• Increase Text Icon
  • Decrease Text Icon
  • Email Icon
  • Print this page
You are here: Home . orders . or02-0901

2000 Texas Title Insurance Biennial Rate Hearing CO-02-0901

No. 02-0901

Official Order of the Commissioner of Insurance of the State of Texas

Austin, Texas

Date: August 23, 2002

Subject Considered:

In the Matter of the 2000 TEXAS TITLE INSURANCE BIENNIAL RATE HEARING Docket No. 2471

General remarks and official action taken:

On this day came on for consideration by the Commissioner of Insurance (Commissioner) fixing 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, Section 9.1.

The Texas Department of Insurance (TDI) issued a Notice of Call for Issues Related to 2000 Biennial Title Hearing which was published at 25 TexReg8508 on August 25, 2000. Any association, any title insurance company, any title agent or 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 25, 2000. Eleven 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 2000-33 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, 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; Agenda Item 2000-34 to amend Rate Rule R-11, Mortgagee Policy Endorsement; Agenda Item 2000-35 to adopt a new rate rule establishing premiums for the proposed new Restrictions, Encroachments, Minerals Endorsement; and Agenda Item 2000-36 to adopt a new rate rule for the Texas Residential Limited Coverage Junior Mortgagee Policy. Stewart Title Guaranty Company (Stewart) submitted Agenda Item 2000-37 to amend Rate Rule R-16, Amendment of Exception to Area and Boundaries; and Agenda Item 2000-38 to adopt a new rate rule establishing a premium for the proposed new Residential Homeowner's Endorsement. The Office of Public Insurance Counsel (OPIC) submitted Agenda Item 2000-39 to adopt a new procedural rule concerning proposed reissue rates; Agenda Item 2000-40 to adopt a new rate rule concerning reissue rates; Agenda Item 200 0-41 to amend Rate Rule R-5 to address reissue rates; and Agenda Item 2000-42 to amend Rate Rule R-16 regarding area and boundaries. The Department of Insurance Title Division staff (Title Division staff) submitted Agenda Item 2000-43 to amend Rate Rule R-2 to address tax free exchanges under Internal Revenue Code §1031.

TDI issued a Notice of Public Hearing on October 20, 2000 and it was published at 25 TexReg11136, on November 3, 2000. Docket No. 2470, the rulemaking phase, was set for hearing on December 27, 2000 and Docket No. 2471, the ratemaking phase, was set for hearing on December 29, 2000.

Stewart; Title Underwriters of Texas, Inc. (TUT); Texas Association of Abstracters and Title Agents (TAATA); TLTA; Independent Metropolitan Title Insurance Agents of Texas (Metros); Sierra Title Company, Inc., Metro Title Company, Inc. d/b/a Sierra Title Company 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); and Texas Society of Professional Surveyors (TSPS) 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.

Upon a joint motion of TLTA, Metros, and TUT, and a motion of TAATA, both phases of the hearing were continued to a date after June 17, 2001 in order to accommodate the 77 th Texas Legislative Session. Prehearing Order No. 1 issued on November 29, 2000 granted the continuance and ordered that the following were admitted as parties in the ratemaking phase: TDI staff represented by Catherine Reyer; TUT represented by Robert Simpson; Stewart represented by Catherine Brown Fryer, TLTA represented by Thomas Rutledge and Greg Hooser; TAATA represented by Bert Massey, II; Metros represented by Will Davis; Sierra represented by John Robert King; TSPS represented by Mark J. Hanna; and OPIC represented by Rod Bordelon, Lanetta Cooper and Erin Martens. In addition, Prehearing Order No. 1 determined that the Commissioner would hear the ratemaking phase of this hearing, no party having requested that it be heard by the State Office of Administrative Hearings pursuant to TEX. INS. CODE ANN. art. 9.07(c).

On May 31 , 2001 John King, individually, and on behalf of Sierra filed a Motion for Reopening the Docket and on June 13, 2001 and June 18, 2001, Stewart and TLTA, respectively, filed motions in opposition to King and Sierra´s motion. On July 13, 2001, Prehearing Order No. 2 was issued denying King and Sierra´s motion to reopen the dockets because they had not been closed and setting a deadline of August 3, 2001 for admitted parties to file supplemental or amended submissions of proposed agenda items. On August 2, 2001, Stewart filed two new items with rate implications: Agenda Item 2000-44 to amend Rate Rule R-11.e. to implement the adoption of the proposed Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1) and Agenda Item 2000-45 to amend Rate Rule R-15 to implement the adoption of the proposed Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1). Also on August 2, 2001, Gary and Cathy Lancaster (the Lancasters) filed a motion requesting party status in the 2000 Title Biennial Hearing.

