• Increase Text Icon
  • Decrease Text Icon
  • Email Icon
  • Print this page
You are here: Home . orders . co040405

Commissioner's Order No.04-0405

No. 04-0405
Official Order
Commissioner of Insurance
of the
State of Texas
Austin,Texas
Date:April 23, 2004


Subject Considered:
In the Matter of the 2002
TEXAS TITLE INSURANCE BIENNIAL RATE HEARING

General remarks and official action taken:

On this day came on for consideration by the Commissioner of Insurance (Commissioner) the matter of determining the premium rates for title insurance and other matters with rate implications pursuant to TEX. INS. CODE ANN. art. 9.01 et seq. The Commissioner has jurisdiction over these matters pursuant to TEX. INS. CODE ANN. §31.007 and arts. 9.01, 9.02, 9.07, and 9.21 and pursuant to the Texas Administrative Code, Title 28, Chapter 9.

The Texas Department of Insurance (TDI) issued a Notice of Call for Issues Related to the 2002 Biennial Title Hearing which was published at 27 TexReg 8329 on August 30, 2002. Any association, any title insurance company, any title agent and any member of the public that wished to request that any matter or subject, in addition to the rates for title insurance, be considered at the biennial hearing was instructed to provide a detailed description of the matter or subject to TDI by September 30, 2002. Eighteen matters with rate implications were submitted for consideration prior to the ratemaking phase of the biennial hearing and were certified as matters having rate implications to be considered at the ratemaking phase of the biennial hearing. Texas Land Title Association (TLTA) submitted Agenda Item 2002-38 to adopt a Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates) for the next calendar year and subsequent years until changed by subsequent order of the Commissioner; Agenda Item 2002-39 to amend Rate Rule R-5, Simultaneous Issuance of Owner and Mortgagee Policies; Agenda Item 2002-40 to amend Rate Rule R-15, Owner Policy Endorsement; and Agenda Item 2002-41 to amend Rate Rule R-27, Texas Residential Limited Coverage Junior Mortgagee Policy. Stewart Title Guaranty Company (Stewart) submitted Agenda Item 2002-42 to adopt a new rate rule for the proposed new Zoning Endorsement - Unimproved Land and the proposed new Zoning Endorsement - Completed Structure; Agenda Item 2002-43 to adopt a new rate rule for the proposed new Access Endorsement; Agenda Item 2002-44 to adopt a new rate rule for the proposed new Restrictions, Encroachments, Minerals Endorsement; Agenda Item 2002-45 to adopt a new rate rule for the proposed new Non-Imputation Endorsement; Agenda Item 2002-46 to adopt a new rate rule for the proposed new Contiguity Endorsement; and Agenda Item 2002-47 to adopt a new rate rule for the proposed new Additional Insured Endorsement. Fidelity National Title Insurance Company/Alamo Title Insurance and Chicago Title Insurance Company/Security Union Title Insurance Company/Ticor Title Insurance Company (Fidelity) submitted Agenda Item 2002-48 to amend Rate Rule R-11, Mortgagee Policy Endorsement, to establish a premium for the proposed new Down Date Endorsement. Gary P. and Cathy L. Lancaster (Lancasters) submitted Agenda Item 2002-49 to amend Procedural Rule P-23, Division of Premiums between Title Insurance Agents and Title Insurance Companies; Agenda Item 2002-50 to delete Rate Rule R-16, Amendment of Exception as to Area, Boundaries, etc.; Agenda Item 2002-51 to amend Rate Rule R-11, Mortgagee Policy Endorsement; Agenda Item 2002-52 to amend Rate Rule R-8, Mortgagee Policy, on a Loan to Take Up, Renew, Extend or Satisfy an Existing Lien(s); Agenda Item 2002-53 to adopt a new procedural rule regarding New Home Transaction; and Agenda Item 2002-54 to adopt a new rate rule for a New Home Rate. The TDI Title Division staff (Title Division staff) submitted Agenda Item 2002-55 to amend Rate Rule R-8, Mortgagee Policy, on a Loan to Take Up, Renew, Extend or Satisfy an Existing Lien(s).

TDI issued a Notice of Public Hearing on October 23, 2002, and it was published at 27 TexReg 10482, on November 1, 2002. Docket No. 2537, the rulemaking phase, was set for hearing on December 31, 2002, at 9:00 a.m., and Docket No. 2538, the ratemaking phase, was set for hearing on December 31, 2002, at 1:30 p.m.

Stewart; Lancasters;TLTA; Texas Association of Abstracters and Title Insurance Agents (TAATA); Independent Metropolitan Title Insurance Agents of Texas (Metros); Sierra Title Company, Inc., Metro Title Company, Inc. d/b/a Sierra Title of Cameron and Willacy Counties, Sierra Title of North Texas, Inc., Sierra Title of Corpus Christi, L.L.C., and Sierra Title of Hidalgo County, Inc. (as one party)(Sierra); Texas Society of Professional Surveyors (TSPS); Title Insurance Company of America (TICA); and John Phipps (Phipps) filed motions for admission as parties. Department of Insurance staff (TDI staff) and the Office of Public Insurance Counsel (OPIC) filed notices of intervention indicating that they would appear in the proceedings.

By letter dated October 28, 2002, Lancasters filed a Written Request for the State Office of Administrative Hearings (SOAH) to conduct the ratemaking phase of the 2002 Biennial Title Hearing pursuant to TEX. INS. CODE ANN. art. 9.07(c). The Lancasters also filed Motions Objecting to: the Characterization of Certain Agenda Items as Rulemaking Matters, to Consideration of Certain Agenda Items, and to Admitting TLTA as a Party. TLTA filed Motions for Continuance of the rulemaking and ratemaking phases of the 2002 Biennial Title Hearing with TDI and SOAH, respectively. Stewart and Metros filed responses in support of the TLTA Motions for Continuance, and OPIC filed its response stating no objection to the TLTA Motions. Metros filed a Motion to Sever certain of the agenda items and for a separate hearing on those certain agenda items.

