Fitch Ratings: Robust Housing Market Supports Outsized U.S. Title Insurer Returns

Fitch Ratings, New York, said U.S. title insurance firm profitability should continue to exceed rating expectations over the near term, supported by a robust single- and multifamily housing market.

The agency said continued home price appreciation from elevated market demand and a constrained housing supply amid persistently low interest rates benefits the title insurance industry. “Operating margins at Fidelity National Financial, First American Financial, Old Republic International and Stewart Information Services remained above historical averages, while title-related claims hovered near historical lows,” Fitch said.

Pre-tax operating margins will likely remain above long-term industry averages, Fitch said. Aggregate pre-tax operating margins equaled 17 percent in first-half 2021, with an aggregate combined ratio of 85 percent as of June 30, improving from 87 percent last year. Mortgage rates remain near historic lows, which favorably impacts pricing for title underwriters and will likely limit title-related losses, which will also benefit profitability within the title industry. But rising mortgage rates and normalizing refinance volumes could cut total loan originations by 26 percent this year and a further 27 percent next year, with revenue declining from 2021 levels, Fitch said. Refinancings could fall from 65 percent of originations in 2020 amid the height of the pandemic to 24 percent by 2023, according to Mortgage Bankers’ Association data.

Commercial activity has buoyed title insurer revenues for the last several years and continue to make a “material impact” for large underwriters in 2021, Fitch said. Commercial title insurance accounted for nearly nine percent of total revenues at both year-end 2020 and through the first six months of 2021. Commercial open orders increased 31 percent compared to first-half 2020, indicating a healthy commercial market. “Commercial deal flow is expected to remain well below the 2019 peak, but sustained commercial sector lending improvement should continue to drive order volumes,” Fitch said. “Results are expected to be well within ratings expectations for title insurers.”

However, the economy still faces downside risk, especially the most recent surge in pandemic-related disruptions. “Title insurers are better capitalized than in 2008 during the Great Financial Crisis, but a prolonged economic downturn leading to falling wages, rising unemployment, rising property foreclosures or lower housing investment would be negative for the industry,” Fitch said.