Charlene,

I appreciate your enthusiasm! When we feel we're playing in a fair game the entrepreneurial spirit ignites and society benefits. Our economic system thrives under impartiality! That's how we succeed in creating the best products and services.

I believe the problem with affiliated/controlled businesses is one brought about by the title insurance premium which covers several job specializations and is really tantamount to bundling.

Recall that Microsoft and IBM were deemed to be anti-competitive in bundling products. Microsoft, according to the court, was playing unfairly by including the IE browswer with the operating system.  The French as recently as March, 2010, accused IBM of bundling software to hardware. The remedy sought is to make IBM's software protocols and interfaces open to third party vendors.

Boeing in 1934 had to disgorge its engine manufacturing from its airplane business. If one wanted to build a competitive airplane, and Boeing was the only game in town for engines, it's pretty tough to start without motors. Starting a new engine manufacturing facility so one could build airplanes would make it prohibitive to enter the market!

Search, examination and settlement are integral to title insurance. But so are engines and avionics with an airplane. None of the parts are any good without the other parts. But by separating the engine, avionics and airplane new entrants may enter the markets competitively on all sides and complement each other. It becomes dynamic!

This is not an anti-trust argument as that's obviously stretching too far. It's to present ideas that some integrations (bundles) need be separated to provide open pathways to competition and consumer benefit.

We certainly want real estate companies and loan companies open to competitive title channels. That invigorates competition and we feel we have a chance. We'll morph and seek changes and efficiencies to gain business. But if the channels are closed who would make the effort? Bundling can create an unfair use of market power when it eliminates free competitive choice!!

On one side of the argument is the real estate or mortage company who genuinely believes they can enter the title insurance market and provide better services and support than anyone. If this is a "genuine competitiveness" then economics work efficiently. It is when the "genuine" part of the competiveness is lacking though it may be argued in a very spirited way that it is not!

The "title insurance premium" covers at least four (4) job specializations in most instances. You have a portion which goes to reserve requirements for future claims (insurance), a part for the title search (copies, travel to the courthouse, etc.), some portion for the examination and in many cases a good part covers the settlement process where the actual signing takes place to create the new estate.

The title insurance rate filings have portions attributed to the search and examination function but as was voiced by Mr. Kennedy of First American, "Eventually insurance won't be an important component of the product"! It's a fact that less than 5% percent of title insurance premiums are paid in claims. 93-95% of the premium is statutorily protected income streams which have very little connection to the actual cost of conducting the "insurance" part of the business. That's why affiliated/controlled businesses become attractive. The bundling of the job specialties removes them from the competitive forces of the economy placing them under title insurance underwriter control and this becomes the on-ramp to the business.

Let's suppose the title insurance premium was governed by an actual loss claim ratio. In looking at insurance departments across various states and different insurance lines the ratios are quite high in relation to title insurance. In homeowners' insurance in Texas, for example, the claims paid average 60-68% of premiums  with some years showing losses and some years showing good profit. So if a homeowner's insurance company collects $100.00 we can assume that $60.00 is going to pay claims on average. This will vary from year to year and state to state. Think of hurricanes, wild fires and earthquakes. I don't think we have counterparts to hurricanes, wild fires and earthquakes with the exception that defalcations may be similar. But "fidelity insurance" can be provided by the insurance market as a whole as is done with "errors and omissions" coverage. And defalcations are often brought on by decisions of the underwriters themselves and underwriters are beginning to deny this coverage anyway!

If we extrapolate this to title insurance premiums then a $100.00 premium which has $5.00 paid in claims (5% loss/claims ratio) would become an $9.00 filed premium. The other $91.00 would be freed or placed in the dynamics of the economy so that competitive forces would then be in play for the search, examination and settlement.

