Fidelity National Financial (FNF)

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Top Contributors Lawrence Tanzman Related Articles Fidelity (disambiguation) Fidelity National Information Services (FIS) First American (FAF) Interest Rates LandAmerica Financial Group (LFG)

This article is about the title insurer. For other uses of fidelity, see Fidelity (disambiguation)

In 2005, Fidelity sold off its ownership stake in Fidelity National Information Services (FIS), which processes transactions for financial institutions. This sale generated a $318.2 million gain for the 2005 fiscal year. ^[3]

Fidelity's revenues are tied to the real estate market. With fees and premiums earned only at sales and refinances of real estate, first quarter earnings for 2008 were down 67% from the prior year due to the weak real estate market. ^[4] On June 5th, 2008, Fidelity announced the sale of 20% of its ownership stake in Sedgwick CMS. Management claimed this sale created liquidity and value from its assets. ^[5]Prior to this sale, the company ran a negative cash flow of nearly $75 million for the first quarter of 2008.^[6] Fidelity's competitors have fared no better, with the top four Title Insurers all recording double digit negative quarterly revenue growth for first quarter of 2008. ^[7]

A.M. Best Co. rated many of Fidelity's subsidiaries with an 'A' rating and the Fidelity parent company with a 'BBB' rating. ^[8]

On November 7th, Fidelity signed an agreement to purchase the Title Insurer LandAmerica Financial Group (LFG) for 0.993 shares of Fidelity per share of LandAmerica.^[9] This merger is awaiting regulatory approval because combining LandAmerica and Fidelity would give Fidelity a 46.3% market share of US Title Insurance.^[9]

[edit] Company Overview

2007 Fidelity National Financial Income and Revenue^[10]

[edit] Business Financials

Fidelity's revenue grew 7.5% and 16.4% in 2004 and 2005, respectively. Subsequently, their revenue fell 2.2% in 2006 and then fell 41.5% in 2007. ^[11] Fidelity's management comments that the 2005 revenue was exceptionally high due to the one time revenue of $318.2 million for the sale of the company's interest in Fidelity National Information Services (FIS). ^[12] Additionally, contributions to income for periods prior to October 24, 2006, include revenues from Fidelity National Information Services (FIS); the subsequent reporting periods do not. ^[13]

[edit] Business Segments

2007 Revenue by Segment^[14]

Fidelity has six main segments of operation:

• Direct Title Insurance Premiums (29% of sales): Direct title premiums are premiums earned from Fidelity performing the entire insurance origination process. This means that an employee in the Fidelity family finds clients to insure, inspects the property, performs required research on the title, and then issues the policy, passing along the entire premium and claim obligation to Fidelity. Direct Title operations earn higher margins than Agency Operations. Revenues from Direct Title operations were $2.26 billion in 2005, and then declined to $1.96 billion in 2006. This figure further fell to $1.6 billion in 2007. Management cited a declining purchase market as a cause for the decrease in 2005-2006 and the declining purchase market compounded with a smaller volume of refinances to account for the decrease in 2006-2007. ^[15]
• Agency Title Insurance Premiums (41% of sales): Agency title premiums are earned when an independent agent finds a client to insure and inspects the property and title. However, after issuing the policy, the agent sends a percentage of the premium to Fidelity, who in return assumes obligations to any claims losses connected to the policy. Agency Operations generate a smaller margin than Direct operations. Revenues from Agency Title Premiums were $2.68 billion in 2005, $2.65 billion in 2006, and $2.20 billion in 2007. The Agency Title Premiums decreased due to the same market conditions that affected the Direct Title Premiums and decreased further due to a change in accounting methods for the Agency Titles. ^[16]
• Escrow, title-related and other fees (20% of sales): This segment encompasses fees earned in connection with the closing procedure for a real estate transaction. These services typically coincide with Fidelity's Direct Operations, and therefore are subject to the same economic conditions as the Direct Operations. The Escrow, title-related, and other fees decreased 7.6% from 2005 to 2006, but then increased 1.6% in 2007. ^[17]
• Specialty Insurance (7% of sales) The Specialty Insurance segment generates revenues through premiums earned from Fidelity's flood, homeowners, home warranty, and automobile insurance operations. The flood insurance section of Specialty Insurance is a safe source of revenue because all flood insurance is underwritten by the US Government. ^[18] Specialty Insurance revenues declined from $438 million in 2005 to $410 million in 2006 and further declined to $403 million in 2007. These decreases were primarily due to fluctuations in the hurricane season which incurs extra claims processing costs to Fidelity. ^[19]

^{[22] [23] [24]} The following are operating metrics that describe measurements of performance specific to Fidelity's industry:

