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No. of Recommendations: 2
This is a cross post from the Inside Value FAF board

I just had a phone meeting (5th Feb) with 3 of First American's top title insurance executives where we discussed the questions brought up by Hewitt regarding the Iowa state-run title insurance scheme. These are my notes:

Notes on tele-conference with FirstAm – 5th February 2007

Gary L. Kermott, Vice Chairman – First American Title Insurance Company
John M. Hollenbeck, Senior Executive Vice President – First American Title Insurance Company
Clifford L. Morgan, Senior Vice President, Underwriting and New Product Development – First American Title Insurance Company
David Schulz – Investor Relations

Subject: Iowa State-run Tile Insurance

I articulated my and Hewitt Heisermann's concern that state-run title insurance would be a threat to the company if it were to spread to other, much larger, states. Answers in no particular order:

1. It is inconceivable that the Iowa model would spread to other states, and to date only Washington State has even considered some form of state run scheme.

2. Iowa's system is manual as the state has no access to electronic title databases. No other state would have access either.

3. Iowa's annual purchases are about the same as Orange County, California. Larger states simply could not cost effectively run such a manual scheme. Cliff Morgan has been in the business for over 40 years and pointed that in the 1940's California had a state scheme which went broke.

3. Iowa's system has lower coverage than title companies. For instance it will only cover events prior to the title transfer. FirstAm gave some examples of their additional coverage: future risk of someone stealing title and using for their gain; future encroachment by a neighbor; building code violations by previous owners discovered in the future.

4. Iowa's state scheme is used by 1.5% of all residential home purchasers. A main reason why this will not grow is that lenders insist on the better coverage and faster service provided by title companies. For the same reasons it is inconceivable that commercial real estate purchasers would use the state system.

5. Iowa's system requires someone to research & provide an abstract, a lawyer to check the abstract and a lawyer to then give an opinion before title insurance can be purchased. The average total cost on a $180,000 home is $705 vs. $735 from First American. There are additional hidden costs to be born by the purchaser, such as a 45 instead of a 30 day rate lock (15 days more interest cost).

6. Given the small profit, the manual nature of the process, and little chance of market share growth there is little incentive for Iowa to expand the system

7. If Iowa is barely making a profit on $705 of fees it will be more difficult for California where FirstAm's average charge on a $180,000 purchase is $668.

FirstAm were surprised at my concern over the Iowa issue and obviously had not paid as much attention to investor concerns because they did not see it as a threat. They agreed that they should have done a better job of articulating their position. They also mentioned a 40 page report on the subject by Nelson Lipschitz which I hope to get a copy of. They apologized for not getting back to Hewitt (I think Hewitt will be getting a call!).

I will cross post my notes on Hewitt's IETC board in a couple of days - gotta let IV subscribers have some advantage :-)

On another note excellent acquisition of Core-Logic imo

Best Regards
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