TDI Prehearing Order No.1 issued on November 27, 2002, denied the Lancasters Motions Objecting to the Characterization of Certain Agenda Items as Rulemaking Matters and to Consideration of certain Agenda Items and suspended action on the Lancasters Motion Objecting to Admitting TLTA as a Party and on determining hearing dates and scheduling, which were transferred to SOAH. SOAH Prehearing Order No. 1 issued on December 10, 2002, set a prehearing conference to address topics to ensure the orderly progression of the ratemaking phase of the 2002 Biennial Title Hearing. TDI Prehearing Order No. 2 issued on December 16, 2002,granted TLTA's Motion for Continuance of the rulemaking phase of the 2002 Biennial Title Hearing and ordered the rulemaking phase continued to a date after the conclusion of the 78th Session of the Texas Legislature and also denied Metros' Motion to Sever. SOAH Prehearing Order No. 2 issued on December 23, 2002 set a schedule for filing motions to appear as a party and also noted that the following motions had been filed and received by SOAH as of December 19, 2002: Motion Objecting to Admitting the TLTA as a party, filed by the Lancasters; Motion for Continuance, filed by TLTA; and Motion Relating to Prehearing Conference, filed by TAATA. SOAH Prehearing Order No. 3 issued on March 3, 2003,found that the Lancasters' Motion Objecting to Admitting TLTA as a Party did not state a basis upon which to deny party status to TLTA and further admitted all parties who filed motions for admission as a party.

Accordingly, SOAH admitted as parties in the ratemaking phase the following: TDI staff represented by Catherine Reyer; the Lancasters represented by Stephen A. Hester, Jr.; Stewart represented by Catherine Brown Fryer; TLTA represented by Thomas A. Rutledge; TAATA represented by Bert V. Massey, II; Metros represented by Will D. Davis; Sierra represented by John Robert King; TSPS represented by Mark J. Hanna; TICA represented by G. Bickford Shaw, who was later substituted as counsel by Mark J. Hanna by TDI Prehearing Order No. 3 granting substitution issued on September 8, 2003 in Docket No. 2537; John Phipps represented himself; and OPIC represented by Rod Bordelon and Erin C. Martens.

By letter dated April 10, 2003, the Lancasters' filed a Withdrawal of Written Request and Motion to Transfer Docket to TDI so that the ratemaking phase of the 2002 Biennial Title Hearing could be conducted by the Commissioner pursuant to TEX. INS. CODE ANN. art. 9.07I. SOAH Prehearing Order No. 4 issued on April 23, 2003, extended the time for filing objections to the motion to withdraw the ratemaking phase of the 2002 Biennial Title Hearing from the docket of SOAH. TAATA joined in and supported the motion of the Lancasters to remove the case from the docket of SOAH, and Phipps filed objections to the Lancasters withdrawal of written request and motion to transfer docket. TLTA and Metros filed responses to Phipps, and Metros also filed its support of the Lancasters written request, and Phipps filed objections to the responses. SOAH Prehearing Order No. 5 issued on May 29, 2003, granted the motion of the Lancasters and ordered that the 2002 Texas Title Insurance Biennial Rate Hearing be transferred to TDI and the SOAH docket be closed.

On August 13, 2003, a Notice of Reconvening of 2002 Texas Title Insurance Biennial Hearing was issued and, on August 29, 2003, was published at 28 TexReg 7495. The notice set the rulemaking phase for September 24, 2003, and the ratemaking phase for December 15, 2003. No party objected to this notice.

The hearing on the rulemaking phase was held on September 24, 2003. Commissioner's Order No. 03-1059, dated October 29, 2003, denied or otherwise disposed of rules and forms considered under the rulemaking phase, except for agenda items withdrawn by their respective submitters. The Commissioner Order denying Stewart's Agenda Items 2002-4, 2002-5, 2002-6, and 2002-7 rendered moot Agenda Item 2002-42 in the ratemaking phase. The Lancasters withdrew Agenda Items 2002-49, 2002-50, 2002-52, 2002-53, and 2002-54, by letter dated April 10, 2003, and withdrew Agenda Item 2002-51 by letter dated July 24, 2003; however, Agenda Item 2002-51 remained for consideration, having been amended by TLTA by letter dated May 2, 2003, which was before the Lancasters' withdrawal of same. Fidelity withdrew Agenda Item 2002-48 in the ratemaking phase by letter dated September 18, 2003. By letter dated November 14, 2003, Stewart filed proposed amendments to Agenda Items 2002-45 and 2002-47.

TDI Prehearing Order No. 4 issued on October 30, 2003, set a schedule for the prefiling of testimony and each party's statement of position. TDI Prehearing Order No. 5 issued on December 4, 2003, set forth the order of presentation of argument and evidence by the parties. By letter dated December 5, 2003, Will D. Davis gave notice of a scheduling conflict and the necessity for his withdrawal as counsel for Metros in the ratemaking phase of the 2002 Biennial Title Hearing and supplemented the notice with agreements or expressions of no opposition by all the other parties except Phipps to continuing the premium division between agents and underwriters at 85% for agents and 15% for underwriters.

By letter dated November 29, 2003, the Lancasters filed requests for issuance of subpoenas and subpoenas duces tecum for James A. Johnson, Glenn H. Clements, and Jack Rattikin, III. Counsel for these individuals and TLTA and Stewart filed either objections or motions to quash these subpoenas and subpoenas duces tecum. A hearing on the motions to quash was held prior to the scheduled ratemaking phase of the 2002 Biennial Title Hearing on December 15, 2003, and at the conclusion of the hearing, a motion for continuance was requested and filed by the Lancasters. TDI Prehearing Orders Nos. 6 and 7 issued on December 15, 2003, granted the motions to quash and denied the motion for continuance.

