Insurers Challenge Banc One's Plan for Reinsurance

Banc One Corp. has come under attack from the mortgage insurance industry.

Insurers have complained in a letter to the Office of the Comptroller of the Currency that the Columbus, Ohio, banking company is trying to horn in on their business through a mortgage reinsurance program.

The bank sent proposals to mortgage insurers in May that said it wants to assume as much as 75% of the risk on loans it would reinsure in a subsidiary it is establishing.

Mortgage Insurance Companies of America, the industry trade group, has asked the Comptroller's Office to review Banc One's plans.

An OCC spokesman said the agency is waiting for Banc One to respond to the group's concerns. He added that once this response is received the OCC will write back to the insurers group.

Mortgage insurers say the Banc One arrangement would make it more of a competitor than a partner because Banc One would get a majority of the insurance premiums. Brad L. Conner, senior vice president of Banc One Mortgage, said this claim is inaccurate because Banc One will not set premium rates and will not underwrite the initial insurance.

Several mortgage lenders are establishing reinsurance subsidiaries, hoping to share the profits of the mortgage insurance industry. By setting up a reinsurance subsidiary, the lender assumes portions of risk and receives some of the premiums from mortgage insurers.

Banc One got approval from the OCC in May to establish a mortgage reinsurance subsidiary.

Chase Manhattan Bank, PNC Bank Corp., and Norwest Corp. have also gotten approval from the OCC to set up reinsurance subsidiaries. Nonbank-owned lenders Countrywide Credit Industries and North American Mortgage already have mortgage reinsurance units.

The eight mortgage insurance companies have enjoyed high profitability in recent years. Mortgage banks have seen profit margins narrow as lending has become more commoditized.

"The mortgage insurance industry is saying, 'We know things have been good.' When you have oligopolies, sometimes there are situations where excess profits are being made," said Edwin Ciskowski, an analyst at Equitable Securities.

But the letter sent to Chase, the first bank approved by the OCC to set up a mortgage reinsurance subsidiary, explicitly stated that banks are not allowed to underwrite primary mortgage insurance.

Banc One's plans differ from other lenders' not only in the share of risk they are willing to assume but also in a willingness to pay claims from the first dollar of loss.

Industry observers said Banc One would be unwise to assume this type of risk. Although mortgage insurers have done well in recent years, the industry is vulnerable to economic downturns.

"When the time comes to write claim checks, this isn't the greatest business in the world," Mr. Ciskowski said.

Banc One is negotiating with two mortgage insurers to set up its subsidiary, Mr. Conner said.

Mark Amacher, vice president of strategic planning and marketing for United Guaranty Corp., said his company had negotiated with Banc One. But United Guaranty typically cedes only 15% of the risk.

Jonathan Gray, an analyst with Sanford C. Bernstein & Co., said such reinsurance deals "make absolutely no sense" for mortgage insurers. Companies would be able to gain market share, he said, but at the expense of profits.

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