A Moody’s report predicts that U.S. title insurers will continue to struggle for the next 12 to 18 months.

Insurance Networking News, April 11, 2011

Alex Vorro

Optimism regarding the title insurance industry is rather low right now. Given the fact that U.S. title insurers are still attempting to extract themselves from the housing bubble explosion, a new report from Moody’s Investors Service predicts that they will remain challenged over the next 12 to 18 months.

“Over the medium term, we expect title insurers to be pressured by a shrinking revenue base and lower income due to a drop in mortgage refinancings,” says Paul Bauer, Moody’s VP and author of the report, “accompanied by only a mild, if any, uptick in home sales.”

Moody’s believes that the credit profile of the industry will be driven by four factors:

• Interest rates

• Total number of home sales

• Legal or political developments

• Potential consolidation

Interest rate trends are the primary driver of refinancing volume, Moody’s says, with the industry benefiting when rates decline, as they did in 2010. Steady or rising rates, on the other hand, would cause a drop-off in refinancings.

“The Moody’s economic forecast is for mortgage rates to go up this year, with the 30-year fixed rate rising to about 6% from 5%,” Bauer says. “This scenario would prompt a significant drop in mortgage refinancings, and therefore title insurance revenue.”

Though home sales are likely to show slight improvement, the agency expects they will remain sluggish this year, resulting in continued, reduced title revenue from policies issued upon purchase of a home. While this revenue source will likely be stronger than revenues from mortgage refinancings, it nonetheless is likely to remain weak, since home prices have yet to correct to a level at which buyers are willing to enter the market.

In terms of regulatory and political changes, Moody’s asserts that the picture remains unclear at best for the industry, since title insurance is a key element of the mortgage finance market, which itself faces an uncertain future. Though the rating agency doesn’t see any immediate risk for title insurers, the contentious real estate environment and murky future of mortgage finance could lead to adverse developments.

Additionally, given declining revenues, the industry could see further consolidation, with a potential for distressed sales or even failures among smaller companies, Moody’s says. Consolidation could also add operational risks and reduce financial flexibility for companies that acquire others.

Despite the pressures, Moody’s thinks title insurers’ ratings are not likely to move downward.

“We believe our ratings are correctly positioned to reflect the cyclicality of the industry, including periods of decline,” Bauer says. “And our rated companies have the operational flexibility to shrink if needed, and the capital adequacy to meet some volatility on the loss side.”