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Title Insurance Industry Capital Position Improves, Fitch Reports

June 24, 2014

Fitch Ratings views the U.S. title insurance industry as strongly capitalized with a risk-adjusted capital (RAC) score of 168 percent in 2013 compared with 166 percent in 2012 for its rated universe marking the fifth straight year of improvement.

The industry RAC score is calculated on a weighted average basis. As such, Fidelity National Financial, Inc. and First American Financial Corp., whose combined market share is 60 percent, greatly influence results.

Leading the improved RAC scores was a 6 percent increase in aggregate stated policyholders' surplus in 2013 mainly due to earnings and unrealized investment gains.

Augmenting this increase was a $78 million increase in Fitch's view of statutory reserve redundancy. This reserve adjustment is driven by a view that the industry's statutory balance sheet loss reserves, which are formula-based, are overstated. However, Fitch also believes that actuarially estimated reserves as shown in Schedule P of statutory financial statements are understated and will continue to develop adversely in the near term, albeit at a lower magnitude than prior years.

Continued lean expense structures contributed to solid RAC scores in 2013. Expense leverage and agency risk, the largest risk charge in the RAC score at 34 percent of total charges before covariance adjustments, increased in concert with title operating revenues in 2013.

An offsetting factor to the RAC improvement was the industry's large loss and ceded reinsurance charge, which represents 21 percent of total charges before covariance adjustments, increased significantly in 2013. This charge measures an underwriter's exposure to a large, net single risk, though full limit losses are rare.

Fitch anticipates that title insurance industry capitalization, as measured by the RAC ratio, will remain near current levels in 2014. Surplus will likely remain relatively flat in the near term. While shareholder dividends could vary by company, Fitch anticipates that distributions will be supported by earnings and not capital.



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