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Title Insurers See Small Decline in Capital Strength

The risk-adjusted capital position of the nation's title insurers, while still showing the industry as well capitalized, declined slightly between year-end 2004 and year-end 2005, a study conducted by Fitch Ratings here shows. But, the report adds, the effect of growth in surplus combined with a reduction in revenue should result in an increased RAC for the industry in 2006.

"Fitch views its quantitative RAC ratio as an important step in allowing interested parties to evaluate capital adequacy of title insurers in a meaningful, systematic fashion. The RAC is just one of many elements Fitch considers in assigning a title insurer's financial strength rating," it said.

The industry aggregate RAC for 2005 was 182%, compared with 184% in 2004. Fitch said, "An unexpectedly prosperous 2005 resulted in a higher expense leverage charge."

Fitch pointed to American Land Title Association statistics that show a record operating revenue for title companies in 2005 of $17.8 billion. But this increased revenue brought increased expenses as well." Statutory surplus creation was not strong enough to offset the expense leverage charge."

The rating agency looked at eight companies, five national title insurance underwriters and three regional ones.

Of those five, the national company with the highest RAC is Stewart Title Group, Houston, at 236%, up from 234% one year earlier, followed by Old Republic Title Group, Chicago, at 206%, down from 207%.

They were followed by First American Title Group, Santa Ana, Calif., at 174%, down from 185%; Fidelity National Title Group, Jacksonville, Fla., at 173%, down from 185%; and LandAmerica Title Group, Richmond, Va., at 154%, up 141%.

"Fidelity's RAC declined by 12 percentage points from the prior year, which was the widest margin in Fitch's universe. A slight decrease in statutory surplus at FNF due to dividends and increased non-admitted assets related to goodwill from an acquisition at Chicago Title caused the period-to-period deterioration.

"FAF's decline in Fitch's RAC calculation year-over year was a function of two things: adverse reserve development and expense leverage. Approximately, 45% of the adverse reserve development FAF took was related to policy year 2004. Also, FAF's acquisitions increased their expense leverage charge approximately 19%," said Fitch.

As for the three regional players, all three showed an increase in RAC and two of them had RACs much higher than the national players.

Investors Title, Chapel Hill, N.C., has a RAC of 381%, up from 357%. Rocky Hill, Conn.-based Connecticut Attorney Title Insurance Co. has a RAC of 322%, up from 300%. Finally, there is Attorney's Title Insurance Fund, Orlando, Fla., with a RAC of 187%, up from 174%.

"CATIC benefited from the sale of its United General Financial Services common stock investment when the company was purchased by FAF. The United General holding was large enough to trigger the issuer concentration risk for CATIC in prior years. Attorney's Title Insurance Fund also had United General common stock, but the investment was modest relative to the fund's balance sheet," the Fitch report noted.

For this year, the report said, "Given the forecast deterioration in title revenue, Fitch expects expense leverage to decline in 2006. Consequently, all other things being equal, this would point to an improvement in the aggregate RAC ratio for 2006. Other heavily weighted factors such as large loss and adverse claim development may not decline, however, and would potentially suppress gains in the RAC ratio."

Fitch added, "The most likely scenario is for surplus growth and lower expense leverage to combine in 2006 to bring growth in the title industry's RAC." (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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