On September 4, 2001, an Amended Notice of Public Hearing for the 2000 Texas Title Insurance Biennial Hearing was issued and, on September 14, 2001, was published at 26 TexReg7146. The amended notice set a prehearing conference for November 8, 2001, the rulemaking phase for November 27, 2001, and the ratemaking phase for February 5, 2002. No party objected to any of these notices.

On September 7, 2001, the Lancasters filed a motion requesting the amendment of Agenda Item 2000-33 and requesting the submission of eight new items to be considered as agenda items. By letter dated September 12, 2001, the Lancasters were informed that their motion requesting party status would be considered at the prehearing conference on November 8, 2001, that the right to propose amendments to existing agenda items would be governed by previous rulings on that issue, and that the new items would not be considered as agenda items in these dockets. On September 17, 2001, the Texas Association of Realtors filed comments in opposition to the Lancasters proposed new agenda items.

On September 21, 2001, the Lancasters again filed a motion for admission as a party. On November 8, 2001, the Lancasters filed a petition for amendment of Rate Rule R-8 and a motion to dismiss the 2000 Texas Title Insurance Biennial Hearing. On November 8, 2001 a prehearing conference was held to consider scheduling and other preliminary matters. In Prehearing Order No. 3, dated November 9, 2001, the Lancasters were admitted as a party and filing deadlines were set.

The hearing on the rulemaking phase was held on November 27, 2001. Commissioner´s Order Nos. 01-1208 and 02-0240, dated December 18, 2001 and March 15, 2002, respectively, adopted or otherwise disposed of rules and forms considered under the rulemaking phase, except for agenda items withdrawn by their respective submitters. Stewart's withdrawal of Agenda Items 2000-20, 2000-21, and 2000-22 in the rulemaking phase rendered Agenda Item 2000-38 moot in the ratemaking phase. A hearing on the Lancasters' motion to dismiss was held on December 18, 2001 and Prehearing Order No. 4 denying the motion was issued on January 4, 2002. By letter dated January 25, 2002, OPIC withdrew Agenda Items 2000-39, 2000-40, and 2000- 41.

On February 5, 2002, 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 February 6, 2002. The following Agenda Items were considered in this hearing: Agenda Item 2000-33 to adopt a Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates); Agenda Item 2000-34 to amend Rate Rule R-11, Mortgagee Policy Endorsement; Agenda Item 2000-35 to adopt a new rate rule establishing premiums for the proposed new Restrictions, Encroachments, Minerals Endorsement; Agenda Item 2000-36 to adopt a new rate rule, Texas Residential Limited Coverage Junior Mortgagee Policy; Agenda Item 2000-37 to amend Rate Rule R-16, Amendment of Exception to Area and Boundaries; Agenda Item 2000-42 to amend Rate Rule R-16 regarding area and boundaries; Agenda Item 2000-43 to amend Rate Rule R-2 to address tax free exchanges under Internal Revenue Code §1031; Agenda Item 2000-44 to amend Rate Rule R-11.e. to implement the adoption of the proposed Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1); and Agenda Item 2000-45 to amend Rate Rule R-15 to implement the adoption of the proposed Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1). 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. However, Mr. King made a statement, which the Commissioner included as public comment in the record. 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 2000-I.

Following opening remarks by the parties, presentation of the evidence followed. TLTA presented its case through the testimony of Dr. Nelson R. Lipshutz, Dr. David Appel, and Dr. George William Berry; Stewart presented its case through the testimony of Mr. John F. Rothermel, III; TUT presented its case through the testimony of Dr. David Appel; OPIC presented its case through the testimony of Mr. Allan Schwartz; and TDI staff presented its case through the testimony of Dr. Mark Crawshaw. Metros, TAATA, and Sierra presented no testimony at the hearing. On February 6, 2002, the Commissioner adjourned the hearing on the merits. The parties submitted post-hearing briefs on March 20, 2002.

On March 18, 2002 LandAmerica Title Group (LandAmerica) informed TDI that the expense data it had provided to TDI for two of its underwriters, Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation, were overstated for 1999 and 2000. On April 4, 2002, TDI advised the parties that the LandAmerica data was incorrect and provided the parties with revised data. On April 10, 2002 LandAmerica submitted more detailed expense information that was also forwarded to the parties. An informal conference call between the parties and TDI was held on April 11, 2002 to discuss procedural issues concerning the corrected data. On April 12, 2002, Post Hearing Order No. 1 was issued scheduling a Post Hearing hearing for April 23, 2002 to consider the admissibility of the corrected LandAmerica data and scheduling deadlines, if appropriate. On April 24, 2002, after the Post Hearing hearing, Post Hearing Order No. 2 was issued ruling that the corrected data was admissible and scheduling dates for any supplemental rate recommendations, replies to recommendations, and replies to the replies as April 26, 2002, May 3, 2002, and May 8, 2002, respectively. On April 26, 2002, the parties made supplemental submissions and on May 3, 2002 the parties submitted letters indicating that they had no further comments in reply to the supplemental submissions. On May 28, 2002 by Commissioner´s Order No. 02-0544 the Commissioner closed the record in this case.

