A Bermuda insurance executive impressed upon a largely banking audience in London the attributes of Bermuda as an innovative financial insurance market.

Tony Forster, chairman and CEO of Bermuda-based merchant banking-type and financial guarantee advisory company, Britannia Group, Ltd. was speaking about structuring with residual value insurance (RVI), during The Fifth Annual Leasing Life, London Leasing Forum.

The conference was designed to address the increasing fundamental changes to operational and commercial activities facing the leasing industry.

The industry is spending vast resources on dealing both with the Y2K or "millennium bug'' issue and the impending European monetary union.

Leasing also faces challenges from tax raising authorities who are cooperating with each other to reduce what they see as tax "leakage'' and those setting accounting standards could jeopardise the future of operating leasing.

Further, the industry is trying to come to grips with capital concentration, as new rounds of mergers and acquisitions are announced. And many believe the European union will bring further efforts at consolidation.

Against this backdrop, Mr. Forster, sporting his Bermuda shorts, participated in a discussion on the appeal of RVI and other residual value guarantee products to lessors.

RVI protects against catastrophic decrease in asset value. It offers asset owners insurance on the market value of certain insured assets at specified points in time. If the market value of these assets cannot be achieved through liquidation, a residual value insurance policy indemnifies the owner for the shortfall.

Expressed another way, RVI indemnifies an insured against a loss that results when the fair market value of a properly maintained asset is less than its insured residual value at a pre-specified future date.

Mr. Forster said that the best RVI deal ever done was arranged by Sir James Goldsmith with the chairman of Travelers Insurance Co, "which didn't know then and doesn't know to this day that it is in the business of RVI.'' He suspected that will change as a result of Travelers' announced merger with Citicorp, the largest ever banking/insurance merger.

Mr. Forster explained that Sir James wanted to buy US forest products group, Diamond International, for $1.1 billion, but was short by about $600 million.

He asked Travelers to guarantee that Diamond's standing timber would be worth at least $650 million in 12 months.

Mr. Forster said, "He paid a premium of about two percent up front and walked away with Diamond, which he immediately broke up to sell off the pieces.

Needless to say, he had a re-usable fall-back price on the standing timber, which actually sold for about 80 percent of its one billion dollar-plus market value.'' But he said RVI can be a very useful tool for lessors, and has been widely used for whole portfolios by the biggest and best lessors over more than 20 years.

For financial institutions, RVI converts an operating lease into a finance lease, evening out income and accelerating retained earnings when compared to an operating lease.

Since residual value insurers attract penalties from rating agencies relative to even minor risk taking, it would make sense for the agencies to equally credit insureds when analysing their risk.

BUSINESS BUC