Fidelity Title Booming as Lean, Mean Machine : Insurance: West Pointer William Foley’s hard-edged style of management and acquisition has led to phenomenal growth of Irvine-based firm.

For a hard-charging entrepreneur like William P. Foley II, the title insurance industry was so stodgy and dull in the early 1980s that it was ripe for conquest.

So Foley built a title company to fit his aggressive, no-nonsense style; one that now earns him the sobriquet, the “Bruce Lee of title insurers.” He introduced marketing and management ideas that inspired employees and caught competitors off guard.

In the process, he led Fidelity National Financial Inc. from a tiny Arizona storefront operation 10 years ago to become the nation’s fifth-largest title insurance company with 4,700 employees in 48 states and its headquarters in Irvine. It is No. 2 in the state behind First American Financial Corp. in Santa Ana, the nation’s second-largest title company.

Foley, the president and chief executive officer, and his top aides also have made Fidelity the envy of the industry by achieving what no other major title insurer has been able to do in the past five years--generate annual profits solely from operations. And it will do it against this year.

“There’s no room for comparison in my book. These guys are the best,” gushed John O’Neil, an industry analyst with the Oppenheimer & Co. Inc. brokerage in New York.

Fidelity’s revenue solely from title operations has grown at a rate of 30% a year for the last five years. It expects one more blockbuster year--topping $500 million in revenue, a 31% hike over last year--before it eases into a slower-growth cycle and concentrates on adding ventures related to its title business.

Both the rapid growth, which came largely from major acquisitions in the past two years, and the complexities of managing a much larger, nationwide company have forced Foley to add a bit of fat to his bare-bones approach to management.

He has, for instance, broken one of his longtime corporate vows--to avoid bureaucracy--by hiring a regional manager to handle the company’s East Coast operations. “He’s not allowed to have a regional staff; just him and a secretary,” said the red-tape-hating Foley. His tenet now is “minimize bureaucracy.”

He also said he is trying to soften his domineering ways over his own staff.

“I used to have hair before I worked for him,” Steve McCartney quipped about his stressful days as Fidelity’s chief financial officer for five years in the mid-1980s.

The stress has paid off on the bottom line, though. The company’s net income has grown from $2.5 million in 1988 to $15.1 million last year.

The company’s phenomenal growth is almost as much a surprise to Foley as it is to Fidelity investors and competitors.

“I hate to say this,” he confessed, “but there really wasn’t much of a plan,” he said. “I mean, there was a plan in that we wanted to expand, but I never dreamed back in the mid-’80s that our company would become as big as it is today.”

As a business, title insurance is one of the least risky because it insures against past events, not future ones. It protects buyers against mistakes in ownership, liens or encumbrances such as taxes, mortgages or other ownership claims on property being insured. If companies research the public record accurately, they would never have a loss. But mistakes are made, and the companies fall victim to fraud, especially by independent agents.

Fidelity owes its success mainly to an approach unusual in the industry:

* Its title policies are sold mostly by employees, not through agents. This not only saves money--agents keep 80% of premiums, while using employees cost only about 50%--it also gives Fidelity a better way to guard against losses. Fidelity paid out about 5% of its revenue on losses last year, compared to an industry average of 8%.

* It focuses on the residential resales, which are safer and more consistent than the commercial and new-home markets. While concentrating on home resales, Fidelity has benefited from the refinancing boom over the last few years--lenders require a new title policy for any new home loan.

* It has made astute acquisitions--two major ones in the last two years and 11 since 1986--and turned around undervalued, lagging operations. The expansion has given it a national presence and something it never had before: a sizable investment portfolio. “One of the reasons we’ve been so successful in operations is that we had to be,” Foley said. “We had no cushion like other title companies that could rely on earnings from their investment portfolios when title operations were down. Now, we’ve got a cushion, but that doesn’t mean we’re going to change.”

* It maintains a flexible, entrepreneurial spirit, especially in its abhorrence of the industry’s usual bloated bureaucracy. It set up a separate subsidiary, American Title, in Northern California to compete against Fidelity as well as other insurers, part of Foley’s scheme to create competing companies the way Procter & Gamble set up competing soap brands. He hopes to bring the concept to Southern California soon. Being light on management, Fidelity also can move quickly to dismiss part-time and temporary employees, as well as full-timers if needed, when business slows. Foley’s readiness to pare staff and cut costs caused one analyst to dub him the “Bruce Lee of title insurers.”

* It created an incentive package for most employees and employee stock ownership. Foley is the largest single shareholder with 21.1% of the stock, dwarfing the next largest, Frank P. Willey, the company’s general counsel, who owns 2.8%. But nearly 1,200 employees own an additional 22% through contributions and matching grants from the company. “There’s nothing like a highly motivated employee, and there’s no better motivation that owning a part of the ship,” said industry analyst Jamie Inglis at the Philo Smith & Co. insurance research firm in Stamford, Conn.

