Title insurance underwriters are well-prepared to survive the economic pressures roiling the U.S., as their statutory capital levels should remain strong, a Fitch Ratings report said.
The industry suffered in the late 2000s as high claims levels from the Great Recession tested finances, which forced one nationwide firm, LandAmerica Financial,
At the end of 2021, title insurers' risk-adjusted industry capital declined but remained broadly supportive of the assigned ratings for each company, said Gerry Glombicki, Fitch Ratings senior director, in a press release. Fitch evaluated Fidelity, First American, Old Republic and Stewart for this report.
The
Still, the most recent risk adjusted capital ratio leaves them "well positioned to absorb near-term volatility associated with an evolving macroeconomic environment with higher inflation and interest rates," Glombicki continued.
During the first quarter of 2022, the title industry benefited from lower mortgage interest rates and strong home purchase demand. Over that period, they wrote $5.89 billion in premiums, compared with
"A strong purchase market and continued home appreciation helped offset ongoing contraction in refinance volume to help drive the 3.6% premium volume increase compared to the first quarter of 2021," ALTA Chief Executive Diane Tomb said in a press release.
But revenue growth for the next six months of this year and beyond will come under pressure, as interest rates continue to rise as part of the
If anything, the expected decline in mortgage origination volume in the latter half of this year could have a net positive impact on the title underwriters' capital adequacy, Glombicki said in an accompanying report. Lower operating and expense leverage will contribute to reduced charges to earnings arising from claims activity or underwriting expenses that have a material impact on the targeted policyholder surplus. TPS is measured as the amount of surplus required by a title insurer to support various risk exposures within Fitch's rating guidelines.
Commercial real estate transactions are the wildcard in Glombicki's forecast. Those deals bring in much higher fees than residential transactions do.
For example, First American reported average revenue per commercial order of $13,243 in the first quarter. For a residential purchase transaction it was $3,252, while refinances had an average revenue per order of $1,333.
"One large deal can swing the industry from loss to a profit for the year and large commercial deals tend to be geographically concentrated in larger urban markets," said Glombicki.
Title insurers also benefit from having lean operating structures and are able to quickly reduce costs in this area if needed. "The ability to efficiently manage expenses will also help reduce the impact to both earnings and capital," Glombicki said.
In addition to the largest title underwriters covered in the Fitch report, the industry in aggregate built capital levels over the past several years to withstand any short-term shocks to order flow and revenue.
The larger companies have all adjusted staffing from time to time based on business conditions. Recently Doma, which was not covered by the report, announced a workforce reduction of 15% during its