If an underwriter wanted to award an agency contract to XYZ Real Estate Company or ABC Loan Company then the financial inducement (big filed premium) wouldn't be of such magnitude as to mitigate the economic competitiveness. For example, with a prior title policy and a link to a computerized courthouse which is availabe in many jurisdictions the actual work for the search and examination would be minimal. It may only take a few minutes with a competent title searcher/examiner.

This would take the incentive of inclusive portion from the underwriter and affiliated business out of the equation. The title insurance policy issuer would have to enter the market for search, examination and settlement services as those amounts wouldn't be sloshing around in the underwriter bucket to steer and influence as they now are. Remember the reinsurance kickback schemes. LandAmerica (now owned by Fidelity) paid 35% of its revenue to reinsurance entities to cover 1/2 the risk. No claims were ever paid and it was deemed a "subtle and tidy little kickback" scheme. That 35% percent originated or was available from some form of promulgated title insurance rate.

If the filed insurance premium had not been inclusive of the other specialties beyond the cost of claims and reasonable profit then the schemes couldn't and wouldn't get lift. You would do away with the ingredients which make affiliated/controlled business arrangements other than a genuine competitive effort.

If XYZ Real Estate Company or ABC Loan Company had to enter the market for "real" services then the masks provided by the premium slush fund wouldn't be available. How can these kickback affiliated schemes be profitable if there's no excess monies available to cover the cost of the kickback plus provide profits??

XYZ Real Estate Company or ABC Loan Company would have to hire or contract with people providing the specializations. We would raise our competitive zeal would rise and endeavor to provide the best products and services because the playing field would be fair. Plus a lot more of the transaction profits would remain in the pockets of the title and settlement specialist!! If you trim the pot it will lessen the temptation to devise new ways to slice the juicy spoils!!

Certainly an estate must be created to issue a homeowner's policy. A car title has to be transacted to obtain an automobile policy. But neither one of these "bundles" the process of "titles" in their premium rates and filings.

Where would we be if Microsoft and Apple had been required to get an "agency" from IBM to enter the market?

While there's a lot to take issue with here, I think you went the most astray from logic with this:

Title agents should be the neutral third party when determining whether or not matters affecting title will determine whether or not to proceed to closing rather than whether they will continue to get referrals from their affiliate lender, builder or Realtor.

By their nature, AfBAs don't have to worry about losing a referral stream - as long as the referrer maintains an ownership interest, the orders will flow.  It is actually the independent agents who have more to worry about when making unpopular decisions.  After all, do you really want to delay a closing for a favorite realtor, knowing they won't bring their business back to you if you do?  Often, I wonder, is this the real reason AfBAs are so hated by the so-called "independents"?  Because AfBAs, in the end, have more freedom and leeway to make unpopular decisions than independents do?

Finally, it's nice to point to higher claims rates and jump up and down complaining that it must be AfBAs producing them, but the logic doesn't pan out.  The underwriters who specialize in AfBAs have far lower loss ratios than those who don't; it was the big guys (Fidelity and First American) who pioneered short searches and offshoring.  If anything, it's looking more and more like independent companies do far greater damage to consumers, and the economy as a whole, than do AfBAs.

Title Guy,

Karl Marx and Fredrick Engels argued in the Communist Manifesto that  "too much commerce" was a capitalist fault. Less commerce by eliminating independent companies would fall right into their reasoning!!

From where are you?

AfBAs are the ultimate consummation of capitalism.  Two (perfectly free market) business entities join forces with each other to maximize their profit.  How exactly does that complete the "OMG, Socialism/Communism!!" argument?

Title Guy,

You're presenting the side of capitalism which Marx and Engels believed was one of its faults:

From the Manifesto:

"The productive forces (independent people entering business) at the disposal of society no longer tend to further the development of the conditions of bourgeois property (real estate companies, title underwriters, mortgage companies, banks and others looking for additional markets); on the contrary, they have become too powerful for these conditions, by which they are fettered, and so soon as they overcome these fetters, they bring disorder in the whole of bourgeois society, endanger the existence of bourgeois property. The conditions of bourgeois society are too narrow to comprise the wealth created by them. And how the does the bourgeoisie get over these crises? On the one hand, by enforced destruction of a mass of productive forces; on the other by the conquest of new markets, and by the more thorough exploitation of the old ones".

