For the first time in its nearly eight year history, Bermuda political risk insurer Sovereign Risk is seeing the world as a slightly less risky place.

Insurers are in the business of risk so at first glance one might think this could mean a decline in business opportunities, but the political risk market is still a very active sector, Sovereign CEO Price Lowenstein told

Sovereign is the only Bermuda-based company that is a dedicated provider of primary political risk insurance. This ?niche? market has only a handful of global players.

Sovereign runs its business ? a $5.9 billion portfolio covering political risks around the globe ? from its Wessex House offices in Hamilton with only ten staff ? and that number includes support positions. But don?t let the lean nature of the company fool you ? the company ranks third as a private political risk insurer.

Only the political risk units of AIG and Zurich are larger, both in terms of staff size and portfolio.

?We compete against them [with each having global offices and up to four times Sovereign?s staff with ten people in Bermuda,? Mr. Lowenstein said.

Sovereign ? set up as a 50-50 joint venture by Bermuda insurance stalwarts ACE Limited and XL Capital ? has seen a steady call for its product and services, namely to underwrite the risks of projects in emerging markets, since it opened its doors in 1997.

But in the last year or two, the world has become a relatively less risky place ? at least from the perspective of those those involved with economic projects in emerging markets ? because it has been two years and counting since the last major economic crisis (Argentina) and none appear to be on the horizon.

There are however still plenty of nations where shaky economic conditions and unrest make the risk proposition for projects within those borders ones Sovereign Risk can?t touch.

?The factors [that need to be in place for us to take part in a deal are that the project makes economic sense and that the banks and the borrowers have a good track record. Our analysis is really two parts: country risk and project risk. You start with the country, from a macro-economic risk, and then you look at the project risk. If the two make sense than it is something we can work with.?

Recently Sovereign undertook a deal with the International Finance Corporation (IFC), the private sector lending group of the World Bank, in connection with a gas pipeline project in Bolivia.

It is the first time a large energy project in Bolivia has been touched by Sovereign, with the country largely being a no-go zone because of its political situation and unrest.

Sovereign ? which operates on a very selective criteria for the deals it becomes involved in ? turns away about 90 percent of the deals it vets.

Mr. Lowenstein said on a global basis Turkey is Sovereign?s most active market, followed by Russia, Indonesia and the Ukraine.

Sovereign?s $5.9 billion portfolio is distributed around the world, with the largest share of business in Asia (28 percent), Eastern Europe and the Former Soviet Union (25 percent), and 18 percent business in Africa and the Middle East. South and Central America account for 17 percent and 12 percent of Sovereign?s business portfolio, respectively.

?If we were sat here two years ago we would have been talking about Argentina, Brazil, Colombia and Peru but our Latin business has really slowed down quite a bit since the Argentine default in 2002.?

Mr. Lowenstein said there were still opportunities in some areas in the Latin American region ? a market that used to be a large one for Sovereign but is now seen as quite risky ? with business activity coming out of Brazil and Colombia, opportunities in the political risk sector for mining projects in Peru and even some projects in Argentina.

Sovereign?s political risk map for 2005 shows that from a risk perspective, Brazil is a better bet than Argentina, for example.

Mr. Lowenstein said Sovereign Risk is also seeing some opportunities in the oil and gas sectors in Africa, including business opportunities in Angola.

A slightly improved situation in some Latin American countries, as well as in other parts of the world, could be just as well given another larger market for Sovereign ? Turkey ? may in short order join the EU, a development that would likely give investors heart to participate in projects without the necessity of political risk insurance.

Although underwriters in the property-casualty insurance sector take it for granted that they will go through periods where volume falls because prices are too low, Mr. Lowenstein said Sovereign follows a different business model, one that is tied to lending spreads. And it is the first time in its nearly eight-year history that lending spreads are declining.

?Lower spreads theoretically mean less risk. There is always pressure between trying to grow the business and writing good risk that doesn?t result in lots of claims. We have had a number of discussions at the board level, asking do you want us to be more aggressive and grow the business, but taking more risk, or do you want us to remain patient, conservative? They are on that [latter side. They are very supportive of [that approach in the current spread environment. That is clearly the right thing to do.

?We operate under very specific operating guidelines set by our board of directors and reviewed every quarter.?

And its board of directors? A hard-hitting team composed of the senior management from Sovereign?s owners ? Brian Duperreault (ACE chairman), Evan Greenberg (ACE CEO and president) and David Furby (president and CEO, ACE Tempest Re), Michael Esposito (XL Capital chairman), Brian O?Hara (XL Capital CEO and president) and Paul Giordano (executive vice-president, CEO of Financial Products & Services).

Mr. Lowenstein said some of Sovereign?s competitors were taking a different, generally more aggressive, approach in the current market.

?At least one is just going after growth and market share, and I think they could get themselves into trouble doing that.?

Although premium income may have been affected, Sovereign will likely pay out less in claims in this environment.

?It is a good because it will keep claims activity low but it is bad because when commercial banking spreads are down that has an effect on our premiums.

?We follow commercial bank lending margins to emerging markets which currently are very low. This is posing quite a challenge to us in terms of growing our business. The spread climate is very tight right now. The reason for this there has not been a crisis in the emerging markets since Argentina, and the perception of risk in emerging markets is much lower now than in years past, and there is a ton of competition between banks to finance projects in emerging markets.?

But the company hasn?t seen its volume of business affected, just the price it can charge for premiums. Although taking in less for the business it writes, there is a corresponding expectation that there will be fewer claims to take a bite out of the company?s earnings. The net effect is business prospects continue to be strong.

In the current climate, political risk premiums carry a lower price tag. ?We have to charge less. Our premium fits within a bank?s lending margin, with most of our client?s being banks. If the lending margin is two percent, the bank will pay us something inside of that. We really follow the bank market, not the insurance property-casualty [cycle.?

?This has been a trend accelerating in the last year. Our volumes are the same but premium levels are down slightly, year on year.?

Mr. Lowenstein said: ?Typically our business is with countries that are somewhere in that spot between investment grade and basket case. Vietnam is a good example. It has migrated from basket case into our zone, and in the next five to ten years it will probably migrate to investment grade.

?The mix of countries changes, the demands of clients changes but the need for political risk mitigation will always be there,? he said.

With the support of its board of directors, Sovereign is taking a cautious approach in these market conditions. ?We are basically being patient and walking away from a lot of business that we think is fundamentally underpriced. It can be frustrating but it is the right thing to do.?

Sovereign posted $62.7 million in premium income last year, and Mr. Lowenstein cautiously predicts that a modest decline will be posted when Sovereign, which is on the half-year calendar, posts its year-end earnings at the end of June.

In the end the current market environment is one Sovereign?s staff may have to get used to operating in, at least for the next while.

?We don?t see any big events on the horizon to change the current climate of stability. To really jolt the banking market into charging higher margins there would have to be something like a banking crisis in China, a problem with the Saudi royal family or Putin being overthrown in Russia...it would take something pretty major in the emerging markets.?