AM Best has revised its market segment outlook on the U.S. title insurance industry to negative from stable, owing to significant decline in home sales and refinancing activity, as well as other economic and macroeconomic factors, such as high prevailing mortgage interest rates and the potential of a recession.
The Best’s Market Segment Report states that title premiums were down 7.5% through the first nine months of 2022, confirming a dwindling of home loan originations and refinancings.
Further deceleration is expected with fourth-quarter results due to the timing of the Federal Reserve’s rate hikes, which occurred in the latter part of the year, and their impact on transaction activity.
Additionally, mortgage interest rates rose throughout 2022 and are now at a level not seen in nearly two decades.
In the latter half of 2022, 30-year mortgage rates were hovering at 7%, compared with the average interest rate of 2.6% in 2021. As a result, home sales declined year over year by 18% through third-quarter 2022 and are expected decline further in 2023.
Title insurance direct premium is expected to fall significantly in 2023, but net underwriting and net operating results should remain positive
Kourtnie Beckwith, senior financial analyst, AM Best
Although the real estate market is going through a soft patch, title insurers have shown an ability to be prudent cycle managers, as observed in 2008; however, they aren’t immune to adversity.
The increase in commercial real estate transactions in recent years should help offset some of the decline in residential transactions (i.e., mortgage originations and refinancing). However, commercial transactions are likely to decline in 2023 as well.
Revenue from commercial transactions, given the values of the properties insured, is typically higher than from residential transactions.
These transactions typically account for 5% to 10% of the market.
Over the next year, AM Best expects to see a continued downturn in home purchases while mortgage interest rates remain high compared with 2019-2021. Refinancing transactions are also expected to continue to decline in 2023.
AM Best views the title insurance market as on that is cyclical and expects underwriters to manage the cycle as they have done in the past.