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 20, 2000, the Texas Department of Insurance (TDI) issued its Notice of Public Hearing in this matter, and it was published at 25 TexReg11136 (November 3, 2000).

2. Upon a joint motion filed by Texas Land Title Association (TLTA), the Independent Metropolitan Insurance Agents of Texas (Metros), and Title Underwriters of Texas (TUT) and a motion filed by Texas Association of Abstracters and Title Agents (TAATA), both phases of the Texas Title Insurance Biennial Hearing were continued to a date after June 17, 2001 to accommodate the 77 th Texas Legislative Session.

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

4. The rate hearing was convened on February 5, 2002, and adjourned on February 6, 2002.

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

6. On March 18, 2002, LandAmerica informed TDI that the expense data it had provided to TDI for two of its underwriters, Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation, were overstated for 1999 and 2000. LandAmerica submitted revised data and detailed expense information to TDI by April 10, 2002.

7. On April 23, 2002, a Post Hearing hearing was convened to consider the admissibility of a 1999-2000 Revised State of Texas Title Insurance Experience report that reflected the corrected data. The report was admitted and the parties were given the opportunity to submit revisions to the rate recommendations and comments.

8. The record in the rate hearing was officially closed by Commissioner's Order No. 02-0544 dated May 28, 2002.

Expenses

Overview

9. Expenses represent the great majority of the title insurance premium dollar.

10. The principal ratemaking methodologies to project expenses were suggested by OPIC, TLTA, and TDI staff.

Expense Data

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

12. TLTA included losses and loss adjustment expenses (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.

13. TDI staff also adjusted the premiums and expenses for 1995 ­ 2000 it used in its projections to eliminate the double counting of income and expense arising when underwriters or agents pay another agent for title services.

14. The transfer payments described in Finding No. 13 overstated the indicated experience expense ratios, and the TDI staff adjustment to account for these payments is reasonable.

15. 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 their compilations.

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

17. Instances where the underlying expenses differed for 1991-2000 are displayed in Attachment 1 to this Order, where the various values have been calculated from data contained in the parties´ exhibits and workpapers and adjusted to the definitions used by TDI staff prior its adjustment for the transfer payments described in Finding Nos. 13-14.

18. Because the underlying data summaries from statistical reports to TDI for the years prior to 1999 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 1999.

19. It is reasonable to assume that it is unlikely that all parties would make the same errors in compiling the data.

20. It is therefore reasonable to assume that, where two parties have used the same underlying expenses or premiums and the third differed, the 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.

21. 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

22. OPIC used both reported and smoothed data to project expense ratios, where the smoothed data relates to an adjustment OPIC made to the reported underwriter expense data for 1999 and 2000 to moderate a very large increase in the underwriter expense ratios for those years.

23. 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 20 years, as well as regressions of the on-level expense ratios from the most recent 20 years against the numbers of owners and mortgagee policies written by underwriters and a dummy variable that ranged from one to nine over the period 1981 through 1989 and was set equal to ten thereafter.

24. The average and median expense ratios described in Finding No. 23 ranged from 79.6 percent to 87.9 percent in the case of the reported data and 79.3 percent to 87.5 percent in the case of the smoothed data.

25. The regression analyses described in Finding No. 23 produced projected expense ratios of 86.3 percent in the case of the reported data and 84.0 percent in the case of the smoothed data, these being determined using the average numbers of owners and mortgagee policies written by underwriters in 1999 and 2000 and a dummy variable of ten.

26. OPIC selected expense ratios of 85.7 percent based on reported data and 84.0 percent based on smoothed data.

27. OPIC effectively averaged the two selected expense ratios in arriving at its final rate indications.

28. TLTA projected expense dollars, including agents´ incurred losses and LAE, separately for three groups: underwriters and direct operations combined, affiliated agents, and independent agents.

29. TLTA's projections were based on regressions over the most recent twelve years of each group´s inflation-adjusted expenses against the corresponding numbers of owners and mortgagee policies written by each group.

30. TLTA's adjustment for inflation described in Finding No. 29 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 2002 cost levels.

