Title-Holder and Still Champ : First American Insurance, Still in Santa Ana, to Celebrate Centennial

A century ago, just after Orange County was carved out of Los Angeles County, two small companies opened storefront offices along the dusty streets of Santa Ana to offer property buyers the assurance that their homes were free and clear of any liens.

The firms were in business to guarantee that no unknown party could produce a deed or some other claim to wrestle the property away from their customers.

To that end, Charles E. Parker sent two employees to Los Angeles to copy land records for all the property in the new county so that his firm would know who owned what.

Painstaking Copies

The employees stayed for two years, painstakingly copying by hand every sale, every lien, every claim of any kind on every parcel of county land. The information they gathered became the foundation for what soon became Orange County Title Co., the name the two Santa Ana companies took when they merged in 1894.

On Thursday, that company, renamed First American Title Insurance Co., will celebrate its centennial at its headquarters, which has remained in downtown Santa Ana a few blocks from its roots. About 12,000 guests are expected to squeeze onto a four-block area around the headquarters to toast the firm’s success.

Today, First American is the nation’s second-largest title firm, with 4,500 branches, subsidiaries, affiliates or agents in the United States. It also offers title services in Guam, Mexico, Puerto Rico, the Virgin Islands and the United Kingdom.

Its expanse is a far cry from the philosophy of founder Charles Parker, who believed that his company should take no unusual risks and simply preserve the business it had.

Parker’s son-in-law, L. Rex Kennedy, a corporate executive, was also conservative about business strategy and preached the virtues of meeting customers face to face.

“My dad always said you can’t preserve the personal touch if you have more than one office,” said Donald P. Kennedy, First American’s current chairman and grandson of Charles Parker. “But I think that if you give those other offices local autonomy, you still can have that personal touch.

“My view is that you have to spread out to preserve what you have.”

As president in 1963-89, Donald Kennedy broke with tradition and oversaw First American’s aggressive acquisitions. After 26 years, he stepped down last month to make room for his son, Parker S. Kennedy, the fourth family president out of five executives to run the firm.

Parker Kennedy plans further expansion as he readies the firm’s entry into Canada and works to boost a sluggish British office. He is also coordinating the development of two recently formed real estate-related insurance subsidiaries to broaden the firm’s business and increase its earnings.

Dividends for 90 of 91 Years

First American has an enviable record to protect, industry analysts say. The firm has paid dividends to stockholders for 90 of the last 91 years, missing only in 1908. In a volatile business, it has had just five money-losing years this century.

“In all the shakeout that’s gone on, it may have become the second-largest, but the stable and solid industry leader really is First American,” said Fred Hill, an industry analyst in the San Francisco office of Baird, Patrick & Co. Inc., a New York brokerage.

Title insurance--which protects policyholders from losses caused by defects in title, or ownership, of real property--is a highly competitive, highly cyclical field. As real estate sales seesaw, so do the earnings of related businesses.

And more players are stepping onto the field.

‘New People Want In’

“The title industry has changed a whole lot in 10 years,” Parker Kennedy said. “New people want in on the business. Banks, for instance, are starting to form their own insurance companies. They’re trying to collect all the fees that result from the real estate loans they make.”

When First American started its expansion, it did not learn from its founder’s Los Angeles effort. It built operations from scratch in four counties, a huge undertaking, considering that more than century of records in each county had to be copied. The firm did not borrow a cent to do it.

Changing its name to First American in 1960, the company decided then it was wiser to buy existing operations.

The firm is also promoting two recently formed subsidiaries: First American Home Buyers Protection and First American Real Estate Tax Service Inc.

The buyer-protection unit insures major appliances during an owner’s first year in a home. The tax service--which is required by some lenders and adds about $50 to the closing price on a home--lets a lender know that taxes are being paid on a home. If taxes are not paid, the government can foreclose before the lender can recoup the loss.

The firm has high hopes for both subsidiaries, particularly the tax service. But title coverage will remain the firm’s bread and butter.

Today, title insurance has become a necessity for home buyers, Donald Kennedy said.

Lenders now require home owners to obtain title insurance, because lenders have increasingly packaged dozens of loans they make and sold them to investors. Those investors, usually quasi-governmental institutions, will not buy those packages unless titles are insured.

Such requirements may also help to turn First American’s British office around, Parker Kennedy said. British lenders are planning to sell their mortgages to U.S. investors, who will require title insurance, he said.

Title is now reviewed by solicitors--lawyers--who take nine months to clear title, and insurance isn’t necessary, he said.

Kennedy also expects the British office will get a shot in the arm from a master policy it is working on for vacation time shares in 350 condominium resorts in 16 countries in Europe, Africa and Asia.

Minimizing losses is how First American has been maintaining its profitability. But Donald Kennedy said title insurers have been taking more and more “off-record” risk, such as fraud and forgery.

Last year, First American’s earnings were hurt by the fraud of agents. A New York agent was convicted of stealing $1.5 million in escrow funds, a Florida agent fled with $5 million and another Florida agent took $1.9 million.

Losses from frauds contributed to last year’s 62% drop in net income--to $12.3 million--for the parent company, First American Financial Corp. A slow first quarter also kept annual revenue flat, as the parent reported a 1% increase, to $643.9 million.

“Almost every title company has been hit by big frauds,” said R. Hutchings Vernon, an industry analyst for Legg Mason Wood Walker Inc., a Baltimore brokerage. “First American has had some fraud--which is its biggest risk--but has managed it well.”

First American’s executives use an extremely conservative investment strategy. Rather than take big equity positions in other companies or take advantage of higher-interest investments, the firm keeps much of its money in certificates of deposit in local banks and savings and loans around the country, said Jack H. Derloshon, the company’s chief financial officer.

The idea is to create good will that could be turned into new business for First American as the lenders steer deals to the title company, he said.

“Periodically, the philosophy is reviewed by management and at the board level, but this strategy seems to have worked well for us,” Derloshon said.