board, as ACE exercised its rights after $75m investment in Cap Re. Roger Crombie reports.

The battle for ownership of Capital Re Corporation took a twist and then an unexpected turn yesterday, as neither Bermuda suitor -- original bidder ACE and late rival XL Capital -- showed any signs of losing interest.

XL's move was announced first, an increase in its offer to acquire Capital Re in a one-step merger transaction, for $13 per share, a 50-cent increase on its original offer, made last Thursday, of $12.50 per share. XL's offer is all in cash, which would be subject to taxation in the hands of the recipients.

XL had announced on Friday that it had entered into a confidentiality agreement with Cap Re on October 6 regarding its offer, although XL broke the news of the sweetened offer itself.

Cap Re shareholders had been set to vote last week on ACE's original all-stock offer, believed to value Cap Re at $606 million.

Instead, the board of Cap Re met on Sunday.

Two top ACE executives, Dominic Frederico and Donald Kramer were elected to Cap Re's board in accordance with an agreement signed between ACE and Cap re some months ago, when ACE invested $75 million in Cap Re.

"ACE has exercised its rights obtained in connection with its investment in Cap Re ... to elect two new (board) members,'' Cap Re said yesterday.

The move could potentially place Mr. Frederico and Mr. Kramer in an odd position; as directors of Cap Re, both must act in the best interests of the shareholders of Cap Re.

Presumably, their view of the best interests of the company would favour the ACE bid.

"It's just business,'' said an ACE insider, asked whether the battle was engendering bad blood between two of Bermuda's largest international companies.

"We continue to be interested in Cap Re,'' said an ACE spokesman yesterday, adding: "We are aware of our rights and privileges under our contract with Cap Re.'' The two Bermuda companies were working together yesterday as joint hosts of the Bermuda Angle.

This is a conference attended by investment analysts, brokers and others who follow the companies' stocks, at the Southampton Princess.

Cap Re is one of two companies which dominate the financial guaranty insurance market.

It operates two divisions, financial guaranty and financial risks, engaged in the business of municipal and non-municipal financial guaranty insurance, or "bond insurance'', mortgage guaranty insurance, title reinsurance, trade credit insurance and financial solutions.

Four new companies have started to sell financial guaranty insurance in Bermuda in the past two years, a move welcomed by the giants, Cap Re and Enhance, as a broadening of their market.

Taken on board: Dominic Frederico, who has been elected on to the Cap Re board.