INDUSTRY ECONOMIC OVERVIEW:
A LOOK BACK AT 2000

We would like to express our appreciation to Lawrence E. Kirwin, Esq.Principal of CDS, for providing this information from the 13th annual edition of CDS Performance of title Insurance Companies. This overview is not intended as a stand-alone release. The CDS report make frequent referral to ratio's that the reader is expected to turn to for amplification.

A much more detailed analysis of the title insurance industry's economic profile may be obtained from the 2001 Edition of CDS Performance of Title Insurance Companies. In addition to the market share information and corporate title family comparisons, the 216 page review contains comparative profit and loss statements and balance sheets for each company and a comprehensive parent-subsidiary cross-reference containing information on over 550 title insurance companies.

For copies contact Lawrence E. Kirwin and Corporate Development Services e-mail: lekirwin@aol.com <mailto:lekirwin@aol.com>
Phone: 800.296.1540
Fax: 301.631.6744

INDUSTRY ECONOMIC OVERVIEW: A LOOK BACK AT 2000

The pace of revenue growth slowed in 2000. Combined revenues of the 89 companies covered in this book totaled $7.8 billion, off $851 million or 9.8% from 1999.

Still, although not a record year, 2000 was the third highest year for the title insurance business. In 1997, revenue was only $5.9 billion! The advances to $8.1 billion and $8.7 billion in 1998 and 1999 respectively, reflected the red-hot economy in those years while 2000 reflected the increased interest rates applied to slow the level of economic activity that was believed to be a precursor to inflation. Unfortunately those higher rates, combined with investor realization that profits still drive the stock market, turned everything around. That in turn undermined consumer confidence and now few folks are predicting where the bottom lies.

The first quarter of 2001 has shown improvement as a burst of refinancing was sparked by the Open Market committee’s action cutting rates. Resales too have been moving ahead, possibly easing a pent up demand created by last year’s higher rates and higher employment levels. Whether this heightened activity will last is at best uncertain and possibly unlikely. Higher unemployment and lower consumer confidence could reflect harshly on the title insurance business.

The big organizational news in 2000 was the acquisition of Chicago Title Company by Fidelity National Financial, the two creating the world’s largest title entity. The transaction was completed on March 20, 2000.

The 9.8% drop in operating revenues was coupled with a small reduction in agent retention, from 66.09% in 1999 to 65.44% in 2000. Operating expenses increased from 81.72% of net revenue (after agent retention) in 1999 to 86.1% in 2000. Operating profits fell from 18.28% in 1999 to 13.9%. In dollars, consolidated operating profits were $375 million in 2000 v. $537 million in 1999.

Investment gains in 2000 were also down. In 1999 the consolidated investment gains totaled $439 million or 7.25% of total assets. In 2000, investment gains were $377 million or 6.45% of assets.

The “bottom line,” consolidated net income, was $257 million in 2000, off 48% from 1999’s $493 million. 

In 2000 there were a variety of changes in the industry’s strength and security. (Readers should note that aggregates are truly hypothetical and that company-by-company results are the vital issue.) The five ratios chosen for the key comparison show a 9.8% decline in operating income and operating profits averaging 15.1%, down from 28.3% in 1998. The relationship between premiums written and net liquid assets changed dramatically when aggregate net liquidity turned negative while premiums written shot up to 132 times the negative amount v. 34.0 times the positive net liquidity in 1999. Aggregate policyholder surplus actually increased marginally from $2.365 million in 1999 to $2.381 in 2000. Lower earnings were 207% of losses in 2000, in 1999 they were 318%.

In 2000, the big Fidelity family captured the largest portion of total operating revenue and net premiums written, 30% and 29% respectively, well ahead of the First American family which took second position with 22.7% and 22.8% respectively. The LandAmerica family was third with 20.7% and 20.7% respectively. The “big eight” families took 89% of total operating income compared with 89.1% in 1999.

The 2000 share of aggregate net premiums written by family showed gains over 1999 for the First American family and for the independents while all the others were down. Fidelity held a 28.99% share v. 29.12% for Chicago and Fidelity combined in 1999. Most of the changes were quite small percentage-wise. The largest moves in each direction showed First American increasing by 1.36 percentage points and LandAmerica declining by 0.82 point.

On a family basis, Investors again led the industry by far with operating profits before title losses equal to 14.94% of total operating income. The second position went to the Old Republic family at 6.01% followed by Fidelity with 5.62% and First American at 4.71%. LandAmerica, which saw a 5.6% ratio of operating profits before losses to total operating revenue in 1999 dropped to 4.38% in 2000. Of course on a dollar basis in 2000, Fidelity’s $132 million in operating profits was well ahead of second place First American which earned $83.6 million, and far ahead of Investor’s $5.5 million.

Aggregate policyholder surplus, after consolidation eliminations, stood at $1.875 billion as compared with $1.886 billion at the end of 1999. Fidelity’s aggregate policyholder surplus, $462 million, was the highest of the nine groups compared. First American was second at $421 million. The aggregate policyholder surplus for the 45 independents was $288 million. The eight families’ policyholder surplus accounted for 84.6% of the industry aggregate.

