Title Insurer Revenue to Decline Slightly in 2016: Fitch

Title insurer operating revenue will end 2016 flat to slightly down as a modest increase in interest rates should dampen purchase and refinance transactions, a report from Fitch Ratings said.

The industry should benefit from continued strength in the commercial real estate market, with the U.S. economy continuing to grow and employment rates modestly improving. This should "somewhat offset softening trends in the residential housing market," said the report, issued last week.

"Expense management will be critical for profitability in 2016, given flat to lower premium volume and Fitch anticipates that operational restructuring undertaken by the industry will help insurers withstand a future cyclical downturn," said Fitch Director Gerald Glombicki, in an accompanying press release.

There will not be any merger and acquisition activity between the four largest underwriters, but there is the potential for the larger players to buy smaller ones. This is because of the "more stringent requirements under the TILA/RESPA integrated disclosure rule," the report said.

More acquisitions of ancillary service providers, like Fidelity National Financial's purchase of Commissions Inc., are also likely, the report said.

Capitalization at the four national underwriters should remain near current levels for 2016. For 2015, the risk-adjusted capital ratio, a measure that Fitch created, was 178%. This was down three percentage points from 2014.

RAC is a weighted-average calculation and as a result, 62% of the score reflects the two largest title underwriters, Fidelity and First American Corp. When compared with 2014, Fidelity's 2015 RAC was down 1%, while First American's increased 19%. This offset the declines of 15% at Stewart Information Services Corp. and of 19% at Old Republic Title.

This is the first time in seven years there was a decline in the RAC; in 2007 and 2008 there were substantial declines compared with the previous year.

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