After experiencing declining profits in each of the last three years, including a 39% drop in 1995, the title insurance industry is experiencing better results in 1996. Both a healthy economy, which has augmented business, and service diversification by title insurers, which has created more profit centers for them, have helped the industry rebound.
Lawrence E. Kirwin - whose company, Wayne, Pa.-based Corporate Development Services Inc. (CDS), has chronicled the ups and downs of the public title insurance companies for the past eight years in its CDS Performance of Title Insurance Companies - says, "1995 was a disaster for title insurers. Refinancing was down as were home sales. Consumer confidence was low, and a lot of people were staying put."
In addition, he says, premium revenues were down in every state in 1995, which points to broad national factors such as the interest rate and the overall economy as reasons for the decline, rather than regional issues.
The title insurance industry is greatly influenced by interest rates because a large portion of its business is derived from refinancing. However, other factors are important as well.
"Even with reasonable interest rates as we have now, without consumer confidence, people will not he interested in upgrading their housing," says Bob Hauser, president of Commonwealth Land Title, Philadelphia. "Fortunately today, inflation appears to be in check, and unemployment is stable, and there is a general feeling of well-being with most consumers."
This is certainly the case in markets seeing the most title insurance activity. Kirwin says business is currently slow in the Northeast and improving on the West Coast. But business is best in the country's midsection.
"We have a lot of Fortune 500 firms headquartered (in Minneapolis) so employment is high," says Chuck Gregory, senior vice president of finance and administration with Minneapolis-based Old Republic National Title. "That is a major reason we have a stable stream of business in this market."
This year, the unstable nature of the refinancing business was in an upswing during the first quarter giving title insurance companies a good start, but the business evaporated during the second quarter. However, despite spotty business activity being reported in the third quarter, Kirwin expects a strong showing for the rest of the year.
"I think business will be substantially better this year, and I base that on an expected increase in the amount of revenue per transaction," Kirwin says. The sale of new properties and the resale of older ones are currently the major types of business for title insurers.
"There may be fewer overall transactions in 1996," says Kirwin. "But the revenue generated on a sale or resale is much higher than the revenue on a refinancing transaction."
This increased revenue can be as much as 50% more per transaction, Hauser says. "There is no question that our mix of business has changed from a refinancing to a resale mix."
"Resaleare less complicated than new construction transactions and involve less risk," says Gregory, adding that, "new housing starts are doing well this year."
"Housing starts are good, and the resale market is strong," says Michael R. Hammond, senior vice president and director of marketing services at Attorney's Title Insurance Fund Inc. (The Fund), Orlando, Fla.
Commercial business picking up
In addition to the residential transactions that are the backbone of the industry, commercial business is also picking up.
"The commercial side of the business went through a rough period in the early-1990s but, in the last few years, it has come back with a vengeance," says Hammond. "We are seeing more investment in raw land as well as lending for the acquisition and development of large commercial projects."
"Commercial vacancy rates are dropping, and this is leading to more investor interest," says Hauser. "So, commercial business has become more important to us."
Results for the last quarter of 1996 should also indicate an increase in commercial business. "The fourth quarter is when most commercial closings take place," says Jan Alpert, president of Richmond, Va.-based Lawyers Title Insurance Corp. "Because corporations like to get things done by the end of the year.
"Commercial business still can't compare with the mid-1980s, but it has been steadily improving for the past two years," says Parker Kennedy, president of Santa Ana, Calif.-based First American Title Insurance Corp.
And during the past three years, every bit of business has been critical to the individual firms. CDS reports that the industry's profits dropped from $611 million in 1993 to $402 million in 1994 and to $247 million last year.
With that kind of profit free fall it is amazing that more title insurance companies weren't in the red, especially since the overall title losses for the industry in 1995 exceeded profits by almost $30 million. "Also from 1994 to 1995, total operating income for the industry decreased by $1 billion from $5.84 billion to $4.81 billion," says the CDS report.
Despite this, Kirwin says that of 83 firms his company tracks, 60 were operating profitably last year.
CDS' report cites strong investment gain of almost $300 million on an 8.1% yield for the industry's overall net income of $266 million. "These are investment gains on securities the corporations purchased," says Kirwin.
But another important element of surviving the decline in industry profits was streamlining operations. This has taken two forms: consolidating offices with like or similar functions and the use of technology to both reduce the number of personnel needed and to increase efficiency.
"The strategy of combining back-office facilities has had a significant impact on the bottom line, and this will continue to have an effect in the future," says Hauser. "The industry in general has recognized more efficient ways to produce business."
Since the bottom fell out of the refinancing boom in 1994, title insurance companies have been downsizing to reduce overhead costs, and the consolidation of back-office operations is just the latest move to trim overhead.
But competition is so great in the industry that Kennedy says every efficiency is seen as a way to cut fees. "As prices continually drop it is hard to stay ahead of the game," he says.
Technology moves to the forefront
However, the majority of these cut-backs in overhead have been made possible by technology.
Alpert says improved technology providing computers with increased data capacity has helped make consolidation of back-office operations possible.
