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Stock Strategist Industry Reports

Success for Title Holders?

Investing in title insurers now could lead to outsized returns for patient investors.

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Although there seems to be some semblance of recovery in most industries, real estate continues to lag. Despite the unusually long downturn in both residential and commercial markets, we expect that the upturn will eventually come, though we think it will be gradual. One way for long-view investors to capitalize on the turnaround is with stocks in the title insurance industry. Title insurers earn premium revenue from all real estate transactions, sales, or refinances, and any material pickup in volume builds its revenue base, adding to profits. We think that stocks in the title industry are poised to outperform the market.

Margin expansion will drive title industry profits higher. It's not unusual for the title insurance industry to experience expanding underwriting margins after a downturn in real estate; in fact, it's been a common theme in the past. As depicted in the chart below, the industry's combined ratio--underwriting expense divided by premiums--has recovered strongly after a period of losses brought about by normal cyclical real estate patterns. For example, after a housing downturn in the early 1990s, the industry's combined ratio stayed below 100% in all but one year from 1992 through 2007. We think the bottom of this cycle was reached in 2008.

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