On December 15, 2003, the hearing on the merits of the ratemaking phase, presided over by Commissioner Jose Montemayor, convened in Room 100, 333 Guadalupe, Austin, Texas and continued through December 16, 2003. The following Agenda Items were considered in this hearing: Agenda Item 2002-38 to adopt a Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates) for the next calendar year and subsequent years until changed by subsequent order of the Commissioner; Agenda Item 2002-39 to amend Rate Rule R-5, Simultaneous Issuance of Owner and Mortgagee Policies; Agenda Item 2002-40 to amend Rate Rule R-15, Owner Policy Endorsement; Agenda Item 2002-41 to amend Rate Rule R-27, Texas Residential Limited Coverage Junior Mortgagee Policy; Agenda Item 2002-43 to adopt a new rate rule for the proposed new Access Endorsement; Agenda Item 2002-44 to adopt a new rate rule for the proposed new Restrictions, Encroachments, Minerals Endorsement; Agenda Item 2002-45 to adopt a new rate rule for the proposed new Non-Imputation Endorsement; Agenda Item 2002-46 to adopt a new rate rule for the proposed new Contiguity Endorsement; Agenda Item 2002-47 to adopt a new rate rule for the proposed new Additional Insured Endorsement; Agenda Item 2002-51 to amend Rate Rule R-11, Mortgagee Policy Endorsement; and Agenda Item 2002-55 to amend Rate Rule R-8, Mortgagee Policy, on a Loan to Take Up, Renew, Extend or Satisfy an Existing Lien(s). Preliminary matters considered included an opportunity for public comment and a discussion of the pendency of the rulemaking portion of the title biennial hearing. No one at the hearing expressed a desire to make public comment. Regarding the status of the rulemaking portion of the title biennial hearing, the adoption of the rules and forms was postponed until a separate hearing could be held on Agenda Item 2002-37.

Following opening remarks by the parties, presentation of the evidence followed. Stewart presented its case through the testimony of Dr. Ted C. Jones, Mr. John F. Rothermel, III, and Mr. James L. Gosdin; TLTA presented its case through the testimony of Dr. Nelson R. Lipshutz, Dr. David Appel, and Dr. George William Berry; OPIC presented its case through the testimony of Mr. Allan Schwartz; and TDI staff presented its case through the testimony of Dr. Mark Crawshaw. TSPS, TICA, Lancasters, TAATA, Phipps, and Sierra presented no testimony at the hearing. Will D. Davis, counsel for Metros, was excused. On December 16, 2003, the Commissioner adjourned the hearing on the merits and the record closed.

The Commissioner has the responsibility under TEX. INS CODE ANN. art. 9.07(b) to fix and promulgate the premium rates to be charged by title insurance companies and title insurance agents for policies of title insurance. The prescribed rates are to be reasonable to the public and nonconfiscatory as to the title insurance companies and title insurance agents. In support of his decision, the Commissioner adopts the following findings of fact and conclusions of law.

FINDINGS OF FACT

Procedural Matters

1. On October 23, 2002, the Texas Department of Insurance (TDI) issued its Notice of Public Hearing in this matter, and it was published at 27 TexReg 10482(November 1, 2002).

2. Both phases of the 2002 Texas Title Insurance Biennial Hearing were reconvened after the conclusion of the 78 th Session of the Texas Legislature.

3. The following entities were admitted as parties in the rate hearing: Stewart Title Guaranty Company (Stewart; Gary P. and Cathy L. Lancaster (Lancasters); Texas Land Title Association (TLTA); Texas Association of Abstracters and Title Insurance Agents (TAATA); Independent Metropolitan Title Insurance Agents of Texas (Metros); Sierra Title Company, Inc., Metro Title Company, Inc. d/b/a Sierra Title of Cameron and Willacy Counties, Sierra Title of North Texas, Inc., Sierra Title of Corpus Christi, L.L.C., and Sierra Title of Hidalgo County, Inc. (as one party) (Sierra); Texas Society of Professional Surveyors(TSPS); Title Insurance Company of America (TICA); John Phipps (Phipps); Department of Insurance staff (TDI staff); and the Office of Public Insurance Counsel(OPIC).

4. The rate hearing was convened on December 15, 2003, and adjourned on December 16, 2003.

5. The rate hearing was held before the Texas Commissioner of Insurance, Jose Montemayor.

Losses and Loss Adjustment Expenses (LAE)

6. OPIC selected a loss and LAE ratio of 2.5 percent, prior to the consideration of catastrophes, from a series of ten averages and medians based on past calendar year on-level loss and LAE ratios for periods ranging from one to 21 years, as well as a regression over the most recent 21 years against a binary variable that has a value of one in the period 1986 - 1992 and zero for other years.

7. The losses and LAE underlying OPIC's selected ratio described in Finding No. 6 included losses and LAE reported by the agent and underwriter groups.

8. The average and median loss and LAE ratios described in Finding No. 6 ranged from 2.2 percent to 5.0 percent; while the regression produced fitted values of 9.9 percent for the 1986 - 1992 years and 2.5 percent for other years.

9. OPIC added a one percentage point provision for catastrophes producing a final selected loss and LAE ratio of 3.5 percent.

10.TDI staff reviewed calendar year loss and LAE ratios over the 14 year period 1989 - 2002, which produced an average of 2.4 percent for 1995 - 2002 and an average of 4.4 percent over the full 14 years.

11. The losses and LAE underlying TDI staff ratios described in Finding No. 10 included losses and LAE from the agents and underwriter groups.

12.TDI staff selected a final loss and LAE provision of 3.9 percent, including a one percentage point provision for catastrophes, based on the loss and LAE ranges and averages described in Finding No. 10 and on Commissioner's Order No. 02-0901.

13. TLTA directly projected a loss and LAE ratio only for underwriters; the losses and LAE for agents were included in its projection of agents' expenses.

14. TLTA calculated loss and LAE ratios for underwriters on a policy year basis using what were essentially normal actuarial loss development techniques.

15. The resulting developed ultimate loss and LAE ratios for the nine-year period 1994 - 2002 ranged from 1.89 percent to 4.13 percent, with an arithmetic average of 2.8 percent.

16. TLTA noted that there was a marked upward trend in the loss and LAE ratios, so it fitted a regression line to the ratios, producing a projected 2004 loss and LAE ratio of 4.58 percent.

17. TLTA selected a final 5.58 percent loss and LAE ratio by including a one percentage point provision for catastrophes.

18. OPIC, TDI staff and TLTA used calendar year losses and LAE for agents, which represent all claims activity, including payments and changes in reserves, that takes place during a given calendar year, regardless of when the policy giving rise to the claims was written.

19. The developed ultimate policy year losses and LAE for underwriters used by TLTA represent the costs of claims arising from policies that were written during a given annual period, regardless of when the claims are reported or paid.

