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INTRODUCTION
Capital Mortgage Insurance Corporation (CMI) sells insurance to lenders protecting against mortgage default losses. They are a wholly owned subsidiary of Northwest Equipment Corporation. Following their acquisition in 1978, CMI’s goal has been to rebuild their business and diversify their services. Mortgage insurance is used to protect mortgage lenders (ie originators and/or underwriters) by transferring mortgage risk, and notably tail risk, from lenders to insurers. Insurers by their nature provide services for events in the tail of distributions, whereas the banking sector tends to provide services closer to the mean of distributions. U.S.-based insurers are also significant participants in the global financial markets. As of year-end 2012, the L/H and P/C sectors reported $7.3 trillion in total assets – roughly half the size of total assets held by insured depository institutions. Of the $7.3 trillion in total assets, $6.8 trillion were invested assets. Insurers in the United States rank among the largest purchasers of corporate, sovereign, state, and local bonds. Insurer investment portfolios also include short-term commercial paper, asset backed securities, and other financial instruments. Some U.S. insurers are significant participants in other institutional markets, such as the derivatives and securities lending markets.
Framework
It is worthwhile considering four extreme cases, and then considering how migrations are likely to occur between the situations. The four situations are where the originator/lender has strong or weak underwriting, and the mortgage insurer has strong or weak insurance underwriting standards. This can be shown in a matrix as follows, together with a high level summary of the expectations under each of the four circumstances.

T
The insurance industry plays a vital role in the economy of the United States. Insurance premiums in the life and health (L/H) and property and casualty (P/C) insurance sectors totaled more than $1.1 trillion in 2012, or approximately 7 percent of gross domestic product. In the United States, insurers directly employ approximately 2.3 million people, or 1.7 percent of nonfarm payrolls. Separately, more than 2.3 million licensed insurance agents and brokers hold more than 6 million licenses.
The financial performance and condition of U.S. insurers continued to show recovery and improvement from the decline during the financial crisis. In 2012, the U.S. insurance industry reported record aggregate premium levels. Net written premiums in the United States were approximately $645 billion in the life and health (L/H) sector and approximately $460 billion in the property and casualty (P/C) sector. Tables 1 and 2 provide a snapshot of the L/H sector marketplace, listing the largest ten L/H insurance groups by 2012 direct premiums written and the concentration in terms of premium volume for life insurance (i.e., non-A&H) and for A&H lines of business, respectively.

Exhibit1
Major Employee Relocation Services Companies
Relocation
Parent Organization
Estimated 1978 Home Purchase
Estimated Value of Home Purchase
Estimated Gross Fee Income
Merrill Lynch Relocation
Merrill Lynch
13,000
$975,000,000
$26,800,000
Homequity
Peterson, Howell, & Heather
12,000
900,000,000
24,750,000
Equitable Relocation
Equitable Life Insurance
5,000
375,000,000
10,300,000
Employee Transfer
Chicago Title and Trust
5,000
375,000,000
10,300,000
Relocation Realty Corporation
Control Data Corporation
3,000
225,000,000
6,200,000
Executrans
Sears/Coldwell Banker
3,000
225,000,000
6,200,000
Transamerica Relocation
Transamerica, Inc.
3,000
225,000,000
6,200,000

Growth of variable annuity premiums is generally correlated with changes in the performance of equity markets. For example, as markets declined in 2008 and early 2009, sales of variable annuities decreased and surrenders increased. However, since 2010, the recovery in the equity markets combined with the low interest rate environment has led consumers seeking greater returns away from traditional life insurance products (e.g., fixed annuities and whole life insurance) and back to variable annuities. Variable annuities offer equity-based variable returns (i.e., based on the underlying values of a portfolio of equities). In addition, variable annuities often include a product feature that guarantees at least a certain minimum return or withdrawal benefit. Known as “minimum guaranty provisions,” these product features exposed insurers to market risk during the financial crisis.

