A Very Scary Year
August 17, 2009
Robert S. Bozarth.
Senior Vice President and
National Agency Counsel
Fidelity National Title Insurance Group
7130 Glen Forest Drive
Richmond, VA23226
1
A Very Scary Year
The economic downturn that began in 2007 began to weigh heavily on the title insurance industry by 2008. The first inkling of trouble occurred when LandAmerica Financial Group merged Transnation Title Insurance Company into Lawyers Title Insurance Corporation on July 1, 2008 because Transnation had experienced unsustainable claims losses. The Transnation merger opened a difficult twelve months for the title insurance industry.[1]
On July 28, 2008, the Ohio Superintendent of Insurance sought and received an order of rehabilitation for the Guarantee Title and Trust Company from the Court of Common Pleas in Franklin County, Ohio (Columbus). Guarantee Title was a small regional player doing business in Arizona, Illinois, Kansas, Michigan, Ohio and Pennsylvania. In the rehabilitation proceedings, the Superintendent learned thatGuarantee Title was insolvent and beyond saving, having a negative surplus of at least $5.5 million; so it petitioned the court for an order of liquidation, which was entered on October 27, 2008. It became the second insurer lost to the industry in 2008.
About the time ofthe liquidation order for Guarantee Title, LandAmerica Financial Group, Inc., a holding company for two national title insurers, Commonwealth land Title Insurance Company and Lawyers Title Insurance Corporation, began actively seeking a merger partner to rescue it from its financial troubles. Fidelity National Financial entered into a merger agreement with LandAmerica on November 7, 2008, but withdrew on Friday, November 21stafter a two week due diligence examination because Fidelity National was uncomfortable with the financial condition of the holding company and its 1031 exchange facilitation company, LandAmerica 1031 Exchange Services, Inc. Upon the failure of the merger agreement, the Nebraska Department of Insurance placed Commonwealth and Lawyers Title into “rehabilitation” on Monday, November 24th. LandAmerica and its 1031 company filed petitions under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Eastern District of Virginia on November 26th. Also on the 26th, Fidelity National Financial offered to buy four of the LandAmerica title insurance subsidiaries. Under the terms of the offer, two subsidiaries of the buyer, Fidelity National Title Insurance Corporation and Chicago Title Insurance Company would acquire Commonwealth, Lawyers Title and two regional insurers, United Capital Title Insurance Company (California) and LandAmerica NJ Title Insurance Company (NJ). After offering to buy the insurers, Fidelity National Title Insurance Company and Chicago Title Insurance Company, the two largest title insurers in the Fidelity National Financial family entered into reinsurance agreements with the four LandAmerica title insurers to reassure the customers of LandAmerica’s title insurers.
The purchase transactions moved swiftly. The bankruptcy court held a hearing on December 16th to consider the offer by Fidelity National Financial. The unsecured creditors asked the court for more time, to consider the Fidelity offer and to see if any other bidders would emerge. However, the Nebraska Department of Insurance insisted that it would place Commonwealth and Lawyers Title into liquidation if they were not sold to a satisfactory buyer by December 21st. Once in liquidation, the value of the companies would drop swiftly. AlthoughStewart Information Services Corp., parent of Stewart Title Guaranty Company made a competing bid for Commonwealth and Lawyers Title, it offered substantially less cash. Stewart’s bid was supported by the U.S. Justice Department because Justice was concerned about the concentration of market power if Fidelity acquired the companies. On the other hand, Justice did not say that it would stop a purchase by Fidelity, so the unsecured creditors’ committee threw its support to the Fidelity offer. The bankruptcy court ordered the sale to Fidelity. On December 21st, Fidelity acquired the four companies and contributed $101 million to Commonwealth’s capital and $113 million to Lawyers Title’s capital. The Nebraska Insurance Department released the two companies from the Order of Rehabilitation on December 21st when the purchase and capital contributions were complete.[2]
On June 11, 2009, ALPS Corporation announced that its whollyowned insurance company, Attorneys Liability Protection Society, Inc., had entered into a definitive stock purchase agreement to acquire Southern Title Insurance Corporation. Southern Title is a Richmond, Virginia-based title insurance underwriter serving 17 states and the District of Columbia.[3]
Finally, Florida’s Attorneys’ Title Insurance Fund, Inc., the largest of the “regional” title insurers (at least it was at the end of 2008), announced that it was forming a joint venture with Old Republic National Title Insurance Company effective July 1, 2009.[4] The Fund and its agents would stop issuing Fund policies on July 1st and begin issuing OldRepublic policies instead. The Fund would cease operations as an underwriter and begin operating as a managing general agent for OldRepublic, but it would remain responsible for claims asserted on existing Fund policies. Florida’s Office of Insurance regulation supervised the reorganization of the Fund from a title insurance underwriter to a managing general agent. In March, OldRepublic had announced that it was amending a long standing reinsurance treaty with the Fund to automatically issue Reinsurance Assumption Certificates with all Fund policies issued after March 26, 2009. Apparently, that stopgap was inadequate to maintain the Fund’s underwriting operations.