20. It is reasonable to use developed to ultimate policy year losses and LAE to calculate the loss and LAE ratio in the rates if such data is available, since it ties losses and LAE to a particular block of policies and is not subject to potential distortions such as changing volumes of business.

21. A disadvantage of using developed to ultimate policy year losses and LAE is that the most recent years are not mature, with many claims not yet settled and many or most claims not even known, and actual ultimate policy year losses and LAE could vary substantially from the projected values.

22. A reasonable way to temper possible fluctuations in the projections, especially for the most recent policy years, is to utilize an average over a number of years.

23. Policy year data for agents' losses and LAE was not available from title statistical data reported to TDI.

24.Based on Finding Nos. 18 - 23, it is reasonable to base the loss and LAE ratio on the sum of the average of TLTA's projected ultimate underwriter policy year losses and LAE and on the calendar year incurred losses and LAE reported by agents.

25.A reasonable provision for loss and LAE in the rates is 4.0 percent, including a one percentage point loading for catastrophes.

Expenses and Premiums

Data

26. There were certain differences in the data elements contained in, and adjustments made to, the expense data used by the parties.

27. TLTA included losses and LAE incurred by agents in the expenses attributable to agents, but did not include losses and LAE incurred by underwriters in the expenses attributable to underwriters; both OPIC and TDI staff excluded all losses and LAE from expenses.

28.Based on Finding No. 24, it is reasonable to exclude all loss and LAE from expenses in order to avoid double counting the agents' losses and LAE.

29.OPIC and TDI staff also adjusted the premiums and expenses they used in their projections to eliminate the double counting of income and expense arising when underwriters or agents pay another agent for title services.

30.OPIC only made the adjustment described in Finding No. 29 for the eight years 1995 - 2002; while TDI staff made the adjustment for the 14 years 1989 - 2002.

31. The transfer payments described in Finding Nos. 29 - 30 overstated the indicated experience expense ratios, and the adjustments proposed by TDI staff to account for these payments are reasonable.

32. Historically, the parties to the title rate proceedings have subtracted tax certificate and recording fee income from gross title income and tax certificate and recording fee costs from title expenses. This was done under the assumption that the amounts were straight pass-throughs.

33. TDI staff noted that the income due to tax certificates and recording fees have generally exceeded the associated costs, creating a source of income to title agents not otherwise reflected in the ratemaking process.

34. TDI staff reflected this excess of income over costs by multiplying the final projected expense ratios by a factor of .998.

35. The adjustment described in Finding No. 34 is reasonable and should be used.

36. OPIC and TDI staff included the change in the statutory premium reserves (sometimes also called the change in the unearned premium reserve) held by underwriters as an expense item in calculating the expenses to be included in the rate.

37. TEX. INS. CODE ANN. art. 9.16, §§(6) and (7), states that the purpose of the statutory premium reserve is to provide for adverse development on known claims and for incurred but not reported claims.

38. The projections to ultimate of policy year losses and LAE described in Finding Nos. 14 - 25 would include provisions for adverse development on known claims and the costs of incurred but not reported claims.

39. To use both projected ultimate policy year losses and LAE and the change in the statutory premium reserve for the development of premium rates would be double-counting a portion of the provisions for adverse development on known claims and the costs of incurred but not reported claims.

40. It is reasonable to exclude the change in the statutory premium reserve from expenses in calculating the rate.

41. In addition to the differences in what constituted expenses and the calculation of those expenses, there were a number of unexplained differences in the expense and premium data used by each of the parties, which may be due to errors in compiling their data.

42. It would be improper to knowingly use incorrect expenses or premiums to project rate needs.

43. Instances where the underlying expenses, adjusted to a common basis, differed for 1989-2002 were identified.

44. Because the underlying data summaries from statistical reports to TDI for the years prior to 1998 are not in the record of this proceeding, it is not possible from this record to determine the correct underlying expenses for years prior to 1998.

45. For 1998 - 2002, the statistical data in the record has been used to adjust the expense figures.

46. For years prior to 1998, it is reasonable to assume that it is unlikely that all parties would make the same errors in compiling the data.

47. It is therefore reasonable to assume that, where two parties have used the same underlying expenses or premiums and the third differed, the same underlying expenses or premiums used by two parties are the correct expenses or premiums. Where none of the parties agree, it is reasonable to use the underlying expenses or premiums of the party in the middle.

48. It is reasonable in this proceeding to base rate calculations on the underlying expenses where all parties agreed on the underlying expenses or premiums, the underlying expenses or premiums of the two parties that agreed where the third disagreed, and the middle expenses or premiums where all three parties disagreed.

Proposed Methodologies

49. OPIC selected expense ratios, excluding all loss and LAE, from a series of ten averages and medians based on past on-level expense ratios for periods ranging from one to 21 years, as well as two regressions against the on-level expense ratios from the most recent 21 years.

50. The first regression model described in Finding No. 49 regressed the expense ratios against a time variable (the year) and a dummy variable that increased in increments of one from a value of one in 1982 to a value of nine in 1990 and was set equal to ten thereafter.

51. The second regression model described in Finding No. 49 regressed the expense ratios against the numbers of owner and mortgagee policies written by underwriters and the dummy variable described in Finding No. 50.

52. The regression model described in Finding No. 50 produced an expense ratio of 85.9% while the regression model described in Finding No. 51 produced an expense ratio of 88.9%. In arriving at its final rate change recommendation OPIC effectively averaged these to produce an expense ratio of 87.4%, prior to expense limitations on account of reverse competition.

53.TLTA projected expense dollars, including agents' incurred losses and LAE, separately for four groups: underwriters, direct operations, affiliated agents, and independent agents.

54. TLTA's projections were based on regressions over the most recent 14 years of each group's inflation-adjusted expenses against the corresponding numbers of owners and mortgagee policies written by each group and a dummy variable.

55. TLTA's adjustment for inflation described in Finding No. 54 was accomplished by multiplying each year's expenses for each group by a factor derived from the Gross Domestic Product (GDP) deflator to bring them to 2004 cost levels.

56. In order to account for a change in the definition of affiliated agents for the reporting of experience that became effective in 1997, the dummy variable utilized by TLTA in its regressions had a value of zero for years prior to 1997 and a value of one for 1997 and thereafter.

