NU Online News Service, April 11, 1:59 p.m. EDT
While a Moody's report indicates a negative medium-term outlook for title insurers, a Keefe, Bruyette & Woods analysis suggests 2011 first-quarter results for title insurers may not be as challenging as initially thought.
KBW says first-quarter title insurance order counts will likely be down year-over-year, but the industry could have a better start in 2011 with respect to earnings due to continued expense management and improvement in loss ratios. KBW adds that the first quarter is typically the weakest of the year for title insurers, "and we expect this to be the case in 2011 as well."
But KBW notes that closed orders "should benefit from a solid [2010 fourth-quarter] open-order pipeline, and therefore results may not be as challenging as first thought."
KBW says it expects open orders for the quarter to be down 10 to 15 percent year over year due to rising interest rates and weak purchase trends.
Moody's, expanding on the impact of rising interest rates, says, "Interest-rate trends are the prime driver of refinancing volume, with the industry benefiting when rates decline, as they did in 2010. Steady or rising rates, on the other hand, would cause a falloff in refinancings."
Paul Bauer, vice president of Moody's, says he expects 30-year fixed rates to rise to about 6 percent from 5 percent, causing a "significant drop" in mortgage refinancings and therefore impacting title-insurance revenue.
On top of that, Moody's expects home sales to remain sluggish, pressuring title revenue from policies issued upon purchase of a home.
Additionally, Moody's says the title-insurance industry could see further consolidation, which could add operational risks and reduce financial flexibility for companies that acquire others.
"Over the medium term," says Bauer, "we expect title insurers to be pressured by a shrinking revenue base and lower income due to a drop in mortgage refinancings, accompanied by only a mild, if any, uptick in home sales."
Despite the negative medium-term outlook, Moody's says 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.
Last month, Fitch Ratings said title insurers' profitability was up in 2010 over 2009, but added that the industry outlook woud not be chanded to stable until evidence pointed to sustainable profitability for the sector.
For mortgage insurers, KBW says they will not likely see a return to profitability in the 2011 first quarter, but they should benefit from continued improvement in credit trends. KBW says it still expects operating earnings-per-share losses in the 2011 first quarter, but suggests those losses will be less than in recent quarters.
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