"We have an office in Orange County, (Calif.) that services the entire state," says Kennedy. "It is the ability to view the recorded documents on a computer screen that has made that kind of consolidation possible. The more county records that are put on computers, the more this kind of administrative streamlining can take place."
"Technology is becoming a more important part of our business environment," says Gregory, "because it enhances our ability to compete with less personnel."
"[Technology]" is where the real cost-savings come from because it cuts down on production costs," says Kirwin.
For example, Old Republic National uses document imaging at its title plants. "Anyone on the system can call up a document directly to their computer screen, rather than requiring someone look up the hard copy in the files and send it to you," says Gregory, adding that this obviously streamlines the production process.
Technology also is being used to attract new business by offering faster, simpler and more efficient business operations. For example, Hauser says, new technology speeds the dataflow to and from the Client, making data collection a quicker operation and thus reducing the time needed to process orders.
Also, Hauser says that computers help with order taking and production, as well as giving clients direct access to data on how their transactions are proceeding.
"Our clients want to know where their order is and when they can expect it," Hauser says.
Earlier this year, Pittsburgh-based National Real Estate Loan Services Inc. introduced Recordlink, a software system designed to speed the retrieval of title information from courthouse records to the title insurer.
The software permits the data to be keyed directly into a laptop computer by researchers rather than by transcribing by hand and then transmitted via modem to National for processing.
"We realize that for courthouses to automate is an arduous task that usually falls victim to lack of funds or budgetary constraints, says Ed Baran, National's chief technology officer. "We are meeting them halfway by taking our ideas for automation to the courthouse."
"It is a matter of offering more integrated information and more functionality in how the information can be accessed and used," says Hammond. "And it is moving to electronic commerce where money is transferred electronically."
Gregory maintains that many of the current systems offer data transmission by EDI or over the Internet. "The ultimate objective is for your client to be able to receive the document or information they need electronically," he says.
Getting customers accurate title information products on time is critical to the closing of property sales. Attorney's Title is capitalizing on this fact by offering customers a "Quality and Service Guarantee." The guarantee was started in November 1993 and states that members will receive accurate title information products on time, or they will not be charged.
The company implemented a total quality management program, including employee training, customer service initiatives and technological innovations to back the guarantee.
Albeit gradually, computers are transforming the once paper-intensive title insurance industry into an arena showcasing electronic communication.
"We are not in a paper-less environment yet," says Hauser, "but to get there, we need the user-friendly systems that technology is providing."
Another area where title insurers have become more efficient is in dealing with fraud.
"The industry has become more attentive to fraud, and that has helped cut losses," says Kirwin, adding that a significant part of the industry's 15% reduction in title losses since 1994 is due to this renewed vigilance. Stricter underwriting standards maintained through a higher level of auditing agents' procedures has also helped, he says.
"Fraud is worse than writing a bad policy, because fraud can cost a company up to 10 times the value of a policy," says Kirwin.
With the title insurance business being so volatile, many firms are looking to diversify the services they offer clients as a form of protection against down cycles in the industry.
"I don't see anyone giving up on title insurance by any means," says Bob Raffa, vice president and director of the national mortgage services unit at Chicago-based Chicago Title. "But title companies are looking for other ways to service customers and drive profits."
Many title companies have begun providing real estate needs that compliment title insurance services such as appraisal services, credit check services, flood certification and document certification.
"We know real estate transactions, and we feel it is best to stay with our core business," says Hauser.
"In addition, because many of these services are required in the title insurance business, the business structure needed to provide them is already in place.
"We want to be a provider of all real estate services and use the same distribution system that we provide title insurance with," says Hauser. In other words, the service can be provided with little or no additional investment by the title insurer.
Kennedy agrees, pointing out that First American Title has a great deal of non-title insurance profit centers, but all of them, from tax monitoring to mortgage software sales, are related to real estate. "We feel it is important to remain close to what we know best," he says.
Challenges of diversifying
However, some argue that business diversification has to include separate businesses not affected by the same economic factors. For example, Irvine, Calif.-based Fidelity National Title invested in the Carl Jr.'s hamburger chain, and Attorney's Title is studying the idea of developing a computer-based business education and training program.
The program would initially be for real estate professionals and have the potential for expansion to other professional occupations. This, Hammond points out, would make it a profit center.
"It will involve on-the-job training to allow the professionals to not only learn, but to apply what they have learned," says Hammond adding that the Fund already has a good reputation in business education through a series of seminars that are attended by 5,000 people each year.
"We want to structure it in a way that it is effective for people on the job," Hammond says. "So they can learn something one day and use it the next."
While these ventures involve risk, so does remaining tied to real estate.
"Companies that are expanding into related areas are not moving into different business cycles," says Kirwin. "In fact, the cycles may even deepen because all of the new business depends on real estate transactions."
"The idea of diversification is to lessen your vulnerability in one area, not increase it," says Hammond. "If you remain in only real estate, you just compound the problem."