57. TLTA's projected expense dollars were based on an assumed 986,745 policies, a figure derived from the number of policies written by underwriters in 2002 reduced by approximately 12.5 percent, the reduction being based on an assumed downturn in refinancing activity.

58. To get an indicated expense ratio, TLTA's projected expense dollars described in Finding Nos. 53 - 57 were divided by TLTA's projected premiums based on the projected 986,745 policies and an assumed average rate selected from ten years of average premiums at current rate levels adjusted to reflect a 2004 estimated average real estate value level.

59. TLTA's average projected expense ratio, including agents' losses and LAE, was 83.8 percent.

60. TDI staff projected expenses, excluding all losses and LAE,for underwriters and agents combined, using four regression methodologies.

61. TDI staff's first methodology regressed the 1989 through 2002 on-level expense ratios against the corresponding numbers of "weighted" policies written by agents. The numbers of weighted policies were calculated by adding 30 percent of the numbers of other than owner and mortgagee policies to the numbers of owner and mortgagee policies.

62. TDI staff's second methodology regressed the 1989 through 2002 on-level expense ratios against the corresponding on-level premiums.

63. TDI staff's third methodology regressed the 1989 through 2002 on-level expense ratios against the corresponding numbers of owner and mortgagee policies written by agents.

64. TDI staff's fourth methodology was similar to that described in Finding No. 63 except that the numbers of owner and mortgagee policies written by underwriters were used.

65. The 2001 and 2002 actual expense ratios were adjusted to reflect differences between the numbers of policies or premiums in those years and those anticipated for 2004, using the coefficients from the regressions.

66. The anticipated numbers of policies and the anticipated dollars of premium for 2004 referred to in Finding No. 65 were effectively averages of the actual numbers of policies and the actual premiums written in 2001 and 2002.

67. TDI staff did not reflect likely increases in premiums due to increases in property values between the 2001 - 2002 period and 2004 in its calculations in the case of the regression described in Finding No. 62.

68. TLTA assumed a 3.4 percent annual increase in premiums due to increases in property values in its calculations.

69. It is reasonable to assume a 3.4 percent per year increase in premiums due to increases in property values between 2001-2002 and 2004 in applying the TDI model that uses on-level premiums as the independent variable.

70. TDI staff further adjusted the projected on-level expense ratios referred to in Finding No. 65 to account for the excess of tax certificate and recording income over costs as described in Finding Nos. 32 - 35 and to account for an apparent misallocation of costs between title and non-title activities in 2001 and 2002 in situations where some agents showed escrow and/or non-policy abstract income with little or no corresponding expenses, title expenses with no title income, and title expenses greatly in excess of title income.

71. TDI staff's adjustment for the apparent misallocation of costs described in Finding No. 70 is reasonable and should be used.

72. In oral testimony TDI staff indicated that there had been an error in the expenses used in the regressions described in Finding Nos. 61 - 64, but only provided recalculations for the first two regressions (those described in Findings Nos. 61 and 62).

73. The average final corrected expense ratios were 87.8 percent in the case of projections based on weighted policies and 87.9 percent in the case of projections based on on-level premiums.

74. The corrected expense ratios in Finding No. 73 are 0.7 and 0.8 percentage points less, respectively, than uncorrected expense ratios contained in TDI staff's pre-filed testimony. This suggests that the corrected projected expense ratios would be approximately 87.8 percent in the case of both of the regressions based on the numbers of owner and mortgagee policies written by agents and underwriters (as described in Finding Nos. 63 and 64).

Final Projected Expense Ratio

75. All of the parties effectively based their expense projections on regression analyses.

76. The determination of the final 2004 expense ratios in several of the proposed methodologies depend heavily on the anticipated numbers of premiums or policies to be written in that year.

77. Both OPIC and TDI staff used the average of the premiums or numbers of policies written in 2001 and 2002 as the anticipated values in 2004 as the bases of most of their projections (one of the OPIC projections used neither policies nor premiums); this is the approach that has been adopted in previous orders.

78. Stewart and TLTA asserted that there would likely be a sharp downturn in refinancings in 2004, which would reduce the premiums and numbers of polices written below the levels seen in 2001 and 2002. TLTA predicted 986,745 owner and mortgagee policies for 2004, approximately seven percent below the average written by underwriters in 2001 and 2002 while the corresponding premiums were projected to be approximately four percent less; Stewart projected even lower premiums.

79. Similar downturn predictions have been made in previous years, but the downturn predictions have never been borne out when compared to the actual experience.

80. With interest rates at very low levels and the possibility of an economic upturn, it is not clear that there will be a reduction in home sales and refinancings during 2004, at least from 2001 - 2002 levels.

81. There is no persuasive evidence in the record that the numbers of policies written in the year 2004 will decrease substantially from the levels seen in 2001 and 2002, especially bearing in mind that based on evidence presented by TLTA, it is anticipated that that the volumes of policies and premiums are likely to be substantially higher than 2001/2002 levels in 2003.

82. It is reasonable to use the average number of policies written in 2001 and 2002 or the average on-level premiums written in 2001 and 2002, adjusted to reflect likely changes in property values, as an estimate of the corresponding writings for 2004.

83. In its regressions, TLTA used the numbers of policies written by underwriters to regress underwriter's expenses, and the numbers of policies written by each category of agents to regress their respective expenses.

84. TLTA effectively used the numbers of policies written by underwriters in calculating its final projected expenses, including those of agents.

85. The numbers of policies written by agents in any calendar year differ from those written by underwriters, due to permissible delays in reporting title transactions to underwriters.

86. Based on Finding No. 82, it is reasonable to use the average number of owner and mortgagee policies written in 2001 and 2002 by underwriters to calculate likely 2004 expenses for underwriters, and the average number of policies written by each category of agent in 2001 and 2002 to calculate likely 2004 expenses for each category of agent under TLTA's methodology. It is also reasonable to calculate the expected dollars of loss and LAE by multiplying the 4.0 percent expected loss and LAE ratio described in Finding No. 25 by premiums based on the average number of owner and mortgagee policies written by underwriters in 2001 and 2002. It is also reasonable to calculate total premiums as the sum of 15 percent of premiums based on the average number of owner and mortgagee policies written by underwriters in 2001 and 2002 and 85 percent of premiums based on the average number of owner and mortgagee policies written by agents in 2001 and 2002.