You write that the productive forces of independent companies "damage consumers and the economy as a whole" which is remedied by the free joinder of affiliates to develop new markets and extract greater returns from existing ones.

This is based on a loss ratio you claim is less for the affiliates than the independents. Is there evidence somewhere for that metric?

Hi Wayne,

Looks like I misunderstood what you were originally implying, sorry about that! I thought you were trying to somehow equate AfBAs with communism - hence my reply.

I'll give you that AfBAs can be seen as one of the detrimental effects of capitalism and the drive to maximize profit, especially when they are set up in such a way to harm consumers. However, I still hold that independents and AfBAs both have the potential to damage consumers and the economy, albeit in different ways. An AfBA has incentive to provide kickbacks and extra incentives to the ownership structure, above and beyond a simple return on investment. That's the whole reason to set up an AfBA after all, to keep profits flowing in a circle rather than going out the door.

But an independent has just as much incentive to provide kickbacks to individual referrers such as mortgage brokers and real estate brokers. Often, without providing some sort of kickback, the independent agent faces a loss of orders from the referrers.

I think the argument has been deliberately changed from one of “kickbacks are bad and raise prices for consumers” to “AfBAs are bad and raise prices for consumers.” It's not solely an AfBA issue, but an industry one, and people who want to preserve the face and value of the title insurance industry should not be fighting with each other right now, but rather standing up against kickbacks in all forms, and from all types of agents. Otherwise, we might as well just give up the insurance portion, kill the monoline statute, and all go work for Fidelity.

As for metrics regarding loss ratios, very few people actually collect such data and then report it (and I don't have my Demotech reports handy!)  However, a quick Google search shows a couple of states that do. As to which companies to compare, Stewart Title is a well known underwriter for AfBAs, and one that has been hit by many state regulators in the past for AfBA violations. For a control, Fidelity will have to do. In Colorado, Stewart loss ratio last year appears to be somewhere around 8%. Fidelity's was around 15%. Old Republic was about the same as Stewart, and only Land Title showed lower than the "traditional 5%" everyone always touts. (http://www.dora.state.co.us/Insurance/pb/2009/pubsSB249TitleReport123109.pdf)

Of course, the real problem in talking about loss ratios for AfBAs vs. independents is that no one collects such data.  If they did, then this issue might finally be put to bed.  As it stands, only insurer data is collected and distributed.

The NAIC put out a "state of the industry" report in 2008, which can be found here: http://www.naic.org/documents/topics_title_insurance_brief.pdf

Title Guy,

I thought you may have made a quick read in your response. The reference to Marx and Engels was that sometimes our most radical and ardent opposition may have laser-like precision in bringing out faults. It's akin to the Democrats criticizing Republicans standing on the small-government less- spending platform from which they fell quite remarkably.

I agree with you wholeheartedly when you write, "It's not solely an AfBA issue, but an industry one, and people who want to preserve the face and value of the title insurance industry should not be fighting with each other right now, but rather standing up against kickbacks in all forms, and from all types of agents. Otherwise, we might as well just give up the insurance portion, kill the monoline statute, and all go work for Fidelity."

We know that a reduction in competitive forces in markets lead to less commerce, less transactions and therefore less wealth. And we also know that some affiliation schemes are nothing more than referral kickbacks and contribute nothing to enhance trade.

In fact, such schemes harm and denigrate production and services and remove valuable capital and resources from those persons dedicated to risking, discovering and implementing creative methods and advancements. If you're on the receiving end of referral fees your biggest anticipation is who will pay you the most!

The issue has been how to parse and define the affilated business. We have the blatant kickback scheme vs. the affiliated business which is dedicated to principles of best practices and ethics.

