Profits should remain healthy for the U.S. title insurance sector despite a likely near- and medium-term decline in the volume of real estate transactions that will cut its revenue and earnings, a rating firm reported.
The findings by Moody's Investors Service came after a period during the past several years when the major title insurers have paid millions in settlement agreements following regulator charges they had paid disguised kickbacks to contractors, mortgage firms and others involved in the home sale process.
Moody's in New York listed as one of the challenges facing title insurers the fact that they "often draw potentially damaging regulatory and political scrutiny."
However, the firm said title insurance is "a niche industry that should remain secure due to its fundamental role in the economy."
The report by Moody's found that the industry's earnings "have been outstanding following two decades of generally low- or declining interest rates and healthy housing markets."
However, the firm said that while residential and commercial resale markets remain strong, signs of market softening have begun to emerge, largely because rising interest rates have dampened the number of mortgage refinance transactions.
"We expect earnings to remain sound in spite of potential revenue declines, with pressure on profit margins protected to some degree by increased diversification, effective expense management and by flexible operating structures," Moody's said.
The company outlined a number of key expectations and rating factors for the sector, including:
o The ability to protect profit margins in the event of a downturn to maintain credit quality.
o Title insurers' flexible operating structures, focus on expense management, and increased diversification to allow for an effective response to volatility in transaction volumes.
o Increased diversification and flexibility will likely soften potential volatility, but industry results will nevertheless remain closely linked to the real estate market.
o An expectation that title insurers will continue to use technology to further automate and streamline the title-closing process.
o Political and legal risks appear to be heightened.
o Differing approaches to the use of financial leverage are likely to continue, with the smaller industry participants maintaining more conservative leverage profiles.
o Large title insurers are likely to continue to rely on acquisitions to achieve revenue growth and greater diversification.
o The overall market and number of key market participants is expected to remain stable, with limited potential for consolidation among the top five insurers.
Moody's listed the largest U.S. title insurance groups and their market shares as:
o Fidelity National Title Insurance Group–30 percent (rated "A3 Stable").
o First American Title Insurance Group–28 percent (rated "A3 Stable").
o LandAmerica Title Insurance Group–18 percent (not rated).
o Stewart Title Insurance Group–12 percent (not rated).
o Old Republic Title Insurance Group–6 percent ("A1 Stable").
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