Mortgage Guaranty Insurance Corp. has moved to reassume $7.5 billion of mortgage insurance risk it had farmed out to a reinsurer over the past nine years.

MGIC, one of the nation's largest mortgage insurers, is reassuming risk it had transferred to European General Reinsurance Co., Zurich. In doing so, MGIC will add about 10% to the value of loans it directly insures.

The Milwaukee-based insurer also announced that, beginning Jan. 1, it will no longer use reinsurance for its main book of business. The company will continue to employ reinsurance as a form of credit enhancement insurance written by a small triple-A-rated unit.

Common Practice

Reinsurers, who assume a portion of an insurance company's risk in exchange for a portion of the premiums, are commonly used by mortgage insurers that wish to write more insurance than their capital structure can support.

"We feel that the reassumption of the book will have a positive impact on revenues, and we feel strongly about the high quality" of the insurance policies, said James S. MacLeod, senior vice president.

MGIC is able to take back the risk because it has salted away profits since 1990, thus accreting the needed capital.

The company was forced to rely heavily on reinsurers in the late 1980s and early 1990s, sometimes ceding between 25% and 35% of its mortgage insurance bookings a year.

Keeping Customers Happy

MGIC elected to use reinsurance, rather than simply limiting its book of insurance written, to allow it to accommodate customers which the company viewed as good risks and with which it wanted to foster strong relationships.

As capital has grown, the percentage of bookings reinsured has shrunk to 15% in 1992 and 7% this year.

MGIC officials see its move away from reinsurance as both a vote of confidence in its own mix of business, but also one in the economy. "We feel our book is dispersed [geographically] enough, and we also feel the economy is coming together," said Mr. MacLeod.

Shrinking Market Seen

Bill Boak, a senior analyst at Moody's Investors Service Inc. who follows the mortgage insurance industry, feels that the move may represent a calculation on MGIC's part that the market for mortgage insurance may shrink next year. With the Mortgage Bankers Association of America predicting a 20% decline in originations in 1994, it may not be a bad bet.

Winterthur Reinsurance, AXA Reinsurance, and Zurich Reinsurance continue to have a substantial book of policies written in 1985-93 by MGIC.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.