Exhibit2
Hypothetical Employee Relocation Company Pro Forma Income Statement
1. Annual purchase volume of 2,000 homes.
2. Assume average holding period of 120 days. Inventory turns over three times annually, for an average of 667 units in inventory at any point in time.
3. Average home value of 75,000.
4. Existing mortgages on home average 50 percent of property value. Additional required capital will be 40 percent equity, 60 percent long-term debt.
5. Free income for corporate clients will average 2.75 percent of value of properties purchased
6. Operating expense will average 1 percent of value of properties purchased
Calculation
Total value of purchases
(2,000 units at $75,000) $150,000,000
Average inventory value 50,000,000
Capital required Existing mortgage 25,000,000 New-long term debt 15,000,000
Equity 10,000,000
Free income at 2.75% 4,125,000
Operating expenses at 1% 1,500,000
Net income $2,625,000
Tax at 50% (1,312,500)
Profit after tax $1,312,500
Return on equity 13.1%

References http://www.studymode.com/search_results.php?query=framework+Capital+Mortgage+Insurance+Corporation http://www.studymode.com/essays/Capital-Mortgage-Insurance-Corporation-a-1042920.html http://www.studymode.com/essays/Case-Summary-For-Capital-Mortgage-Insurance-780060.html http://www.studymode.com/search_results.php?query=capital+mortgage+insurance+coporation&start=20 http://www.housingfinance.org/uploads/Publicationsmanager/0506_New.pdf http://www.bis.org/publ/joint30.pdf https://www.google.co.th/search?newwindow=1&q=capital+mortgage+insurance+corporation+CTS&oq=capital+mortgage+insurance+corporation+CTS&gs_l=serp.3...1089868.1093859.0.1094266.5.5.0.0.0.0.205.656.2j2j1.5.0....0...1c.1.34.serp..3.2.269.E2fhxdJnh5Y Summary
The president and senior vice president of Capital Mortgage Insurance Corporation (CMI) hope to acquire Corporate Transfer Services (CTS). Currently, CMI is a business that sells mortgage insurance to banks and other mortgage lenders. However, executives at CMI desire to expand their business into the real estate relocation industry. Essentially, this industry works to assist employees who have been transferred to a new city as they try to find a new home. The president and vice president of CMI met with the four owners of CTS on multiple occasions. If CMI acquires CTS, it will provide them with a quick way to get started in the relocation industry. This makes the acquisition appealing to the CMI executives, despite the fact that financially, CTS has been struggling to break even.

Analysis
The reality is that CTS is not currently a flourishing company. They were only worth approximately $420,000 as of late 1978. CTS also owes millions of dollars in loans. If CMI acquires CTS, they will acquire these massive loans as well. However, the real estate relocation industry is rapidly growing, and the acquisition of CTS is a wonderful opportunity for CMI to expand beyond simply selling mortgage insurance.
Theory: BATNA, Collaborative (Win-Win), BREAK- EVEN
If a deal is not reached, CMI’s BATNA would be to either build a relocation services in-house or try to acquire a different company. As there are currently no other known targets for the latter, and the former could be expensive and time-consuming, a negotiated deal is the strong preference. CMI has some negotiating power because they are aware that CTS is struggling financially, and are desperate for a buyer. This desperation hurts the reputation of the owners’ motive in the negotiation. CMI also has power from their vision for the future. They have a concrete vision, buy-in from MetroNet, and are leading the way for independent parties to work together and rival Merrill Lynch.
Capital Mortgage Insurance Company (CMI)
Reservation Price: $1.02M ($600K over book value)
Target: $420K (book value of CTS)
Opening bid: $820K ($400K over book value)
Corporate Transfer Services (CTS)
Reservation Price: Unknown by CMI
Target: $5M+ for 80% ownership

Here is a three-pronged strategy for collaborative negotiation based on 1.10 Implementing a Collaborative Strategy (Lewicki 117) that will ensure CMI works towards a “win-win” solution. This makes the acquisition appealing to the CMI executives, despite the fact that financially, CTS has been struggling to break even.