved the deal, which XL announced in its second-quarter earnings statement, and which will be funded by $2.5 billion that XL intends to raise by selling securities.

The sub-prime mortgage crisis has hit SCA, as the value of the mortgage-backed bonds it insures have plummeted. Ratings agencies have downgraded its operating units, thereby crippling its ability to write new business.

XL, which started up SCA and spun it off in 2006, was impacted through reinsurance contracts and guarantee agreements with SCA.

In the fourth quarter of last year, XL posted a loss of more than $1 billion, largely because of charges taken to reflect its SCA exposure. Uncertainty over the depth of XL's potential future losses relating to SCA shook investors' confidence and the share price nose-dived from $82.10 last summer to $18.37 at the close of regular trading yesterday.

Last night XL chief executive officer Michael McGavick said in a conference call with analysts that the SCA overhang had caused "a lot of noise around the franchise" and led to the company to believe that taking a one-time hit to put the problem behind it was the best course of action, as pressure from increasingly concerned ratings agencies rose.

"This burden is lifted," Mr. McGavick added. "SCA is behind us and we can go out and compete again... We expect to come roaring back."

Some of XL's employees will not be so upbeat, however, as jobs are axed in a cost-cutting exercise. The company did not make clear how many posts will go at the company's Bermudiana Road global headquarters. The company has 77 offices, located in 27 different countries, writing both insurance and reinsurance business.

"Given the softening market conditions, we will take actions during the remainder of 2008 to eliminate between $110 million and $120 million from XL's run rate operating expenses from 2009 onwards, reducing XL's expense base by approximately $70 million from 2008 levels," Mr. McGavick said in the statement.

"As a result of this we expect to record a charge of between $50 million and $60 million in the remainder of 2008. This expense reduction will involve all parts of the organisation geographically but the primary emphasis will be on streamlining corporate functions. This will be achieved through job eliminations, increased outsourcing and the cessation of certain projects and activities."

In the conference call, Mr. McGavick said XL's employees were its core assets and had enabled the company to become known for its underwriting prowess. He said there would be a "heavily targeted set of options grants to key customer-facing people" in order to energise and retain them.

The company is also to appoint a chief enterprise risk officer shortly.

XL had been seen by analysts as facing a tough choice between making a huge one-off payment to SCA and taking regular charges relating to the bond insurer for years to come.

As Mr. Dinallo said, commenting on XL in a conference call last night, without the deal "one of the largest reinsurers in the world would have been forever on the hook in rehabilitation".

Rob Haines, an analyst with CreditSights Inc. in New York, said: "In terms of XL, this is a huge cost to them, but it is something they essentially had no choice on. They may be able to stop themselves from becoming a self- fulfilling prophecy in which people begin to lose confidence in them."

Mr. McGavick said: "We have delivered on the commitment to put the SCA overhang firmly behind us and this will allow us to emphasise again XL's world class reputation as an insurer and reinsurer."

The agreement is expected to come into effect next month and will eliminate 98 percent of XL's exposure to SCA. The remaining exposure relates to five infrastructure projects in European Union, Mr. McGavick said, including toll roads and a hospital. These bonds were performing well and were seen as "too benign" to hold up the deal with SCA.

Mr. McGavick said XL intended to refocus on its property and casualty roots, and was "exploring strategic opportunities" related to its life reinsurance operations.