July 1, 2008 to July 1, 2009 encompassed title insurance industry events that had an alarming impact on real estate transactions, but the processes involved may not be familiar to real estate practitioners. The remedies applied included a merger, rehabilitation and liquidation proceedings by state insurance regulators, a holding company bankruptcy, the acquisition of title insurance company stock and a reorganization of a title insurer to a managing general agent. That may sound bad, but compared to other sectors of the financial services industries, title insurance exited that twelve months in better shape than most.
Your client’s existing title insurance policies, ongoing transactions and escrows with title insurers and their agents may be affected by proceedings like these in the future. To manage these risks, you must first understand how title insurers are organized and regulated.
Financial Analysis of Insurance Holding Companies
The larger companies in title insurance are owned by publicly traded holding companies. The holding companies operate by the same rules that other publicly traded companies follow, but they are also subject to insurance holding company acts that prevent the holding company from impairing regulatory protections imposed on the insurance companies. These holding company acts are imposed by state laws enacted to protect policyholders and the general public. The enactments are based on the model Insurance Holding Company System Regulatory Act of the National Association of Insurance Commissioners (NAIC).
The Insurance Holding Company System Regulatory Act, or a variation of it, has been enacted by every state in the United States. The act requires holding companies to make annual reports, supplemented monthly, to enable the insurance regulators to overlook the holding company’s activities with its insurance subsidiaries. Holding companies must report transactions between the holding company and its insurance subsidiaries, transactions between insurance subsidiaries and any other holding company subsidiaries or affiliates, acquisitions of insurance companies by the holding company, or any subsidiary or affiliate, and payment of dividends by an insurance company that have been approved by the insurance company’s domiciliary insurance regulator.
Regulated insurance holding companies also may own non-insurance subsidiaries as well. For example, the holding companies for title insurers own 1031 exchange facilitation companies as well because they share the “same point of sale” with the title insurance companies on real estate exchanges. Even though a title insurer and an affiliate 1031 exchange company may join together to market their products, the title insurer can accept no liability for exchange company transactions or deposits, so the two services must be evaluated separately. A holding company for a title insurer also typically owns hundreds of non-insurance subsidiaries like title insurance agents, data providers, and transaction due diligence providers,many focused on real estate conveyancing.
Within the industry, the holding companies are viewed as families of title insurance companies. There are now four major title insurance families:
Holding Company / Major Title Insurance Subsidiaries / State[5]Fidelity National Financial, Inc. / Alamo Title Company
Chicago Title Insurance Company
Chicago Title Insurance and Trust Company
Commonwealth Land Title Insurance Company
Fidelity National Title Insurance Company
Lawyers Title Insurance Corporation
Security Union Title Insurance Company
Ticor Title Insurance Company
United Capital Title Insurance Company
Other small title insurance companies and agents / TX
NE
IL
NE
CA
NE
CA
CA
CA
First American Corporation / First American Title Insurance Company
First American Title Insurance Company of New York
First American Title Insurance Company of Oregon
Ohio Bar Title Insurance Company
United General Title Insurance Company
Other small title insurance companies and agents / CA
NY
OR
OH
CA
Old Republic International Company / American Guaranty Title Insurance Company
Mississippi Valley Title Insurance Company
Old Republic General Title Insurance Company
Old Republic National Title Insurance Company
Attorneys Title Insurance Fund (FL General Managing Agent)
Other small title insurance companies and agents / OK
MS
MN
MN
FL
Stewart Information Services, Inc. / Stewart Title Guaranty Company
Stewart Title Insurance Company of New York
Monroe Title Insurance Corporation
Other small title insurance companies and agents / TX
NY
NY
In the June 2009 meeting of the NAIC in Minneapolis, the NAIC Group Solvency Issues Working Group began consideration of responses to a short questionnaire to its constituent state regulators to determine if the events of 2007 to 2009 had uncovered any reason to amend the model Insurance Holding Company System Regulatory Act. As you might have predicted after the recent upheavals in the financial services industry, the state commissioners proposed tighter rules for holding companies in the June meeting. The suggestions for amending the act included authority for state insurance departments to audit holding companies or insurer affiliates, minimum capitalization requirements, and expanded disclosure requirements.[6]
It is enough to know that insurance companies can be owned by publicly held holding companies, and that insurance holding companies are subject to some regulation by state insurance regulators, as well as regulation by the Securities and Exchange Commission, etc. They are rated by Standard & Poor’s, Moody’s Investor Service and A.M Best, as well.