But it brings up an interesting question. Kirwin asks that if a company can be more profitable in a good cycle because it offers various services and less profitable in a bad cycle because of the increased overhead the added services entail, does this make the company less valuable?
"Big gains when revenue increases tend to mirror (big losses) when revenue volume falls, due to (the title insurance industry's) need for multiple operations" according to the CDS report. "Smaller percentage gains thus may suggest smaller losses in lean times."
The stock market tends to reflect the risk and growth potential of the stocks of some of the largest public title insurance companies.
"There is a high turnover from quarter to quarter with many of the companies' stock," says Kirwin.
CDS' report on the second quarter of this year showed trading volume for the quarter (as a percentage of outstanding shares) was 21.3% for Lawyers Title, 21.1% for Fidelity National, 15.7% for First American, and 9.6% for Stewart Title.
This kind of high turnover is unusual and can be a red flag for investors, say Kirwin, but he adds that it may just be speculation in the volatile stocks.
"These stocks are subject to fairly high changes in earnings, and it could just be investors looking to hit during a good period of earnings," says Kirwin.
Alliances or independent agents?
Some real estate services firms are avoiding the problem of high overhead by forming strategic alliances with other real estate firms, rather than acquiring them.
"Alliances keep our overhead low," say Gregory. "Companies are trying to centralize their business by offering all the services their clients need. We are doing that as well, but through alliances rather than owned operations."
So partnering allows companies to increase their service offerings without increasing their operating costs.
The same battle is being waged over how companies generate their business - using direct operations or independent agents. This is basically a choice between contracted or in-house services.
Independent agents work on a fee basis, while direct operations are company-owned offices. Direct operations are generally more profitable if the volume of business is high. But when business is off, independent agents are a good way to garner business without the added operating costs.
"When business is good, the multiple offices create a lot of business," says Kirwin. "However when business drops off, these offices are a drag on the expense side."
And, "we (title insurers) have not been adept at predicting downturns or upturns in the industry," says Hammond.
This poor record of forecasting business cycles has most companies looking for a balance between the two types of business.
"With the level of business varying as it is from market to market, knowing what the industry's general thinking is concerning direct operations vs. independent agents is difficult," says Kirwin. "But I think there is currently a move away from direct operations to cut overhead costs."
Gregory says Old Republic National Title gets about 55% of its business from independent agents, except in, the nation's busiest title insurance market.
"In California, agency fees have not been favorable to the underwriter," Gregory gory says. "Things have improved, but we still favor direct operations there."
In general, the fees title insurance companies receive for their services have declined due to the amount of competition in the business.
Keeping tabs on the industry
While Kirwin and CDS track over 80 title insurance companies, consolidation has concentrated most of the business within eight large firms, some with numerous title insurance subsidiaries. These eight giants control 85% of the title insurance business. The remaining 44 non-related companies handle just 15%.
"More acquisition could take place, but the industry is pretty well concentrated now," he says.
While the industry has undergone significant consolidation in recent years, the battle for market share remains fierce with the companies looking for ways to set themselves apart.
The latest trend involves rating agencies sizing up the competition, a fact that should help the consumer.
"Historically, there has not been much awareness as to the underlying strength of title insurance companies," says Kirwin. "But the more it is done, the better off the consumer will be."
Gregory of Old Republic National Title, which has received four consecutive A + ratings from Standard & Poor's, says more and more title insurers are getting rated by nationally recognized agencies for marketing purposes. "It is basically a rating of financial strength," he says. "Will the company be around to pay its claims."
Commonwealth Land Title's Hauser says that the claims-paying capability is the most important factor in receiving a good rating. "It also helps with large multistate transactions, because the client knows by the rating what kind of company we are." Commonwealth has received an A rating from Standard & Poor's and an A + from Duff & Phelps.
However, some in the industry don't feel the way many rating agencies judge companies is an accurate barometer to their overall strength. "A large portion of a company's rating is often based on its claims-paying capability, its cash on-hand, rather than a company's status as an ongoing busines,." says Alpert.
For example, one company is spending capital on new technology and growth to allow it to better serve its customers, and thus has less claim's-paying cash available; On the other hand a second company is making none of these investments in its future, but instead is hoarding its capital reserves.
"So which is the stronger company?," asks Alpert. "I'm not sure some of the rating agencies know the right answer."
Kennedy was not a proponent of rating title insurers because, he says, "there are not really any weak title insurance companies. You can count the number of title insurance failures on one hand."
"However, Gregory adds that Fannie Mae is no longer accepting policies from companies that have not been rated by at least one of a select group of rating agencies.
Hammond says ratings will have an impact on the new services and businesses that title insurers move into. "I think rating agencies will pay closer attention to the diversification plans of the underwriters and how well or poorly these plans work," he says. "Success of these moves is critical. If it is done right, the company can dramatically improve their financial stability but, if it is done wrong, it can lead to big problems."
While the philosophy of business diversification in the title insurance industry varies, most companies seem to prefer staying close to what they know, and that's real estate. And as long as the economy continues to cooperate as it is currently, that seems to indicate good times for the industry, at least in the short term.