THEY ARE

far from glamorous. There are no dot coms at the end of their corporate names. But the reinsurance industry has been yet another part of the financial services sector that is undergoing swift consolidation this year. And takeover talk is always sexy even if the business is arcane.

In June, Warren Buffett's Berkshire Hathaway announced that it would purchase General Re for about $22 billion. Last month, Jack Welch's General Electric agreed to buy Kemper Reinsurance, a privately held firm, for $500 million. And if that wasn't enough, Swiss Re, the world's second largest reinsurer, also announced a deal last month. It is purchasing American reinsurer Life Re for about $1.8 billion.

So when another reinsurer, Capital Re, showed up on this week's SmartMoney earnings revision screen, we figured we couldn't go wrong examining a company that could be a takeover target but that also appears to have the earnings growth necessary to thrive on its own.

Capital Re is a bit different from some of the other reinsurers that have been bought recently. General Re and Kemper Re are reinsurers of property and casualty policies. Life Re, as the name suggests, is a reinsurer of life insurance. Essentially, reinsurers buy policies from other insurers to spread the primary insurer's risk. They receive a portion of premiums in exchange for assuming some of the claim risks.

But Capital Re, which began business in 1988 almost exclusively as a municipal bond reinsurer, focuses on several other highly specialized and profitable areas of reinsurance in addition to its bond business: mortgage, trade credit and title insurance.

"Capital Re has been able to find real niche markets that are not as competitive and have nice upside with relatively stable margins. Most insurance companies are fighting over super-ultra competitive markets with lower top line growth," says Adam Klauber, an analyst with Cochran, Caronia & Co., a research firm that specializes in the insurance sector.

Klauber says with the recent flurry of consolidation in the reinsurance sector, you can't rule out Capital Re as a takeover candidate. But because of the high degree of specialty in the business, there might be less interest from prospective buyers, he says.

That shouldn't worry investors. Capital Re doesn't appear to have any pressing need to sell out. Its niche strategy has enabled the company to post a steady level of 14% earnings gains in the last five years. Second-quarter earnings, reported last month, increased 18% to 59 cents a share, beating the consensus estimate by a penny. Revenue increased 47%, fueled by a 64% gain in net premiums earned.

Estimates for 1998 and 1999 have been raised recently as well (the main criteria for landing on this screen in the first place). In the last month, the 1998 consensus estimate has been lifted 1.3% to $2.35 a share while 1999 estimates increased 1.8% to $2.68.

The mortgage insurance sector has been particularly rewarding. Low interest rates and a strong economy have contributed to a strong demand for new housing over the last year or so. Many homebuyers require mortgage insurance because they are putting a low down payment on the home -- usually less than 20% of the home's selling price. Mortgage insurance companies such as MGIC Investment and CMAC Investment have seen their earnings grow dramatically during this time. And as demand for mortgage insurance increases, Capital Re, which purchases policies from mortgage insurers like MGIC and CMAC, benefits. Klauber estimates that mortgage premiums will account for 26% of Capital Re's net premiums written in 1998.

Klauber says the company's diversification should ensure continued earnings growth in the midteens range. The consensus expected long-term growth rate for Capital Re is 14.4% over the next three to five years as well. Capital Re also continues to branch out into other businesses, namely specialty insurance. The company made its first foray into specialty insurance by buying an agency that manages two Lloyd's of London syndicates in 1996. Capital Re bought another Lloyd's managing agency last October.

These businesses are not as capital intensive as Capital Re's other reinsurance businesses so as a result Klauber is expecting the company's return on equity to improve from its current level of 12% to about 14% to 15% in the next five years.

The stock has pulled back recently along with other financial companies. Capital Re is down 12% since the Dow's 300-point drop on July 17. The stock is 14% off its 52-week high. Klauber thinks this represents a great buying opportunity.

Capital Re is trading at 14 times estimated 1998 earnings and just 12 times estimated 1999 earnings. While Capital Re is trading at a slight premium to the average property/casualty company's multiple of 13 times 1998 earnings, Capital Re's estimated long-term growth rate is more than 10% higher than the average growth rate for the sector. Klauber has a target price of 42. That's about 16 times his 1999 earnings estimate.

And that doesn't have any takeover premium built in. If the consolidation in the reinsurance sector continues to roll along, then it might not be too long before Capital Re gets scooped up, or at least mentioned in a hot takeover rumor. If Warren and Jack are interested in the business, you can bet other executives are busy taking a look as well.