To search these services online, you must register on the rating service’s website, or you can usually call up SEC 10-K, 10-Q, other filings and company ratings by links in the holding company web pages.[7] The holding company websites also contain links to annual reports.However, the financial information in all of these reports consolidates the results from all of the subsidiaries of the holding company, including non-insurance subsidiaries with that of the parent, so you can’t isolate the financial information for an insurance subsidiary in its parent’s financials.
It should be no surprise that an insurance holding company can seek protection, or liquidation, in bankruptcy, as LandAmerica Financial Group demonstrated on November 26, 2008. Consequently, the financial strength of the parent can have a significant impact on its insurance subsidiaries, even if that impact is nothing more than a taint that drives all potential customers to other insurance companies. On the upside, a healthy insurance holding company with a troubled insurance subsidiary is in a position, and has an incentive, to rescue the troubled insurer with a contribution to its capitalization. If the holding company allows an insurance subsidiary to fail, the public may lose confidence in all of the holding company’s insurance subsidiaries. So, verifying the strength of the financials of your insurance company’s parent can reduce your risk of a title insurance company failure, at least in the near term, but it shouldn’t end your investigation. You should inspect the insurer’s financial situation as well, if you can.
Financial Analysis of Title Insurance Companies
As we begin this analysis of title insurance company insolvency, keep in mind that there are two basic risks to the consumer in a real estate transfer with title insurance. There is a basic long term “policy risk” that the policy has adequate coverage for the buyer’s needs, and that policy risk includes having the policy term co-extensive with the policyholder’s interest in the land. In addition, there is a short term “escrow risk” that funds deposited with a title insurer or its agent will not be lost in an insolvency that occurs between the placement of a title insurance order and the closing and disbursement of all funds. There may be a “post-closing” escrow of funds in some cases, but that is the exception.
If you have checked the holding company’s financials, is there any need to verify the financial strength of the insurance subsidiary? Yes. State regulators supervise a title insurer’s posting of reserves, and do not permit one title insurer to assume the risk of another (except by a reinsurance transaction). For example, regulators do not permit one title insurer to aggregate risk on policies issued by another company with an ALTA 12 Aggregation Endorsement, even if the two companies are affiliates or a parent and subsidiary. Coinsuring companies cannot share a title risk jointly and severally. Title insurer A cannot pay claims lossesfrom its reserves for policies issued by title insurer B, even if title insurer B is an affiliate or subsidiary of title insurer A. If the consolidated financials of a holding company do not reveal the resources that each of its subsidiary insurers can apply to your transaction or loss, it is not enough to review the parent’s financials in the belief that all of its assets back up your client’s risk.
A title insurer’s policy liability is limited to the assets of the issuing title insurance company,so where can you find the financials of the individual title insurance company? As subsidiary companies, you cannot expect to find separate SEC filings for them. No 10-Ks, no 10-Qs, no glossy annual reports to shareholders; so where can you go to find financial information on the title insurance company?
The NAIC requires each insurance company to file an Annual Statement with each insurance regulator where the company is authorized to do business. The title insurance industry’s Annual Statement is commonly referred to as the “Form 9” and a bound copy has a dreadful orange-pink cover. You can request a copy from the title insurer, but most holding companies publish a PDF version online in their investor relations section of their homepages(listed in Footnote 7 on page 7). There is a limited print run on bound copies, so your best bet is to find a PDF version. The only thing you will miss is that awful cover.
These are statutory financial statements that follow an NAIC statutory model, not Generally Accepted Accounting Principles. The differences are not that great to an analyst. There are some new terms like “Surplus as Regards Policyholders” and “Admitted Assets,” but the statements begin with a balance sheet showing assets, liabilities, surplus and other funds. The Operations and Investment Exhibit shows the company’s income for the year and its effect on Surplus as Regards Policyholders. There are cash flow exhibits, notes to financial statements and many exhibits detailing the accounts in the main exhibits. The GAAP and statutory conventions are not all that different, so you should have no trouble following the information presented in a Form 9.
The ALTA publishes its industry research on title insurance industry annual and quarterly financial data on its website.[8] It includes a consolidation of the basic Form 9 schedules for the industry, for each family and copies of the schedules for each company. The “consolidations” include only statutory financials, so they include only the insurance company results for the industry and family statements. The year end Statistical Analysis is particularly useful for comparing the relative financial strength of title insurance families and individual title insurance companies with one another.
Title insurers are not rated by the major rating agencies like Standard & Poor’s, Moody’s Investor Service or A.M Best. They only rate the holding companies. For title insurance ratings you must go to Lace Financial[9], Demotech, Inc.[10] or Fitch Ratings.[11] You might also check to see if the state where the land is located has a guaranty fund to compensate insurance losses if a title insurer fails.In many states, guaranty funds do not cover all insurance lines.[12] The usual exceptions are annuities, life, disability, accident and health, surety, ocean marine, mortgage guaranty and, unfortunately, title insurance.[13] Those funds that do cover title insurance[14] may have a bias for compensating individual consumers instead of commercial consumers.