Although the financial consequences of the abrupt end of the refinancing boom spilled over into the first quarter of 1995 for most title insurance companies, industry leaders expect 1995 revenues to match average totals for the year preceding the boom, as the market has returned to "normal."
"The market has been the reverse of last year, when business started out strong and went downhill," says Stewart Morris Jr., president of Houston-based Stewart Title Guaranty Co. "This year it started slowly, but has picked up."
"The entire industry is having a good third quarter," says Jan Alpert, president and chief operating officer at Richmond, Va.-based Lawyers Title Insurance Corp.
"[1995] will end up as an average year, although it has been a head in the ice-box, feet in the fire situation, where two extremes have blended into a medial out, come," explains Alan Prince, senior executive vice president/title operations manager with Chicago-based Chicago Title & Trust.
Prince says that while the decline in residential refinancing (spurred by rising interest rates), along with much of the corporate response (for the most part personnel layoffs),occurred in 1994, the full impact of the decline in residential orders did not affect the bottom line until the first quarter of this year.
Therefore, 1994 remained a reasonably good revenue year, although new orders were down, and executives knew what was coming. While they waited for the inevitable, management had already begun implementing layoffs and salary cuts.
Title insurers were caught off guard due to the speed with which interest rates rose and snuffed out the residential refinancing market. Companies thought the refinancing boom would eventually decline, but it instead became more of a vertical free-fall to the pavement.
And that is where a large number of employees found themselves; they were hired on the rising tide of refinancing and left on the beach as it quickly ebbed away.
"The refinancing boom was a double-edged sword," says Prince. "It provided a large amount of revenue, but when it ended companies were left with a lot of overhead they could no longer justify or afford."
"The Fed began raising rates in July, and that is normally the high point for orders, due to the fact that that is when most people move so as not to disrupt their children's school year," explains Alpert.
"On a refinancing, the title has usually been checked already for the initial loan, so it is very unlikely a claim would result," explains Malcom Morris, chairman of Stewart Title Guaranty Co. and the man who manages the monetary resources from which the company's claims are paid.
The other shoe finally dropped in January as the decline in orders reflected on the bottom line. "I have been in this business for 32 years," says Prince, "and I have never experienced a drop in revenues like the one from the fourth quarter of 1994 to the first quarter of 1995." Comparing quarters
Although traditionally a slow period in the title insurance industry, Chicago Title experienced record first quarter earnings in 1994 bringing in $23.3 million. However, this year the company recorded a pre-tax loss of $12 million (according to the financial statement of Chicago Title's parent company New York-based Alleghany Corp.) And this is so despite management's reducing its staff by i6% from March 1994 to April 1995, postponing salary increases and initiating pay cuts for highly compensated employees.
Increased orders in the second quarter have improved Chicago Title's performance, but few title insurers had good first quarter results this year.
Lawyers Title Insurance Co. may have been the only one of the big seven title insurance firms to record a profit during the first quarter, but that wasn't achieved without great sacrifice on the part of employees.
"We made $1 million in the first quarter," says Alpert. "But, in addition to letting 800 people go, the rest of us took pay cuts for six months. We restored salaries on July 1 and our third quarter results have been good.
"It is a normal market now," she adds. "It will not be like 1993 again."
Alpert says Lawyers Title's revenues from its residential business in the second quarter of 1993, amid the refinancing boom, were 10 million higher than the second quarter of this year. She says the difference could be twice that amount for some of the larger title insurance firms.
"I expect things to remain as they are now through 1996," says Alpert. That is to say with interest rates down slightly from last year but remaining relatively constant.
Many in the industry think the future hinges on the fate of the Balanced Budget Bill, currently in Congress. "If President Clinton signs the bill and it effectively balances the budget, interest rates will drop below 7%, and we will have a healthy economy and a healthy real estate market," says Malcom Morris. "More Americans will be able to afford a house."
