NEW YORK (Reuters) ? The market for US municipal bond insurers grew last year despite a fall in debt issuance.

But the drop in supply, coupled with narrow credit spreads, might have discouraged new players from entering the fray.

?I think some of the ones who wanted to get into it are seeing this as a pretty tough time to start a company,? said Dick Smith, an analyst for Standard & Poor?s Ratings Services.

One company that has said it wants to enter the municipal bond insurance business, Dublin-based Depfa Bank still seems interested, Smith said. A New York Depfa official had no immediate comment.

In addition, one new competitor in the reinsurance field appeared in November: Wachovia Corp.?s BluePoint Re Limited. Jim Pierpoint, a Wachovia spokesman, did not say how many deals the Bermuda-based newcomer had reinsured.

The S&P analyst said municipal insurance can be an attractive business, partly because the risks are considered fairly low. Tax-free bonds enjoy a low default rate.

Municipal insurance also can be counter-cyclical to other insurance lines, such as property and casualty, which can prove volatile. But Smith said fewer new players were interested.

?At one point, we may have had a list of about 20 names, but most of them we haven?t heard from in a very long time, so I?m assuming they?ve disappeared,? he said.

Ratings agencies are often the first to hear of new ventures because the firms submit their business plans.

Though total muni bonds sold last year fell about $22 billion to just over $356 billion, the percentage of issues insured rose to 53.8 percent, according to data obtained by Reuters from bond insurance companies and Thomson Financial.

The percentage of munis that were insured gained three percentage points over 2003.

MBIA Insurance Corp., a unit of MBIA Inc., was the high scorer, insuring $53.9 billion, though that was down just over seven percent from a year ago.

Second was Financial Security Assurance, a unit of Belgian-French Dexia. It insured $46.9 billion in 2004, a 10.2 percent drop from the prior year.

Ambac Assurance Corp., of Ambac Financial Group, was third at $44.8 billion and that marked a 14 percent gain over 2003. Financial Guaranty Insurance Co. insured $32.3 billion, nearly eight percent more than in 2003.

Newer companies also grew. XL Capital Assurance, owned by XL Capital Ltd., backed $9.7 billion in bonds, up 4.3 percent. The fastest grower was CDC IXIS Financial Guaranty North America (CIFG), a unit of Paris-based CDC IXIS. It insured $2.6 billion in 2004, about five times the amount it insured in 2003.

The leading insurers have an edge, partly because they have ?an embedded book of profitable business?, said Thomas McLoughlin, who runs MBIA?s global public finance group. Insurers get upfront premiums but recognise the income over time.

But Thomas Abruzzo, a Fitch Ratings managing director, warned: ?I think the majors are concerned by the lack of opportunities out there in the marketplace, less origination volume and tighter spreads.? Demand for insurance often falls when credit spreads are narrow.

McLoughlin still sees growth areas, including privatisation of roads, bridges and airports. This trend, already established in Europe, is now being explored by US states and cities.