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Life After the Refi Boom

When the residential refinancing wave finally subsides — which some analysts anticipate will occur before the end of the year — title companies will be ready. The nation's biggest title providers are expanding their product lines to generate huge ancillary revenues and attract commercial accounts.

“We're going to be very aggressive in the commercial real estate arena,” says Curt Johnson, senior vice president and COO of the National Commercial Services division at Santa Ana, Calif.-based The First American Corp.

It's not that title companies previously ignored commercial customers. Rather, they are realizing that a diverse product lineup that includes services such as assessments, land surveys and real estate advisory services can attract more commercial customers and generate higher revenues per transaction.

“For customers who need more than title insurance, we have the potential for increasing revenue by 30% to 50% on individual transactions through these other services,” says Janet Alpert, president of Richmond, Va.-based LandAmerica Financial Group Inc.

Multiplying Revenues

There is ample reason to seek commercial customers, which now typically represent less than 10% of total revenues for the title industry. For instance, a title company typically yields $22,500 in title and escrow revenues on a $15 million apartment complex compared with $2,600 on a $300,000 home. If a title company develops a long-term relationship with a commercial developer or owner that acquires, builds and refinances properties in multiple states, the revenues multiply.

“The residential segment is still the core business of the industry,” says Jeffrey Selvy, executive vice president of National Commercial Services for LandAmerica. “But we believe by focusing on the commercial segment and providing these expanded services, it provides a long-term opportunity.”

By expanding their product lineups, title companies also cushion their businesses from the sharp declines in residential title income that can occur when interest rates increase. “The next time interest rates go up, the residential business is going to go down, but if the commercial market sees an increase in interest rates as evidence of growth in the economy, our commercial business can increase,” notes Selvy. “The two sectors can be counter cyclical.”

Although title policies still represent the bulk of revenues (see chart on page 48), executives at the nation's four biggest title companies — Irvine, Calif.-based Fidelity National Financial Inc., LandAmerica Financial Group, The First American Corp. and Houston-based Stewart Information Services Corp. — say new product lines provide the greatest opportunity for revenue growth.

In the past two years, title companies also have installed automated transaction systems that enable customers to open and close both residential and commercial title policies via the Internet. The systems have boosted efficiency, helping title companies keep up with the crush of new residential orders.

For instance, First American processed 455,700 title orders in the first quarter, a 16% increase over the first quarter of 2002. This online technology will generate extra income by increasing efficiency and attracting new customers, although the automated systems are so new that title companies are not yet able to point to specific revenue gains.

Fast-Growth Plan

In 2000, Fidelity National shook up the title industry with its $1.2 billion purchase of Chicago Title, a move that vaulted the company from No. 4 in total title revenues to No. 1 in 2001 with a 30% share of the sector's income. While that acquisition boosted the company's title revenues, its $1 billion purchase of Alltel Information Services will help the company grow revenues through a financial-services platform. “We're moving into areas that are not interest-rate sensitive,” says Eric Swenson, executive vice president at Fidelity National.

Fidelity National posted $1.4 billion in gross revenues in the first quarter of this year, a 27% increase from $1.1 billion in the first quarter of 2002.

With the Alltel acquisition, the company is poised for more growth. The acquisition provides Fidelity National, which merged Alltel into its Financial Information Services (FIS) division, a mortgage servicing platform that processes 50% of the residential loans in the U.S. through its contracts with banks such as Wells Fargo and Bank of America.

Although Fidelity will process loans for banks from the initial application through closing, it will not originate or broker loans, so it is not in competition with the core business of lenders. Instead, Fidelity's mortgage servicing platform gives financial institutions both big and small the option of outsourcing loan-processing duties to Fidelity. The company also foresees major outsourcing potential in the acquired commercial services unit, which provides back-office services such as check processing and ATM transaction management.

At a meeting with analysts in June, Fidelity National's CEO William Foley said the company plans to expand revenues in the FIS division from $800 million in 2002 to more than $2 billion within three years. The company expects to achieve about 10% to 15% of the expansion through internal growth, he said, which involves bundling the new products with its core title services. It plans to achieve the rest of the gains through acquisitions.

If the plan succeeds, overall revenues at the company will jump from $5.1 billion in 2002 to about $7 billion in 2006. And title revenues, which represented about 70% of gross revenues in 2002, would shrink to about 50% of income.

