XL to recapitalize its former bond insurance unit

NEW YORK (Reuters) - XL Capital (XL.N), a large Bermuda-based insurer, said it plans to raise $2.5 billion (1.25 billion pounds) of capital to help recapitalize its former unit, Security Capital Assurance SCA.N, a bond insurance company it spun off in 2006.

XL Capital said it is paying $1.775 billion to Security Capital Assurance and some of its subsidiaries to end agreements with its former units. The New York State Insurance Department said XL Capital will also give 8 million ordinary shares to SCA subsidiaries.

SCA stopped writing new business earlier this year after posting a $1.2 billion loss for the fourth quarter.

SCA had been in litigation with Merrill Lynch MER.N regarding a series of credit derivatives it sold to the brokerage. That litigation was essentially ended as part of this transaction.

Hamilton, Bermuda-based XL Capital also said it recorded net income after preferred dividends of $237.9 million, or $1.34 a share, down from $544.5 million, or $3.00 a share in the same quarter a year earlier.

(Reporting by Dan Wilchins; Editing by Andre Grenon, Leslie Gevirtz)