Sovereign Risk Insurance has achieved another first for Bermuda's insurance industry.

The company has written its first political-risk policy for a capital markets transaction which is also the largest such transaction anywhere to benefit from this type of insurance.

Political risk insurance has become a critical part of cross-border finance and direct investment in emerging markets and less developed nations. It is used to mitigate unpredictable risks arising from political events.

The policy was issued in connection with a $234 million offering of notes, or bonds, issued by the Salta Hydrocarbon Royalty Trust in Argentina. The use of this type of insurance to mitigate sovereign, or state, risks has allowed the bond issue to achieve an investment grade rating three points above the state rating for Argentina.

The 15 year, $74-million policy covers up to 31 months of interest payments on the notes against the risks of currency inconvertibility and currency nontransfer. It is the largest policy ever for a capital markets transaction insured by a private political risk insurer.

The bond issue has been underwritten by Lehman Brothers, Banco Macro and Santander Central Hispano Investment and it is rated by Standard & Poor's, Moody's and Fitch Inc. Collateral for the issue lies with certain oil and gas royalties due to the province of Salta in Argentina under existing concessions.

Mia Koo, director in Fitch Inc's International Structured Finance Group, said, "This transaction marks the first time an Argentine province has accessed the capital markets with an investment grade rating, due in part to the risk mitigation provided by Sovereign's policy.

"We believe the Salta transaction marks two trends that will continue through 2001 -- Argentina provincial debt issuance and increased use of political risk insurance to mitigate sovereign risks.'' Sovereign's president and chief executive officer, Price Lowenstein, commented, "We think the completion of the Salta transaction marks a significant expansion of Sovereign's product availability and a further evolution in the use of political risk insurance in the capital markets.

"We believe that utilising political risk insurance to elevate the ratings for these types of emerging market securitisations above the sovereign ceiling in sub-investment grade countries will be an increasingly popular structure.'' Sovereign is a 50-50 joint venture between ACE and XL, a specialist underwriting agency formed for the purpose of underwriting political risk on behalf of its two shareholders. Company liabilities, premiums and claims are shared equally between the two shareholders. Sovereign has become one of the world's leading providers of political risk insurance and reinsurance.

The products the company specialises in include the following. Expropriation cover protects lenders and investors against a broad range of actions by a host government that reduce or eliminate fundamental creditor and ownership rights.

Sovereign underwrites political risk It also covers outright expropriation, discriminatory legislative actions, deprivation of assets and other similar matters.

Currency Inconvertability/Exchange Transfer cover protects against losses arising from the inability to convert local currency into foreign exchange and transfer it outside the host country. Political Violence cover is for damage or loss caused by politically motivated events of war or revolution.

Clients include export credit agencies, multilateral agencies, equity investors and financial institutions.