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

32. TLTA's projected expense dollars were based on an assumed 825,000 policies, a figure derived from the number of policies written by underwriters in 2000 reduced by approximately seven and a half percent, the reduction being based on an assumed downturn in the Texas real estate market and in refinancing activity.

33. TLTA's projected expense dollars described in Finding No. 32 were then effectively divided by premiums based on the same 825,000 policies and an assumed average rate selected from ten years of average premiums at current rate levels adjusted to a 2002 estimated average real estate value level.

34. TLTA's average projected expense ratio, including agents´ losses and LAE, would be 89.5 percent.

35. TDI staff projected expenses, excluding all losses and LAE, for underwriters and agents combined, using two methodologies.

36. TDI staff´s first methodology regressed on-level expense ratios against the number of owner and mortgagee policies written by underwriters and time, which is intended to capture inflation, utilizing experience from 1981 through 2000, and incorporating a binary variable to reflect a change in the level of expenses between the period 1981-1983 and later years.

37. TDI staff´s second methodology regressed the 1981 through 2000 on-level expense ratios against the retained premiums reported by the four reporting groups, adjusted to current rate and retention levels and time, which is intended to capture inflation, and incorporating a binary variable to reflect a change in the level of expenses between the period 1981-1983 and later years.

38. The binary variables described in Finding Nos. 36-37 had values of one for 1981-1983 and zero thereafter.

39. Based on the coefficients derived from the regression analyses, adjustments for differences in the 1999 and 2000 actual numbers of policies or premiums, depending on the regression analysis, and those anticipated for 2002, were added to the adjusted actual on-level expense ratios for 1999 and 2000 to estimate expense ratios for 2002.

40. The anticipated numbers of policies and the anticipated dollars of premium for 2002 referred to in Finding No. 39 were the average of the numbers of owners and mortgagee policies written in 1999 and 2000 and the average of dollars of retained on-level premiums in 1999 and 2000 trended 5.0 percent to bring them to the estimated level of 2002 real estate costs, respectively.

41. TDI staff adjusted the actual on-level 1999 and 2000 expense ratios referred to in Finding No. 40 to account for an apparent misallocation of costs between title and non-title activities in those years in situations where some agents showed escrow and/or non-policy abstract income with no corresponding expenses and where an agent showed title expenses with no title income.

42. No party objected to the adjustment described in Finding No. 41.

43. TDI staff's adjustment described in Finding No. 41 is reasonable and should be used.

44. The average of the final projected expense ratios, excluding all losses and LAE, were 88.2 percent in the case of projections based on policies and 87.1 percent in the case of projections based on premiums.

Period used in the Regression Analysis

45. The experience of the 1980´s differed markedly from that of the 1990´s and 2000.

46. Both the data itself and testimony concerning conditions in the Texas economy in the 1980´s strongly suggest that it would be appropriate to discount the experience of the 1980´s as anomalous and not predictive of experience in 2002.

47. OPIC effectively split the 20 year experience period it used into a nine year segment (1981-1989) and an eleven year segment (1990-2000) in its regression analyses.

48. In the prior rate case OPIC used ten years of data in its regression analysis.

49. TLTA used 12 years of data in most of its regression analyses, although in 1 instance it used 10 years.

50. TDI staff testified that it would be reasonable to use ten years of data as the basis of the regressions.

51. It is reasonable to use ten years of data to project the expense provision in the title rates.

Projection Methodology

52. All parties used regression analyses in developing their expense indications, although OPIC, as was noted in Finding No. 23, also used a series of arithmetic averages and medians.

53. It is not clear from the record how OPIC utilized the arithmetic averages and medians it calculated in arriving at its final selected expense ratios.

54. It is reasonable to rely on a regression analysis to calculate projected expense ratios.

55. TLTA projected expense dollars using expenses adjusted to a common purchasing power level (2002) through the application of factors derived from the GDP deflator.

56. A weakness of TLTA's selected methodology and the use of the deflator is that they do not necessarily reflect all relevant factors, such as changes in the degree of automation, that may change title insurance costs systematically over time.

57. A strength of TLTA's selected methodology is that the deflator reflects changes in the rate of inflation over time, although over the period used to develop the regression (1989-2000), apparent inflation rates only varied from approximately 1.2 percent to 2.7 percent, based on the factors used in TLTA's calculations.

58. To calculate 2002 premiums TLTA first calculated past gross on-level average premiums per policy on two bases: by dividing the combined agent groups´ on-level gross premiums by the numbers of owners and mortgagee policies reported as written by agents (the "combined" indication); and by dividing the underwriters' on-level reported gross premiums by the numbers of owners and mortgagee policies reported as written by underwriters (the "composite" indication).

