Bond Insurers Buy Bermuda Shorts, Says Fitch IBCA.

NEW YORK--(BUSINESS WIRE)--Aug. 5, 1999--

The growth and globalization of financial guaranty insurance has attracted numerous new participants over the past few years.

Existing multiline insurance companies, as well as newly formed primary and reinsurance companies, now offer alternatives to the traditional monoline primaries and reinsurers.

Among existing companies, new participants include European insurers Zurich Re and Munich Re, Japanese insurers The Yasuda Fire and Marine Insurance Co., Ltd. (Yasuda) and The Mitsui Marine & Fire Insurance Co. (Mitsui), and Bermuda-based insurers XL Capital Ltd (XL) and ACE Ltd. (ACE).

The newly formed companies include Bermuda-based Commercial Guaranty Assurance, Ltd. (CGA) and RAM Reinsurance Co. Ltd. (RAM Re), as well as U.S.-based ACA Financial Guaranty Corp. (ACA).

The new entrants do not yet compete directly against established U.S. bond insurers Ambac Assurance Corp. (Ambac), Financial Guaranty Insurance Co. (FGIC), Financial Security Assurance Inc. (FSA), and MBIA Insurance Corp.

The ones that write primary business do so in two ways. Some, like Yasuda and Mitsui, partner with the established bond insurers (MBIA-AMBAC International), while ACA and CGA write transactions not pursued by the `big four'. XL pursues both strategies, partnering with FSA and writing its own transactions.

While many of the new entrants have different risk appetites than the big four, they nevertheless represent potential future competition.

The additional capacity, as well as the entrance of companies that provide only reinsurance like Zurich Re, Munich Re, and RAM Re, already provides an alternative to the traditional U.S. monoline reinsurers -- Capital Reinsurance Co. (Capital Reinsurance) and Enhance Reinsurance Co. -- and French reinsurer AXA Re Finance S.A.

Of the nine new financial guaranty participants, four are in Bermuda. This is no coincidence, as more than 1,500 insurance companies are now located in Bermuda and insurance and reinsurance has surpassed tourism as the island's leading revenue generating industry.

Bermuda has several advantages that make it attractive for insurance companies. The first of these is that Bermuda has no corporate income tax, allowing for higher returns. Furthermore, a company can apply for an exemption from paying taxes until 2016, should taxes be imposed after the company has formed.

Second, Bermuda reinsurers can provide financial guaranty coverage to U.S. primaries without incurring the expense of getting licenses in the U.S. or conforming to U.S. statutory regulations.

Third, Bermuda's regulatory environment is also generally less complicated and restrictive than U.S. jurisdictions, allowing for a streamlined incorporation and registration process. However, from a regulatory standpoint, Bermuda is generally more reputable than other tax-advantaged jurisdictions, as it has a treaty with the U.S. regarding insurance enterprise taxation that provides for mutual assistance in tax matters.

Fourth, the importance of insurance to the country's economy provides confidence that its regulators -- The Bermuda Monetary Authority (BMA), the Ministry of Finance, and Registrar of Companies (the registrar) -- will responsibly set and enforce the country's regulations and act to prevent fraud, which could undermine Bermuda's reputation as a global insurance power.

Finally, the frequency of flights and the island's proximity to major world cities make Bermuda a convenient place to do business.

Incorporation outside the U.S. has certain disadvantages for a financial guarantor. If an insurer is not licensed in a state, it may not write direct business there. However, insurance may be provided through a broker. Reinsurance provided by companies outside the U.S. is permitted, but statutory credit is given only if a letter of credit or other security agreements are made.

For a copy of Fitch IBCA's report on Bermuda Insurers, released Aug. 4, visit Fitch IBCA's web site at `www.fitchibca.com' or call Market Services in New York at 1-212-908-0500.