The title insurance industry will enjoy another positive year in 2017, with robust surplus levels and seven consecutive years of positive net income. As a result of the recent favorable financial trends and the current financial condition of title underwriters, KBRA views the industry Outlook as Stable. The industry continues to benefit from favorable loss experience due to lower claims volumes. Further, improved cost efficiencies along with the benefits from technological advances have improved expense ratios. Of the 47 title insurers with over $2 million of statutory surplus, KBRA expects close to 90% of title underwriters to have positive earnings in 2017, with over 75% increasing surplus.
Despite the industry’s recent success, title insurers could face some headwinds in 2018. The Mortgage Bankers Association (MBA) is projecting further declines in mortgage volumes, with significant declines expected for mortgage refinances. Since premium volume and profitability for the title insurance industry is closely tied with real estate sales and mortgage refinancing activity, lower volumes could lead to lower profitability.
However, there are indications 2018 could be favorable for the U.S. housing market. U.S. home building jumped to a one-year high in October of 1.29 million units which represents a 13.7% increase. Homebuilder confidence has also steadily increased since September, as measured by the ‘National Association of Home Builders/Wells Fargo Housing Market Index' (HMI). In December, the HMI reached 74, representing the highest level in 2017.
Despite the lack of M&A among title underwriters in 2017, KBRA expects increased activity in 2018. KBRA notes many of the top independent title underwriters have been adding market share in recent years, and believes M&A could be the means to accelerate market share growth.
In summary, with seven consecutive years of strong net income and increased surplus, KBRA believes a few quarters of declining mortgage volumes projected by the MBA is manageable. In addition, the overall mortgage declines are largely related to refinances, with indications of new originations and new home sales increasing in 2018.
About KBRA and KBRA Europe
KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.