59. The results for the most recent ten years in Finding No. 58 were then adjusted to a common 2002 property value level by applying a 2.4 percent annual inflation factor, and averaged, producing an indicated average premium per policy of $971 for the combined group and $1,055 for the composite group.

60. TLTA applied the $971 average premium per policy based on the combined experience to the estimated 825,000 policies to calculate the gross premium anticipated for 2002.

61. TLTA indicated that the 825,000 projected owners and mortgagee policies for 2002 was based on the number of such policies written by underwriters, which had a ten-year average premium of $1,055 based on Finding Nos. 58-59.

62. Had the $1,055 average premium been used in lieu of the $971 average premium, the projected expense ratio would have been 82.3 percent rather than the 89.5 percent underlying the rate calculations, and 8.0 percent reduction (82.3 / 89.5).

63. TLTA asserted that the use of the lower average premium was appropriate since it forecast a sharp downturn in commercial construction in Texas in 2002, and a decline in the sales of expensive homes; it therefore selected the lower of the two average premiums.

64. Assuming that there would be a downturn as described in Finding No. 63, the record is not persuasive that the average premium used to calculate projected premiums should be the average premium per policy for the combined group.

65. TLTA based its projection for the number of policies for 2002 on a forecast of a downturn in the Texas economy and a reduction in refinancings.

66. While the evidence presented at the hearing indicated that there had been a decrease in home purchases in September and October of 2001 as compared to the same months in the prior year, it also indicated that sales approached 2000 levels in November, the latest data presented.

67. With interest rates at very low levels, the number of home sales and refinancings could well increase.

68. There is no persuasive evidence in the record that the numbers of policies written in the year 2002 will decrease substantially from the levels seen in 1999 and 2000.

69. TLTA agreed with testimony in a previous proceeding that "the most reliable predictor of policy volume in any single year is the average over a reasonable preceding period."

70. It is reasonable to use the average number of policies written in 1999 and 2000 or the average on-level premiums written in 1999 and 2000 as an estimate of the corresponding values for 2002.

71. Given the use of ten years of experience, the OPIC and TDI staff regression models differ in two primary ways: OPIC did not use an independent time variable where TDI used an independent time variable; and OPIC used the projected value on the regression line where TDI staff used the parameters from the regression model to independently trend the actual 1999 and 2000 expense ratios to 2002 levels.

72. TDI staff´s use of the time variable was intended to reflect fairly steady underlying inflation rates while its use of the numbers of policies or premiums written variables were intended to capture cyclic forces that depend on the volume of business written; OPIC attempted to capture both factors with a single independent variable.

73. TDI staff indicated that using the point on the regression line and using the parameters of the model to trend recent experience are both approaches commonly encountered in ratemaking situations. The choice between the two can depend on the particular context.

74. Using the point on the regression line is reasonable if there is a great deal of random fluctuation in the data, since this tends to smooth out the data. Trending the recent experience using the parameters of the model is desirable if there may have been fundamental changes in the more recent periods that may not be captured by the model.

75. It is clear from Finding Nos. 40 and 59 that premiums reflect inflation (or deflation) in real estate values.

76. It is not clear from the record how the inflation (or deflation) in real estate values may interact with the time variable, which is intended to capture inflation, based on Finding Nos. 36-37 in TDI staff's premium based regression.

77. While OPIC included averages and medians in its analyses, it provided no guidance as to how such averages and medians should be used to determine the final rate indication.

78. None of the ratemaking methods proposed by the parties clearly stand out as superior to the others.

Reverse Competition and the Reasonableness of Expenses

79. OPIC's witness 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.

80. OPIC recommended reducing expenses by 2.5 percent to account for the impact of reverse competition.

81. 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.

82. TDI staff´s witness 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 the necessary and reasonable expenses.

83. TDI staff proposed a 2.0 percent adjustment to expenses to account for reverse competition.

84. 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.

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

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

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

Losses

88. OPIC selected a loss and LAE ratio of 2.4 percent, prior to the consideration of catastrophes, from a series of ten averages and medians based on past calendar year on-level calendar year loss and LAE ratios for periods ranging from one to 20 years, as well as a regression over the most recent 20 years against a binary variable that has a value of one in the period 1986-1992 and zero for other years.

89. The losses and LAE underlying OPIC's selected ratio described in Finding No. 88 included losses and LAE from both the agents and underwriter groups.

90. The average and median loss and LAE ratios described in Finding No. 88 ranged from 2.1 percent to 4.8 percent; the regression produced fitted values of 9.3 percent for the 1986-1992 years and 2.4 percent for other years.

