As mortgage rates rise and home price appreciation continues, employees in the housing industry are hard at work preparing for shifting market conditions. Rising mortgage rates have affected the entire industry, including in the title insurance sphere, with refinance volumes dropping nearly 60% for some companies during the first quarter of 2022 — and things are only expected to get worse when we get the Q2 numbers, as interest rates are now at the highest level in years.
Despite these challenges, a new report from Fitch Ratings found statutory capital will remain strong for U.S. title insurers even as macroeconomic pressures increase in coming months.
According to Fitch Ratings Senior Director Gerry Glombicki, the U.S. title insurance industry’s risk-adjusted industry capital declined, however, overall it remained supportive of ratings at the close of 2021.
“Title insurers are well-positioned to absorb near-term volatility associated with an evolving macroeconomic environment with higher inflation and interest rates,” Glombicki said in a statement.
In the first quarter of 2022, the title industry posted positive revenue growth, according to the American Land Title Association, but experts predict this growth will come under pressure later in the year as mortgage rates continue to rise. However, as in the first quarter of the year, commercial title orders may help bolster revenue.
“One large deal can swing the industry from loss to a profit for the year and large commercial deals tend to be geographically concentrated in larger urban markets,” Glombicki said.
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While reduced mortgage origination volumes will negatively affect total revenues, experts believe the impact on capital adequacy could be positive as the capital strain from new business will be reduced. In addition, many title insurance operations run leaner operations, employing freelancers or using technology solutions to deal with the increase in volume during the course of the pandemic, enabling them to now easily reduce operating costs.
“The ability to efficiently manage expenses will also help reduce the impact to both earnings and capital,” according to Glombicki.
The industry aggregate 2021 risk-adjusted capital (RAC) ratio decreased to 182% from 204% a year prior. This was largely driven by a drop in the scores at two of the four companies analyzed, which include Stewart, Old Republic, Fidelity and First American, and an increase of nearly 24% in target policyholders surplus (TPS).
Fidelity’s RAC ratio dropped 31 percentage points, while First American’s dropped 44 percentage points in 2021. Stewart and Old Republic, meanwhile, saw RAC score increased in 2021, rising 13 and three percentage points, respectively. Despite the decreases, the overall industry score and each company’s individual RAC score is consistent with Fitch Ratings’ guidelines for the top end of the “A” category and remains broadly supportive of outstanding rankings.
In addition, the industry base RAC score also decreased in 2021, dropping 15 percentage points to 149% at the end of the year.