US Title Insurers’ Capital Ratios Fall to New Low

The US title insurance industry is feeling the squeeze from the subprime mortgage meltdown and subsequent decline in housing prices.

Fitch Ratings says the industry’s risk-adjusted capital [RAC] position at year-end 2007, showed a significant decrease: the title industry’s RAC ratio is at its lowest since the RAC Model was first introduced in 1997.

Disproportionately large declines in the RAC ratios of First American Financial (NYSE: FAF) and LandAmerica Financial Group (NYSE: LFG), which account for approximately one-half of the industry s revenue, weighed heavily on the industry’s RAC ratio.

The fall in the RAC ratio reflects both a deterioration in capital and a reduced redundancy between statutory reserves and expected claims, Fitch said. Widespread expense reductions favorably influenced targeted policyholders’ surplus, but the effect was outweighed by lost surplus. While the industry ratio fell dramatically, Fitch notes that a few companies held relatively steady and consequently, disparities among individual title insurance companies deepened.

It is Fitch’s view that the primary risk facing most title insurers is the inability to quickly cut fixed costs in the face of retreating revenue.

In spite of expectations of further operating difficulties for title insurers, Fitch’s
aggregate title insurance industry RAC ratio is likely to remain relatively flat in 2008. It is expected that further deterioration in policyholders’ surplus will be matched by a reduction in the Expense Leverage charge as companies continue to take aggressive cost-cutting measures.

The report ‘Title Insurers’ Risk-Adjusted Capital Adequacy at Year-End 2007‘, is available for purchase.