Capital Re Corp. has formed a subsidiary to offer reinsurance to mortgage insurers, the company announced.
The unit, Capital Mortgage Reinsurance Co., will be the first American entrant into mortgage reinsurance, according to David A. Buzen, chief financial officer of Capital Re.
Reinsurers assume a portion of an insurer's risk in exchange for a portion of the premiums.
With Mortgage Guaranty Insurance Corp., one of the largest mortgage insurers, eliminating its use of reinsurance in 1994 and with mortgage originations generally expected to fall, it may seem to be a difficult environment in which to enter the field.
An Enormous Industry'
Capital Re shouldn't find these facts too daunting, according to one analyst. "Mortgage insurance is an enormous industry and if [Capital Mortgage] can win just a small portion of the amount reinsured, it will be a significant amount of business from its perspective," said Robert G. Hottensen Jr., an analyst who covers the industry for Goldman, Sachs & Co.
For its part, Capital Mortgage Reinsurance is concentrating on long-term goals and the advantages it sees in serving the mortgage insurance industry.
"We are cautiously optimistic," said Mr. Buzen, "We think one thing we can offer is the ability to tailor reinsurance to meet specific needs."
Typically, reinsurers simply are ceded a certain agreed-upon percentage of all mortgage insurance written by a firm.
While Capital Mortgage will offer this type of "treaty share" reinsurance, it will also have the capability to offer more specialized types of service, said Mr. Buzen.
Thus, if a mortgage insurance company wants to farm out a higher potion of the risk for its policies written in, say, Missouri, it will be possible to do so.
Also, if an insurer wishes to write a specific book of mortgage insurance that it believes will have a higher loss ratio, it.will be able to cede portions of this business to Capital Mortgage Re under certain conditions.
Expanding the Business
It is the company's hope that this will allow it. to expand its book of business beyond insurers who wish to reinsure for the usual statutory or regulatory reasons, said Mr. Buzen.
Capital Mortgage will also offer reinsurance of mortgage-backed security pool insurance. Pool insurance is offered by mortgage insurers to the securitizers, which use it as a form of credit enhancement.
Many pool insurers have made a practice of farming out risk to other pool insurers. Capital Re will now perform the same function.
Initially, the company is being capitalized by its parent, which is extending a total of $150 million in funding.
The company expects to begin offering primary mortgage reinsurance and pool reinsurance late in the first quarter of 1994.