Title Insurers Enter Virgin Markets

When Heitman International acquired a stake in four Euro Mall Shopping Centers in the Czech Republic in August 2003, the deal marked the investor's first purchase of a title policy in Central Europe. The properties, valued at about $104 million, also made history because they were the first retail projects in the country sold with a title guarantee.

“Title insurance will give us a greater sense of security,” says Dennis M. Dart, director of legal affairs for Heitman International in Warsaw, Poland. “In the past, we relied on the opinions of attorneys — and very good attorneys — but there are uncertainties and inherent risks of title in Central Europe.” Title insurance assumes the risk of any potential errors, Dart emphasizes, and provides Heitman's leadership team with peace of mind.

Heeding their clients' call, title insurers are working to bring title guarantee to U.S. investors abroad, as well as creating demand for their products within foreign markets. Top firms such as Stewart Information Services Corp., LandAmerica Financial Group Inc., The First American Corp. and Fidelity National Financial Inc. have made a concerted effort to expand their international business in recent years.

Just as in U.S. policies, international title insurance guarantees the legal aspects of a real estate acquisition or financing, focusing in particular on ownership and zoning compliance issues. The opportunity for title companies to seize market share internationally stems in large part from inefficiencies in foreign markets, where recording systems documenting property transfers are still in their formative stage, say experts.

High-Stakes Game

The international arena represents an untapped market with seemingly endless opportunities. In contrast, the U.S. is a fairly mature market where competitors are fighting each other to grow market share. According to the American Land Title Association, the U.S. title industry generates $17 billion in revenues each year.

Although title firms have dabbled in foreign policies for a couple of decades, international expansion began in earnest in the late 1990s. Title firms recognized the enormous potential to not only tap into the growing number of U.S. investors and individuals buying property overseas, but also to enter new foreign markets and create demand at the local level.

“Many of these countries are virgin markets where there has not been title insurance historically. So the potential for growth is much higher there,” says J. Carmichael Calder, vice president of international underwriting for Santa Ana, Calif.-based First American Title Insurance Co. “We can pick up more market share with far less effort.”

And far less competition as well. Only a handful of title firms are writing international title policies. First American is among that pioneering group. The company provides title insurance to investors in more than 60 countries. In 2003, the company generated more than $150 million in revenue from its international sector and wrote approximately 635,000 title policies.

Although that business is a mere fraction of the corporation's overall revenues — 2.4% of the firm's $6.2 billion in revenues last year — it is a growing chunk of business. First American expects its international segment to grow by 20% in 2004, and the firm expects to maintain that growth rate for at least the next two years, Calder notes.

In addition, finding new title insurance clients in foreign markets also opens the door to a full line of related products such as legal services, escrow and trust services.

What's Propelling Global Expansion?

The primary driver behind the emerging international title insurance industry is U.S. investment overseas. “We go hand-in-hand with the U.S. investment in these countries,” explains Chris Hill, general manager of Stewart Title Latin America, “and U.S. investment in these countries has risen significantly, especially since 9-11.” Clients include commercial developers and investors, as well as private individuals interested in buying second homes or vacation property.

“It is absolutely driven by the U.S. market where you have the lenders demanding some sort of title protection,” adds Calder.

First American developed its offshore program in large part because it grew tired of saying “no” to customers. Companies were approaching First American seeking title guarantees while refinancing corporate facilities — including both U.S. and international property in countries such as Mexico and Ireland. “We recognized the demand to provide title insurance for all of those properties, so we developed our offshore line in the late 1990s,” Calder explains.

The globalization of business is adding to the demand for title insurance. In particular, the emergence of the European Union has encouraged financial institutions to lend across borders and created more of a need for a standardized title guarantee, adds Joel S. Peck, senior vice president of the international division for Richmond, Va.-based LandAmerica.

A German bank, for example, is not interested in requiring title insurance for transactions in Germany, Peck explains. But once that German bank starts lending in Italy, suddenly the bank is less comfortable with Italian laws and practices.

