Four of the nine new companies formed recently to compete in the bond insurance sector are based in Bermuda. Ahmed ElAmin looks at a new report on the potentially lucrative market and how the Bermuda market is developing a name for itself among financial guarantors.

In the last few years Bermuda has emerged as a new powerhouse in the bond insurance market, according to a new report by rating agency Fitch IBCA.

Bond insurers, known generally as financial guaranty companies, cover bond payments or principal on default thus helping to boost the rating and price of an issue.

Out of nine new financial guaranty companies formed worldwide to compete in the industry four are in Bermuda. The companies are ACE Ltd. and Capital Re Corp.'s combination, XL Capital Ltd.'s joint ventures with Financial Security Assurance International Ltd., CGA Group Ltd., and RAM Reinsurance Co. Ltd.

Waiting in the wings is Global Markets Access Ltd. which failed in March this year to raise capital through an initial public offering and is now looking for alternate sources of capital.

Fitch stated that Bermuda has several advantages which make it attractive as a location for insurance companies, including the lack of corporate income tax, the ability of reinsurers to provide financial guaranty coverage to US primary companies without having to get licences, a less restrictive regulatory environment, and confidence in regulators.

In relation to ACE's entry into the market through the planned merger with Capital Re, Fitch noted the company is one of two major US financial guaranty reinsurers.

Fitch also noted that the merger was announced when Capital Re announced a potential $67 million loss from transactions with International Financial Services Life Insurance Co. (IFS).

"IFS is one of the subsidiaries of Thunor Trust run by Martin Frankel, who is currently being sought by authorities in connection with the theft of IFS assets,'' Fitch stated.

The XL joint venture with FSA resulted in two companies to the sector. FSA Financial Security Assurance International Ltd. writes non-US financial guaranty business and assumes a portion of FSA's US business. XL Financial Assurance Ltd. is a reinsurer and in some cases insurer of obligations that generally have higher risk and return than other monoline insurers. The company guarantees securitisations, including collateralised bond obligations and load obligations, consumer assets and corporate pooled transactions.

CGA Group, started in 1997, provides bond insurance on medium-term notes and other debt securities and liabilities issued by investment vehicles to fund the purchase of structured finance securities.

The company provides financial guaranty insurance through Bermuda-based subsidiary CGA, and investment management services through New York subsidiary CGA Investment Management, Inc.

CGA got hit for about $20.8 million when CGA-insured investment vehicles bought several CFS credit card receivable-backed transactions and were unable to sell the securities after they lost value and fraud was discovered.

In the last half of last year, CGA faced a liquidity crunch created by the emerging market and hedge fund crisis. CGA was in danger of losing money when market values dropped and some insured investment vehicles were facing calls on financing facilities.

"However, asset values recovered, thereby relieving the danger,'' Fitch said.

"Management has since tightened liquidity guidelines and controls. Except for CFS, the company has not incurred any credit losses on its assets.'' RAM Re, which has set up offices at the RAM Re building on Reid Street, began operations early last year to reinsure monoline financial guarantee business.

In its first 12 months RAM Re has assumed about $4 billion in par. Robert A.

Meyer is founder and chief executive officer of the company.