Could the Tides be Turning for the Title Sector?
Analysis of the title insurance market reveals better-than-expected numbers.
Insurance Networking News, October 12, 2011
The past few years haven’t been kind to the title industry. However, experts report an increase in surplus and expect Q3 results—once tallied—to be better than previously expected.
A.M. Best released a report—“Despite Economic Turbulence, Title Industry Outlook Remains Stable”—stating the title insurance industry managed to report an approximate 7-percent increase overall in surplus, driven mainly by the equity market recovery in 2010, and A.M. Best has maintained its stable rating outlook for the title sector with the view that the majority of ratings will not change over the near-to-medium term.
The outlook indicates the industry’s relatively strong financial condition—as reflected in the balance sheet strength of the major title insurers—as well as positive operating margins through the first half of 2011, despite the operating environment’s unprecedented challenges. In 2010, operating results for individual companies were mixed:
• Title insurance direct premiums written (DPW) were slightly down, at $8.7 billion in 2010, from $8.8 billion in 2009, approximately a 1-percent drop year over year.
• A sizable underwriting loss of $210 million, and substantially decreased net investment income. These were the primary causes for the net income loss of $105 million for the year, compared to positive net income of $429 million for 2009.
In its report, the rating agency lists the current financial strength ratings and outlooks for leading title companies:
Fidelity National Financial Group: A-/Stable
First American Title Insurance Group: A-/Stable
Stewart Title Guaranty Company: B++/Stable
Old Republic Title Insurance Group: A/Negative
The industry overall reported an operating loss, driven by increased loss and loss adjustment expenses (LAE), coupled with a significant decrease in net investment income, A.M. Best said. These negatives, however, were somewhat offset by the strengthened financial position of the industry, which overall, lowered its premium base while increasing its capital base, thus producing reduced leverage measures for most major underwriters. The exception was Old Republic Group, whose market share increase outpaced surplus growth in recent years. On balance, this resulted in recent rating affirmations – including those for Fidelity National Financial Group and First American Title Insurance Group, which comprised nearly 65 percent of the 2010 market based on net premiums written.
Investment bank Keefe, Bruyette & Woods (KBW), released its 3Q11 Title Insurance Preview, which states that 3Q11 trends will be dominated by refinancing activity as interest rates have dropped materially since late July. As a result, the firm expects title industry open orders to be up materially in August and September, with closed orders most likely picking up the pace in September. This should drive better than previously expected results in 3Q11 as well as improve the outlook for 4Q11 given the delay between opening a new order and closing an order (when premium compensation is received). As a result of these improved conditions, KBW is raising its earnings estimates for the industry but remain neutral in its view of the sector given current valuations.
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