87. Based on Finding Nos. 28, 31, 35, 40, 48, 52, 69, 71, 82, and 86, the projected expense ratio based on OPIC's methodology would be 87.2 percent, that based on TLTA's methodology would be 81.5 percent, and those based on TDI staff's methodologies would range from 86.4 to 87.2 percent, depending on the regression model used.

Reverse Competition and the Reasonableness of Expenses

88. OPIC testified that reverse competition in the title insurance marketplace results in excessive and inappropriate expenses which should be removed from historical expenses in determining rates.

89. OPIC recommended reducing final projected 2004 expenses by 2.5 percent to account for the impact of reverse competition.

90. Although OPIC's testimony regarding the presence and general impact of reverse competition is persuasive, its specific recommendation of a 2.5 percent expense reduction is not supported by sufficient credible evidence.

91. TDI staff testified that, because of the potential for reverse competition, it cannot be automatically assumed that the historical expenses reported by the agents and underwriters reflect necessary and reasonable expenses.

92. TDI staff proposed a 2.0 percent decrease in projected expenses to account for reverse competition, based on an observed increase in advertising costs, the so-called "Plano effect", and judgment.

93. Although TDI staff's testimony regarding the presence and general impact of reverse competition is persuasive, its specific recommendation of a 2.0 percent expense reduction is not supported by sufficient credible evidence.

94. TLTA made no adjustment for reverse competition in its rate recommendation.

95. TLTA's statistical analyses, which purported to demonstrate that there is no expense-increasing impact from reverse competition, tested a limited number of variables and/or hypotheses, and are neither conclusive nor persuasive.

96. The evidence in the record supports a conclusion that reverse competition exists and has increased title insurance expenses, but does not adequately support any specific adjustment to reported expenses.

Provision for Profit

Cost of Capital

97.Only OPIC and TLTA provided analyses specifically directed at the cost of capital of the title insurance industry.

98. OPIC recommended a 9.1 percent after-tax return on equity, based upon capital asset pricing model (CAPM) and discounted cash flow (DCF) analyses of five title and 44 property and casualty insurers combined. This compares to a recommended 10.7 percent after-tax return on equity in the previous title rate case.

99. TLTA disputed OPIC's cost of capital analysis because it included only insurers, ignoring other firms with similar business risk characteristics, relied on an inappropriately low, selected risk premium in the CAPM analysis, and overweighted the results for property and casualty insurers by combining property and casualty insurers and title insurers in a single combined sample.

100. TLTA recommended an 11.6 percent after-tax return on equity, based upon the results of DCF and CAPM analyses. It performed separate analyses on five title insurers, 26 property and casualty insurers, and 67 Value Line small and mid cap diversified financial service firms. This compares to a recommended 12.5 percent after-tax return on equity in the previous title rate case.

101. OPIC disputed TLTA's cost of capital analysis because it relied entirely upon arithmetic as opposed to geometric means in its CAPM analyses, considered only historical data to estimate risk premiums, used excessive growth rates in its DCF analysis for title insurers, did not adjust for debt in the capital structure of insurers and insurer holding companies, and included a group of business firms having no demonstrated relationship to title insurance.

102. It is reasonable to give some weight to geometric means in a CAPM analysis.

103. TLTA's CAPM results are overstated due to its exclusive reliance on arithmetic means.

104. OPIC selected a risk premium of 6.0 percent for use in its CAPM analysis but a higher risk premium would also have been reasonable based on OPIC's evidence.

105. While the record shows that there are points of similarity between property and casualty insurers and title insurers, and thus property and casualty insurer indications may provide helpful insight into necessary returns on equity for title insurers, it also shows that there are significant differences which makes the direct application of indicated necessary returns on equity from one group to the other inappropriate.

106. OPIC's use of a combined sample of five title insurers and 44 property and casualty insurers in its return on equity analysis effectively gives the property and casualty segment nine times the weight given to the title insurer segment, and may therefore produce inappropriate indications for title insurers.

107. OPIC's indicated target rate of return on equity should therefore be given less weight.

108. The portion of TLTA's cost of capital analysis related to diversified financial service firms is of limited demonstrated relevance in determining title insurers' cost of capital, and should be given little weight.

109.TLTA's DCF result for title insurers reflects a growth rate which is excessive and unreasonable, and should be given less weight than the corresponding CAPM analysis.

110.OPIC made no explicit adjustment for the effect of debt held by title underwriters and their holding companies in its cost of capital analysis, although it may have affected its judgments in arriving at the various assumptions it made.

111. TLTA's cost of capital estimate was not adjusted to reflect the debt in the capital structure of insurers and insurer holding companies. If this were reflected, the indicated cost of capital would decrease. The amount of the decrease cannot be determined from the record.

112.Were adjustments consistent with the foregoing findings made, a reasonable cost of capital would be approximately 10.5 percent.

113. A reasonable cost of capital for use in this proceeding is 10.5 percent.

Profit Provision

114. TLTA used a calendar year accounting model to derive a profit provision for underwriters (including direct operations and affiliated agents) of 8.56 percent based on its recommended 11.6 percent rate of return.

115. TLTA derived a profit provision for independent title agents by giving an 85 percent weight to reported profit margins for agents in other lines of insurance and a 15 percent weight to reported profit margins for attorneys. The resulting profit margin for independent title insurance agents was 9.50 percent.

116. By giving 51.01 percent weight to its underwriter (including subsidiary agents) margin and 48.99 percent weight to its non-subsidiary agent margin, TLTA derived a combined profit provision for Texas title insurance of 9.02 percent.

117. Substituting a target rate of return on capital of 10.5 percent and no other changes, TLTA's model produces a profit provision of 7.04 percent for underwriters and a combined profit provision for Texas title insurance of 8.25 percent.

118. OPIC used a calendar year accounting model to derive a profit provision of 3.7 percent for underwriters and agents, based on its recommended 9.1 percent return on net worth.

119. Substituting a target rate of return on capital of 10.5 percent and no other changes, OPIC's profit model produces a profit provision of 4.9 percent.

