The following article, prepared by A.M. Best, gives an assessment of the state of the Title Insurance industry in 2009. The general view is that headwinds will exist in 2010, but that the pricing environment may improve, and the payout to agents may decline.
“While the title industry’s premium volume and profitability deteriorated significantly in 2008, trends have been improving modestly in the second half of 2009. The housing market has begun to revive, and home sales also have been increasing slightly. The federal government’s greater involvement in the mortgage market, the favorable tax treatment of new home purchases, and the continued low mortgage interest rates have aided the housing market, as well. However, the title industry still faces headwinds as future revenue and profitability trends will be significantly impacted by high unemployment, continued significant home foreclosure activity and the uncertain direction of home prices.
During the housing bubble in the first half of the decade, the industry’s revenue more than doubled. But just as the number of real estate transactions drove up title insurance revenue—along with a greater incidence of title claims—the housing market downturn resulted in a significant paring back of revenue and negatively trending profitability measures in 2008. The upward trend in the rate of defaults and foreclosures, which began in the subprime mortgage segment in 2007, spread to other areas of the mortgage market in the form of greater delinquencies and rates of foreclosure in the “Alt-A” and even to “prime” mortgage segments.
Title insurers, like insurers in many sectors of insurance, have not been immune to failure. A.M. Best Co.’s annual study of insurance impairments includes at least 18 title insurers that have become impaired or insolvent. In 2008, four title companies were identified as impaired, according to A.M. Best’s special report, “U.S. Property/Casualty – 1969-2008 Impairment Review: Real Estate’s Title Insurers Lead 2008 P/C Financial Impairment.”
Loss experience in 2008 and 2007 deteriorated noticeably, partly as a result of inadequate reserving for future claims during the period of the housing boom of 2000-2006. The end of the housing boom and the subsequent rapid increase in defaults and foreclosures has led to significantly greater incidence of title claims arising out of those calendar years.
The title industry is highly dependent on real estate markets, which, in turn, are highly sensitive to mortgage interest rates and overall economic well-being. Typically, there is an inverse relationship between changes in mortgage interest rates and real estate activity, and hence, operating revenue for title insurers.
As interest rates fall, real estate transactions generally increase and title insurers’ operating revenues generally rise, reflecting the greater demand for title products. The reverse occurs when interest rates rise. Changes in mortgage interest rates create corresponding fluctuations in title insurers’ total operating revenue and pretax operating gains.
While the real estate market has slowed down significantly in recent years, the mortgage interest rate environment has continued to be favorable. The 2009 30-year fixed-rate mortgage yield as of September 2009 has decreased 92 basis points from the yield as of year-end 2008, which had declined by 22 basis points when compared to the yield as of year-end 2007. This favorable interest rate environment has helped to stabilize overall housing market activity and has is not as significant as the unprecedented refinance boom of 2003.
Incurred losses also have been rising due to inadequate loss reserving practices earlier in the decade when transaction volume was increasing dramatically. The industry’s composite ratio increased by approximately 10 points to 109.0% (from 99.5% in 2007). This resulted from an increase in the loss and loss adjustment incurred ratio (up three points) and a sharply higher expense ratio (more than six points) due to the rapid decline in premium volume.
Title insurance policies have no set termination date and no limitation on filing claims. However, the only fees collected are the one-time charges when the policy is issued. Thus, losses reported in any one year will affect that year’s profitability for statutory accounting purposes but are not generated by that year’s business activity.”