The housing market is set to slow during the second half of 2022 due to rising mortgage rates, low home buyer demand and fewer homeowners opting to sell their homes. This resulted in a decline in capital adequacy in the title insurance industry, according to a report released on Friday. Fitch Ratings,
In 2022, the overall risk-adjusted capital (RAC) ratio of the titling industry, which is a measure of the resilience of a financial institution’s balance sheet to tolerate economic risk or recession, is expected to fall to 168%, compared to 182% in 2021 Went. The 168% figure is in line with Fitch’s guidelines for an “A” category rating.
According to Fitch, this suggests that headwinds expected to emerge in the second half of 2022 weakened revenue and earnings and also adversely impacted the capital levels of some underwriters.
Fitch attributed the decline in the industry-wide total RAC score to a nearly 17% decline in adjusted policyholders’ surplus (APS), which was slightly less than the decline in target policyholders’ surplus (TPS) due to lower expense leverage and large happened. loss fee.
In addition, Fitch estimates that the level of unnecessary statutory loss reserves fell 14% year over year, which also contributes to the lower RAC ratio, and that 81% of reported statutory reserves ($5.1 billion) will be in the 2022 RAC ratio. was used. 100% of Schedule P reserves ($4.1 billion). Fitch noted that based on Schedule P reporting, recent underwriting periods continue to generate reported loss ratios lower than the historical average.
The industry base RAC score also fell, falling 13 percentage points from the year before to 136% at the end of 2022.
When the Big Four broke up, Fidelity National Financial The lowest was the RAC ratio at the end of 2022, which fell 13 percentage points year over year to 129%, the biggest reason for the decrease was an increase in large loss and reinsurance risk assignment fees and a decline of about 32%. APS.
old republic It had the second lowest RAC at 158%, which was six percentage points lower than a year ago. Fitch attributed the decrease to a 9% decline in surplus and an increase in large loss and assignment reinsurance fees, which was partially offset by a decrease in leverage expense and agency risk fees., first american ranks third with a RAC ration of 186%, a slight increase from a year ago, which keeps the firm in line with Fitch’s “A” rating guidelines. Despite the drop in surplus, the marginal increase was driven by an 18% decline in TPS due to a decline in large losses and assigned reinsurance fees.
stewart Highest-ever RAC at 221%, essentially unchanged from a year ago, keeping the company in line with Fitch’s “AA” rating guidelines. Fitch attributed Stewart’s results to a modest decline in surplus and estimated reserve excess. Given the improvement as well as a slight drop in TPS, Stewart’s base RAC at 191% is the highest in Fitch’s universe.
Looking ahead, Fitch believes we will begin to see the impact of some of the headline companies’ expense-cutting measures in the second quarter of 2023 and expects net profit for the industry to be “equal or slightly better” for the full year 2023. should expect a slowdown in originations and a decline in home prices over 2022.”
“A decline in premium volumes and a reduction in operating expenses, along with flat to marginally higher capital levels, will drive a modest capital adequacy improvement in 2023,” the report said.
“Title insurers are actively cutting spending in response to macroeconomic pressures, which, combined with lower premium volumes, should lead to a modest improvement in capital adequacy in 2023,” Gerry Glombicki, senior director at Fitch, said in a statement.
Furthermore, Fitch also expects industry capital levels to go up slightly in 2023, benefiting from recent austerity measures. However, Fitch Ratings also says that further spending cuts may be necessary if market conditions worsen.
While the confluence of high mortgage rates, low home prices and limited current home inventory is putting pressure on the industry, an industry-wide decline in operating expenses coupled with flat capital levels is expected to increase the headline RAC ratio. End of 2023.
