A.M. Best Special Report: Clouds on Horizon After Title Industry's Bright Year.

OLDWICK, N.J. -- The title industry reported near-record results in 2004, following a record-setting year in 2003. Overall underwriting performance in 2004 was almost as strong as in 2003, fueled by favorable economic conditions marked by the continuing housing boom, according to a special report issued by A.M. Best Co.

The industry's operating revenue declined slightly from the historically high 2003 levels, while performance was driven by continuing favorable loss experience and enhanced operating efficiencies.

Following record earnings generated in the previous year, the title industry reported robust earnings in 2004 for the ninth consecutive year. The industry's 2004 net income of approximately $1.1 billion was almost at par with the record-breaking year of 2003. Pretax underwriting gains, while significant, nevertheless declined somewhat from 2003, whereas both net investment income and net realized capital gains compared favorably with the prior year. The favorable performance was driven by strong underwriting results and an increase in net realized capital gains attributed to favorable equity markets in 2004. Operating revenue was nearly equal to the historical high posted in 2003 and reflected sustained high demand for title products.

As the broader economy continued its recovery in 2004, the housing sector, which included a demand for new mortgages as well as refinancing activity, remained favorable even as the Federal Reserve initiated a policy of gradually increasing short-term interest rates from the historically low levels witnessed in 2002 and 2003. While the housing affordability index dropped by 5.8 points to 132.6 in 2004, largely reflecting rapid appreciation in real estate prices, it still remained well above historical levels, as long-term rates, which are the primary determining factor behind mortgage rates, continued to trend lower. There are some troubling trends on the horizon. These include the development of what many in the housing industry refer to as a real estate "bubble," as home prices continue to increase at rates far above the growth in personal income.

The title industry also is the subject of several investigations. The actions were initiated by the regulatory agencies of states such as California and Colorado, as well as by the U.S. Department of Housing and Urban Development (HUD), the federal agency with oversight of the housing industry and related practices. The primary focus of the investigations at the state level are so-called captive reinsurance agreements, whereby several major title insurance companies ceded nearly 50% of the premium to captive reinsurance companies set up by homebuilders and developers.

The investigations have centered on whether these payments were in effect "kickbacks" in return for referral of title business from the developers, and whether these arrangements raised the cost of procuring title insurance for the homebuyer. As of this writing, several of the major title insurers have promised to end these practices; have refunded part or all of the premiums involved in these arrangements back to policyholders; and have paid fines and penalties to the regulatory agencies as part of an overall settlement.

The industry has evolved rapidly in recent years due to several factors, which included: consolidation activity; introduction of new and expanded products; technology advancements; entry into new lines of business; and national and international expansion. As the industry continues to evolve by diversifying its products and services and enhancing its utilization of technology, the potential for volatility in revenue and earnings will be somewhat mitigated by economic cycles.

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A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.