But even a stable interest rate can encourage new business. "If people think the interest rate is about as low as it is going they will go ahead and close on a loan," says Stewart Morris, Jr. Also if the rate goes up slightly many people contemplating a loan will go through with it, afraid the rates will continue to rise."
But he adds that a drop in rates can have the opposite affect of delaying orders as buyers wait to see how low rates will go.
But any anticipated drop is unlikely to rekindle refinancing. "Interest rates are down a little this year, but as for the refinancing of homes, it is unlikely rates would get low enough to justify homeowners [refinancing] again," says Charles J. Kovaleski president of Orlando, Fla.-based Attorney's Title Insurance Fund Inc. "Our outlook is that we are going to continue to see more of what we are seeing now."
Whatever the reason, orders have picked up.
"After the first quarter, the rest of the year has been pretty good, with orders strong through the summer and pretty good in the fall," agrees Prince. "The markets are returning to normal."
"We have been building our inventory of orders since the end of the first quarter," says Lawrence White, executive vice president of Santa Ana, Calif.-based First American Title Insurance Co.
Part of this could be attributable to the rebounding economy. "Job creation, and the interest rate are probably the two biggest indicators in our business," says Stewart Morris, Jr. "If jobs are being created in a market, there will be a lot of transactions, because people will be moving to fill those jobs regardless of the interest rate,
"Title insurance is very much a relationship business," he continues. "In the smaller or mid-size markets, local entrepreneurs can often do a better job than a corporation, because often they grew up in the town and have a long-term relationship with the people they are doing business with. On the other hand, in larger markets, the efficiency afforded by a corporate office is often better suited to our needs."
Bigger is better
Currently, most of the major title insurers are in the agency acquisition mode.
"I think this is just part of an overall business mind-set right now that `bigger is better,"' says Kovaleski.
"The trend right now is slightly toward acquisition and start-up," agrees Stewart Morris, Jr., adding that the refinancing boom increased the value of some agencies and as a result the owners of those agencies see the current market as a good time to sell. "The major title insurance companies want to increase their market shares, and this is much more easily done through acquisitions," he explains.
"Lawyers Title has been on an acquisition program to purchase other agents for two or three years," says Alpert. The company has made recent purchases in Orlando, Bethesda, Md., and San Antonio.
Acquiring agencies can be done for a number of reasons: to gain a presence in a particular market, to have more control over the agency and the orders it generates, or to change the balance of the sources of the company's orders.
The industry axiom has always stated that companies should be direct operators in good markets, because it increases profits and uses independent agents in lean markets to cut down on overhead expenses. But the refinancing boom seems to have changed that way of thinking, at least for the time being.
"Our orders are 52% direct operator-generated and 48% agency-generated," says Alpert. "So we are trying to stay 50/50 to hedge both ways."
Prince says a little more than half of Chicago Title's gross revenue is agency-driven. He agrees that the split "moderates the valleys" in a down market, but adds that using outside agents also allows the company coverage in markets that they have neither the money nor the management resources to operate in.
A surprising problem
One downside to agency-driven orders is less control over the agents and their orders. This proved to be a critical problem in 1994, as defalcations (the theft of escrow money by agents) severely affected the bottom line of many title insurance firms.
"Defalcations impacted more than half of our earnings last year," explains Alpert, "so it was a significant problem." She adds that the extent of the defalcation problem was a surprise, because her firm, in particular, had not had a major defalcation since 1986.
Defalcations have not been as much a problem this year, due to a combination of better business activity and a more wary eye toward independent agents.
"We have tightened our screening process for select' the agents we work with and, through our district managers, we are keeping closer contact with them," says Stewart Morris, Jr. "Also, our auditing staff identifies agencies that get into positions where theft might be tempting. This gives us the option of helping them correct the problem or, if we deem it necessary, to terminate our business with them."
"If the agents know they are being thoroughly audited on a regular basis, that tends to make them more honest," adds Prince.
