Fitch's Annual Review & Outlook For Title Insurance

January 18, 2002

CHICAGO--(BUSINESS WIRE) -- Fitch has published its annual Review & Outlook[PDF] report covering the title insurance industry. In the report Fitch discusses industry performance during 2001, rating actions taken during the year, major events, and expectations for 2002. Some areas of interest may include a discussion regarding substitute title insurance products, how Fitch will incorporate new accounting standards for goodwill in its analysis, and a study seeking expense efficiencies following years of investment in technology.

Entering the year 2002, Fitch continues to view the Rating Outlook for the U.S. title insurance industry as Stable. Key factors supporting this Rating Outlook include the generally strong financial condition of essentially all of the title insurers rated by Fitch, and expectations for a weakened, but still reasonably healthy real estate market in 2002.

Fitch views the capital and surplus of the title insurers in its rating universe as strong from both an absolute dollar and risk-adjusted perspective. Further, reserves continue to appear adequate as measured on both a GAAP and statutory basis. Looking at the title industry from a macro perspective, prospects for 2002 are not that bad. In spite of a real estate market that is declining under pressure from an economic recession, most forecasts call for only a moderate downcycle in the coming year.

Fitch assigns ratings with a long-term perspective, recognizing that title insurance is a highly cyclical business. Fitch rates through a cycle and does not target their ratings to ride up and down with a cycle. Therefore, Fitch's industry Rating Outlook can continue to be Stable despite the cyclical and structural challenges facing title insurers.

In January 2001, Fitch predicted a slight 2%-4% increase in operating revenue for the title insurance industry which proved to be greatly understated. This forecast was based on mixed signals of declining interest rates and a slowing real estate market.

Actual third quarter 2001 results instead showed a strong 20% increase in operating revenue relative to the same period in 2000, and revenue growth for the full year should approach that same level. Further, the real estate market was relatively robust in 2001 despite the economy slipping into recession. Lower interest rates triggered a refinancing boom, which overcame a real estate market that started to show more serious weakness during the third quarter of 2001.

Looking ahead to 2002, we are faced with the prospects of flat interest rates. Recent reductions in the Fed Funds target rate have had a modest impact on longer term mortgage rates. In addition, deterioration in the real estate market during the third and fourth quarter of 2001 can be traced to the economic shock from the events of September 11, and a general seasonal decline. Real estate market activity in 2002 is expected to be down from 2001 levels, and similar to levels seen in 2000.

Consequently, Fitch is expecting significant declines in title insurance operating revenue in 2002 as refinancing activity slows. Accordingly, the key to maintaining profitability will be the speed at which title insurers can cut operating expenses to match a slower real estate market.

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Source: Fitch

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