Analysts wondering why attempts to build new reinsurance companies are suddenly in the works might find a clue in the first-half earnings statements from the firms already doing business.
They show that the two major municipal bond reinsurers, Capital Re Corp. and Enhance Financial Services Group, both enjoyed unprecedented profits during the first six months of 1992.
Capital Re was the biggest gainer, showing a 42% increase in net income over last year's first half. Profits rose to $15.2 million from $10.7 million in 1991. On a statutory basis, the jump was even higher, to $10.5 million from $3.7 million, or a 184% increase.
Enhance Group's net income, which includes contributions from its two subsidiaries, Asset Guaranty Reinsurance Co. and Enhance Reinsurance Co., rose 22% for the half, to $18 million from $14.7 million. On a statutory basis, the figure jumped 31%, to $17.1 million from $13.1 million during the same period last year.
Enhance Reinsurance Co. and Capital Reinsurance Co., a subsidiary of Capital Re Corp., are the two major monoline reinsurers for the municipal market, accounting for about 70% of the industry. Several other European companies are active in the area, but only as part of larger multiline businesses.
With Enhance and Capital Re doing so well, it is not surprising others are looking for a piece of the action. too. Last month, a group of several insurance industry veterans announced they are looking for investment capital to start up a new monoline reinsurance competitor, dubbed MuniRe.
Insurance industry analysts say there seems to be room for another reinsurer, if the venture can raise the $100 million needed for a triple-A rating. Even then, the rewards would not be immediate.
"A new company will have to begin putting premiums on the books, and earning that premium is a slow process," said Sheila Brody, vice president of communications at Enhance. "As we've reiterated, we had the benefit of having assumed several large books of business when we came into the business."
Capital Re also acquired a large book of business during its first year of operation, said Alan Roseman, a senior vice president with the firm.
"If they don't have access to a large portfolio, it will be more difficult," Mr. Roseman said of MuniRe. "I guess they see our success as a calling card for their efforts, but our profit certainly has to be compared to the capital investment."
The profits that are attracting potential new entrants came on the strength of record refundings and a surge in insured new-issue volume during the first half.
"Refundings, as well as the earnings generated from our growing unearned premium reserve, contributed to substantially higher earned premiums year-over-year," Wallace O. Sellers, Enhance's president and chief executive officer, said in a statement.
For Enhance, refundings accounted for $4 million of the $21.8 million in premiums earned for the half, up from $2.4 million in 1991. Refundings added $2.1 million to Capital Re's total earned premiums of $12.5 million for the half.
Despite the big gains elsewhere, the net premiums written category was not strong for either reinsurer in the first half.
Capital Re saw net premiums written drop 6.3%, to $26.8 million from $28.6 million. Enhance was basically flat, moving to $23.9 million from $23.5 million last year.
Mr. Sellers attributed that to a high level of facultative activity in the first six months of 1991 that skews the half-to-half comparison. With facultative coverage, reinsurers take on a particular bond issue from a primary guarantor. With treaty reinsurance, on the other hand, a primary insurer cedes a portfolio of risks without allowing a review of particular credits.
Mr. Roseman said Capital Re's drop in net premiums written reflected a timing issue. The company planned a lot of retrocessions, or the ceding of business to other reinsurers, in the second quarter, he explained. But on an annualized basis the net premiums written category would even out, Mr. Roseman predicted.
Michael E. Satz, chairman and chief executive officer of Capital Re, said the company set earnings records for the half despite a $4.8 million loss reserve. An affiliate, Credit Reinsurance Co., established the reserve in May for losses related to Olympia & York's New York City real estate problems, he noted.
"The dramatic increase in earnings was attributable to growth in the municipal bond reinsurance market and an additional sharp rise in investment income," Mr. Satz said. "This more than offset the impact of the loss reserve."
Enhance built up $4.1 million in loss reserves in the first half, most of it set aside in the first quarter for potential claims on commercial real estate debt.
Reinsurers' strong showing on net income mirrors results from the major primary insurers, which also showed big profits for the half. The largest insurer, Municipal Bond Investors Assurance Corp., saw net income rise 43% on a statutory basis, to $92.4 million from $64.5 million.
Connie Lee Insurance Co., which focuses exclusively on the education sector, is active on both the primary and reinsurance sides. The company's first-half statutory net income was $1.27 million, compared to a loss of $73,700 in the first six months of 1991.