If you haven't heard yet, the "Big 5" is soon going to become the "Big 4."  Fidelity is merging with LandAmerica.  Combined, the companies will control more than 46% of the title insurance market.  LandAmerica has struggled more than the other underwriters in our current environment - its shares dropped about 85% this year, making the company vulnerable.  The company reported a third-quarter loss of nearly $600 million, or 39.45 per share... the shares were trading as low as $4.75 per share last week.

"The unprecedented credit freeze and depressed real estate market have negatively impacted our business to the point that it has become increasingly difficult for LandAmerica to remain an independent public company," LandAmerica's Chief Executive Theodore Chandler said.

There is no doubt that the "unprecedented credit freeze and depressed real estate market" played a significant role in this turn of events.  However, LandAmerica has suffered more than its competitors.  If you are wondering why... I have a theory.

If you remember back to the late 1990's, LandAmerica was the culmination of a merger between Commonwealth and Lawyers Title.  That change, I believe, was a significant turning point which eventually led to the downfall of LandAmerica. 

Prior to the creation of LandAmerica, the Commonwealth and LandAmerica had very different market strategies.  Commonwealth was very much agent driven, and Lawyers Title was focused on direct operations.  At the time of the merger, I was a partner in a small agency that wrote for Commonwealth and Stewart Title.  We primarily wrote on Commonwealth paper because they were very good to their agents... they referred a lot of very lucrative commercial transactions to our office.  Once the merger was finalized, those orders went to the direct operations of Lawyers Title.  Over time, we eventually began writing more and more on Stewart paper.

I wrote back in July about the downside of direct operations.  While there are obviously advantages to maintaining large direct operations - mainly they don't have to give up 80% of the premiums to agents - they are expensive to maintain.  Direct operations add significant fixed costs that are not easy to cut in lean times.  And, Fitch Ratings noted that this was a major risk factor facing title insurers.

It is Fitch’s view that the primary risk facing most title insurers is the inability to quickly cut fixed costs in the face of retreating revenue.

Certainly, there will be some benefits from this huge merger.

The deal will reduce the combined debt of the companies by about $250 million before the merger closes. Fidelity, however, does not expect any material change from its current debt to total capitalization ratio of about 30 percent. 

Fidelity estimates about $150 million in operational cost synergies throughout the combined operations, Chairman William Foley said.

However, what most of the underwriters have seem to have forgotten is that the agents are the life blood of the title industry.  I can understand why the underwriters want to have direct operations, but they are getting so prevalent that it makes it more difficult for the agents to compete; and, when things slow down - everyone suffers. 

Amassing a large number of direct operations is probably very profitable when things are booming. However, now that things have slowed down, all of the fixed costs they come with are really taking a toll on the underwriters. 

Old Republic has the smallest percentage of direct operations and A.M. Best recognized that as a strength.

However, the group’s title premium is nationally diversified, which somewhat limits volatility to regional fluctuations in real estate markets. Moreover, approximately two-thirds of the group’s premium is generated through independent agents. This enables the group to potentially better manage down cycles as fixed costs are generally lower for that distribution channel.

There is something to be said for Old Republic's business strategy and I would hope that it would be something for the others to take notice of.  I have some doubts about the wisdom of Fidelity folding LandAmerica into the mix.  This doesn't seem to be a good time to take on more direct operations.  I think this should be a time for the underwriters to be recognizing that our industry was much stronger when independent agents were the preferred distribution channel.

Robert A. Franco
SOURCE OF TITLE