stewart title guaranty company - department of...

KENTUCKY

DEPARTMENT OF INSURANCE

FINAL REPORT

TARGET

MARKET CONDUCT EXAMINATION

Stewart Title Guaranty

Company

1980 Post Oak Boulevard

Houston, Texas 77056

As Of

December 31, 2009

June 27, 2012

Sharon P. Clark

Commissioner

Kentucky Department of Insurance

215 West Main Street

Frankfort, Kentucky 40601

RE: Market Conduct Examination #2010-02

Dear Commissioner Clark:

Pursuant to appointment #2010-02 by the Department of Insurance, and in accordance with

the provisions of KRS 304.2-100, KRS 304.2-210, KRS 304.2-230, Kentucky Administrative

Regulations Title 806, other applicable laws, and the procedures established by the National

Association of Insurance Commissioners, an examination of the market conduct activities

has been conducted regarding:

Stewart Title Guaranty Company



The report, based on the activities of the Company as of December 31, 2009, is hereby

respectfully submitted.

Sincerely,

James Axman, CIE

Market Regulation Data Analyst/Examiner

PUBLIC PROTECTION CABINET

Steven L. Beshear Governor

Department of Insurance

P.O. Box 517 Frankfort, KY 40602-0517

800-595-6053 http://insurance.ky.gov

Robert D. Vance

Secretary

Sharon P. Clark Commissioner

STEWART TITLE GUARANTY COMPANY MARKET CONDUCT EXAMINATION #2010-02

KENTUCKY DEPARTMENT OF INSURANCE

3

TITLE PAGE

TARGET MARKET CONDUCT EXAMINATION

NAME OF COMPANY: Stewart Title Guaranty Company

NAIC COMPANY CODE: 50121

NAIC GROUP CODE: 340

NAIC EXAM TRACKING SYSTEM NO.: KY 215-M19

DEPARTMENT OF INSURANCE NUMBER: 301442

DATE INCORPORATED: 02/20/1908

STATE OF DOMICILE: Texas

DATE BUSINESS COMMENCED: 03/11/1913

DATE ADMITTED IN KENTUCKY: 09/27/1973

HOME OFFICE: 1980 Post Oak Boulevard


DESK EXAMINATION: Kentucky Department of Insurance

215 West Main Street

Frankfort, KY 40601

TIME FRAME OF COMPANY January 1, 2009 through

OPERATIONS EXAMINED: December 31, 2009

LENGTH OF TIME FOR EXAMINATION: December 1, 2011 through

June 13, 2012

EXAMINATION COORDINATOR: Mary P. Thomas, Vice President

Regulatory Counsel

PARTICIPATING JURISDICTION: Department of Insurance

Commonwealth of Kentucky

Phone: (502) 564-1936

Fax: (502) 564-6090



4

TABLE OF CONTENTS

PAGE

FOREWORD 5

ABBREVIATIONS 5

SCOPE OF EXAMINATION 6

COMPANY PROFILE

• HISTORY OF COMPANY 7

• PREMIUM LOSSES AND RATIOS 7

COMPANY OPERATIONS AND MANAGEMENT 8

UNDERWRITING AND RATING PRACTICES 11

KENTUCKY LOCAL GOVERNMENT PREMIUM TAXES 12

SUMMARY OF FINDINGS 13

SUBMISSION 14



5

FOREWORD

The findings of this Report are based on an examination of the business practices of Stewart

Title Guaranty Company (Company) in the Commonwealth of Kentucky. The examination

process is governed by, and performed in accordance with, the standards and procedures of

the National Association of Insurance Commissioners (NAIC) and the Kentucky Department

of Insurance (Department). This target market regulation examination report is one by test

wherein each test applied during the examination is stated and the results are reported.

The Company was first notified of this examination on April 13, 2010. On May 27, 2010,

the Company was notified that the examination would be suspended due to scheduling

conflicts with current ongoing examinations.

