"Most investors we have spoken with over the past several months had handicapped XL's chances of prevailing at 70 percent to 90 percent," Mr. Small wrote.

On Friday, XL Capital Chief Executive Officer Brian O'Hara said that he had received a draft actuarial report from the Independent Actuary in connection with the arbitration over reinsurance recoverables relating to its acquisition in 2001 of certain Winterthur Swiss Insurance Company subsidiaries.

XL said the actuary's report indicates Winterthur's seasoned net reserve and net premium recoverable amounts are closer to the independent actuary's estimate than XL Capital's.

"Since last February, management had repeatedly stated they expected to win and had reflected their estimate of approximately $1.45 billion in recoverables on the balance sheet," Mr. Small wrote.

Instead, Winterthur is expected to pay XL $575 million (including interest) for the net losses and unearned premium balances relating to the acquired business. That lower payment is expected to result in XL recording a net charge of about $830 million for the fourth quarter of this year, Mr. O'Hara said.

Mr. Small said such a charge would wipe out about 13 percent of book value and call into question XL's underwriting capacity as the renewal season approaches.

The company may have to cut back underwriting unless it can complete some multibillion-dollar equity raising effort in short order, Mr. Small added.

Mr. Meredith said the action could jeopardize the triple-A rating of XL's financial guarantee business if the entire operation is downgraded below the AA- level.

But he said he is still maintaining his buy recommendation since "the loss should not impact its business prospects in its traditional insurance and reinsurance business."

"XL still stands to be a major beneficiary of the firming property insurance and reinsurance market," Mr. Meredith wrote.

Mr. Small, however, sees the share price, currently at around $73, losing 15 percent to 20 percent of its value and is maintaining his underperform valuation. He has previously written that the hardening market that everyone expects could be a disappointment to the insurance industry.

Mr. O'Hara tried to put the best face on the announcement.

"While extremely disappointing, the IA's draft report removes the uncertainty that has existed since the process began," he said, asserting the acquisition was both a strategic and financial success.