What title insurers' 3Q results reveal about the mortgage market

October 26, 2020 11:45 AM

The three national title insurance underwriters that have reported third-quarter earnings so far reveal operating revenue that is clearly benefiting from the increase in mortgage transactions. Below we parse their numbers to assess the impact of high purchase and refinance activity.

The 3Q lending landscape: Equal purchase and refi activity

The Mortgage Bankers Association estimated there were 2.8 million loan units originated in the third quarter, split nearly evenly between purchases and refinancings. And its weekly application survey is showing both purchase and refi activity remaining well ahead of where it was at this point in 2019.

On a dollar basis, the MBA estimated there was $860 billion of total volume in the third quarter, with refi activity higher at $450 billion during the period versus $410 billion for purchases.

The market is already shifting back to a purchase one. In the second-quarter refis were 61% of the 3 million units originated and 63% of the $930 billion in dollar volume, whereas in the third quarter, those shares have shifted to 52% refi and 48% purchase.

This shift, which is expected to continue over the next three years, benefits title underwriters because they earn higher revenue on purchase transactions than refinancings. As a result they can earn more on lower overall volume.

First American's earnings

First American Financial, the second largest title insurer, had a 30% year-over-year increase in closed orders. Closed refinance orders were up 85% over the same time frame.

Yet revenue per order was down by 13% when compared with the third quarter of 2019. As a result, total revenue was only up by 15%, to $1.9 billion.

Net income was down slightly on a year-over-year basis, to $182.3 million in the third quarter from $187.2 million one year prior.

"Our third-quarter financial results were strong, achieving a record pretax title margin of 19%," Dennis Gilmore, First American's CEO, said in a press release. "During the quarter, we initiated a process for the sale of our property and casualty business. While the business, until recently, has performed well, we decided to maintain focus on our core business and redeploy the capital to areas with higher expected returns."

Pretax income for First American's Title Insurance and Services segment was $337.5 million in the third quarter, compared with $253.6 million one year prior.

Direct orders opened at the company rose to 410,000 from 317,000 in the third quarter of 2019, while closed orders increased to 291,500 from 224,100.

However, First American disclosed in its 10-Q filing that the Securities and Exchange Commission sent the company a Wells Notice stating its staff has made a preliminary determination to recommend a filing of an enforcement action against the title insurer over information security issues related to a second-quarter 2019 data breach.

This week, First American announced the acquisition of ServiceMac. The title insurer bought a minority interest in the mortgage subservicer's parent company, which will be converted to an equity interest in ServiceMac. Gilmore described the move as intended to "further expand our product innovation efforts." ServiceMac's CEO and president Bob Caruso will continue to run that firm.

Old Republic's earnings

The title segment pretax operating income at Old Republic International grew nearly 42% year-over-year, to $103.1 million in the third quarter from $72.8 million one year prior.

Operating revenue was up 17% in the same time frame, to $799.6 million from $684.3 million.

Open orders grew to 181,465 from 131,479 on a year-over-year basis, while closed orders went to 143,523 from 105,607.

Meanwhile, Old Republic's mortgage insurance business, which has been in run-off since 2011, had operating income of $4.5 million for the third quarter, down from $7.3 million one year prior.

The company's delinquent mortgage inventory shot up from 6,280 as of March 31 to 8,700 loans on June 30 before shrinking slightly to 8,320 as of Sept. 30.

"As we enter the fourth quarter, order counts remain strong, mortgage rates are projected to remain favorable, and homeowners with the renewed focus on their living space should all contribute to an expected strong finish to the year," Carolyn Monroe, president of Old Republic's title business, said during the company's third-quarter earnings call.

Old Republic had net income of $246 million for the third quarter, up from $202.8 million one year prior. Besides the title and MI businesses, the company's results also include its general insurance segment, which comprises lines of business like workers compensation and auto, among others.

Stewart's earnings

Stewart Information Services saw its title business' third-quarter operating revenue increase 13% year-over-year, to $562.7 million from $499.2 million. Pretax operating income for the segment grew by 66% over the same time period, to $82.4 million from $49.5 million.

Business sourced from its direct operations made up 14% of its revenue growth, at $35 million. Gross independent agency revenue increased 11%, totaling $28.5 million.

Stewart's net income for the third quarter was $55.9 million compared with $66.1 million one year prior. But the third quarter of 2019 had $46.9 million of net realized and unrealized gains, including the $50 million merger termination fee from Fidelity National Financial after the Federal Trade Commission put the kibosh on the deal.

For the third quarter, Stewart had 165,261 direct orders opened and 112,788 orders closed, compared with 111,345 opened and 78,474 closed one year ago.

After the earnings release came out, Stewart showed it is continuing to move on from the Fidelity National Financial deal by announcing the acquisition of appraisal and valuation solutions company Pro Teck Services. This deal comes after its June purchase of United States Appraisals.

"As we continue to invest in Stewart's future, this acquisition adds innovative technology, data and analytics to our growing valuation businesses, critical for driving future business," said Stewart CEO Fred Eppinger in a press release, with the added scale and capabilities "allowing us to increase our services for our customers."