On November 12, 2011, the examination began as a desk audit at the Kentucky Department

of Insurance, 215 West Main Street, Frankfort, Kentucky 40601. The operations of the

Company from January 1, 2009 through December 31, 2009 were reviewed; premium tax

data was obtained for the Fourth Quarter 2010 to reconcile with the requirements of

Chapter 91A, of the Kentucky Insurance Code.

ABBREVIATIONS

Stewart Title Guaranty Company STG or Company

National Association of Insurance Commissioners NAIC

Kentucky Department of Insurance Department

Local Government Premium Tax LGPT



6

SCOPE OF EXAMINATION

EXAMINATION AUTHORITY

Pursuant to the directive of the Kentucky Department of Insurance, and in accordance with

the provisions of KRS 304.2-100, KRS 304.2-210, KRS 304.2-230, Kentucky’s

Administrative Regulations Title 806, other applicable laws, and the procedures established

by the National Association of Insurance Commissioners (NAIC), a target examination of the

market conduct activities has been conducted regarding:

Stewart Title Guaranty Company



The Company’s activities for the period beginning January 1, 2009 and ending December

31, 2009, were examined.

PURPOSE

The purpose of the target examination was to determine the Company’s compliance with

Kentucky insurance statutes and Department regulations. The examiner may not have

discovered every unacceptable or non-compliant activity in which the Company may be

engaged. The failure to identify, comment on, or criticize specific Company practices does

not constitute an acceptance of the practices by the Department.

ERROR TOLERANCE

The Department utilizes error tolerance guidelines established by the NAIC, except in

certain instances as defined by state statute/regulation, or within established Department

business practice. Defined error tolerances are shown below:

FILE SAMPLING

Unless otherwise noted, file sampling was based on a review of files that were randomly

selected by applying Audit Command Language (ACL™) software to the computer data files

provided by the Company. Sample sizes were chosen based on guidelines developed by the

NAIC.

Area

Error Tolerance

Percentage

Applied

LGPT – Risk Allocation 10%

Records Retention 5%



7

COMPANY PROFILE

HISTORY OF COMPANY

Stewart Title Guaranty Company (STG or Company) is a subsidiary of the Stewart

Information Services Corporation (SISC). SISC is a stock company and is listed on the New

York Stock Exchange (STC). The Company is domiciled in Texas, and is headquartered in

Houston, Texas. The Company was established in Galveston, Texas in 1893.

Per the Company’s Web site, STG is the third largest title company, and delivers global title

insurance policies and escrow services in more than 80 countries. STG commenced

business on March 11, 1913, and was admitted in the Commonwealth of Kentucky on

September 27, 1973.

PREMIUMS, LOSSES AND LOSS RATIOS

The following chart is derived from data reported to the NAIC, and summarizes Company

results for 2005 through 2009 for premiums, losses and loss ratios for Kentucky. The title

insurance industry is unique among insurers in that the instances of claims paid are typically

low. This is reflected in the following chart showing the Company’s loss ratio in Kentucky

from 2005 through 2009.

Kentucky Data

YEAR 2008 2009 2010

Direct

Premiums

Earned

10,174,729 9,606,774 7,237,393

Direct Losses

Paid 1,085,005 818,067 268,536

1Loss Ratio 10.6% 8.5% 3.7%

CERTIFICATE OF AUTHORITY

During the period under review, the Company had a valid Certificate of Authority to transact

title insurance business in the State of Kentucky. The Company was acting within the scope

of its Certificate of Authority.

1 Loss ratio is the ratio of total losses paid out in claims divided by the total earned premiums



8

COMPANY OPERATIONS AND MANAGEMENT

FILING REQUIREMENTS

The examiner reviewed Company rate, rule, and form filings in effect during the scope of

the examination.

No violations noted.

RECORD RETENTION

The examiner requested a listing of all policies and supporting documents written during the

period under review; January 1, 2009 through December 31, 2009. A data listing of 32,363

policies was provided, and the examiner selected a random sample of 116 policies.

The Company was unable to provide supporting documents for two transactions in the

sample on the basis that the Agency contract was cancelled.

This finding resulted in an error ratio within the error tolerance guidelines

applied.

