XL Capital falls on concerns over SCA stake

NEW YORK, June 11 (Reuters) - Shares of XL Capital (XL.N: Quote, Profile, Research), a large Bermuda insurer and reinsurer, fell as much as 9 percent on Wednesday on concerns it could be hurt by its investment in Security Capital Assurance Ltd.

XL shares fell after a court ruled that bond insurer SCA has to honor about $3 billion in protection written on collateralized debt obligations to Merrill Lynch & Co Inc MER.N.

XL was spun off SCA about two years ago and remains its largest stakeholder with a 46 percent stake. SCA has been hit by mounting losses tied to guarantees of a wide variety of securities, including collateralized debt obligations, that saw a slump in value as credit market conditions tightened.

Although XL has written off much of its investment in SCA, it remains on the hook for some of the losses that were booked before the spin off. In a statement late on Tuesday, XL said the Merrill transactions followed SCA's IPO, limiting its liability.

The key risk for XL is "significantly higher deterioration in pre-SCA IPO exposures," Goldman Sachs analyst Thomas Cholnoky said in an investor note.

Cholnoky said the court decision favors XL in the long run as it could give it a stronger stand in negotiating a settlement with SCA, which could curtail those liabilities. Cholnoky has a "buy" rating on XL shares.

XL shares were down $2 to $31.04 in midmorning trade, after touching an intraday low of $30.53, its lowest level in nearly seven weeks. SCA shares are due to be delisted from the New York Stock Exchange after its shares traded too long below the NYSE's $1 minimum listing standard.

(Reporting by Lilla Zuill; Editing by Derek Caney)

((lilla.zuill@thomsonreuters.com;+1 646 223 6281)) Keywords: dc XLCAPITAL/SHARES

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