NEW YORK (Bloomberg) — Security Capital Assurance Ltd., stripped of its AAA bond insurer ratings, rose the most in almost two months in over-the-counter trading after saying it's trying to cancel insurance it wrote on collateralised debt obligations.

"We intend to pursue our rights fully with respect to this matter," Paul Giordano, SCA's president and chief executive officer, said on a conference call today. Reserves for the $3.1 billion of mortgage-linked CDOs represent a "significant portion" of what the company set aside last quarter, he said.

Terminating the contracts would eliminate the potential for losses. Competitors such as MBIA Inc. and Ambac Financial Group Inc. may also seek to get out of the $100 billion of protection on CDOs tied to sub-prime mortgages that they've written if they're unable to shore up capital through "means less embarrassing to investment banks," said Janet Tavakoli, president of Chicago-based Tavakoli Structured Finance.

"The first shoe has dropped," Tavakoli, a consultant, wrote in a note to clients today.

SCA rose 13 cents, or 20 percent, to 79 cents, after climbing as high as $1.40. It was the biggest percentage gain since the stock rose 76 percent on January 23. New York Stock Exchange trading has been halted on the stock since March 3 after its price fell below $1. SCA stock, first sold to the public in 2006, has fallen 97 percent over the past year.

SCA on Thursday scrapped its dividend and said it will stop writing new business after posting a $1.2 billion fourth-quarter net loss. The company also said auditors won't question whether it can remain in business.

After SCA said in February it wouldn't meet its year-end filing deadline, the company said auditors might question its ability to continue as a "going concern." SCA in the fourth quarter put aside $651.5 million to cover claims on CDOs and $37.2 million for bonds backed by home equity loans. CDOs repackage pools of assets into new securities with varying risks.

SCA is seeking to terminate seven contracts on CDOs with an entity that it said hadn't met its obligations under the deal. The termination is being disputed by the other party, SCA said without identifying the entity. The insurer moved to end the so-called credit-default swaps this quarter after the counterparty failed to meet requirements "in a fundamental way," Giordano said. He said he wouldn't discuss the details of the issue, citing the recommendation of lawyers. The contracts represented more than half of the 13 that caused SCA to boost reserves last quarter.

The disputed contracts were responsible for $427.4 million of new reserves, according to a report yesterday by Fox-Pitt Kelton Cochran Caronia Waller analysts Gary Ransom and Amit Kumar, who didn't say with whom the contracts were written.

As part of efforts to meet or reduce capital needs, which include the possibility of reinsurance, SCA has been seeking to restructure contracts, Giordano said. SCA talked to banks and other firms who bought its protection on $16.8 billion of asset- backed CDOs on a one-on-one basis and "we are now in a process of organising them into a group," he said.

SCA hired Rothschild Inc. to help review its business after anticipated losses on sub-prime-mortgage securities resulted in crippling downgrades by the three major rating companies.