HUD is struggling to come up with a definition and rule solution but they've missed the mark on several occasions. I don't think legislation can alter or change the problem. RESPA was enacted in 1974 and recent violations discovered by various state insurance departments show the schemes were more egregious and rampant than ever! Sometimes it's difficult to see how pernicious and insidious this may be.

NAILTA created a definition which I think is on target:

“Any individual or entity authorized and licensed to issue title insurance policies and/or to conduct real estate closings that is not controlled by, whether directly or indirectly, a title insurance company/underwriter, bank, mortgage company, mortgage broker, real estate firm (including agents and brokers), builders, developers, appraisers, surveyors, any subsidiaries thereof, or by any other referral source

and/or

does not share, split, give or receive stock dividends and/or distributions of profits with a title insurance company/underwriter, bank, mortgage company, mortgage broker, real estate firm (including agents and brokers), builders, developers, appraisers, surveyors, any subsidiaries thereof, or by any other referral source.”

I was imagining a car salesman who has just landed a nice commission by selling a new high-end car. The purchaser needs auto insurance and inquires of the salesperson. In this scenario the salesperson is thankful for the business and wants to steer his newly acquired client towards the lowest priced auto policy for the least premium. It's the least one can do in appreciation of the business.

Now suppose the automobile salesperson is a party to a scheme which will provide a 25% commission fee for steering the purchaser to a particular automobile insurance agent. This 25% fee can be disguised in a number of ways from paying board of director fees, making a relative an employee to an outright cash payment in a brown paper bag in an open parking lot.

The point is the sentiment turns 180 degrees. It goes from being an ally in finding the lowest premium with the greatest coverage to the other extreme of the highest premium with the least coverage. After all, 25% of a larger amount means more money in the pocket of the referror. And who doesn't like more money?

And let's take this further. Suppose all car dealerships begin to form affiliated relationships with automobile insurance agents. Allstate, State Farm and others like the idea because they can reduce their advertising and lock in business. The automobile dealers get even more creative and they tacitly agree to charge a 1.5% Dealer Prep fee which includes the automobile insurance. However, if the purchaser wants to go somewhere else for their auto insurance that's fine by the dealer but the 1.5% Dealer Prep fee is absolute. So the purchaser obviously wants to reduce the purchase price with ancillary costs (insurance) as much as possible so they don't shop!

In the meantime, ABC Automobile Insurance Agent is out trying to make the market aware of lower-premium, super-coverage, lickity-split claims service but can't seem to make any inroads whatsoever. New phone systems, automated application processing, iPhone hookups, you name it -- nothing will move the automobile insurance referrals their way. They give up and close their doors. Too bad for them I suppose many would say!!

And to really maximize the profit spread between the agency commission payment to the automobile salesperson the clerical aspects of checking driver's license and title are done overseas where it can be done for about 1/10th the cost as compared with the United States. Why worry about 401(k)'s, health insurance, social security and all that added cost?

Of course, we know the automobile insurance market doesn't work this way. Geico, Allstate, State Farm and others are consistently marketing to the public at large regarding the virtues of each of their insurance products. We know to call around and find the best price with the best coverage!

Look at title insurance from another standpoint. Mr. William Foley of Fidelity National has developed the largest title insurance underwriter in the nation and become a billionaire by recent reports. He is wealthy and successful beyond our imaginations. He's obviously very keen, astute and brilliant in his execution. It was reported in these pages that amongst his holdings are an $80 million dollar property in Montana and recently purchased a renowned farm in New Zealand for $24 million plus with a multimillion dollar planned renovation. And it's interesting to note that Fidelity National has long-term debt in the neighborhood of $900 million with the ongoing overhead of any large insurance company.

I don't think anyone could argue against the fact that affiliated businesses would be in the best interest of Fidelity or any other underwriter for that matter. There are these assets and liabilities and overhead issues which require income. And what better way to secure income than establish affiliates with large real estate companies, loan companies and others to get a solid handle on business being placed on your policy forms. It's a no-brainer!!

