XL Capital chief executive officer Brian O'Hara said yesterday that the company had "taken the full measure of pain" related to its sub-prime mortgage-linked problems and expected no more related losses, after XL announced a fourth-quarter loss of more than $1 billion on Tuesday.

The $1.5 billion charge that XL took to account for its exposure to the sub-prime and credit-market crisis had come when the global business insurer was on course to post a record annual profit of $2 billion, Mr. O'Hara told The Royal Gazette, and he insisted that XL's core business was still "in good shape".

And he revealed that the XL board expected to decide on his successor as CEO by early spring. XL announced last October that Mr. O'Hara would step down in mid-2008 after 14 years as CEO, and would remain as chairman for another year.

The majority of the fourth-quarter losses were down to XL's involvement in Security Capital Assurance (SCA), a bond insurer in which XL owns a 46-percent share. Some of the mortgage-linked securities which SCA guarantees have plummeted in value as a wave of delinquencies has swept the US, as property prices have plunged, and SCA has lost more than 80 percent of his market value since last summer.

Former XL chairman Michael Esposito stepped down last year to concentrate on his role as chairman of SCA.Mr. O'Hara said the whole financial guaranty industry, not only SCA, had "lulled itself into a false sense of security" over investment products linked to sub-prime mortgages, high-risk loans lent to people with poor creditworthiness.

"We don't anticipate anything more emerging in future quarters," Mr. O'Hara said. "We have taken the full measure of pain. We still have $117 million of equity in SCA and if conditions deteriorate further than expected, then it is a possibility that it could be written down further. But once gets to zero, if it goes that far, that's it."

XL reported a $1.06 billion loss for the last three months of 2007, which wiped out the earnings from the previous two quarters and surpassed the $1.04 billion loss the company recorded in the third quarter of 2005 in the wake of Hurricane Katrina.

The CEO admitted that employees had not been happy with the situation, but staff retention rates remained good, internal communications were strong and the comments of staff members were welcomed by senior management.

"We've been tested a number of times and I believe that most employees understand that these problems emanated from an area we had already said we were exiting, because it did not fit our culture," Mr. O'Hara said. "It was unfortunate we couldn't exit before those problems occurred.

"Certainly people are not happy about this marring what was going to be a year of record earnings. Without the effects of the credit crisis we were on course for full-year net income of $2 billion."

XL shares fell three cents to $43.97 in trading on the New York Stock Exchange yesterday and have lost 37 percent of their value over the past 12 months.

Mr. O'Hara hoped investors and shareholders would appreciate the company's immediate efforts to deal with the problems and not leave the issues hanging.The company's difficulties were exacerbated last month by downgrades in credit ratings from rating agencies Fitch and AM Best. Mr. O'Hara defended XL against the suggestion, made in commentary by AM Best, that "risk management controls are below expectations" at the company.

He said XL's core property and casualty business was still performing well, benefitting from sound risk management. Net income for the fourth quarter, excluding the charges, was $440 million and full-year combined ratio for 2007 was 88.8 percent. Combined ratio is a measure of underwriting profitability, with anything under 100 percent indicating a profit.

"SCA was responsible for the risk management as far as these problems go and if they are guilty, then so are all the major players in the financial guaranty industry," Mr. O'Hara said. "One of the two major players lost more in the last two quarters than it had in the last 28 years in aggregates.

"Everybody thought the financial guaranty industry was pretty smart, but it lulled itself into a false sense of security. It was all due to a new product that they fell into, which was not a good product."He was referring to securities linked to sub-prime mortgages and, in particular, collateralised debt obligations (CDOs), which are securities backed by a pool of bonds, loans and other assets. "The whole financial guaranty industry, including those that had triple AAA ratings (top ratings from agencies Moody's, S&P and Fitch) all got into this new product line," Mr. O'Hara added.

Exposure to the sub-prime debacle has so far caused more than $130 billion of write-downs by some of the world's biggest banks, including Merrill Lynch, Citigroup, Bear Stearns and UBS. It has also wiped billions of dollars off the value of mutual funds and pension funds and stock markets around the world have fallen, as fears grow that the housing and credit crisis could lead to a recession in the US.

"The credit markets got frothy," Mr. O'Hara said. "There was too much easy money and it got easier. The level of risk management in banking and investment banking became very slack. People were taking out what they thought was easy money and pushed further in. The full story still has to unfold, as to how this thing developed.

"Entire industries had managed to get themselves into trouble before, he added, giving the example of the dot-com boom in the 1990s. Mr. O'Hara pointed out that Standard & Poor's, which unlike insurance specialist AM Best rates the financial guaranty companies, had opted to affirm its A+ financial strength rating of XL, even after the charges were announced.

One Fortune 50 client said to XL this week that it "had no concern about the rating changes, because they know we are the best claims-payer in the industry", Mr. O'Hara said.

The client was more concerned about the choice of the next CEO and that the person chosen should continue in the same vein.

"We are well progressed in that process and we expect the board to come to a decision early in the spring," Mr. O'Hara, who is acting chairman, added.AM Best also expressed concerns about XL's potential for further sub-prime-related losses in its directors and officers (D&O) and errors and omissions (E&O) lines, which cover management of companies against shareholders' legal claims.Mr. O'Hara said he was confident that D&O losses would be "held within our loss ratio".

After many companies have lost a large portion of their share value during the crisis, more class action lawsuits are expected. Mr. O'Hara said: "This obviously will take some of the profit margin out of the business, not just for us, but for the industry."

The CEO believes opportunities will emerge for XL as the world financial crisis subsides, particularly in D&O insurance and in the investment area, as many stocks had been oversold.