INTERNAL AUDITS

The Company (Underwriter as defined in the Agreement) provided 65 internal Kentucky

agency (Company as defined in the Agreement) audits for the scope of the examination.

These periodic audits are performed by the state district office auditor as a matter of routine

procedure.

The Company has a non-exclusive Title Insurance Agreement with each of its Kentucky

agencies. The agreement, which includes a provision entitled “DUTIES OF THE COMPANY”

states in part:

(d) No later than the fifteenth (15th) day of each month, Company shall send to the

Underwriter:

(1) A register that includes a numerical list of all title policies issued during

the previous calendar month;

(2) A copy of each Title Policy issued during the previous calendar month;

(3) Payment for the gross premiums charged for the previous calendar

month;

(e) Company agrees to issue and report all Title Policies in a timely manner, but in

no event later than thirty (30) days from the end of the calendar month in which

the closing was consummated or all conditions of the policy satisfied.

(f) The Company agrees to keep safely in its escrow accounts all funds received

from any source in connection with transactions in which UNDERWRITER’S Title

Policies will be issued, and to disburse said funds only for the purpose for which

they were entrusted.



9

The examiner randomly selected a sample of 15 Agency audits; the review of these audits

revealed the following deficiencies:

Thirteen (13 out of 15 or 87%) audits concluded that the agency (Company) failed to

timely report policies/transactions to the Company;

Eleven (11 out of 15, or 73%) audits concluded that the agency (Company) failed to

timely remit premiums to the Company;

KRS 304.9-035, states in part:

“Any insurer shall be liable for the acts of its agents when the agents are acting in

their capacity as representatives of the insurer and acting within the scope of their

authority.”

Failure to enforce the defined business process to ensure policy

transactions are remitted and reported timely is a violation of KRS

304.9-035.

Examiner Note:

The Company is taking corrective action by implementing an IT process to timely

report/remit policy transactions.



10

AGENT LICENSING AND APPOINTMENTS

There is no licensing or appointment requirement for title producers/agents in the

Commonwealth of Kentucky.



11

UNDERWRITING AND RATING PRACTICES

The underwriting and rating review included an analysis of the Company’s practices related

to underwriting requirements, proper use of rules, rates, policy forms and endorsements

according to the requirements of KRS 304.14-120 and KRS 304.22-020(3).




12

KENTUCKY LOCAL GOVERNMENT PREMIUM TAXES

The Company submitted Fourth Quarter 2010 local government premium tax (LGPT) data

for review, to determine the Company’s business process to properly place the risk in the

correct taxing jurisdiction, and to verify compliance with KRS 91A.080 and 806 KAR 2:095.

The Company submitted 1,038 title policies for review.


A review was also conducted to determine if the Company clearly demonstrated the correct

amount of LGPT and the proper taxing jurisdiction on billing instruments and/or declaration

pages. KRS 91A.0810 and 806 KAR 2:092 specifies minimum standards for the disclosure

of local government premium taxes to policyholders.

In 17 instances (out of a sample of 116), the declaration page of the

title policy produced at the closing did not contain the proper tax

information disclosure. Failure to clearly disclose the LGPT amount

and proper taxing jurisdiction on the declarations page is a violation

of KRS 91A.0810 and 806 KAR 2:092.



13

SUMMARY OF FINDINGS

INTERNAL AUDITS

The Company failed to enforce the defined business process to ensure policy transactions

are remitted and reported timely, which is a violation of KRS 304.9-035. (See Page 9)

LOCAL GOVERNMENT PREMIUM TAX

The Company failed to clearly disclose the LGPT amount and proper taxing jurisdiction,

which is a violation of KRS 91A.0810 and 806 KAR 2:092. (See Page 12)



14

SUBMISSION

The examiner would like to express appreciation to Stewart Title Guaranty Company for the

cooperation extended during this examination.

The examiner respectfully submits this examination report to the Commissioner,

Department of Insurance, Commonwealth of Kentucky, for further action.

_____________________________________

James Axman, CIE

Market Regulation

Data Analyst/Examiner

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