“This acquisition gives us the opportunity to cross-sell all of our products and services,” says Raymond Quirk, president of Fidelity National. “The company's plan has always been to be diversified.”

Audrey Snell, a research analyst at New York-based Brean Murray & Co., is impressed with the company's strategy to heighten revenues by providing check processing and financial transaction services to banks. “They have risen above titles to become a diversified financial services company,” she says. The services, she notes, could be a juggernaut that will help further expand the company's market share.

New Niches

Fidelity's rivals also are busy growing their product lines, albeit in a less dramatic fashion. First American plans to bolster revenues with its acquisition of St. Petersburg, Fla.-based U.S. Inc., a company that provides tenant-screening programs, employee background checks and other services.

The company, renamed First Advantage Corp., is expected to contribute $170 million in revenues to First American in 2003. Gross revenues in the first quarter totaled $1.3 billion, up 27% from $1 billion during the same period in 2002.

Although First Advantage's products are unrelated to the parent company's title business, First American is not ignoring its core product. The company is heightening its efforts to attract commercial title customers through its National Commercial Services division created in 2002.

The Commercial Services division provides commercial customers a single contact in one of its 13 regional offices, instead of directing customers to its hundreds of branch offices for multiple transactions. The directors of each regional office still rely on the local expertise of the branch offices, but the regional offices are able to provide standardized service regardless of a property's location, says Johnson of First American.

“First American has been much more actively engaged in the larger, multi-site transactions in the past year,” says Johnson. In June, the company was finalizing a proposal to provide title and related services to a company with properties in 37 states.

First American also plans to increase the average revenue per transaction through niche offerings such as the ExpressMap, a land survey that replaces the need for more expensive plat and field surveys that help companies obtain additional risk coverage on their title policies. Johnson says ExpressMap images, which the company began offering in August 2002, typically generate $3,500 to $7,000 per commercial transaction.

By contrast, a plat and field survey can cost up to $30,000, so the company expects to attract commercial customers looking for a less expensive option. In 2002, the company also expanded its market coverage in the title sector through 20 acquisitions, including Guaranty Title in Maine and San Benito County Title in California.

Stewart Information Services, which experienced a 28% increase in title revenues in the first quarter, has entered the mapping services niche with its GlobeXplorer product, which it purchased in December 2002 for an undisclosed price from Landata Geo Services. The online service, which the company says contains the world's largest database of aerial and satellite images, expanded in March when the company acquired Citipix from Rochester, N.Y.-based Eastman Kodak Co. Citipix provides aerial imagery of commercial sites in 65 U.S. metropolitan markets.

Stewart also is working to win more commercial title customers in untapped markets. In December 2002, the company purchased San Ramon, Calif.-based InterCity Cos., which provides escrow services to the timeshare industry. The acquisition will enable Stewart to attract title business from the timeshare industry by bundling title policies with the InterCity's core escrow services. “That puts us upfront in the timeshare arena,” says Malcolm Morris, Stewart chairman and co-CEO. “We're making contacts like crazy.”

Likewise, LandAmerica also purchased the National Assessment Corp. in August 2002 for an undisclosed price. Through its assessment division, LandAmerica conducts structural and environmental studies as part of a due-diligence process that is required prior to the issuance of a title policy. First-quarter revenues at the company jumped from $551 million in 2002 to $696 million this year, a 26% increase.

“We have realized that the commercial sector is an important part of the business,” says Alpert, “and we've put it all under one umbrella of products.”

Steve Webb is a Jacksonville, Fla.-based writer.

Title Revenues Vs. Overall Revenues at the Four Biggest Title Companies

Fidelity National Financial Inc. 2001 2002
Gross Revenues $3.87 billion $5.08 billion
Gross Title Revenues $2.69 billion $3.55 billion
The First American Corp.
Gross Revenues $3.75 billion $4.70 billion
Gross Title Revenues $2.69 billion $3.44 billion
LandAmerica Financial Group Inc.
Gross Revenues $2.17 billion $2.59 billion
Gross Title Revenues $2.12 billion $2.53 billion
Stewart Information Services Corp.
Gross Revenues $1.27 billion $1.78 billion
Gross Title Revenues $1.19 billion $1.68 billion
Source: Fidelity National, First American, LandAmerica and Stewart Information Services

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