Fitch Ratings: profitability at peak in 2019 for US title insurers

US title insurers' record profitability in 2019 is unlikely to be surpassed in 2020, according to Fitch Ratings' annual outlook report for the sector. The prospect of higher interest rates may curb refinancing activity while favourable macroeconomic trends may plateau. Fitch maintains stable outlooks for the US title insurance sector. The rating outlook for all companies rated is currently stable.

"Despite consistent flat revenue growth, title insurers have steadily boosted profit margins over the last five years," said Gerry Glombicki, director, North American Insurance.

The four largest title underwriters that constitute approximately 85 percent of the market reported increased aggregate GAAP title operating margins from 10 percent in 2015 to 13 percent in 9M2019.

Profit improvement in 2019 relates to lower expense ratios from a shift in business mix towards refinancing transactions and benefits from operating efficiencies. Claims experience remains highly favourable with the group reporting an average loss ratio of 4 percent from YE 2016 through 9M2019.

Fitch said the segment benefits from very strong risk adjusted capital positions, improved loss reserve adequacy, and conservative asset allocations, which will offset any modest deterioration in revenue and profits due to higher interest rates and lower mortgage originations. US title insurers have capacity to withstand future adversity due to their very strong levels of capitalization, which Fitch expects to be at or above 2018 levels at YE 2019.

"Commercial real estate transactions buoyed title insurer revenues for the last several years and will likely contribute significantly to their bottom line in 2020," said Glombicki.

Fitch believes the uncertain interest rate environment is a potential disrupting factor for US title insurers as it greatly impacts order flow and policy volume. Although the Federal Reserve is expected to maintain the benchmark federal funds rate near current levels, further declines could spur a reduction in mortgage rates that boost refinancing activity. Any rise in interest rates, while less likely in 2020, would be more disruptive.

Fitch added that larger macroeconomic changes, including a shift towards a recession or broad declines in housing market activity or investment would have a more consequential effect on title insurers' performance.

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