It was only less than two months ago that New Jersey Title Insurance Co. was forced to stop issuing new business because of defalcations, and now a similar scenario has played out for Southern Title Insurance Corp.
Southern Title, a regional title underwriter based in Richmond, Va., announced that it would voluntarily suspend issuance of new title policies effective as of Sept.15 and will focus continuing efforts on the resolution of claims received on previously issued policies.
In a bulletin sent to its agents signed “with sincere apologies” from company president Eugene McCullough, the company acknowledged that its hand was forced by a recent defalcation and it was voluntarily suspending new business.
“It is with great heartbreak that I must advise that Southern Title, in coordination with the Virginia Bureau of Insurance, is voluntarily suspending the issuance of new policies effective immediately,” the bulletin stated. “This unfortunate action is a result of a recent development of substantial agent defalcation. It is important to note that the directors and officers of Southern Title Insurance Corp. are confident that the company is solvent and there is adequate surplus to pay all claims. However, until we understand the full magnitude of the defalcation, the suspension of operations is the most prudent course of action.”
The bulletin also stated that agents and approved attorneys would be able to obtain policies for transactions that have already closed.
“Southern Title understands that this action will cause some of you, especially our exclusive agents, an immediate hardship. We apologize for the disruption of your business and the inconvenience to your customers, but can only assure you that this was a difficult but necessary decision,” the bulletin continued.
As of yet, there was no word from Southern Title on where or when the defalcation occurred. The Title Report is still awaiting comment from the company.
The news is both surprising and unsurprising. It’s surprising because Southern Title had been in the news recently for becoming licensed in Florida and had reported an influx of new agents, a new chief operating officer and a new direction. But knowing about the volatility of the market today, and by digging into the numbers, the news isn’t entirely shocking.
Southern Title, like most underwriters, had been experiencing higher than normal claims volume resulting from policies from now-canceled agents in the 2005-2008 timeframe. As of June 30, the company had a net loss of $1 million, which prompted its parent-company, ALPS, a risk retention group wholly owned by ALPS Corp., to contribute $525,000 to the company. These losses follow a $4.1 million net loss from 2010, which caused ALPS to contribute $3.85 million in capital. Its loss ratio, as listed in the 2010 edition of the Demotech Performance of Title Insurance Companies book, was 12.48 percent. Those results, while not enough to cause such a decision on their own, do not leave much room for error.
Read on for an inside look at the defalcation that pushed this decision
Demotech had been discussing the financial situation with Southern Title during the last few quarters, and while the results weren’t favorable, it didn’t appear to Demotech that the company was accounting for defalcations in their statements.
“They were receiving capital contributions from their parent, and we said that’s OK in the short run, but eventually they needed to show an underwriting profit and not lose money on an underwriting basis,” said Barry Koestler, senior financial analyst and chief ratings officer for Demotech. On Sept. 15, Demotech withdrew its Financial Stability Rating of A, Exceptional, for the company.
Southern Title’s release, the Virginia Bureau of Insurance and Demotech all indicated that the company would have enough money in reserve to be solvent and pay claims going forward. As of June 30, the company had a $5.8 million surplus set aside to pay claims.
“While we regret the disruptions to the former agents, employees and service providers of Southern Title, meritorious claimants and insureds of Southern Title should be comforted by the ability of Southern Title to continue to protect existing policyholders,” said Joe Petrelli, president of Demotech.
In Virginia in 2010, where all of Southern Title's direct agents are located (35 percent of the business), Southern Title accounted for $8.9 million of the state’s $286.2 million written premiums. Of all regional underwriters, Southern Title was ranked 12th in terms of premiums written as of the second quarter results. Southern Title is licensed in 23 states.
“We’re incredibly proud of our employees, and the effort they’ve invested in the operational transformation of Southern Title. However, until we understand the full magnitude of those claims and defalcations, the decision to suspend operations was a difficult but necessary one,” said McCullough, in a statement.
In 2008, ALPS RRG, acquired Southern Title. At the time, Southern Title had $43 million in gross revenues and had net admitted assets of more than $25 million.
UPDATE: The Virginia Bureau of Insurance has now put Southern Title into receivership