Why venture that an independent "may" write your policy when you can establish an affiliated agency which more or less guarantees your policy is written? And even the independent is a target. First American is under a suit alleging they purchase, take ownership or contractually limit independent agents from selecting another underwriter which is anti-competitive (several theories are considered).

I suppose on the one hand all underwriters could do away with agents but then the affiliated arrangement would be difficult to conceive in another form. They would be back to standard marketing against their underwriter competitor. That puts the premium up-for-grabs vs. the security of the affiliated business. I think Mr. Charles Procter of NAILTA made some good points in his letter to the New Mexico Public Regulation Commission:

http://www.nailta.org/news/92-nailta-response-to-nm-rate-increase.html

Here is an exchange in a recent earnings call with Fidelity:

Bill Foley

......And when we acquired Land America, our agency base expanded to about 8,000 agents, and today it is about 5,900 agents....

Brett Huff – Stephens

Question first on pricing and I apologize I missed the first few minutes of the call, so I apologize if the question was asked, but could you give us an update on pricing? If I recall, we were about to lap most of the price increases that started last year, are there any more on the horizon, or how do we think about that going forward?

Bill Foley

I think we need to look at our model right now that our price is going to be level with the particular states where we find we have gaps or we have gotten our pricing over-complicated. There may be some slight increases, but on the other hand, with some abbreviated products that we are developing, the pricing may actually go down. So, I would just give it a leveled pricing context to this point. We have kind of went through and increased our prices in the states where we thought it was appropriate.
......

Brett Huff – Stephens, Inc.

Okay. And then last question, any update on efforts to variabilize [ph] some of your costs offshore anything? I know you guys have cut a lot and are much meaner than ever, but any sort of next steps in terms of structural change that we should look at?

Bill Foley

We have a pretty strong Indian operation at the present time. Randy, do you have any comments on that?

Randy Quirk

Well, yes, Bill, we are doing a good part of our title production through the FNF India in some select states. We are pushing hard with California and some parts of Florida now. We also have technology onshore here that allows us to take the orders in and forward it over to India. So, we continue to increase that process, but in the meantime, in terms of our staffing levels here, onshore we are going to, we believe we are going to hold as we go through the back end of the third quarter here in terms of staffing levels, and use our offshore process plus the technology to keep our staffing levels where they need to be.

Brett Huff – Stephens

Okay. That is what I needed. Thanks for your time.

http://jobsearch.naukri.com/mynaukri/mn_newminnernew.php?xz=8_0_4&xo=&js=1&f=110610001941&xp=3&xid=128476357338784200&qc=475017&qs=r&qt=all&enableRoleMapping=y&mode=7&id=

http://www.youtube.com/watch?v=nYheGyiZTOA

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It seems to me what's brewing is rates are rising as evidenced by the recent rate increase filings of the various underwriters while at the same time underwriters are shipping a great deal of their processing overseas for cost savings. The affiliated business falls right into this tidy arrangement in securing an order source.

I suppose we all would be enthusiastic about this if it was resulting in "lower" title insurance rate filings and a more competitive market place for independents who are really the backbone! The consumer is certainly not seeing any benefit as was the general observation in a recent ALTA Survey:

"Another of HUD's core objectives in these regulations was to reduce settlement costs. A third of the respondents stated that closing costs had increased under the rule. Only 7.5 percent believed that settlement costs had declined."

So the question remains, "can affiliated businesses coexist with independents so that the productive forces and innovative developments make our society better, more efficient and wealthier"?

It may be that independent title folks are a doomed species as they are contrary to the dividend flows and Wall Street pursuits except where they may become affiliated in generating a reliable income stream.

The Mom and Pop Pharmacy (and many others) suffers near extinction as the WalMart SuperCenter comes rolling into town. Who knows? Maybe our entire judicial system will be outsourced to China and India and the proceedings done by webinar!!