120. Both TLTA and OPIC used averages of the past investment returns of the title insurance industry to derive the estimated investment returns in their profit models. TLTA estimated the after-tax investment return to be 5.17 percent of equity, while OPIC estimated the pre-tax investment return to be 6.5 percent of equity. Based on OPIC's assumed 30 percent tax rate, the OPIC after-tax investment return would be 4.6 percent.

121. It would be reasonable to give some consideration to current yields, as interest rates are presently at very low levels.

122. Based on Finding No. 121, 4.5 percent is a reasonable after-tax investment return to be used in TLTA's model.

123. OPIC's selected 30 percent tax rate was used to adjust its total target after-tax rate of return on equity to a pre-tax level.

124. A portion of the total return of title insurers comes from investment income and capital gains or losses while the remainder comes from the underwriting profit margin in the rates. Each is generally taxed at different rates, so the OPIC tax rate is presumably a blended tax rate.

125. TLTA's analysis of the effective tax on investment returns of title insurers over the seven-year period 1996 to 2002 was approximately 25.2 percent. Since any underwriting profits would be subject to a 35 percent tax rate and both OPIC and TLTA had in the neighborhood of half the necessary income coming from each source of income, the 30 percent tax rate used by OPIC appears reasonable for its intended purpose.

126. To determine a pre-tax investment income yield, however, it is more reasonable to use a tax rate specifically applicable to investment income, or, based on the record, approximately 25 percent.

127. Using a 25 percent tax rate and the after-tax yield of 4.5 percent described in Finding No. 122, the corresponding pre-tax investment rate for use in OPIC's underwriting profit margin calculation would be 6.0 percent.

128. Based on Finding No. 127, 6.0 percent is a reasonable pre-tax investment return to be used in OPIC's model, subject to questions regarding the applicability of the investment return to the agent equity reflected in OPIC's model.

129. OPIC's estimated investment return is based on data for underwriters, and not independent agents, but is applied in OPIC's model to the equity attributed to both underwriters and independent agents.

130.The reasonableness of OPIC's application of an underwriter-derived investment return to independent agent equity is not clear. Although OPIC's recommendation was not contested in this particular respect, the underlying data shows that the investment income earned by independent agents is significantly lower in relation to premiums than is the case with underwriters. This means that more of the necessary return for agents would have to be generated from the premium per se. Even allowing for a higher premium-to-net worth ratio for agents, as compared with underwriters, this strongly suggests that the appropriate combined investment return would be lower than that derived based on the experience of underwriters, and that the 6.0 percent investment return described in Finding No. 128 probably overstates the combined investment return of underwriters and agents.

131. TLTA´s analysis included a premium-to-net worth ratio of 1.05 to 1.0, while OPIC's analysis included a premium-to-net worth ratio of 1.75 to 1.0. Much of this difference is due to the approaches taken by the various parties.

132. The TLTA premium-to-net worth ratio pertained to underwriters (including direct operations and affiliated agents) alone, while the OPIC ratio also included consideration of independent agents.

133.TLTA's ratio was based on the 10-year average of ratios derived from Texas-specific data.

134.The same data showed that 5-year and 20-year averages were 1.02 to 1.0 and 1.29 to 1.00, respectively.

135. Additional data in TLTA´s pre-filed testimony showed that the premium-to-net worth ratios for Texas were lower than those for the nation as a whole. In particular, based on data contained in TLTA's pre-filed testimony, the nine-year countrywide average leverage ratio is approximately 20 percentage points greater than the Texas leverage ratio.

136.If all other things are equal, less leverage suggests less risk. This, in turn, suggests that the use of TLTA´s Texas-specific premium-to-net worth ratio may not be appropriate.

137. Whether there are any additional risks associated with the business of title insurance in Texas which, in effect, necessitate a lesser degree of leverage (i.e., a lower premium-to-net worth ratio) in Texas to reflect the same level of risk reflected by the higher leverage existing nationally is not clear based on the evidence in the record.

138. Based on Finding Nos. 133 through 137, a premium-to-net worth ratio in the range of 1.2 to 1.0 to 1.3 to 1.0 would be a reasonable value to be used in the TLTA model.

139. OPIC premium-to-net worth ratio of 1.75 to 1.00 is intended to reflect the leverage of independent agents, as well as that of underwriters.

140.OPIC provided evidence indicating that the leverage ratio for independent agents would likely be higher than that for underwriters. No data specifically based on independent title agents was provided, however.

141. TLTA presented evidence that the 1.75 to 1.00 overall leverage ratio is equivalent to assigning a leverage ratio of about 7.5 to 1.0 for independent title insurance agents.

142.OPIC presented evidence that, based on a study by the Independent Insurance Agents and Brokers of America, the average ratio of revenue to net worth for insurance agents was 16.2 percent. This average was not normalized to reflect the distribution of independent title agents by size of agency, however.

143. TLTA testified that title insurance agents have a more substantial capital investment than other agents because of the need of creating and maintaining title plants.

144. There is little in the record that would allow one to precisely determine the appropriate leverage under the OPIC methodology. The record as a whole suggests that a combined underwriter and agent leverage ratio between 1.6 to 1.0 (which would produce a leverage ratio of about 4.2 to 1.0 for independent title agents) and 1.75 to 1.00 would be reasonable.

145.With a rate of return of 10.5 percent, a pre-tax investment return of 6.0 percent, and a premium-to-net-worth ratio of 1.75 to 1.0, OPIC's model produces an indicated profit provision for underwriters and independent agents of 5.1 percent; with a 1.6 to 1.0 premium-to-net-worth ratio of 1.6 to 1.0, the indicated profit provision is 5.6 percent.

146. Because the 6.0 percent pre-tax investment return probably overstates the investment return likely to be earned by underwriters and independent agents combined, the 5.1 to 5.6 percent provisions described in Finding No. 145 probably understate the combined profit requirements of underwriters and independent agents.

147. With a rate of return of 10.5 percent, an after-tax investment return of 4.5 percent, and a premium-to-net worth ratio of 1.2 to 1.0, the TLTA model produces a profit margin for underwriters of 6.6 percent. Changing the premium-to-net worth ratio to 1.3 to 1.0 produces a profit margin of 6.1 percent.