The composite balance sheet for the industry was slightly changed in 2000. Assets totaled $5.8 billion v. $5.6 billion in 1999. Policyholder surplus was quite similar. It equaled 32.07% of total assets in 2000 v. 33.08% in 1999. The dollar value of bonds and stocks were slightly lower as were cash and short-term investments. Th provided 55.89% v. 58.22% in 1999. Affiliated agents provided 23.65% v. 22.47% in 1999. Agents retained 65.44% of total operating income in 2000 v. 66.09% in 1998. Non-premium income earned by the insurers totaled $663 million, or 8.5% of 2000’s total operating income v. $748 million, or 9.4% of total operating income, in 1999.

In 2000, operating expenses for the industry totaled 86.1% of net operating revenue (total operating income less agent retention). In 1999 expenses consumed 81.72%.

Incurred title losses consumed 15.3% of net operating revenue in 2000, up from 12.3% in 1999. As a percent of premiums written, 10.6% of paid losses came from for direct operations, 5.6% from non-affiliated agents and 3.2% from affiliated agents.

The title industry’s reported net investment gain showed a significant decline. In 2000, investment gain was $377 million or 6.45% of average invested assets; in 1999 it was $439 million or 7.25% of total invested assets.

After paying Federal taxes of $80.5 million (down from $142 million in 1999), the industry showed statutory net income of $257 million v. $493 million in 1999. 2000’s net income equaled 4.39% of total operating income v. 8.13% in 1999.

Policyholder surplus (after consolidation eliminations) increased by $27 million in 2000 v. an increase of $157 million in 1999. Adjustments to policyholder surplus in 2000 included a $259 million dividend payment to owners. This compares with $248 million in dividends in 1999.

Premiums written in 49 jurisdictions declined and increased in only seven. (“Jurisdictions” include all 50 states, the District of Columbia, Guam, Puerto Rico, the Virgin Islands, Canada and “all other.”) California continued to lead the states in the volume of premiums written with $1.284 billion. But it did not advance—it declined 11.79%. Iowa, with the state agency reporting for the first time led the way in percentage increase. Colorado seemed to be the best state in which to do business in 2000 with a 5.16% advance in premiums written. On the downside, Oregon was not the place to be—premiums written fell by 26.6%!

The ten states with the largest volume of premiums written accounted for 68.6% of all the premiums written in the 56 jurisdictions v. 67.3% in 1999.

Overall, premiums written were off 10.2% while in 1999 the average state’s premiums written advanced 7.7% v. a 36.2% advance in 1998. Twenty-one of the jurisdictions showed change less than the average 10.2% decline. Thirty-five jurisdictions reported declines greater than the 10.2% average decline.

As compared with 1999, direct losses paid (as reported in Schedule T) increased 11.75% to $336 million from $301 million. California led the way with the highest dollar losses followed by the other two leading states: Florida and New York. Illinois was fourth. Eight jurisdictions reported double-digit loss-to-premium ratios. Overall, the loss-to-premium ratio was 4.6% up from 3.7% in 1999.

Market share by state is shown in Section Four. We realize this portion of the book is of vital interest to many readers.

Most of the forty-seven ratio comparisons compare the aggregate and median performances with the “ten largest” companies. In all cases those are the ten companies with the highest amount of total operating income. They can be seen in Ratio A1. The comparatives for the prior years reflect the performance of each year’s ten largest companies. In fact, in every ratio only the companies reported on in the current year are reported in comparison. This distorts results somewhat in the case of mergers since revision of prior year data is beyond the scope of our reporting. This year three dissolved companies were retained in the listing to preserve total comparisons.

The details of the ratios are best left to the readers most interested in specific companies or topics. Some highlights include A4, which shows that agents accounted for 85.4% of premiums written and that the average retention percentage was 82.3%. In 1999, those two percentages were 86.3% and 81.9%, respectively. A6 shows serious erosion in a determination of the liquidity within subsidiaries or affiliates. B4 is another way to rank the size of companies. B8 calculates the number of days of operating expenses that policyholder surplus represents—the degree of “cushion.” The ten largest companies’ median is 309 days of expenses, while the industry average is 374 days. Twenty-seven companies have less than the industry average, of these, thirteen are members of the eight “families.”

C3 through C7 show loss coverage. It has generally worsened for the second year. C8 indicates that the loss ratio of direct operations is the highest, non-affiliated agencies are next highest and affiliated agencies the lowest.

D7 and D9 represent checkpoints. Those who stray very far from the average may want to investigate the cause—often varying state levies. D10 shows operating profits per dollar of salaries. It’s down to $0.29 in 2000, from $0.39 in 1999 from $0.44 in 1998.

The four E ratios will be much more useful when everyone completes the data and completes it consistently. There is some credibility in the middle ranges permitting comparisons but readers are warned that the composites and medians are distorted by the limitations of the data.

Finally, Section Six presents Form 9 data on parent/subsidiary relationships. Where location data is included on Form 9, it is shown in this section, but readers should note that in some cases companies may be providing state of incorporation locations which may differ significantly from the location of principal operations. If location information is otherwise known, it has been included.

Lawrence E. Kirwin

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William C. Hart
Title Law Associates™
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