91. OPIC added a one percent provision for catastrophes producing a final selected loss and LAE ratio of 3.4 percent.

92. TDI staff recommended a ratio for normal losses in the range of 2.0 percent to 4.0 percent and a ratio of 4.0 percent to 6.0 percent for all losses and LAE based on an inspection of calendar year loss and LAE ratios for the period 1981-2000.

93. The losses and LAE underlying TDI staff ratios described in Finding No. 92 included losses and LAE from both the agents and underwriter groups.

94. TDI staff selected a final loss and LAE provision, including catastrophes, of 4.5 percent based on the loss and LAE ranges described in Finding No. 92 and on Commissioner´s Order No. 00-0534.

95. TLTA projected loss and LAE ratios separately for agents and underwriters.

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

97. The resulting developed ultimate loss and LAE ratios for the ten-year period 1991-2000 ranged from 1.49 percent to 3.07 percent, with an average of 2.13 percent.

98. TLTA selected a 5.0 percent loss and LAE ratio based on the facts that the developed ultimate loss and LAE ratios trended upwards in the most recent years and that a loss and LAE ratio of 4.5 percent was used in determining the existing title insurance rates.

99. As was noted in Finding No. 12, calendar year losses and LAE incurred by agents were included with other expenses in TLTA's rate projections.
100. 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 take place during a given calendar year, regardless of when the policy giving rise to the claims was written.

101. TLTA used developed ultimate policy year losses and LAE for underwriters which 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.

102. 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.

103. A disadvantage of using developed to ultimate policy year losses and LAE is that the most recent years are not developed to any great extent, and actual ultimate policy year losses and LAE could vary up or down from the projected values.

104. 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.

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

106. Based on Finding Nos. 100-102, it is reasonable to base the loss and LAE ratio on the sum of TLTA´s projected ultimate underwriter policy year losses and LAE and on the calendar year incurred losses and LAE reported by agents.

107. A reasonable provision for loss and LAE in the rates is 3.9 percent, including a one percent loading for catastrophes, and should be used. (See Attachment 2.)

Provision for Profit

Cost of Capital

108. OPIC recommended a 10.7 percent return on equity, based upon capital asset pricing model (CAPM) and discounted cash flow (DCF) analyses of title and property/casualty insurers.

109. 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 overweighed the results for property/casualty insurers, in comparison with the weight given to title insurers.

110. TLTA recommended a 12.5 percent after-tax return on equity, based upon the results of DCF and CAPM analyses which it performed on title insurers, property/casualty insurers, and other business service firms.

111. OPIC disputed TLTA's cost of capital analysis because it relied entirely upon arithmetic as opposed to geometric means in its CAPM analyses, and 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 included a group of business firms having no apparent relationship to title insurance.

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

113. The portion of TLTA´s cost of capital analysis related to other business service firms is of limited relevance in determining title insurers' cost of capital, and should be given little weight.

114. TLTA's DCF result for title insurers reflects a growth rate which is excessive and unreasonable, and should be given little weight.

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

116. The difference between the arithmetic and geometric means is approximately two points.

117. Reducing the risk premiums in TLTA's analysis by one point gives approximately as much weight to the geometric mean as to the arithmetic mean, and produces more reasonable cost of capital indications.

118. TLTA's property/casualty cost of capital estimate was not adjusted to reflect the debt in the capital structure of property/casualty holding companies. If this were properly reflected, the indicated cost of capital would decrease; however, the amount of the decrease is not ascertainable from the record.

119. With adjustments consistent with Finding Nos. 113 through 118, TLTA´s 12.5 percent cost of capital would drop to approximately 11.0 percent.

120. OPIC selected a risk premium of 6.0 percent for use in its CAPM analysis but a higher risk premium, such as 6.5 percent or 7.0 percent would also have been reasonable based on OPIC´s evidence.

121. Using a selected value is a reasonable approach.

122. Adjusting OPIC's CAPM analysis by using a 6.5 percent or 7.0 percent risk premium would raise OPIC´s overall cost of capital to approximately 11.0 percent.

123. OPIC's cost of capital analysis is heavily weighted with property/casualty insurers, as opposed to title insurers.

124. If additional weight were given to the title insurers in OPIC´s cost of capital analysis, OPIC's results would be higher.

125. If adjusted to reflect the debt in the capital structure of property/ casualty holding companies, OPIC's cost of capital analysis results would be lower.

126. A reasonable cost of capital for use in this proceeding is 11.0 percent.

Profit Provision

127. TLTA used a calendar year accounting model to derive a profit provision for underwriters (including direct operations and affiliated agents) of 8.45 percent based on its recommended 12.5 percent rate of return.