Title insurance also is on the rise as foreign investors exhibit a desire to tap into international capital sources. Foreign mortgage lenders trying to take advantage of the commercial mortgage-backed securities (CMBS) market recognize the benefits of using title insurance to assist in floating bonds in securitizations, especially if they are interested in accessing U.S. capital markets, Calder notes.

Why Title Insurance Is So Critical

Title insurance has been in the U.S. for more than a century, and it is standard practice in both commercial and residential real estate transactions. “Outside of the U.S. it simply does not exist, except to the extent that U.S. firms are doing work internationally,” Peck says.

Title insurance covers a wide variety of issues, ranging from title defects due to fraud or negligence to restrictive covenants that may encumber the use of the property. “Title is title, it really doesn't matter if you're in Houston or Prague,” says Steven Lessack, senior vice president and director of international title operations for Stewart International in New York.

Without title insurance, investors are at greater risk if someone challenges the ownership or intended use of the property. The worst-case scenario is that a buyer loses the money he shelled out for the property, or the buyer becomes embroiled in costly litigation.

In the event there is a legal challenge, the title firm takes over the litigation on behalf of the policyholder and will assume its costs. If the litigation proves unsuccessful, the investor is reimbursed for his loss — up to the amount of the insurance policy.

Emerging Markets

Outside of the U.S., Canada has the most established title business. The Canadian market is still miniscule compared with the U.S. — well below $1 billion in annual revenues compared with about $17 billion in the U.S., according to the American Land Title Association.

However, momentum is clearly building north of the border as the title industry becomes more firmly entrenched. “Canada is a substantial market for all the insurers,” Lessack says. In 1997, revenues were minimal with only a couple of thousand policies issued. Today, the overall Canadian title insurance industry is responsible for generating an estimated $120 million in revenues, he says. Stewart operates seven offices in Canada.

“In markets such as Canada, the U.K. and Costa Rica, we have seen that title insurance can be adapted to address local issues,” Hill agrees. For example, Stewart started writing title in Costa Rica in 1997. For the first five and a half years, revenue was 100% driven by U.S. investors. Now the local market represents about 30% of the firm's business. Stewart Latin America currently insures property valued between $125 million and $150 million per year.

“In the States, title insurance is there as a matter of fact. It is not valued as something that really protects you or as a product that levels the playing field,” Hill says. “But in Latin America it is a very tangible element in the transaction.” In fact, developers, sellers and lenders promote the fact that they have title insurance. “It is a much more service-level issue,” he adds.

Varying Approaches to Expansion

Title firms are deploying a variety of strategies to expand into foreign markets, ranging from establishing a market presence via branch offices, affiliates and subsidiaries to simply doing business offshore from the U.S. or other core international offices.

“Entering a new market is like creating a start-up company,” Calder says. “We often start on a small scale and have to deal with quick ramp-ups in some areas.” Other challenges include the logistics of dealing with different financial currencies, time zones and cultures.

Stewart Latin America, for example, is headquartered in Houston, and maintains offices in Costa Rica and the Dominican Republic with plans to open additional offices in Mexico and the Caribbean. In addition, Stewart also drives business through its Stewart Title Attorney Referral (STAR) network. STAR was rolled out a year ago, and currently includes about 150 agents throughout Latin America. The firm expects that network to grow to 400 to 500 hundred within the next five years.

Prior to entering a new market, title companies analyze a number of factors such as how the title registration system works, as well as regulatory and licensing requirements. “There are countries that we have looked at where we have felt uncomfortable about putting our efforts into it because of deficiencies in the system,” Calder says. “We need to have a certain level of confidence in the registration system — the validity and dependability of records.”

Despite the inherent risks associated with entering foreign markets, title firms are forging ahead with expansion plans in pursuit of sizable revenues. “I believe that certain countries are poised for the use and need of our product,” Lessack says. “Our company sees international growth as a foundation for our future.” Stewart maintains offices in 15 countries, including recent additions in Scotland, Spain and Turkey.

As U.S. title firms enter foreign markets, they are essentially creating title markets from the ground up. The biggest hurdle is educating customers and government entities about title insurance — what it is, how it works, and why it is desirable. Oftentimes, title firms are changing title protocols that have been in place for decades.

Beth Mattson-Teig is a Minneapolis-based writer.

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