148. OPIC and TDI staff questioned TLTA´s reliance upon reported profit margins for attorneys in deriving a profit margin for independent title agents.

149. It was suggested that the reported profit margins for attorneys could represent a wide variety of activities including those that could be expected to have above average profit margins.

150. A lower profit margin nearer to the margin derived for underwriters using TLTA's formula is more reasonable than TLTA´s 9.50 percent profit margin for independent title agents.

151.A reasonable profit provision for use in this proceeding is 6.0 percent.

Indicated Rate

152. Based on Finding Nos. 25, 28, 31, 35, 40, 48, 52, 69, 71, 82, 96, and 151, the OPIC regression analyses produce a rate change indication of -4.5 percent.

153. Based on Finding Nos. 25, 28, 31, 35, 40, 48, 69, 71, 86, 96, and 151, the TLTA regression analysis produces a rate change indication of -9.1 percent.

154. Based on Finding Nos. 25, 28, 31, 35, 40, 48, 69, 71, 82, 96, and 151, the TDI staff regressions produce rate change indications of -3.0 to -3.9 percent depending on the regression model used.

155. A reasonable rate change is -6.5 percent.

Rate Implicated Rules

156. TLTA submitted Agenda Item 2002-38 to adopt a Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates), and in so doing to consider the expense and loss experience of the industry so as to establish a rate which is reasonable to the public and nonconfiscatory to title insurance companies and title insurance agents.

157. After considering the expense and loss experience of the title industry and the analysis of the evidence adduced in the ratemaking phase of the biennial hearing, a change in the prescribed rates in the Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates) of -6.5 percent, as stated in this order, is hereby found to be reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

158. TLTA submitted Agenda Item 2002-39 to amend Rate Rule R-5, Simultaneous Issuance of Owner and Mortgagee Policies; Agenda Item 2002-40 to amend Rate Rule R-15, Owner Policy Endorsement; and Agenda Item 2002-41 to amend Rate Rule R-27, Texas Residential Limited Coverage Junior Mortgagee Policy.

159. The TLTA proposals to amend Rate Rules R-5, R-15, and R-27 are reasonable and should be adopted.

160. Stewart submitted Agenda Item 2002-43 to adopt a new rate rule for the proposed new Access Endorsement; Agenda Item 2002 -44 to adopt a new rate rule for the proposed new Restrictions, Encroachments, Minerals Endorsement; Agenda Item 2002-45 to adopt a new rate rule for the proposed new Non-Imputation Endorsement; Agenda Item 2002-46 to adopt a new rate rule for the proposed new Contiguity Endorsement; and Agenda Item 2002-47 to adopt a new rate rule for the proposed new Additional Insured Endorsement.

161. After considering the evidence presented in this record on the additional work and underwriting risk concerning Stewart's proposed endorsements and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing the rates as proposed and amended by Stewart. The rates for each of these endorsements are reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

162. TLTA amended Agenda Item 2002-51 as originally filed by the Lancasters to amend Rate Rule R-11, Mortgagee Policy Endorsement, to lower the premium to $25 for the endorsement provided for in Procedural Rule P-9b(9).

163. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support amending the rate as proposed by TLTA. The rate for this endorsement listed in Rate Rule R-11 is reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

164. Title Division staff submitted Agenda Item 2002-55 to amend Rate Rule R-8, Mortgagee Policy, on a Loan to Take Up, Renew, Extend or Satisfy an Existing Lien(s).

165. Title Division staff's proposal to amend Rate Rule R-8 is reasonable and should be adopted.

CONCLUSIONS OF LAW

1. The Commissioner of Insurance has jurisdiction over this matter pursuant to TEX. INS. CODE ANN. arts. § 31.007 and arts. 9.01, 9.02, 9.07, 9.21, and the Texas Administrative Code, Title 28, Chapter 9.

2. As referenced in Finding No. 1, proper and timely notice of the hearing was given pursuant to TEX. INS. CODE ANN. art. 9.07 and TEX. GOV'T CODE ANN. §§2001.051 and 2001.052.

3.The Commissioner of Insurance has the duty to fix and promulgate the premium rates to be charged by title insurance companies and title insurance agents created or operating under the TEX. INS. CODE ANN. arts. 9.01 - 9.59 and pursuant to TEX. INS. CODE ANN. art. 9.07.

4. The premium rates fixed and promulgated by the Commissioner of Insurance specified in the findings of fact in this order are reasonable to the public and nonconfiscatory as to the title insurance companies and title insurance agents.

5. In fixing the premium rates specified in the findings of fact in this order, the Commissioner has considered all relevant income and expenses of title insurance companies and title insurance agents attributable to the Texas title insurance business.

6. The fixing of rates in accordance with the findings of fact and conclusions of law in this order is in compliance with the provisions of TEX. INS. CODE ANN. art. 9.07.

7.The amendment and adoption of the rules, rates, and forms in accordance with the findings of fact and conclusions of law in this order are in compliance with the provisions of TEX. INS. CODE ANN. art. 9.07.

IT IS,THEREFORE, THE ORDER OF the Commissioner of Insurance that, effective 12:01 a.m., July 1, 2004, rates applicable to title insurance policies written in Texas will be calculated based on these findings of fact and conclusions of law. The Commissioner further orders that a Schedule of Basic Premium Rates for Title Insurance contained in the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas be adopted by reference as indicated in Appendix A attached hereto, effective July 1, 2004.

IT IS, THEREFORE, THE FURTHER ORDER of the Commissioner of Insurance that Rate Rules R-5, R-8, R-11, R-15, R-27, R-29, R-30, R-31, R-32, and R-33 be amended and adopted by reference as indicated in Appendix B attached hereto, with subsection (d) of Rate Rule R-27 being modified to reference the updated title of the Texas Residential Limited Coverage Junior Mortgagee Policy Home Equity Line of Credit/Variable Rate Endorsement (Form T-46). These rate rules are adopted as part of the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas,effective July 1, 2004.

SIGNED and ENTERED April 23, 2004, at Austin, Texas.

JOSE MONTEMAYOR

COMMISSIONER OF INSURANCE



For more information, contact:

Last updated: 09/06/2014

Contact Information and Other Helpful Links