A.M. Best Says U.S. Title Insurance Sector Remains Profitable Amid Regulatory Uncertainty

October 8, 2015

A.M. Best is maintaining a stable outlook on the U.S. title insurance industry, which reflects the industry’s continued positive financial condition, as reflected in the balance sheet strength of the major title insurers, according to a new special report. The stable outlook also incorporates some degree of uncertainty surrounding regulatory changes governing the mortgage and title sectors, the strength of the economy and the current environment in the housing market.

The A.M. Best report “Title Sector Remains Profitable Amid Regulatory Uncertainty” states that the industry’s premiums have increased so far in 2015—with written premiums up 16.4 percent through the first six months from the same period in 2014.

Other highlights from this report include:

  • The industry’s composite ratio—also known as the combined ratio in the property/casualty industry—deteriorated slightly to 95.3 percent in 2014 from 94.6 percent in 2013, the third consecutive year it has been under 100 percent.
  • In 2014, title insurers continued to report growth in surplus, but to a lesser extent than in 2013. Although still rising, growth in year-end surplus slowed to 1.7 percent year over year, compared with 6.6 percent in the prior year, while net premiums written declined, dropping by 11.4 percent in 2014 compared with a gain of 11.8 percent in 2013.

The report also notes housing-market and macroeconomic trends impacting the title sector, including:

  • An increase in national property values of 7.4 percent annually as of July 2015; a 5.3 percent increase in construction activity in August from a year earlier; and a 21.2 percent decrease in foreclosure rates as of July from the previous year.
  • The lowest level of homeownership since 1995, at approximately 65 percent; a slowdown in housing starts by 3 percent in August 2015; and a decrease in existing home sales of 4.8 percent in August, on an annual basis, compared with July 2015.
  • The U.S. economy posted an increase of 3.9 percent in real gross domestic product in second-quarter 2015, following two quarters of moderate expansion. The growth was largely driven by strong personal consumption, government spending and increased residential and non-residential investment.
  • The labor market added an average of 212,000 jobs a month in 2015 through August. The continued job gains have lowered the unemployment rate to 5.1 percent in August from 5.7 percent in January.

Looking forward, now that premiums have generally resumed growing, title insurers will be faced with the challenge of sustaining this period of profitability in the face of upcoming regulatory changes related to disclosure practices, which may potentially result in an initial slowdown in revenue growth, home price and mortgage interest rate increases and relatively slow wage growth, all of which can make homes potentially less affordable and negatively impact the current favorable phase of the underwriting cycle.

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