In some ways, the title insurance business isn't really all that complex. Revenues depend primarily on just two inter-related factors: the level of house prices, and the demand for housing. And, of course, both are suffering in one of the worst housing corrections in U.S. history thus far -- lower prices and shrinking demand have helped push transaction volumes down dramatically for anyone in the business of underwriting title insurance policies.
All of which leads to the obvious conclusion: the ability of title insurers to control expenses in a declining revenue environment is critical to maintaining profitability. And those companies that possess a flexible cost structure, are more proactive in expense management and have access to capital can expect to weather the current down cycle better than others, according to an assessment released Monday by A.M. Best Company
Title insurance isn't a highly-fragmented industry, either: five national writers control nearly 95 percent of industry premium volume.
The credit rating organization said its outlook for the title insurance industry for the balance of 2008 and for 2009 remains negative, and that "any improvement will depend largely on the length and depth of the housing downturn."
The reasons for such pessimism are plenty. Direct premiums written for the title insurance industry were down 14.3 percent in 2007, A.M. Best said, driven by sharp reductions in premium volume for California and Florida. Further, title industry policyholder surplus declined by nearly 22 percent, largely the result of national writers; regional companies posted a modest gain in surplus, according to the report.
Pretax operating income and net income were down 64.7 percent and 69.9 percent, respectively, driven by net underwriting losses of $80 million last year. Investment income was flat, too, at $508 million vs. $509 million in 2006.
Add in mounting incurred losses, along with a loss of policy underwriting inflow, and it's not surprising that the fortunes of the large title players are strapped directly to the deck of the U.S. housing market's bow -- the fate of the ship will essentially determine the fortune of those that ride on the ship.
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