First American Earns Name

Eyes glaze over and the brain goes numb as talk turns to the title insurance business. “It’s boring, I’ll say it for you,” chuckles Parker S. Kennedy.

But it’s not boring to Kennedy, the 48-year-old president of First American Financial Corp., nor to Wall Street investors looking for a solid company.

In fact, these are heady days for the publicly held company, which is based barely a block away from the storefront operation that Kennedy’s great-grandfather started 107 years ago in Santa Ana.

Through slow, steady growth, First American has become the nation’s largest title insurer, collecting nearly $600 million in premiums and escrow fees in the first six months this year to edge out long-time rival Chicago Title Insurance Co.

First American also has helped to smooth out its volatile earnings--typical in the industry--by building a real estate services operation that last year generated more for the bottom line than the title business.

“This is a very well-managed company and very strong,” said industry analyst Thomas O’Donnell at Smith Barney Inc. in New York.

But any euphoria at First American is tempered by the growing scandal surrounding the title and real estate industries. Widespread reports that title firms are paying kickbacks to real estate agents, brokers and lenders for referral business has led to investigations by both the state Department of Real Estate and the state Department of Insurance.

Title companies agreed last week to halt such abuses as paying Realtors cash under the table and providing such perks as car lease payments and computer equipment to obtain business referrals. Paying cash for referrals has always been unlawful, Kennedy said, but other title practices haven’t been spelled out in state and federal rules.

“There’s a lot of competition,” Kennedy said. “The rules are not clear, and people are pushing them to the edge. It’s hard to know what you can and can’t do, and there’s very little enforcement.”

Now, he said, First American has told its title officers to abide by the new rules that state Insurance Commissioner Chuck Quackenbush is expected to issue soon. “We’re going to follow the rules 100%, and we expect the whole industry to do that as well,” Kennedy said.

He intends to take an active role by joining a trade group committee that will monitor complaints and push companies to correct problems.

Undeterred by the roiling controversy, First American remains at the forefront of the industry’s twin trends of consolidation and diversification. It earns rock-solid support from Wall Street, and with good reason.

The firm has paid cash dividends to stockholders for 97 of the last 98 years, missing only in 1908. In a volatile business, it has had just five money-losing years this century.

Through everything, analyst O’Donnell said, the company has been “a survivor.”

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The title business is an antique industry, relying on a tedious county-by-county accumulation of public records about who owns what land. Much of the work in tracing ownership of real property is still done in pen and ink in more rural counties under archaic county recorder indexes labeled “Grantor” and “Grantee.”

Title insurance--which protects policyholders from losses caused by unrecorded claims--has become a modern-day necessity for home buyers. Lenders require homeowners to obtain title insurance to protect lenders as well as investors in the secondary market, where mortgage loans are sold.

“It’s an industry that needs to be speeded up,” said Charles F. Gunther, an analyst at Van Kasper & Co. in San Francisco.

And he believes that First American, with a host of other services it has built up, is leading the industry toward its changeover.

“First, they bought a tax monitoring service. Then they picked up a flood plain certification service. They acquired a mortgage credit company. They just took on a mortgage appraisal service,” Gunther said. “And they’re going to tie all these services together through electronic delivery of information.”

First American also operates a number of other real estate-related services, including a home warranty business that insures major appliances and fixtures during a new owner’s first year in a home. Each business ranks among the top three nationwide, the company says.

A few--like flood certification, which determines if homes are in flood zones, and the tax service, which notifies lenders when borrowers fail to pay property taxes--add to the closing costs of home purchases. Buyers typically pay for those services.

With First American delivering its bundle of services over computers, however, home buyers could possibly see lower title insurance costs and lower overall closing costs, Gunther said.

Kennedy also foresees lower costs. “As the business becomes more computerized, it’s changing the industry a lot,” he said. “The middleman is being cut out--like the title agent and smaller title companies.

“The secondary market wants the process of getting a loan cut down to a month--and it wants to cut $1,000 out of the closing costs,” he said.

First American is meeting that challenge, in part, by centralizing all California title information in one Orange County plant, rather than having plants in nearly every county.

The company, with 4,500 agents in the United States and eight other nations, told Wall Street this month that it plans to become the “first fully integrated, most efficient and innovative real estate information services provider in the world.”

Its group of real estate services may be the key to the company’s future. While accounting for only 12% of the company’s $1.3 billion in revenue last year, the operation accounted for 42% of its $47.6 million in pretax earnings.

Title and escrow premiums accounted 84% of the revenue but only 37% of the operating income.

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The highly fragmented industry has been consolidating throughout the 1990s.

But First American decided even earlier that it had to be a buyer to remain independent. It jumped into the national scene in 1983 when it purchased St. Paul Title Insurance Co., which gave First American 9.6% of the title market.

Since then, First American’s title business has grown internally and through smaller acquisitions. It took 20.4% of the market last year, a hair’s breadth away from Chicago Title’s 20.5% share, according to the American Land Title Assn. First American overtook Chicago Title in the first six months this year, recording $900,000 more in title premiums and escrow fees than the Chicago company, according to figures from both companies.

The huge California real estate market is still a major factor in First American’s operations, providing 23% of the company’s title revenue. But that’s down from nearly 40% only six years ago, a reflection of the company’s continued expansion in other states.

Kennedy says he has hardly noticed all the changes, partly because they have come slowly and partly because he grew up in a company that his father ran and launched on its growth plans long ago. His father, Donald P. Kennedy, remains as the company’s chairman.

Parker Kennedy allows himself one diplomatic comment about overtaking Chicago Title: “They’ve done a good job, and we’ve done a good job too.”

While acquisitions have been a big part of First American’s growth, he prefers to dwell on the company’s employees, many of whom have been with the company most of their working lives.

“We’ve just had the best of luck in cultivating and keeping really good people,” he said.

But the company’s growth will soon take it away from its home in downtown Santa Ana. Kennedy said the company has an option for the next three months to buy property across from Hutton Centre on the city’s south side, where it will build a 200,000-square-foot facility--about double its present size.

Kennedy is enthused about one aspect of the probable move: The new office will have windows. The company’s current quarters--two adjacent buildings--have only one window, and that’s in an office for an executive of the company’s First American Trust Co. subsidiary.

“The new building will have lots of windows,” Kennedy said.

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Gaining Market Share

First American Financial overtook Chicago Title Insurance during the first six months of 1996 to become the largest title company in the U.S. Here’s how First American had been closing the gap. Percent of national market share:

Chicago Title Insurance

1991: 24.8%

1992: 22.3%

1993: 21.3%

1994: 20.2%

1995: 20.5%

First American Financial

1991: 16.2%

1992: 17.8%

1993: 19.2%

1994: 19.5

1995: 20.4

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First at Home Too

First American already ranks first in California and is either first or second in 32 other states and the District of Columbia. California market share, 1995:

First American Financial: 25%

Fidelity National Title: 22%

Chicago Title: 15%

Stewart Title: 10%

Nations Title: 9%

All others: 19%

* Source: Market share data based on gross title fees provided by the American Land Title Assn.

* Researched by JANICE L. JONES/Los Angeles Times