128. TLTA derived a profit provision for independent title agents by giving 85 percent weight to reported profit margins for agents in other lines of insurance and 15 percent weight to reported profit margins for attorneys. The resulting profit margin for independent title insurance agents was 8.97 percent.

129. By giving 47.7 percent weight to its underwriter margin and 52.3 percent weight to its agent margin, TLTA derived a combined profit provision for Texas title insurance of 8.72 percent.

130. With a rate of return of 11.0 percent and no other changes, TLTA's model produces a profit provision of 6.73 percent for underwriters and a combined profit provision for Texas title insurance of 7.90 percent.

131. OPIC used a calendar year accounting model to derive a profit provision of 4.2 percent for underwriters and agents, based on its recommended 10.7 percent rate of return.

132. With a rate of return of 11.0 percent and no other changes, OPIC's profit model produces a profit provision of 4.4 percent.

133. 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, after correction for a double-counting error related to investment expenses, estimated post-tax investment returns to be 5.17 percent of equity, while OPIC estimated pre-tax investment returns to be 8.0 percent of equity.

134. Correction of a data error caused the analysis underlying OPIC's investment return estimate to be somewhat less supportive of OPIC's 8.0 percent estimate.

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

136. Based on Finding No. 133, 5.0 percent is a reasonable after-tax investment return to be used in TLTA´s model.

137. Based on Finding Nos. 132 and 133, 7.5 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.

138. 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.

139. 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. Even allowing for a higher premium-to-net worth ratio for agents, as compared with underwriters, this strongly suggests that the appropriate investment return on equity for agents would be lower than that derived for underwriters, and that the 7.5 percent investment return described in Finding No. 137 probably overstates the investment return on the combined equity of underwriters and agents.

140. TLTA's analysis included a premium-to-net worth ratio of 1.25 to 1.0, while OPIC's analysis included a premium-to-net worth ratio of 1.75 to 1.0.

141. 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.

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

143. The same data showed that 5-year and 20-year averages were 1.42 to 1.0 and 1.46 to 1.0, respectively.

144. Additional data showed that the premium-to-net worth ratios for Texas were notably lower than those for the nation as a whole.

145. All other things equal, less leverage suggests less risk. This, in turn, suggests that TLTA´s Texas-specific premium-to-net worth ratio may not comport with the cost of capital determined in earlier findings, because the cost of capital was determined based on analysis of financial data which is primarily national, as opposed to Texas-specific, in nature.

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

147. Based on Finding Nos. 138 through 144, a premium-to-net worth ratio in the range of 1.4 to 1.0 to 1.5 to 1.0 is a reasonable value to be used in the TLTA model.

148. The OPIC premium-to-net worth ratio of 1.75 to 1.0 is intended to reflect the leverage of independent agents, as well as that of underwriters.

149. OPIC provided evidence indicating that the leverage ratio for independent agents would be higher than that for underwriters.

150. Although not the only possible leverage ratio which could properly be attributed to underwriters and independent agents on a combined basis, OPIC's leverage ratio is reasonable.

151. OPIC's basis for its selection of the ratio comports reasonably well with the 11.0 percent cost of capital indicated in Finding No. 126.

152. With a rate of return of 11.0 percent, a pre-tax investment return of 7.5 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 4.7 percent.

153. Because the 7.5 percent pre-tax investment return probably overstates the investment return likely to be earned on the combined equity of underwriters and independent agents, the 4.7 percent provision described in Finding No. 152 probably understates the combined profit requirements of underwriters and independent agents.

154. With a rate of return of 11.0 percent, an after-tax investment return of 5.0 percent, and a premium-to-net worth ratio of 1.4 to 1.0, the TLTA model produces a profit margin for underwriters of 6.2 percent. Changing the premium-to-net worth ratio to 1.5 to 1.0 produces a profit margin of 5.8 percent.

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

156. OPIC suggested that the reported profit margins would be for a subset of attorneys that could be expected to have above average profit margins.

157. OPIC was similarly concerned with the reported profit margins for other insurance agents relied upon by TLTA.

158. It is reasonable to give some weight to the historical profitability of title agents.

159. According to TLTA's exhibits, independent Texas title agent profit margins averaged 7.58 percent and 6.03 percent, respectively, over the five- and ten-year periods ending with the year 2000.

160. A lower profit margin much nearer to the margin derived for underwriters using TLTA's formula is more reasonable than TLTA´s 8.97 percent profit margin for independent title agents.

