New York-based financial guarantee insurer XL Capital Assurance has set up a new, separately capitalised subsidiary, XL Capital Assurance-(UK). As an insurer regulated by the UK Financial Services Authority, the new company will be able to provide insurance wraps for capital market transactions including CDOs and other asset-backed securities in Europe.

The launch of the new company, rated triple A by Moody's, Standard & Poor's and Fitch Ratings, puts XL Capital Assurance on the same footing as monolines such as Ambac, MBIA and Financial Security Assurance, which also have European insurance subsidiaries.

"This fills out our strategy in Europe," says Michael Rego, managing director in XL Capital Assurance's London office and head of the new company. "It means that we now have a platform that allows us flexibility in the way we execute transactions. Through an affiliate, XL is able to provide services as a derivatives arranger with respect to ISDA-documented credit derivatives, or we can take credit risk in a more traditional way by issuing a monoline insurance policy."

One of the company's first priorities is to wrap a European cashflow CDO. "Provided we find the right deal, we would like to provide a guarantee for a European cash CDO in the fourth quarter," says Rego. "This would allow us to establish an inaugural issue in the market."

While some financial guarantee companies look set to pull back from the credit market, XL Capital Assurance remains committed to CDOs. "While the overall market for synthetic CDOs has had a mixed performance, XL Capital Assurance continues to believe that careful structuring and deal selection results in strong performance in this sector," says Rego. "And we remain committed to participating along those lines.

"However, there are many other types of asset-backed transactions that interest us, such as residential mortgages and whole company securitisation. We are also enthusiastic about the use of CDO technology in areas beyond corporate bonds and loans, such as in hedge fund and private equity-backed CDOs."