Fitch Ratings has upgraded its outlook for the title industry to stable from negative, but that is because the weak market conditions expected to affect industry profitability in 2012 are largely reflected in the current ratings.
It did state that any uncertainty related to potential profitability and capital losses from adverse loss development has diminished.
Fitch said it anticipates continued top-line pressure for the title insurers next year because of persistent weakness in the economy and housing market, and there is no clear catalyst for change in the near term. If proposed revisions to the Home Affordable Refinance Program are approved, it could spur additional refinance activity and provide some lift to title underwriter revenue.
The industry's capitalization has improved and in 2012 Fitch expects incremental improvement in this area. But, it added capital levels would remain below historic norms.
The agency uses a proprietary risk-adjusted capital model. In 1997, the industry's RAC was close to 200%, and between 2000 and 2006, it was above 180%.
After bottoming out in 2008 at 105%, the RAC for 2009 was 133% and for 2010 was 144%. For 2011, Fitch said it expects a modest improvement in the capital position by yearend, as surplus continues to show modest improvement with flat to declining risk exposures.
Among the headwinds title underwriters are facing is the impact of agent defalcations, which put a pair of regional underwriters out of business last year.
“New Jersey Title Insurance Co. and Southern Title Insurance Corp. were ordered by regulators to stop writing new business following losses from defalcations, providing a reminder that defalcations remain a significant risk in the title insurance industry,” Fitch said.
There is no reliable historic data on losses from defalcations and these schemes tend to come to light during tough periods in the housing market as the agents who committed the fraud do not get access to new funds to replace missing ones. Fitch added, “Defalcations are difficult to predict and future incidents remain highly uncertain.”
In the case of New Jersey Title, the impact from the defalcation from TitleServ is expected to cost between $40 million and $50 million to resolve.
“More stringent auditing capabilities could limit agent fraud going forward. Title insurers are enhancing their oversight capabilities by enhancing the frequency and rigor of such reviews,” Fitch said.
In 2012, Fitch said the larger companies, with scale and a more variable cost structure will likely continue to outperform their smaller and less efficient peers. It predicts the industry will remain profitable in 2012 because of the dominant positions of the No. 1 underwriter, Fidelity National Financial, and the No. 2 underwriter, First American Corp.
Given the large market share these two companies have, it is unlikely there will be consolidation among the larger title companies.
But “a sustained downturn may ultimately lead to further industry consolidation among smaller underwriters as companies seek scale and cost efficiencies,” it said.
As for the remaining two national underwriters, Fitch has both companies on a negative ratings outlook for issues specific to each outfit.
In the case of No. 3, Stewart Information Services Corp., Fitch believes its margins “will continue to be disproportionately pressured by poor economic and housing market conditions.”
Old Republic International Corp.'s title subsidiary has been the only one of the four national players whose market share has been increasing, according to the American Land Title Association. ORI's negative outlook is related to the large losses suffered by its mortgage insurance subsidiary, Republic Mortgage Insurance Co., which is currently in run-off.
But statements from ORI state it remains committed to the mortgage insurance business and is working to gain approval for a new subsidiary to start writing policies again.
