Insurer Thrives by Helping Lenders' Bottom Line

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Amerin Guaranty Corp. revels in being perceived as somewhat different from the rest of the mortgage insurance industry.

This is a company that, unlike other insurers, employs no retail sales force. Most of its employees work out of its downtown Chicago headquarters overlooking Lake Michigan.

This is a company that, at the Mortgage Bankers Association of America's annual conference in San Francisco last fall, hosted an after-hours cigar and port-tasting party for its customers.

And this is a company that, to the chagrin of some stock analysts who follow the industry, can seem more interested in helping lenders make money than in selling them insurance.

But there is method to this madness. Mortgage insurers have enjoyed healthy levels of profitability in the last few years while most mortgage lenders have been scrambling to make money in the highly competitive world of originating and servicing loans.

"There is a real imbalance in the marketplace," said Amerin executive vice president Jerome J. Selitto. "The question is when, not if, the lenders recognize the vendor is making more money."

Amerin says it is doing all it can to help large mortgage banks find ways to use mortgage insurance to increase profitability.

In fact, two of its highest-ranking executives have substantial experience in mortgage banking but little in mortgage insurance.

Mr. Selitto, who has been with Amerin since it was formed in 1992, started his career with a small thrift in Florida and had experience securitizing mortgages, with stints at First Chicago Capital Markets and PaineWebber.

And Roy J. Kasmar, who joined Amerin last year after more than seven years at Prudential Home Mortgage Corp., is chief operating officer.

Mr. Selitto and Mr. Kasmar are part of the office of the chairman, along with founder Gerald L. Friedman.

Mr. Selitto is in charge of marketing and sales. Mr. Kasmar heads risk management, legal, and administrative operations.

Part of Amerin's strategy is to cater to the larger lenders in the industry. When it was founded, many of the decisions regarding mortgage insurance were made by managers at the branch level, and the products were mainly differentiated by price. But Amerin set out to change this.

"When we created Amerin, we wanted lenders to think of the relationship with the mortgage insurer less like a vendor and more like a strategic partnership," Mr. Selitto said.

In reaching out to larger lenders, Amerin has a clear advantage in having executives who know what lenders want.

"What better way to have that understanding than to have participated as a lender?" Mr. Kasmar said.

Mortgage insurance is a product that protects lenders from defaults on loans with low down payments. Generally, borrowers must purchase mortgage insurance if they are putting less than 20% down.

But Amerin has given the industry a twist with two products designed to enhance lender profitability.

With lender-paid mortgage insurance for example, the lender, not the borrower, pays the insurance premiums.

But the lender comes out ahead by charging higher rates on the mortgage.

Borrowers in turn benefit because they can get a tax deduction from the extra interest paid. Mortgage insurance premiums paid by borrowers are not tax deductible.

Another of Amerin's products allows lenders to share mortgage insurance premiums. The lender sets up a reinsurance subsidiary and receives premiums commensurate with the risk that the reinsurer assumes.

Many lenders have taken notice. "There was very little difference in the way business was done until Amerin," said Marshall Gates, managing director of Countrywide Credit Industries, Pasadena, Calif., one of Amerin's biggest customers.

"Now there is a lot more competition for the larger lender's business."

But innovation has its price. Edwin Ciskowski, analyst for Cleary Gull Reiland & McDevitt in Milwaukee, said because Amerin is on the cutting edge with new products, that makes it a target for criticism when the industry has problems.

"A lot of the time, Amerin gets the blame for things in the industry," Mr. Ciskowski said.

Captive reinsurance is the subject of controversy in New York State, where the Insurance Department has warned insurers against using reinsurance as a means for receiving kickbacks.

And some analysts said they are concerned that Amerin's products have helped to contribute to a round of discounted pricing in the industry and that these policies will lead to lower profit margins for the mortgage insurers.

Jonathan Gray, an analyst for Sanford C. Bernstein, said if New York State barred captive reinsurance, it would bode well for the industry at large because it would lead to an elimination of one form of price competition.

Mr. Kasmar brushed this criticism aside. "I don't expect returns to totally collapse," he said. "I think there is a discipline in the industry that won't allow pricing to get out of control."

In the last few months, Amerin has gained additional high-profile customers such as PNC Mortgage Corp., North American Mortgage Co., and GMAC Mortgage Corp. Six of the 10 largest originators and 14 of the top 20 are Amerin customers.

But nearly two-thirds of Amerin's insurance in force last year came from three lenders, Norwest Mortgage Inc., Countrywide, and BankAmerica Mortgage. This concentration leaves some analysts concerned about possible erosion in market share if these companies decide to do more business with other insurers.

Mr. Kasmar said concerns about market share, though obviously important, are not an obsession for the company. Amerin's share is about 6%, making it one of the smaller companies in the industry.

"The company doesn't need double-digit market share to be successful," he said. Mr. Kasmar added that because of its size, Amerin is able to keep costs down to best serve the customers it already has.

And as other mortgage insurers begin to offer their own versions of lender-paid and captive programs, the larger lenders seem to recognize who has been the source of much of the new thinking in the industry.

"To their credit, the other mortgage insurance companies are keeping up with the changes in the industry, but Amerin was the initiator of them," said Countrywide's Mr. Gates.

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