Fitch: Outlook Stable For Title Insurance Industry

NU Online News Service, Jan. 13, 12:52 p.m.EST?Despite expectations that the title insurance sectorwill see a decline in 2003 revenues after two record-breakingyears, the outlook for the industry is still favorable, a ratingfirm said.

Fitch Ratings in Chicago said it continues to carry a StableOutlook on the industry, following the firm's annual review andoutlook.

Title sector statutory net operating revenues are on track toexceed $10.8 billion for the full year 2002, creating back-to-backrecord-setting years for the title insurance industry, Fitchreported.

Douglas Pawlowski, director, Fitch Ratings, said, "It is likelythat heavy order flow from 2002 will cushion the expected 28percent decline in mortgage originations, leading Fitch to projecta 10 percent to 12 percent decline in statutory net operatingrevenue for 2003.

"Although a decrease in revenue of this magnitude soundsdrastic," Mr. Pawlowski noted, "it would still produce the secondbest revenue year in industry history."

Favorable results were driven by a second consecutive year ofheavy refinancing volume where an estimated 58 percent of mortgageoriginations were refinancings. Fixed 30-year mortgage rates havesteadily fallen from approximately seven percent during the firstquarter of 2002 to just below six percent in December 2002, Fitchsaid.

The rating title stocks, Fitch said, outperformed not only thebroad stock market, but the financial sector as well. On average,title insurance stocks gained 22.2 percent during 2002, compared toa

loss in the S&P 500 index of 21.2 percent.

Financial services sector stocks, which includes title insurers,lost 12.2 percent during 2002 measured by the NYSE Financial Index.In spite of superior performance in 2002, title stocks continued totrade at significantly lower multiples than other financial serviceinstitutions, Fitch said.

The ratings concern said the real estate market was "one of thefew bright spots in an otherwise shaky U.S. economy."

Fitch said investors, wearied by several years of stock marketdeterioration, sought refuge in real estate, which has a history ofgreater stability. Fitch noted that housing starts have been robustall year and are forecast by The Mortgage Bankers Association ofAmerica to reach a record 1.7 million for the full year 2002.

However, Fitch noted that MBA forecasts for the real estatemarket in 2003 are mixed. MBA is predicting that housing starts,existing home sales and new home sales will be lower by three tofive percent from 2002 levels, which remains strong relative tohistorical norms.

MBA also forecasts prices for both existing and new homes toincrease by nearly five percent and two percent, respectively in2003. Fitch said, however, it should be noted that housing marketsare regionally fragmented and the predicted appreciation couldrepresent areas that missed the large increases the lastseveral

years.

Given the economic environment and current low interest rateenvironment, Fitch said it is expecting interest rates to remainflat in 2003, significantly reducing the refinancing share ofmortgage originations. As evidence for this view point, Fitchpointed to the most recent one-half percentage point reduction inthe Fed Funds Rate taken in November 2002, which the company saiddid not produce the same impact on mortgage rates as the Fed rateactions taken in 2001.

As a consequence, Fitch said, the refinancing activity that hasfueled industry growth over the past couple years is expected toslow during 2003.

Fitch said it believes the title industry in aggregate is wellcapitalized, though there remain significant disparities in capitalstrength among individual companies. Policyholders' surplus grew bymore than 14 percent from year-end 2001 for title insurers inFitch's rating universe.

Fitch said although the title industry showed tremendous growthin profits retained during the year, greater expense leverage willboost required surplus, resulting in little change in the 2002industry Risk-Adjusted Capital ratio.

Fitch's review and outlook report titled "Review and Outlook:2002-2003" is available through Fitch's Web site,www.fitchratings.com, or the Ratings Desk at 1 (800) 893-4824.