Bermuda bond insurers take aim as MBIA, Ambac falter

By Walden Siew and Lilla Zuill - Analysis

NEW YORK/HAMILTON, Bermuda (Reuters) - As bond insurer titans MBIA Inc (MBI.N) and Ambac Financial Group (ABK.N) falter, smaller players in Bermuda, 700 miles off the U.S. seaboard are looking to take center stage.

The 21-square mile British territory is home to Assured Guaranty and CIFG, two of the biggest potential winners as rivals MBIA and Ambac, the world's two biggest bond insurers, suffer due to exposure to bad U.S. subprime mortgages and risky debt.

Along with No. 3 bond insurer FSA, based in New York, Assured and CIFG are expanding as competitors struggle to maintain their investment-grade "AAA" ratings.

"This is their opportunity to muscle in when the dominant players are ailing," says Rob Haines, senior insurance analyst at CreditSights Inc. in New York.

Along Bermudiana Road in Hamilton, known locally as "Insurance Row," pricey champagne and lavishly catered parties are still in high demand.

Companies like Assured Guaranty are on the move, this week opening a new office in Sydney to expand its business in Australia and Asia.

The firm's other greatest growth areas are in Britain, Spain and Italy, Assured CEO Dominic Frederico said in an interview.

"We see international operations as a great growth opportunity in Europe, Australia and Asia," Frederico said. "We could be No. 2 or No. 3 in terms of U.S. public finance deals. We should be able to grab a fair share of the market."

For a Factbox on bond insurers' rankings, see ID:nN09616523

Municipal bonds insured by MBIA; Ambac; FGIC, a unit of Blackstone Group LP (BX.N); XL Capital Assurance, a unit of Security Capital Assurance SCA.N, and others have dropped in value on fears that insurers could lose their top ratings due to insufficient capital plans.

Bonds insured by Assured and Dexia's (DEXI.BR) Financial Security Assurance have fared better, as those insurers are less vulnerable to downgrades since they have largely sidestepped exposure to risky debt securities known as collateralized debt obligations that generated high premiums during the boom years.

MBIA faltered last year by expanding into so-called structured finance and guaranteeing $8.1 billion of the riskiest of those CDOs.

Similar missteps may result in further losses for bond insurers and Wall Street banks.

MBIA shares suffered their biggest declines in 13 years after that revelation in December and had its biggest one-day decline ever in a volatile year. In January a year ago, MBIA stock traded at a record high.

MBIA fell almost 4.0 percent on Wednesday after saying it would cut its quarterly dividend while Ambac fell 0.9 percent. Both insurers' shares dropped more than 71 percent last year.