* It is a hands-on operation. Foley and his top lieutenants travel weekly to branch offices, exhorting field employees to practice the corporation’s precepts, including customer service and respect for employees, and keeping local managers in tune with what headquarters is doing.

Wall Street, which Foley has been courting ever since taking Fidelity public six years ago, is finally sold on his operation. The company’s stock price has soared from $3.875 a share only 30 months ago, adjusted for two stock splits since, to more than $32 a share in recent months. It closed Friday at $30.625 a share, unchanged from Thursday’s close on the New York Stock Exchange.

Analysts have little doubt that Foley, Willey and other top managers can continue to spur Fidelity’s growth and profitability.

“Their record speaks for itself,” Inglis said. “The company still has significant growth potential.”

Most analysts agree, especially those at three Wall Street investment banking firms that helped sell the company’s new stock in one or both of two offerings in the last two years. Their platitudes in research reports pour in like rave reviews for a hot new movie:

“Above average,” opines Merrill Lynch & Co. in New York.

“A jaguar among elephants,” purrs Furman Selz Inc. in New York.

“Fidelity National Financial is our kind of stock,” crows Oppenheimer.

The three companies also manage Fidelity’s $220-million investment portfolio. Farming out the asset management to experts, as well as getting out of some bad real estate deals, Inglis said, lets the company’s managers focus on what they know best: title insurance.

The proceeds from the offerings, $10.7 million last year and $18.3 million this past spring, helped Fidelity make major acquisitions that doubled its size. The offerings also gave the company enough shares outstanding, 9.8 million, to get Wall Street more interested in trading the company’s stock.

Foley, 48, is a native Texan and former Air Force captain who maintains the trim physique of his college days and the military bearing ingrained in him at the U.S. Military Academy at West Point, N.Y.

With a master’s degree in business administration and a law degree, Foley practiced real estate and tax law for seven years in Phoenix and became a major investor in Security Savings & Loan in Scottsdale.

He joined the Arizona thrift full-time in 1981 and initiated its acquisition of a tiny Tucson title agency and a small Denver title insurer, recognizing how those operations could funnel customers to the thrift. He and Willey, who had been working at Foley’s law firm and at the title company, began acquiring small title companies, mainly in California.

Foley’s major assignment for the thrift, however, was running a troubled Florida time-share project. After 10 months of spending every other week in Florida, he wanted out. As a thrift director, he also began to vote against loans that its chairman, Thomas Van Sickle, wanted to make to customers, widening a rift that was growing between them.

“I just thought those loans were a prescription for disaster,” Foley said. As it turned out, bad loans and drastically falling land values eventually caused the thrift’s failure in 1989.

Van Sickle, though, saw only a brash and abrasive young director.

“With Bill Foley, there’s only one way that people work for him: Do exactly what he requests,” said Van Sickle, now a hotel owner in Sedona, Ariz. “He was somewhat dictatorial, to say the least.”

Others who have worked with Foley are kinder in their assessments.

“He’s a very, very smart guy, and because he’s very fast-paced, you learn a tremendous amount from him,” said Steve McCartney, Fidelity’s former CFO, who know works for another company. “But he’s hard to work for because he doesn’t have the best people skills. You pay for it with some stress.”

At the end of 1984, Foley and Willey engineered a leveraged buyout of Fidelity. They still were interested in the thrift business, and applied to open one in Northern California.

Regulators, who had forced Van Sickle out at Security Savings in the mid-1980s, didn’t want any of his compatriots coming back into the industry. Foley said he was threatened by regulators with annual tax audits and an investigation into the buyout of Fidelity unless he withdrew his application and agreed to a five-year ban from the industry.

“I realized the power of the federal government,” Foley said. “I just didn’t want to fight it.”

As Fidelity grew, Foley tried something different. In 1988, the company bought a 5.6% stake in General Housewares, a gift and housewares company in Stamford, Conn., but soon sold it as questions about its intentions arose. “We just thought it was a real undervalued company,” he said. “It was poorly conceived idea. But we made money on it because the stock price went up.”

However, he still saw related businesses he wanted to acquire. In 1989, Fidelity bought a 23.6% stake in the Hammond Co. in Newport Beach, a regional mortgage banker, where Foley took a seat on the board. But the chairman, Thomas T. Hammond, wasn’t interested in selling. Fidelity eventually sold its shares back to the company for its original purchase price.

Barely a year later, Fidelity agreed to form a joint-venture mortgage-banking operation with Charter Savings Bank in Huntington Beach. The thrift, however, was ailing, and federal regulators seized it, killing the venture.

“We thought that the mortgage banking business might be an nice adjunct to what we do,” Foley said. “In hindsight, it probably was not a wise investment to make in an industry that provides all our business to us.”

