The Long and Short
Title insurance providers can benefit from lower rates
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
With interest rates down since late April and likely to continue falling as the Fed eases, the lower rates can be a source of relief for industries that directly benefit. Specifically, insurance and mortgage finance companies that underwrite title insurance might stand to benefit from higher closings and refinance activity in the housing market.
The companies that hold the three biggest market shares in title insurance in the US are Fidelity National Financial (FNF: Baa2/BBB/BBB), First American Financial (FAF: Baa2/BBB-/BBB) and Old Republic International (ORI: Baa2/BBB+). This industry has faced considerable pressure on top-line performance since the heady days of 2020 and 2021, as 10-year rates and 30-year mortgages have gradually increased to their highest levels in 2023-2024 since before the Global Financial Crisis. That drastic shift in rates in a relative short period has weighed considerably on refinancing and overall home closings (Exhibit 1). That has clouded prospects for companies that underwrite title insurance, including both residential and commercial real estate volumes. While mortgage rates still remain significantly high relative to the prior decade, the implications of further rate relief could provide a considerable boost to the industry.
Exhibit 1: Falling mortgage originations have hurt title insurers in recent years
Source: First National Financial company presentation
As the top producer in the industry, FNF maintains more than 30% of the US market. The company generates over 80% of their revenue and over 60% of earnings from title insurance. This includes not only the title premium but also escrow fees and other title-related fees. A much smaller percentage of earnings are generated from their life insurance products, which have provided some degree of diversification throughout the difficult operating environment over the past two and a half years. Those business lines are primarily focused in fixed-indexed annuities.
Exhibit 2: Spreads on insurers with large title and mortgage insurance shares
Source: Santander US Capital Markets LLC, Bloomberg/TRACE G-spread indications
FAF is the second largest title insurance operator in the US and provides other real-estate and banking related services. Title revenues, which includes both residential and commercial, represent over 90% of total annual revenue for the company. ORI is the third largest operator in the industry. However, the company is positioned as a more diversified P&C insurance operation than either FNF or FAF, generating about 52% of revenue through general insurance (primarily P&C with some Life operations) and about 47% through title insurance. ORI also had a mortgage insurance subsidiary that was in run-off that it sold to Arch Capital (ACGL: Baa3/BBB/BBB) in a deal that just closed in June of this year.
Exhibit 3: Yields on 30-year fixed mortgages and 10-year US Treasury debt
Source: Bloomberg LP, Bankrate.com US Home Mortgage 30-year Fixed National Average
Like ORI, ACGL is also more diversified across traditional P&C and reinsurance business lines but has extensive operations in mortgage insurance. Unlike title insurance, mortgage insurance carries substantial mortgage credit risk. This puts the company in a different category than the other three, particularly as it relates to the current concerns about the trajectory of the US economy. Mortgage credit risk results in losses during periods of significant default activity, which come about during periods of macroeconomic downturns and therefore higher levels of unemployment.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2024 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