Hedging their bets
While maintaining a balance of revenue between company-generated orders and those procured by independent agents provides a measure of protection against down cycles, tide insurers are also hedging their bets by investing in other types of profit centers.
Lawyers Title has invested in flood insurance and home inspection companies; First American has moved into tax services and credit reporting companies; Stewart Title has started a flood determination company and a document preparation company, On-line Docs, which provides documents needed to close transactions in all 50 states, electronically, within a matter of minutes.
"One of our current strategies is to expand into the real estate information business," says Stewart Morris, Jr. "National and local lenders are looking for ways to close deals more quickly and for less money. So we are trying to provide all closing services by computer."
However, others say many of these new investments are not diverse enough and are susceptible to the same type of economic downturns. "Most of what I have seen other underwriters acquire are real estate-related businesses," says Attorney Title's Kovaleski. "If I was going to diversify, I would acquire assets that were counter-cyclical to the real estate industry."
First American's White agrees, but points out that in addition to being a way to diversify, these investments are a way to increase business by offering the full-service needs of their clients.
Malcom Morris agrees, adding that automation is the key to making this work. "Because these profit centers are all tied to real estate, through automation we are able to achieve them with only slight increases in our overhead."
More consolidation?
While many companies are diversifying their holdings, there is still some discussion as to whether there will be more consolidation among title insurers. This could hinge on banking consolidation.
"The major banks are consolidating, and there will be fewer major players," explains Alpert. "Each of these major banks will want to deal with only one or two title insurance companies, so as the number of major banks gets smaller, so will the number of major title insurers."
It would not surprise me to see more consolidation," adds Prince. "But it would be difficult to guess which players might be involved."
White agrees that the consolidation of the title industry's customer base is a problem, but he isn't sure Washington would allow consolidation among the largest title insurers. "The FTC usually steps in when there is the potential for too much of a monopoly on an industry," he says.
Consolidation is the quickest way to grow a company, but future market shares hinge on the speed and efficiency of title insurers who meet the needs of customers.
"The industry is going to have to get increasingly more efficient and the transfer of data by computer is the next step", says Prince.
"We align ourselves with our clients, so we can eliminate the duplication of work," says Stewart Morris, Jr., "and the completion of many services by computer does just that. It is also useful in our marketing campaign to attract clients."
Indeed, computerization has become a critical tool in attracting business, but it is only one aspect that potential clients should look for in a title insurance firm.
Clients' expectations
"The client should always look at the balance sheet and how the insurer is rated," says Stewart Morris, Jr. "Title insurers are rated on their claims paying capability, in terms of liquidity and reserves."
"And the quality of the assets that back up those reserves is also important," says Kovaleski. The point is, how long would the surplus be able to pay claims if the company was to undergo problems?
The insurer's coverage area is also important. "The insurer must have the ability to service clients wherever their business may take them," says White.
"And that service must be quick and responsive so clients can reach the right people and get answers they need," adds Alpert.
In general, clients want the help they need concentrated in one location for ease of communication. "Our clients are consolidating a lot of their processes and they want us to do the same by providing all of the services they need," says White. "They want the ability to call one number and get any data about any of their orders."
Applicant will coordinate and oversee usage of companies computer program applications known as Fast map and TiNO in title insurance industry. Will answer questions and provide trouble shooting for problems that occur in usage of programs by other personnel. Will train personnel in the usage of programs to formulate and draft meter and bounds legal descriptions and title searching programs. Must have legal authority to work in the U.S.
Experience: 2 years in computer operations experienced with DOS and Windows. 1 yr experience Title searching with Fast Map and TiNO required
Hours and Salary: 8:00 a.m. to 5:00 p.m., $11.50 per hour/40 hrs per week. Apply by resume to: Colorado Department Of Labor and Employment, Attn: James Shimada, Tower 2, 1515 Arapahoe Street, Suite 400, Denver, Colorado 80202. Refer to job Order No.:C04450156