If the reality is that any business is only as good asits bottom line, then business is back to being goodfor title underwriters. The year-to-date resultsindicate that many of the economic factors of 2012have once again become favorable to titleunderwriters and the title insurance industry.

The profitability of title underwriter operations isencouraging: For the third consecutive quarter,aggregate underwriting results on a year-to-datebasis were positive for the title industry and nearlythree-quarters of title underwriters reported a netunderwriting gain individually through the thirdquarter 2012.

The title industry reported an aggregate operatinggain of nearly $317 million through the thirdquarter 2012, ending operating losses reportedthrough the third quarter in the previous two years.Industry net income of nearly $493 million wasreported through the third quarter, a 205 percentyear-over-year improvement. This also marks thehighest level of net income for the title industrythrough the third quarter since 2007.

While title underwriters are again reporting netoperating gains and net profits, they have alsocontinued to maintain adequate levels ofpolicyholders’ surplus while increasing directpremiums written period over the period. Titleunderwriters, in aggregate, increased policyholders’surplus more than 20 percent since year-end 2011 to$3.5 billion. The title industry reported a leverageratio (liabilities to policyholders’ surplus) of 1.57.Demotech prefers underwriters report leverage ofless than 3:1 and a ratio greater than that willsubject an underwriter to additional review andanalysis.

Title underwriters reported approximately $8 billionin direct premium written through the third quarter,representing a 15.3 percent increase period overperiod. Most of the premium growth experiencedby title underwriters was derived from refinanceactivity based on historically low interest rates. Theeffect those interest rates would normally have ingenerating premium has been partially offset byhigh credit qualifications and loan-to-value ratiobarriers.

The title industry has reason to hope that the directpremium gains seen over the past few periods aremore than a brief respite and instead the start ofsustained growth. Moreover, the rapid consolidationin the industry means the potential new revenue isdistributed among a smaller pool of companies,giving each a larger, more profitable share.As theindustry begins to string together quarters ofpositive growth, new investments in titleunderwriters may potentially emerge.

As mentioned previously, in the first quarter 2012,the title industry reported improved results.Through the second quarter of 2012, the titleindustry reported solid results. In the third quarter,title industry results leave little question that theindustry is on the mend. Moreover, year-end resultswill showcase bottom line results of good business.

Demotech, Inc. has served P/C insurancecompanies, Title underwriters and specialtyinsurance markets since 1985 and has beenassigning Financial Stability Ratings® (FSRs) tothese markets since 1989. Follow Demotech onTwitter (@_Demotech) or visit www.demotech.comfor more information. Paul D. Osborne is a seniorfinancial analyst; Douglas A. Powell is a seniorfinancial analyst.

The Breakdown: Title underwriterprofitability at highest level since 2007

Reprinted from the Jan. 14, 2013, edition of The Title ReportOctober Research LLC * Copyright 2000-2012 * All Rights Reserved

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by Douglas A. Powell and Paul D. Osborne