Fitch: U.S. Title Insurer Profits Decline on Weaker ReFi Volume

The U.S. title insurance industry reported declines in title operating revenues and profits for first-half 2014 as the industry continued to deal with lower mortgage refinancing volumes. Harsh winter weather and higher interest rates in the first quarter also contributed to lower mortgage and real estate market activity over the first six months of 2014, according to Fitch Ratings.

The four largest U.S. title insurers reported a combined 12% decline in title operating revenues in first-half 2014 versus the same six-month period one year prior. While title orders opened during second-quarter 2014 declined 19% year over year, revenue per order expanded due to strength in purchase and commercial activity, as well as rising home values.

The group's combined ratio rose 4.5pp to 98.1% during first-half 2014. First American Financial Corp. was the only company to post a lower combined ratio due to sharp reductions in adverse-loss reserve development. While title insurers' expense structures are now better positioned to withstand cyclical declines, underwriting weakness was tied to rising expense ratios.

One positive trend in first-half 2014 was an improved loss ratio for all four major title insurers, due primarily to continued underwriting improvement and reduced strain on operating capacity. Loss development from prior underwriting periods has also diminished considerably but remains a focus point.

The deterioration in underwriting performance drove the group's reported GAAP pretax title operating margin to 6.1% for first-half 2014, compared to 10.3% for the same period in 2013. Besides the deterioration in revenues and underwriting profits, recent results for the market in aggregate were negatively affected by one-time acquisition-related expenses incurred by industry leader Fidelity National Financial, Inc.

Weaker market fundamentals will continue to restrict the potential for future revenue growth and profit margin expansion. Mortgage originations continue to fall due to reduced refinancing activity. While commercial activity remains robust, it is unlikely to fully offset other unfavorable trends. Disciplined expense management and continued favorable commercial market activity will be important contributors to industry profitability in second-half 2014.

For more information on this topic, please see our special report, "U.S. Title Insurance 1H14 Dashboard," available at www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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