Fitch Expectations for 2008

Title Revenue Down another 3-5%
Industry Operating Margin between 2-4%

Fitch’s annual rating report on Title Insurance shows few surprises. By reviewing and analyzing company financial statements, and evaluating the real estate and mortgage markets in general they seem to have a reasonably healthy grasp on the title industry and where it is headed. And the industry, as the report suggests is pretty much in a stupor.

Fitch’s ratings look through long term cycles to focus on underlying fundamentals of the industry, properly noting that staffing is the highest expense in the industry and must be cut dramatically to make a profit. In Fitch’s opinion, the balance sheets, along with the movements of the title insurance underwriters to cut expenses, are strong enough to weather the current downturn, supporting a Stable Rating Outlook on the title insurance industry.

But as the report says: “The real story behind the current unfavorable title insurance market is the deterioration in operating margins, falling to 2.3% from 6.6% in 2006. These operating margins pale in comparison to an industry operating margin in excess of 14% in 2003 during the peak years.”

Surprisingly, however, several noteworthy issues were mentioned, but not deemed to be as harmful as I might have expected, and with financial details likely buried by underwriters who do not wish to enlighten the public and their stockholders about

• Losses due to frequent closing of title agencies because of defalcations
• Higher claims losses due to the poor quality of underwriting during the heavy volume years of 2003-5

Additionally, No mention was made of the enormous penalties paid by Title Companies that we have seen in the past year. And what of the potential consequences for the many outstanding lawsuits for violations of laws that may result in additional fines? Everyone in our industry is keenly aware of problems due to violations of RESPA, issues with affiliated business arrangements and Re-insurance scams, not to mention the Costs of Litigation to defend against numerous suits of wrongdoing. We can only hope that the industry is as stable as its financials suggest.

The full Report can be viewed online at www.Fitchratings.com under Financial Institutions – Insurance – Specialty Reports.