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Venerable title insurer, First American, diversifies

It took nearly 80 years for the business that started out as Orange County (CA) Title Co. to diversify itself beyond title abstracting and insurance. But after taking that first step, diversification has been the name of the game for what is now known as The First American Financial Corp. (NYSE: FAF).

"We are diversified, yet focused," says First American president and CEO Parker S. Kennedy. "We have entered many businesses, but at the same time these are all businesses we know make us more than just a conglomerate."

Since the mid -1980s the Santa Ana, Calif.-based company has been expanding its business horizons on an almost constant basis. In the process, it has become one of the nation's leading providers of business information and related products and services.

The beginning The First American story began in the late-1800s when two Orange County, Calif.-based companies merg- ed to form Orange County Title Co. After almost 60 years of building its business base in Southern California, the company reorganized and went national in 1957, establishing itself as First American in the process. In 1968, it reorganized again, with The First American Financial Corp., emerging as a general holding company conducting its traditional business line through First American Title Insurance Co. and its subsidiaries.

During the 1980s and 1990s, First American carried out an extensive program of diversification that was augmented through a number of mergers and acquisitions (M&As). On the diversification front, the program began in earnest in 1985 with the creation of First American Real Estate Tax Service, a business unit focused on providing lending institutions with information regarding property tax payments on mortgaged properties. That same company also set up its home warranty for consumers, issuing one-year insurance policies on fixtures in resale homes.

While First American was opening new lines of business, it also pursued a strategy of M&As to grow its title operations. Purchases of and mergers with regional title companies around the country helped extend the company's reach into new markets. Meanwhile, First American also uses the M&A approach to grow its tax service business.

Active in the 1990s First American quickened the pace of diversification during the past decade. In 1994, it renamed its tax service business, First American Real Estate Information Services, which more accurately reflects the mortgage credit reporting services it offered. In 1995, the company acquired two credit reporting companies: Credco Inc., a national mortgage credit reporting company; and Flood Data Services (FDI). These acquisitions made First American a major player in the mortgage credit reporting and flood zone certification businesses.

In 1998, First American and Experian Group completed a merger of their respective real estate information subsidiaries into a new company, creating one of the nation's largest and most diverse provider of information technology and decision support for the mortgage and real estate industries. That same year, the company purchased Data Tree, a company that provides database management and document imaging systems to county recorders, governmental agencies and the title industry.

Also during 1998, First American announced the formation of First American Consumer Risk Management, a subsidiary encompassing consumer-related business lines including automotive credit reporting, sub-prime automotive credit reporting, direct-to-consumer reporting, and pre-employment and multifamily resident screening

"The establishment of First American Consumer Risk Management is the result of our diversified strategy to produce consistent, high- margin income not dependent on factors such as mortgage interest rates and the real estate economy," according to Kennedy in a statement delivered at the time.

Reaping benefits That strategy has paid a lot of dividends for First American. In 1998, First American Title Insurance Co., the company's largest subsidiary, increased its leading market share (based on premiums written) of the national title insurance market to 22%, according to American Land Title Association statistics. Meanwhile a study con- ducted by The Wall Street Journal ranked First American No. 1 among insurance, property, and casualty firms in 1998, with its one-year return to shareholders of 97.2% easily out-distancing all its competitors.

In 1999, First American won even more accolades. Fortune magazine reported that executives, directors and securities analysts rated First American as America's ninth Most Admired Company in the mortgage finance realm, based on criteria ranging from long-term investment value to social responsibility. Later that year, First American ranked second in PC Week's annual Financial Services Fast@Track.

FAST solutions PC Week has recognized First American's FAST solutions, a suite of e-commerce initiatives that electronically accepts orders and routes, processes, and speeds delivery of First American products and services directly to customer desktops.

"FASTWeb, FASTWin, as well as FASTDirect are the three main First American e-commerce engines,"explains John Hollenbeck, national title processes director.

"With each of these engines, customers can purchase multiple products and services from us, and actually receive the product back over the system," he adds.

FASTWeb is an Internet-based order and delivery system through which mortgage-lending customers can order property information, maps and comparable sales data. FASTWin is a desktop application for these products and services that links with existing loan origination systems, while FASTDirect is a system-to-system solution, a piece of middleware which connects seamlessly with a lender's origination system.

Of the three engines, FASTWeb has the highest profile, according to Hollenbeck. An agent can log onto FASTWeb, select a state and county, enter a property address or owner name, and pull up a property record with information on ownership, legal description, and sales price.

In many cases, the agent can also get information on property characteristics such as number of beds/baths, pools, type of heating and air conditioning systems, garage size, when the property last sold and at what price, the amount of the first mortgage, and in some markets, even demographic information.

Additionally, the Interactive Division also supports a number of what Hollenbeck calls direct-to-consumer Websites. Among them, is a credit reporting service, where a consumer can sign up on a membership basis and receive various personal credit information, while allows users to look up property values.

Growing Businesses "The title [insurance] business will continue to be a growth generator for First American for some time," says Tom Klemens, executive vice president and CFO. "It will continue to buy companies and grow market share as other title insurance companies are bought.

"First American will bring the property information they house on-line, enabling electronic title searches of properties on a nationwide basis," he adds. "Just type in a property name on a computer and the imaged documents you need to complete a title search will come up on the screen."

Thanks to the Data Tree purchase and Experian joint venture, the framework for this national electronic coverage is well in place. First American is going state by state to cover properties in major metro areas, with a goal of covering approximately 80% of all properties in these markets in the next five years.

Growth in the real estate information side of First American's business is also a possibility. It covers lines including mortgage credit reporting and flood zone certification. Unfortunately, a lot of that business fluctuates with the real estate market, which in turn has a lot to do with interest rates, consumer confidence, and jobs, says Klemens.

During the next three to five years, First American's main focus will be on growing the non-cyclical, non-interest-rate-sensitive consumer information and services part of its business, according to Klemens.

"The consumer information part of the mix will probably be an increasingly important part of our growth over time because it has nothing to do with interest rates or real estate markets," says Klemens. "We look for it to generate consistent revenues and bottom-line profits. In the next three to five years, First American hopes to hit $1 billion in revenue from its consumer information and services business, up from around $250 million in 1999."

Future challenges First American faces several challenges in its quest for growth and diversification, according to Kennedy. Customers are demanding very efficient delivery of products in electronic form, At the same time, customers want prices as low as possible.

Perhaps one of the the larger challenges is making sure the marketplace understands exactly what First American is all about. The company is frequently lumped with all the other title insurance companies. First American provides business information and related products and services that go far beyond just title insurance, which makes it unlike any other company in the country.

First American Financial Corp. offers several services. Among them are:

* title insurance & services;

* real estate information & services;

* property & casualty insurance;

* property & automotive insurance tracking service;

* resident screening;

* pre-employment screening;

* lender-placed flood & hazard insurance;

* investment advisory trust & banking services.

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