Buy-Out Deal Turns Sour at Ticor : Mortgage Insurance Unit Faces Losses of $166 Million
When a leveraged buy-out took Ticor private early last year, several state insurance regulators say they worried that the Los Angeles mortgage and title insurer would be left dangerously deep in debt. But California Insurance Commissioner Bruce Bunner backed the plan, partly, he says, on “the financial strength and integrity” of the buyers.
The $271-million deal to buy Ticor from Southern Pacific Co. went through. It was financed by a private group led by American Can Corp., a Fortune 500 company, and by Harold S. Geneen, the former chairman of ITT who is known for his business savvy and toughness. Also included were Ticor President and Chief Executive Winston Morrow and Ticor Executive Committee Chairman Rocco C. Siciliano.
Leveraged buy-outs are financed largely with borrowed money secured by the assets of the company being purchased. The goal for investors is to buy a company with a relatively small amount of their own cash. But even as Ticor joined the growing list of companies bought through the increasingly popular technique of leveraged financing, it fell victim to another trend: the rising default rate on mortgages for homes appraised at unrealistically high values when inflation and interest rates were rising during the late 1970s and early 1980s.
In particular, Ticor’s mortgage insurance subsidiary, Ticor Mortgage Insurance, has been shaken by a financially troubled East Coast real estate syndicate, Equity Programs Investment Co., whose risky loans it insured.
3rd-Largest Mortgage Insurer
The result is that, a year and a half after its parent went private, Ticor Mortgage, the third-largest mortgage insurer in the nation, faces a loss of $166 million that could likely lead to insolvency and a barrage of lawsuits.
Ticor’s other major operation, Ticor Title Insurance, is the nation’s leading title underwriter. But while the title unit is profitable, it remains what even Ticor executives say is an unglamorous “cash cow” that lacks potential for fast growth.
For the prominent businessmen who funded it, the buy-out’s appeal has suddenly soured. For the insurance industry, Ticor Mortgage’s problems may stunt the growth of a major part of the popular financial guarantee market, a $210-billion-a-year business that helps support the secondary market of mortgage-backed securities. For the home buyer, that could make loans harder to get.
Ticor’s problems raise many questions about the company’s internal checks and balances, including those between the parent and all of its subsidiaries, and about possible conflicts of interest among board members and companies whose loans Ticor insures.
In light of the funding shortage hitting many other sectors of the insurance industry, Ticor’s troubles add fuel to criticism by consumer groups and many legislators who wonder if state regulators are able to adequately monitor the financial safety of the insurance companies that operate within their borders. As in many industries, there is a revolving door among insurance regulators and companies that critics say fosters a potential for conflict of interest. It’s a phenomenon that troubles Ticor, too.
Several former Ticor executives work at EPIC, a relationship that Ticor is exploring in a newly launched internal investigation. In addition, many of the outside directors that were ousted from Ticor Mortgage’s board last week work for companies that buy Ticor insurance.
Morrow says Ticor Mortgage is unlikely to survive the EPIC fiasco. State regulators agree, adding that if Ticor weren’t saddled with extra debt from its buy-out, it might have been better able to absorb the costs of EPIC’s delinquencies.
Ticor Mortgage, which accounted for 36% of Ticor’s earnings last year, enjoyed a good reputation until August, when it disclosed that it could lose as much $166 million in connection with delinquent mortgages and mortgage-backed securities it insured for EPIC of Falls Church, Va. EPIC had rocked the real estate world a few days earlier by announcing that it could not make payments on $1.4 billion in home loans.
Biggest Default in History
EPIC’S default was the biggest in real estate history and triggered a run on deposits at EPIC’s parent, Community Savings & Loan Assn. of Bethesda, Md. In September, Maryland officials took control of day-to-day operation at the thrift. That caused most of EPIC’s limited partnerships, which had been marketed as tax shelters, to file for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code.
Senior management at Ticor Mortgage knew about EPIC’s problems “as long as a year ago” but told no one in authority at parent Ticor, Morrow said at a recent interview. “It’s incredible--but true,” he said.
Morrow said he mostly blames EPIC and Community for Ticor Mortgage’s problems, but he would not elaborate on whether he thinks the two companies engaged in sloppy practices or in out-and-out misrepresentation. Yet, he said, Ticor “had plenty of opportunities to take . . . a much more modest exposure.” He said he meant that Ticor could and should have disassociated itself from EPIC as early as last October.
Although Morrow cautioned that “many things could happen” to save Ticor Mortgage, he also reiterated his belief that the subsidiary will go out of business. In recent weeks the state barred the company from taking on new business. Although the company on its own stopped taking new business as of Sept. 10, the state’s action may help shield Ticor from breach-of-contract lawsuits. Such suits could arise from parties who were promised coverage before the September cutoff.
Protect Policyholders
State regulators say their only intention in enacting the ban was to protect Ticor Mortgage’s existing policyholders, and they disagree whether it will serve as a shield against lawsuits. They also disagree over whether Ticor’s decision last month to separate its title and mortgage businesses into individual subsidiaries of the parent will shield the healthy title operations from lawsuits connected with the troubled home-loan insurance group.
Leonard Schapira, a financial consultant for the Better Business Bureau of Los Angeles, says he opposes using a state ban as a shield.
“It would be a dangerous precedent,” he said. “I just don’t think government agencies should be able to induce the breaking of contracts and then protect companies from consumers’ claims.”
