Fitch Concludes Settlement of Alleged Kickbacks Has No Impact on Ratings of Affected U.S. Title Insurers
|July 22, 2005|
CHICAGO--(BUSINESS WIRE)-- This week's report that the California Department of Insurance has settled with The First American Corporation, Fidelity National Financial, and LandAmerica Financial for allegedly paying kickbacks through captive reinsurance arrangements to several large homebuilders in exchange for a guarantee of business does not affect Fitch's ratings of these companies and removes uncertainty from the U.S. title insurance industry, according to Fitch Ratings. (See ratings below).
The combined settlement with the California Department of Insurance of $37.8 million calls for The First American Corporation to pay $20 million, Fidelity National Financial to pay $13.3 million, and LandAmerica Financial Group to pay $4.5 million.
Fitch has closely monitored the potential effects of these investigations on the U.S. title insurance market. As expected, these investigations resulted in added pressure on companies to modify business practices, and as a result, title insurance companies have ceased participating in these reinsurance arrangements. In addition, recent settlements have clarified individual company exposure including expected fines and penalties. Fitch believes the California settlement marks the pinnacle of these investigations. Fines and penalties related to these matters in other states are expected to be more modest.
California like several other states has been investigating title insurance companies' reinsurance arrangements with settlement producers (i.e. persons that are in a position to influence the selection of a title insurer, such as homebuilders) that steer business to a title insurance company. In these reinsurance arrangements, a title insurer cedes a portion of title insurance premiums to a captive reinsurer that is at least partially owned by the settlement producer who is the source of the business.
The investigations focused on potential violations of the Real Estate Settlement Procedure Act (RESPA) and state statutes that prohibit payment of referral fees for title business and considered two primary issues: whether there is any true risk transfer related to the reinsurance agreement, or whether the reinsurance premiums paid to captive reinsurers are in excess of the market rate for the risk being assumed.
Fitch rates the following:
Source: Fitch Ratings