The municipal bond reinsurance industry registered impressive profits through the first nine months of 1992, tracking big gains by the underlying primary insurers.

The two major reinsurers, Capital Re Corp. and Enhance Financial Services Group, generated a combined $51.5 million in net income for the first three quarters, a 30.4% increase over the $39.5 million they earned during the same period last year.

Capital Reinsurance Co. and Enhance Reinsurance Co., the municipal subsidiaries of the two companies, are the major reinsurers dedicated exclusively to the municipal market, accounting 70% of the industry.

Several European companies are also active in the municipal area as part of larger, multiline businesses.

Enhance Group took the biggest share of the industry's profits, with a $29.8 million slice. But Capital Re had a larger increase over 1991 results, showing a 35.6% rise, to $21.7 million from $16 million, compared with Enhance's 26.8% growth in net income.

On a statutory basis, Enhance's net income rose to $27.2 million from $22.9 million, while Capital Re's increased to $17.5 million from $6.9 million.

This year's unprecedented profits have come from record refundings and a surge in insured new issues, which are also at an all-time high.

Wallace O. Sellers, president and chief executive officer of Enhance, said both municipal reinsurance and specialty activities contributed to the company's strong bottom line.

"We saw a strong quarter in the municipal reinsurance business, with premiums written up 39% over last year's third quarter," Sellers said last week in a statement announcing the results. "Our specialty activities continued to do well and constituted 25% of net premiums written for the quarter."

On a year-to-date basis, Enhance's overall net premiums written rose 9.5%, to $39.1 million from $35.7 million. That figure includes municipal, asset-backed, and specialty activity business, such as the firm's primary insurance work. Enhance writes a small amount of primary municipal insurance for certain issues, usually when the size of the deal is too small for the major primary insurers.

Capital Re moved ahead of Enhance in the category of net premiums written for the first nine months with a 26.8% increase over last year, showing $44.5 million compared with Enhance's $39.1 million.

Michael E. Satz, chairman and chief executive officer of Capital Re, said his company's earnings were affected by new information related to the financial difficulties at Olympia & York, which has used Capital Re for some of its projects. Information on the extent of potential losses allowed Capital Re to refine its estimates of the problem and adjust reserves.

As a result, Capital Re established a loss reserve of $1.3 million during the third quarter and Credit Reinsurance Co., one of its subsidiaries, added $11.5 million to the $4.8 million loss reserve it established last May for an Olympia & York Eurobond issue.

The move cut $2.5 million from Credit Reinsurance Co.'s third-quarter equity income and reduced earnings per share by 53 cents for the nine-month period.

The loss reserves are now believed to be large enough to cover all expected future losses for the Eurobond issue and another Olympia & York project, 55 Water Street in Manhattan, according to Capital Re.

"In the context of a record level of revenues, strong earnings, and a continuing expansion of the municipal bond insurance market... the loss reserves relating to 55 Water Street have rapidly become a footnote in Capital Re's financial history," Satz said. "Our general expectation of positive growth in the income statement and balance sheet of the company has not changed."

Losses and loss adjustment expenses at Enhance totaled $5.4 million during the first nine months, compared to $4.2 million during the same period in 1991. Most of this year's loss reserve was established in the first half and is related to commercial real estate transactions.

Connie Lee Insurance Co., which focuses exclusively on the education sector, is active in both primary and reinsurance business. The company's net income for the first nine months was $4.3 million, a 59.3% rise over the $2.7 million recorded in 1991.

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