161. Based on Finding Nos. 125 through 158, a combined underwriting profit provision in the range of 6.0 to 6.5 percent would be consistent with a target rate of return of 11.0 percent, and would be reasonable for the Texas title insurance industry.

162. A reasonable profit provision for use in this proceeding is 6.25 percent.

Indicated Rate

163. Based on Finding Nos. 14, 21, 43, 51, 54, 70, 87, 106, 107 and 161, the OPIC regression analyses produce a rate change indication of ­6.1 percent using the actual data and ­9.4 percent using the smoothed data.

164. Based on Finding Nos. 14, 21, 43, 51, 54, 70, 87, 106, 107 and 161, the TLTA regression analysis produces a rate change indication of ­3.2 percent using an average premium per policy of $971 and ­10.6 percent using an average premium per policy of $1,055, where the number of policies in both instances were set at 947, 579, the average of 1999 and 2000.

165. Based on Finding Nos. 14, 21, 43, 51, 54, 70, 87, 106, 107 and 161, the TDI staff regression produces a rate change indication of ­7.5 percent using numbers of policies as an independent variable and ­3.5 percent using premium volume as an independent variable.

166. A reasonable rate change is ­6.0 percent.

Rate Implicated Rules

167. TLTA submitted Agenda Item 2000-33 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.

168. 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, the prescribed rates in the Schedule of Basic Premium Rates for Title Insurance (Texas Title Insurance Premium Rates) have been reduced as stated in this order and hereby are found to be reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

169. TLTA submitted Agenda Item 2000-34 to amend Rate Rule R-11, Mortgagee Policy Endorsement, to establish rates for the mortgagee policy endorsements adopted as a result of the rulemaking phase of the biennial hearing, namely, the First Loss Endorsement (T-14), the Last Dollar Endorsement (T-15), the Mortgagee Policy Aggregation Endorsement (T-16), and the Planned Unit Development Endorsement (T-17).

170. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing a rate of $25 for each endorsement. The rate for each endorsement is reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

171. TLTA submitted Agenda Item 2000-35 to adopt a new rate rule establishing premiums for the new Restrictions, Encroachments, Minerals Endorsement (T-19) adopted as a result of the rulemaking phase of the biennial hearing.

172. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing the premium rates as proposed with a modification to the minimum premium rate which is hereby set at not less than $25 for this new endorsement. The rates for this endorsement are reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

173. TLTA submitted Agenda Item 2000-36 to adopt new Rate Rule R-27, Texas Residential Limited Coverage Junior Mortgagee Policy, to establish rates for the Texas Residential Limited Coverage Junior Mortgagee Policy and corresponding endorsements adopted pursuant to Commissioner´s Order Number 98-0955, effective October 1, 1998.

174. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing the rates as proposed by TLTA. These rates are reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

175. Stewart submitted Agenda Item 2000-37 and OPIC submitted Agenda Item 2000-42 to amend Rate Rule R-16 regarding the Amendment of Exception to Area and Boundaries.

176. 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 Stewart. The rate for this endorsement is reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

177. Title Division staff submitted Agenda Item 2000-43 to amend Rate Rule R-2 to address tax free exchanges under Internal Revenue Code §1031 that will provide title agents and underwriters with a consistent treatment for these types of transactions. Title Division staff's proposal to amend Rate Rule R-2 is reasonable and should be adopted.

178. Stewart submitted Agenda Item 2000-44 to amend Rate Rule R-11.e. to implement the Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1) for mortgagee policies which was adopted as a result of the rulemaking phase of the biennial hearing.

179. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing the rate as proposed by Stewart. The rate for this endorsement is reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, and should be adopted.

180. Stewart submitted Agenda Item 2000-45 to amend Rate Rule R-15 to implement the Supplemental Coverage Manufactured Housing Unit Endorsement (Form T-31.1) for owner policies which was adopted as a result of the rulemaking phase of the biennial hearing.

181. After considering the evidence presented in this record and the analysis based on reasonable actuarial judgment, the evidence adduced and the analysis support establishing the rate as proposed by Stewart. The rate for this endorsement is reasonable to the public, nonconfiscatory as to title insurance companies and title insurance agents, 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, Section 9.1.

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., November 1, 2002, 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 November 1, 2002.

IT IS, THEREFORE, THE FURTHER ORDER of the Commissioner of Insurance that Rate Rules R-2, R-11, R-15, R-16, R-27, and R-29 be amended and adopted by reference as indicated in Appendix B attached hereto, with subsection l of R-11 being modified to delete the reference to T-2 to make it consistent with Procedural Rule P-9b(14). 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 November 1, 2002.



For more information, contact:

Last updated: 09/06/2014

Contact Information and Other Helpful Links