Fitch Ratings views the U.S. title insurance industry as strongly capitalized with a risk-adjusted capital (RAC) score of 163% in 2012 compared with 144% in 2011. The improvement is primarily due to industry surplus growth of 34%, which is largely related to solid earnings in 2012.
The industry RAC score is calculated on a weighted average basis. Therefore Fidelity National Financial, Inc. (Fidelity) and First American Financial Corp (First American), with a combined market share of 60%, have a great influence on results.
Full year 2012 marks the first year since the housing market crisis that the RAC score benefited from a statutory reserve redundancy for all four rated title insurers. This reflects Fitch's more favorable view of the industry's loss reserves relative to the formula-based reserves stated on the balance sheet.
Fitch also believes that title loss reserves will develop adversely relative to actuarially estimated reserves as shown in Schedule P of statutory financial statements but at a slighter magnitude relative to recent years. Inadequately priced underwriting periods that experienced sharp deficiencies have largely matured. Also, improved underwriting practices and reduced transaction volume diminish the potential for material incurred loss development in more recent policy years.
Another factor contributing to the improved industry RAC score relates to scale benefits achieved from leaner expense structures accompanied by higher revenue.
An offsetting factor to the RAC score improvement was a higher large loss and ceded reinsurance charge (R10). Fitch's model update changed how this ratio is calculated from prior years in addition to increasing its correlation to other risk factors. This charge measures an underwriter's exposure to a large, single risk loss, though full limit losses are rare.
Fitch estimates a relatively modest improvement in the title insurance industry's 2013 capital position as measured by the RAC ratio. 'Continued profitable operations will likely drive modestly higher industry surplus, while expenses will remain relatively flat and in line with projected revenue volume. Fitch expects dividends paid to holding companies to vary by insurer but remain largely in line with historical levels,' said Gerry Glombicki, Director at Fitch Ratings and Title Insurance Sector Head.
The full report 'Title Insurers' 2012 Risk-Adjusted Capital Adequacy' is available at 'www.fitchratings.com'. Analysis of company-specific variances in capital adequacy is included in the report.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: Title Insurers - 2012 Risk-Adjusted Capital Adequacy
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708478