Fidelity recently acquired LandAmerica out of bankruptcy giving it roughly 46% of the national title insurance market.  Fidelity is now the largest title insurer in the country.  But, it may have "bitten off more than it can chew" if my experience with the company is any indication of its financial stability.  At least one of Fidelity's subsidiaries, Chicago Title, is several months delinquent with us.  According to a representative of the company, they are paying their bills as they get paid.  These are sure signs of financial difficulties and cash flow problems.  These are problems one would not expect from the largest title insurer in the nation!

Prior to the LandAmerica acquisition, we did work for both companies.  We rarely ever had any payment issues either of them, but that is changing.  Recently, we were contacted by the LandAmerica office we provided abstracting services to.  They told us that we would have to reduce our full search fee from $125 to $70, or they would have to find another vendor.  Basically, they are seeking to roll-back searching fees to where they were about 15 years ago!  We cannot do the work that cheaply, so we politely declined.

Meanwhile, we have been trying to collect past due invoices from Chicago Title, one of the Fidelity underwriters.  One office has several hundred dollars owed from as far back as August 2008.  Things apparently started to go south when Chicago started running all of their searches through their Vendor Management Company (VMC), CastleSearch.  CastleSearch also has outstanding invoices totalling over $2,000 that are more than 30 days past due.

Perhaps too late, we cut them off.  We have been sending polite past-due notices for months and have not even received a phone call.  This time, we let them know that we would not be returning any further work until the delinquent account was brought current.

After a few emails back and forth trying to get the delinquent invoices to the right person for the "ump-teenth" time, I called the person who appeared to be responsible based on their emails.  I was told that they are paying their bills "as they get paid."  She politely told me that she would have to find another vendor if I was "going to hold their work hostage," because I am costing her money.  I tried to explain to her that I had no choice.  I have to make payroll; I have to pay my examiners and I can't do that if they don't pay us.

There are two common definitions of insolvency.  Balance sheet insolvency is when liabilities exceed assets.  Based on the February 4th Earnings Call, Fidelity seems to have lots of money on the books.

We now have reserves for claim losses of more than $2.6 billion which is approximately twice that of any other title company, reserves plus stockholders equity of approximately $5.4 billion and a cash investment portfolio of more than $4.7 billion.

My first question for Fidelity is why can't you pay my measly $2,500 bill if you have $4,700,000,000 in cash investments?  And that leads to my second question - is Fidelity insolvent?

The second definition of insolvency is Cash Flow Insolvency - the inability to pay debts as they come due.  The Balance Sheet Test for insolvency is all on paper.  We know that fancy accounting is misleading at best... anyone remember Enron?  In my opinion, if you really want to know about a company's financial condition, just look at how well they are able to pay their bills.  My bill with Chicago is peanuts (for them).  But, multiply that by thousands of examiners, and their admission that they are "paying as they get paid," and we start to get a very different picture than was presented on the Fidelity Earnings Call. 

And, if you dig deeper into the transcript from the Earnings Call, it wasn't all rosy.  The company's net loss was $1.7 million on $1 billion in revenue.  The executives also clarified the $4.7 billion in cash investments.

Of the gross $4.7 billion, approximately $1.1 billion was theoretically available for use, with about $900 million held at regulated underwriters and approximately $200 million in non-regulated entities.

I'd like to know a little more about what that really means.  This just bolsters my concern that the balance sheet numbers are merely a result of paper accounting.  What does "theoretically available for use" mean?  What is not theoretical is that my invoices apparently can't be paid until they receive payment from their customers.  In my world, the real world, this indicates a problem.  To me it indicates that Fidelity, or at least one of its large subsidiaries, Chicago Title, is unable to pay its debts as they come due.

Fidelity is taking aggressive cost cutting measures by closing offices and reducing headcount. 

We continue to reduce headcount through much of the fourth quarter eliminating approximately 600 additional positions before the addition of the new underwriters. In the first month since the acquisition of Commonwealth, Lawyers and United Title we have been very aggressive on reducing costs in those underwriters.

Through the end of January we have eliminated approximately 1500 of the 5500 employees that we inherited at the closing on December 22nd; a reduction of approximately 27% of the existing workforce.

We have also closed about 125 offices in the first month of ownership. In total we have eliminated annual run rate expenses of approximately $180 million.

Apparently, part of the "cost cutting" includes not paying for the work they ordered and accepted from their independent abstractors (at least not in a timely manner).  As I mentioned, Chicago has outstanding invoices from 8 months ago! In the past, this type of evasive behavior was commonplace with the VMC clients.  Many of them unilaterally adopted payment terms that exceeded the standard NET30 and they often claimed that they would pay when they got paid.  When the largest underwriter in the country starts to take this position, things are bad... really bad. 

Unlike Fidelity, we don't have a $4.7 billion cash investment portfolio.  If they don't pay us, I can't pay our employees.  When they start to lag behind in payment, it doesn't take long to affect our bottom line.  Independent abstractors will face very difficult times if a company the size of Fidelity can't pay for the work they ordered until they get paid.

If the title industry continues to suffer, as I predict it will throughout this year, things will get worse.  Fidelity's acquisition of LandAmerica may just drag the company under.  What will happen if Fidelity files bankruptcy?  As an unpaid creditor I am worried about the possibility.

Robert A. Franco
SOURCE OF TITLE