The nation’s five biggest title insurers saw operating revenue from title operations fall 12 percent in 2007 and may experience another 20 percent drop this year, analysts at Fitch Ratings said in issuing their first-ever negative rating outlook for the industry as a whole.
The negative rating outlook — the first since Fitch began covering the industry in the early 1990s — was prompted by expected declines in mortgage originations, and expectations that mounting losses will eat away at capital levels, analysts said.
"If 2008 turns out as poorly as expected, the industry will have endured consecutive losing years which, in the context of historical results, is considered unusual," Fitch analyst Doug Pawlowski said during a briefing on the rating agency’s special report on the title insurance industry.
The report projected that title insurers will have to step up cost-cutting measures, including layoffs, to keep pace with falling revenues.
The March 5 report looked at the five companies that control more than 90 percent of the title insurance business: First American Corp., Fidelity National Financial Inc., Land America Financial Group Inc., Stewart Information Services Corp., and Old Republic International Corp.
With the exception of Fidelity, all of the companies reported pretax losses from title operations in 2007 — and Fidelity saw pretax earnings from title fall 71 percent.
The five companies reported a 25 percent decline in direct title orders in the fourth quarter of 2007 compared to the same quarter a year ago — a "significantly worse" slowdown than the 16 percent drop seen in the third quarter, Fitch analysts noted. Direct title orders were off 10 percent for the year, to 6.62 million.
Operating revenue from title operations fell 12 percent, to $16.3 billion industrywide, with larger declines at Fidelity (down 15.4 percent to $4.8 billion), Stewart (down 15.4 percent to $2 billion), and Old Republic (down 13.2 percent to $851 billion). Land America saw direct revenue from title operations fall less than the industry average — by 10.4 percent to $3.1 billion — while First American experienced a 9 percent decline to $5.5 billion.
Meanwhile, the industry’s loss ratios shot up from 6.7 percent in 2006 to 10.4 percent in 2007 — driven largely by $550 million in strengthening of loss reserves. Losses are mounting in part because of lax underwriting standards during the boom, Fitch analysts said.
"During the heavy volume of title orders in the past years, personnel were stretched thin, and underwriting standards became more lax,” said Fitch analyst Gerald Glombicki, leading to an increase in policy loss ratios and loss reserve ratios.
The companies with the highest loss ratios were those with the most revenue — First American (12.9 percent) and Fidelity (10.4 percent). Loss ratios at LandAmerica (8.6 percent), Stewart (8.5 percent) and Old Republic (6.6 percent) were below the industry average for 2007.
While the companies have been cutting expenses, revenues are falling faster, meaning industry expense ratios actually increased to 91.4 percent in 2007, up from 87.8 percent a year ago.
The companies with the least revenue had the highest expense ratios — 98.1 percent for Old Republic, and 97.7 percent for Stewart. Expense ratios were close to the industry average at First American (92 percent) and Land America (91.7 percent), and below industry average at Fidelity (86.5 percent).
First American, which plans to spin off its title insurance and related businesses into a separate company, laid off 1,100 workers and cut expenses by 10 percent in the fourth quarter (see Inman News story).
It will be difficult for title insurers to cut expenses, as they "have already been doing so for the past 12 to 15 months," Glombicki said. But Fitch analysts expect other title insurers will make similar moves.
"Despite laudable improvement in the automation of the title insurance business over the last decade, it remains a labor-intensive and high-fixed-cost business," Fitch analysts said in their report. "Thus, staff reduction activity will continue before the industry returns to a more profitable footing."
With revenue falling faster than companies are able to cut expenses — and with policy loss ratios and loss reserves climbing — Fitch analysts are keeping an eye on each company’s risk-adjusted capital ratios.
According to Fitch analysts, First American had the lowest risk-adjusted capital ratio among major title insurers, and Stewart the highest.
Fitch’s risk-adjusted capital ratios for each company, based on year-end 2006 data, were: Stewart Title Group (234 percent); Old Republic Title Group (221 percent); Fidelity National Title Group (175 percent); LandAmerica Title Group (159 percent); and First American Title Group (142 percent).
Fitch analysts said they believe risk-adjusted capital ratios will remain adequate when year-end 2007 data is plugged in, but there is a "strong likelihood" that ratios will decline at several title insurers.
"Although the industry is viewed as well capitalized at the current time, consecutive years of losses could significantly dent the industry’s capital levels," Pawlowski said.
After First American warned of fourth-quarter losses, Fitch lowered the company’s insurer financial strength (IFS) rating on Feb. 11 by one notch, to "A" (see story).
Fitch’s outlook on First American’s insurer financial strength rating remains negative, meaning it could be downgraded again, as is the case for Old Republic Title Group’s "AA-" IFS rating.
Fitch analysts have "stable" rating outlooks on Fidelity National Title Group’s "A" IFS rating, LandAmerica Title Group’s "A-" IFS rating and Stewart Title Group’s A+ rating.
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