With the title industry booming from refinancings--it grew 25% last year to $5 billion--weaker companies revived and Fidelity sees fewer opportunities to acquire firms at bargain prices. Foley also acknowledges that Fidelity is “getting to about all the market share we can garner in some of these counties.”

So as it prepares to settle into a period of slower growth next year, the company is considering more traditional ways to expand, from engaging in credit life insurance on mortgages to buying into title-related operations, such as services that inform lenders if borrowers are paying property taxes.

“If we’re going to keep the growth going, we’re going to have to get involved in some other lines of insurance business or in businesses that are related to the title insurance industry,” Foley said.

Chronology of Success

Through a series of acquisitions, Fidelity National Financial is emerging as an industry leader and a favorite among stock watchers.

1984

* Leveraged buyout: William P. Foley II and Frank P. Willey form Fidelity National Financial and purchase controlling interest in Arizona-based Fidelity National Title Insurance. Foley chosen as president and chairman; Willey vice president and general counsel.

1985

* Employee ownership: Becomes first employee-owned title insurance company after receiving permission to sell stock to employees.

1986

* Expands California presence: Purchases Stockdale Title Co. in Bakersfield.

1987

* On Wall Street: Goes public, trading on American Stock Exchange.

* Acquisition: Purchases San Francisco-based Western Title Insurance Co. for $30.3 million.

* Moves headquarters: Relocates from Scottsdale, Ariz., to Irvine.

1989

* Three-state expansion: Purchases existing operations in Oregon, Texas and New Mexico.

1990

* Acquisition: Purchases two more Texas operations.

* Receives recognition: Named among 200 best small companies in America by Forbes magazine.

1991

* Concentrates efforts: Begins performing all Southern California title work out of one regional office.

1992

* More honors: Named 25th best performing stock on American Stock Exchange for 1991 by Fortune magazine.

* Acquisitions: Purchases operations in six Northern California counties and later nearly doubles its size by acquiring Meridian Title Insurance and its subsidiary, American Title Insurance for $21.1 million. The purchase expands its base to seven states.

1993

* Record revenue: Reports revenue of $382 million with net earnings of $15.1 million.

* Stronger foothold: Purchases Security Title & Guaranty Co. in New York for $21 million.

* Cash infusion: Public stock offering brings $18 million on Wall Street.

Source: Fidelity National Financial;

Researched by JANICE L. JONES / Los Angeles Times

Los Angeles Times

Fidelity Moving Up the Ranks Irvine-based Fidelity National Financial Inc.’s main subsidiary, Fidelity National Title Insurance Co., moved from 48th place in 1981 to become the nation’s seventh largest title insurance company in 1992. Title company: 1992 market share Chicago Title Insurance: 22.3% First American Title Insurance: 17.8 Commonwealth Land Title Insurance: 15.1 Stewart Title Guaranty: 8.9 Fidelity National Title Insurance: 8.8 Lawyers Title Insurance: 8.1 Old Republic Title Insurance: 7.2 All others: 11.8 *

Profile: William P. Foley II * Title: President and CEO, Fidelity National Financial Inc. (parent of Fidelity National Title Insurance Co.) * Education: bachelor of science degree, U.S. Military Academy, West Point, 1967; MBA, Seattle University, 1970; JD, University of Washington, 1974 * Background: U.S. Air Force, 1967-1972; practiced law before joining Security Savings & Loan in Phoenix in 1981 and headed its real estate subsidiary, Land Resources Corp. In 1984, Foley and colleague Frank Willey formed Fidelity National Financial and purchased controlling interest in Fidelity National Title Insurance. *

What is Title Insurance? * Ownership protection: It insures real estate buyers against prior claims of ownership or interests in real estate. * How a policy is issued: If property record check is clear, policy is issued to buyer, protecting him or her from losses incurred if another person or agency, such as the Internal Revenue Service, is later found to have a legal right to all or part of the property. * Differs from homeowners insurance: Title insurance covers past events that affect a buyer’s ownership at the time of closing. Property insurance protects against a host of possible future claims, from guests who slip off porches to vandalism. * Required policies: Lenders insist on title insurance as a condition for funding home mortgages and loans secured by real estate. * Terms: Face amount of policy is based on property purchase price or amount of secured loan. Policy holders are covered for the amount of the policy plus the cost of defending their title against adverse claims. *

Turning a Profit

In the past six years, Fidelity National Financial’s compound annual growth rate has been 25.2% with net earnings growth of 44.3%. Revenue and earnings in millions:

*

Total revenue Net earnings 1988 $135.0 $2.5 1989 163.2 5.0 1990 183.3 5.2 1991 220.6 6.2 1992 382.0 15.1

Sources: American Land Title Assn.; Fidelity National Financial; Researched by JANICE L. JONES / Los Angeles Times