The title insurance industry has shown a modestly declining RiskAdjusted Capital (RAC) ratio in 2005, according to a new study fromFitch Ratings.

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Relative stability came as surplus growth was balanced againstgreater capital requirements. “The decline in title revenue to datein 2006 has been expected and will lead to more modest surplusgrowth in the near future than experienced over the past fiveyears,” the report noted.

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The decrease in the RAC ratio reflects growth in several of therisk components of Fitch's model, particularly related to expenseleverage, potential adverse claims development and large policyloss exposures.

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The record-setting operating revenue generated by the titleinsurance industry in 2005 increased the expense leverage charge inFitch's RAC ratio, reflecting the risk of higher fixed costs in ahistorically cyclical industry.

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“Surplus growth in 2005 was solid but did not fully compensatefor the greater risk factors,” Fitch analyst Doug Pawlowski toldthe National Underwriter.

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The study's results revealed that the title industry remainswell capitalized overall, although significant disparities incapital strength among individual companies remain.

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Based on developments to date in 2006, namely decliningoperating revenue, Mr. Pawlowski said the RAC ratio is likely toimprove.

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“Specifically, even though operating results are expected totrend downward, surplus is forecast to increase during 2006,” hesaid.

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Further, declining revenue will reduce the charge for expenseleverage, meaning a higher RAC ratio.

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