Fitch Gives Title Insurers Negative Outlook

Fitch Ratings said today that it has set a negative outlook for the nation's title insurers based on a sharp decline in their revenues and profits.

The New York-based rating firm said in addition to the profit slump in 2007 it expects further deterioration in 2008 and 2009.

Fitch in a report reviewed 2007 full-year GAAP results for the five national title insurers and the market's profitability prospects in 2008.

The company noted continued unfavorable credit and property market conditions, spurred by the subprime mortgage crisis, support the revised forecast for the industry.

Fitch said that Friday it will hold a conference call to discuss its findings.

According to the rating firm, it is historically rare for U.S. title insurers to produce net losses, but four out of five publicly-traded, national title underwriters in Fitch's rating universe reported losses in 2007 due to declining revenues and unexpected growth in incurred claims losses.

Fitch said it assigns ratings for title insurers at a level that can withstand a normal industry cycle. But “the current downtrend may be unusually severe and longer in duration than past cycles, and create significant pressure on some company ratings,” according to Doug Pawlowski, sector head for title insurance ratings at Fitch.

Leading indicators of future title insurance revenues, including mortgage origination and title insurance order flow, reveal that further challenges lie ahead, Fitch said.

The firm advised that “reducing expenses remains the key element to profitability in a down market and title insurers with a greater proportion of fixed costs will be at a disadvantage and will require significant expense restructuring to restore profitability.”

Poor title insurers' results in 2007 are also attributable to unfavorable loss reserve development from the policy years in the previous cyclical earnings peak years of 2003-2006, Fitch found.

The company said higher than anticipated loss ratios in these periods indicate that underwriting quality diminished greatly when industry participants were operating at full capacity.

Gerald Glombicki, director in Fitch's Insurance Rating Group, said, “There is some concern that these reserve deficiencies coupled with operating losses will affect capital adequacy within the title industry.”

The rating firm said more information on the impact of these events will be available as Fitch completes its loss reserve adequacy and risk-based capital analysis for U.S. title insurers based on 2007 statutory financial statements this spring.

Fitch's full report, titled “Title Insurance Outlook Turns Negative in Midst of Unusually Sharp Market Downturn,” is available online at www.fitchratings.com.