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Stock Strategist

Firms at the Center of the Real Estate Bust

Title insurers face a long road to recovery.

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Real estate transactions, the lifeblood of the title insurance industry, have come to a screeching halt, slashing revenue and underwriting income. Unlike other lines of insurance, title insurers collect a one-time fee at the closing of a sale or refinance, and that fee is reported in its entirety as revenue on a quarterly basis. Most other forms of insurance distinguish between written and earned premium, which serves to smooth out the earnings stream as revenue and policy obligations are matched. But title insurers--already tied to the cyclicality of the real estate market--have even larger swings in revenue and income, wreaking havoc for shareholders.

Title insurance is a highly cyclical, slow-growth industry that generates strong cash flow in good times--and attempts to break even in downturns. But few could have envisioned times being as bad as they are now, with financial markets facing extreme stress. What's worse, a major portion of expenses is fixed, leaving the insurers with few realistic cost-cutting options. Still, all of the companies have made deep cuts into variable costs, which have lessened underwriting losses somewhat. LandAmerica has reduced its head count almost 30% since the beginning of 2007, and First American and Fidelity have followed suit.

Jim Ryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.