Court protection or no, Morrow stresses his determination to succeed with a publicity campaign to separate the title and mortgage businesses in the public’s mind. That mental separation among policy buyers is essential, he says, if Ticor Title is to keep from losing business to bad publicity connected with EPIC.
“When you’re in a situation like this--going to back to my Avis days--you work even harder,” Morrow said, referring to his 12-year tenure as head of the car rental company that capitalized in its advertising on its No. 2 ranking. Morris joined Ticor in 1981.
Many title industry executives describe Ticor Title as a strong, well-managed company, and Morrow is adamant about the survival of the unit and its parent.
“Ticor without Ticor Mortgage would obviously have taken a considerable haircut,” he said. “But the future of the title company is very strong.” Several insurance analysts agree. Of Ticor Title, one said: “It won’t grow gangbusters, but it has an excellent management and it’s been doing business for a long time.”
Morrow would not speculate on why he was not told about a report on EPIC that Ticor subordinates ordered from the accounting firm of Touche, Ross & Co. last year. He said he has hired the Cleveland-based law firm of Jones, Day, Reavis & Poque to conduct its own investigation of EPIC, including an examination of the close relationships between executives at the real estate syndicate and at Ticor.
He insisted that no conflict of interest exists between that investigation and Siciliano, who is executive committee chairman at Ticor and a lawyer who long has been affiliated with Jones, Day. Morrow said Siciliano, who until the leveraged buy-out was Ticor chairman, will not be connected with the study.
In early 1984, Greenwich, Conn.-based American Can invested $50 million and received four seats on Ticor’s eight-member board as well as options to buy 100% of the insurance company’s stock from the rest of the leveraged buy-out investment group.
The investors scrounged up an additional $100 million for the buy-out by selling Ticor assets, including the company’s 21-story headquarter building at 6300 Wilshire Blvd. They also borrowed $100 million from a group of banks led by Manufacturers Hanover Trust. State regulators say that Ticor’s yearly payment on debt related to the buy-out “is in the neighborhood of $30 million to $40 million.”
Guidelines Ignored
That is money that could have given Ticor more stability in the midst of the current home-lending insurance crisis, say several top regulators, who spoke on the condition that their names not be used. Insurance companies typically write several dollars in premiums for each dollar kept in reserve. This makes insurance a highly leveraged business by nature. A highly leveraged buy-out could reduce a company’s ability to pay claims, and that is exactly what has happened to Ticor, the regulators say.
In the EPIC case, Ticor Mortgage faces greater losses than the other two major insurers involved with the real estate syndicate. Morrow says Ticor has a strict set of guidelines for its mortgage insurers, but the code was completely ignored when it came to EPIC. Internal audits failed to detect the problem, and Morrow says he has no idea why.
Ticor also ignored industry rules-of-thumb as to what is safe. Morrow says Ticor holds policies on EPIC homes for which the down payment was only 5% of the property’s face value instead of the usual 20% to 25%. Ticor, like other mortgage underwriters, insures mortgages for 25% of face value. Because the face amount on EPIC holdings is higher than normal, Ticor has insured mortgages that are larger and riskier than average. To make matters worse, many of the properties are in markets such as Texas that are oversupplied with new homes. That depresses their value even further.
At the end of June, Ticor Mortgage’s assets totaled $263 million. Once liabilities are subtracted, the unit has $198 million from which to pay claims. Assuming it pays the total $166 million related to EPIC, Ticor Mortgage will be left with a slim $32 million for other claims.
Industry sources say Ticor Mortgage may soon be declared insolvent and taken over by the state. Standard & Poor’s and Moody’s, the two top rating agencies, already have lowered to below investment grade their estimates of Ticor Mortgage’s ability to pay claims.
Took Directors Off Board
American Can, whose decision to take an equity position in Ticor was a key reason that the leveraged buy-out was approved, two weeks ago took its four directors off the Ticor board. Some executives close to the situation speculate that the resignations signal American Can’s disgust with Ticor as an investment. Others suggest it merely signals that American Can has no intention of bailing out Ticor’s mortgage unit. American Can won’t comment.
Morrow says that Ticor has “no present plan” to fill the board seats vacated by American Can, which he said retains the right to those directorships as well as to the options to buy Ticor from the rest of the investment group.
“I don’t see how anyone can say they are not an interested spectator,” Morrow said.
He concedes that, in the worst-case scenario, where Ticor Mortgage folds and American Can washes its hands of Ticor, the parent company’s investors would have to pin any hopes of recovering their investment on the title unit.
Last year, the unit contributed 60% to the parent’s bottom line. It did so by earning 5.9 cents on each dollar of revenue, a significantly better performance than the industry average of 5.2 cents. The title insurer’s capital surplus was $141 million in August, 2.5 times that of its nearest competitor, Chicago Title, which has $54 million. Still, Ticor’s market share has slipped since 1980, and the current flap over Ticor Mortgage can’t help business.
“We’ve got our hands full,” said Morrow. HOW TICOR MORTGAGE GREW Winston V. Morrow, Rocco C. Siciliano and Harold S. Geneen, from left, were among the group of investors who took Ticor private in a leveraged buy-out last year. Their willingness to invest in the company was based partly on the fast growth of its Ticor Mortgage Insurance subsidiary. That growth, however, came to an abrupt halt in August after the billion-dollar default by an East Coast real estate syndicate on home loans that Ticor had insured.
