acquisition of reinsurer Capital Re, declares ACE chairman Brian Duperreault.

Analysts applauded the move. Deidre Stark reports Bermuda-based insurance giant ACE Ltd. yesterday announced a deal to buy reinsurer New York-based Capital Re Corp. for $606 million in stock.

The move fits with ACE's continuing aggressive expansion through the company's diversification into specialty finance.

ACE will swap 0.6 of one of its share for each Capital Re share -- or $18.90 a share based on yesterday's price, which is a 1.8 percent discount from Capital Re's current value.

Analysts widely praised the deal as a smart move which nets ACE a quality company at a bargain price since Capital Re's stock market value has halved in the past year.

Capital Re shares fell 11 percent, or $2.25, to $17, while ACE stock eased 88 cents to $30.63 in Thursday trading on the tail of the buy out announcement.

The fall of Capital Re's shares occurred after it admitted yesterday one of its units was liable for a $67 million "exposure'' because of reinsurance with International Financial Services Life Insurance Co. Capital Re said this insurer was "under orders of rehabilitation'' from US regulators after an apparent looting of its funds which is under criminal investigation.

The buy out is expected to close in the second half of this year after regulatory and shareholder approval, with ACE's binding letter of intent revealing it will not pay more than $22 a share. This latest deal would allow Capital Re to spread its wings and expand into more profitable market segments.

The two insurers have been courting for months. In March, ACE agreed to buy roughly 11 percent of Capital Re for $75 million, signalling to many on Wall Street that it was thinking about buying the rest.

In March last year the two companies jointly formed a reinsurance venture to write both traditional and custom-designed programmes covering financial guaranty, mortgage guaranty and a broad range of financial risk.

ACE chairman, president and CEO Brian Duperreault said through the joint venture ACE had been impressed with Capital Re's management and business.

"We believe that ACE's strong capital base and favourable location can enhance Capital Re's already profitable enterprise,'' he said.

The acquisition was a "significant step'' towards ACE's goal of diversification, bolstering its appeal as a specialty property and casualty insurance company.

Moody's Investors Service in March downgraded the triple-A financial strength rating of Capital Re unit Capital Reinsurance Co., due to tough competition and the company taking on more risk. One Connecticut-based analyst said yesterday's deal effectively got Capital Re "off the hook''.

"With the downgrade, they were in rather difficult straits. And since ACE has got plenty of cash, they can probably get the rating back up.'' Earlier this year ACE agreed to acquire the property-casualty business CIGNA Corp. for $3.45 billion in cash. In 1998, Capital Re's net income was $1.27 a share, compared with $2.16 a share from a year-earlier.