• Average Fee from Direct Operations measures the earnings per policy from Fidelity's Direct operations. These fees have increased over the past three years due to the fact that the fees are proportional to the value of the property being insured and property values have appreciated.
• Claims Loss Provision is the amount of money that Fidelity sets aside to cover claims on insurance policies. The money set aside in a given year is intended to cover not only claims from that year, but also claims from previous years. This number was significantly higher in 2007 because management decided that it had not set aside enough money to cover claims in the previous two years.
• Title Premiums are the total revenues from premiums from both Direct and Agency operations. These premiums are the primary income for Fidelity.
• Claims loss provision/Premiums is a percentage measure of how much money is set aside to cover claims relative to the total amount of premiums earned. This measure shows profitability because it measures how much Fidelity's insurance policies are costing the company relative to how much revenue they generate. The percentage for 2007 was significantly higher than the previous two years because Fidelity had a higher Claim Loss Provision in 2007.

The values for Average Fee from Direct Operations do not include fees from FIS so that the average fees can be usefully compared over time.

Title Premium Revenues by Location^[25]

[edit] Key Trends and Forces

[edit] The Weak Housing Market reduces the demand for Title Insurance

Premiums from Title Insurance policies generate the majority of Fidelity's revenue. Title Insurance policies are sold along with the sale of real estate. When more properties are sold, more premiums can be collected. However, with today's slow market for real estate, fewer properties are sold leaving fewer opportunities for Fidelity to earn premiums from Title Insurance policies. On June 27, 2008, Analyst Robert Napoli lowered his earnings forecast for Fidelity from 90 cents a share to 50 cents and cited the weak housing market as the reason for the decrease. ^[26]

[edit] Interest Rates strongly influence the volume of mortgage refinances

Interest rates were between 1.00% and 1.25% during 2003, and then rose steadily until September of 2007. The steady rise in interest rates makes refinancing mortgages unattractive. Revenue from Title Insurance policies rises as the number of mortgages being refinanced rises. Revenue falls in the opposing case. Interest rates have sharply dropped since September of 2007, creating a greater incentive to refinance and therefore more opportunities for Fidelity to earn Title Insurance premiums. When the average rate was 4.13% in 2001, revenues from Title Insurance were $2.7 billion. As interest rates fell to an average of only 1.13% in 2003, Title revenues rose to $4.7 billion, but then fell to $3.8 billion as interest rates rose to an average 5.08% in 2007. ^{[27] [28]}

[edit] U.S. Economic Cycles affect consumer spending on insurable products

As the economy booms and busts, consumers change their preferences about how much to spend. During an economic downturn, fewer consumers are willing to purchase a new home, diminishing the number of potential Title Insurance policies. In addition, fewer consumers are willing to purchase new cars and other products covered by Fidelity's Specialty Insurance segment. The reverse is true during an economic expansion. The Economic Cycles affect the U.S. Housing Market, Interest Rates, and the Appreciation of home prices.

[edit] Appreciation in home prices raises revenue

The premium charged for a Title Insurance policy and a home warranty is directly related to the value of the property being insured. An increase in property values increases the average premium earned by Fidelity. Average premiums from Direct Operations increased from $1,487 to $1,580 from 2005-2006, which Fidelity claims was due to an appreciation of home prices during that year. ^[29]

[edit] Competition

Competitors to Fidelity work either with title insurance or specialty insurance. The following is a list of the major competitors from both groups:

• First American (FAF) is also a holding company and has earned at least 69% of its revenue from Title Insurance premiums over the past three years. First American has the largest market share in U.S. title insurance and competes directly with Fidelity for premiums, escrow, closing, and processing related fees. First American also operates an Information Technology Segment, which provides Mortgage and Property Information.^[30]
• LandAmerica Financial Group (LFG) earned 88.1% of its 2007 income from its Title Insurance Operations. ^[31], of which 13.1% was from operations in California, which is where Fidelity earns the majority of its title revenues. ^[32]
• Old Republic International (ORI) is an insurance underwriter operating in three segments: General Insurance, Mortgage Guaranty, and Title Insurance. Old Republic's primary source of revenue is its General Insurance segment, which earned nearly 60% of the company's 2007 revenue. The General Insurance segment provides property and liability insurance. Only 21.4% of the company's revenue came from Title Insurance. ^[33] While Old Republic earned less revenue from Title Insurance than Fidelity, Old Republic is not as susceptible to fluctuations in the real estate market.
• Stewart Information Services (STC) Stewart Information Services has two operating segments: Title Insurance and Real Estate Information. 94% of the company's 2007 revenue came from Title Operations. ^[34] 11% of the company's title revenues came from California, Fidelity's largest source of title revenue. ^[35]

Fidelity's other main competitors compete in the smaller business segments of Specialty Insurance.

[edit] Market Share

Fidelity has the second largest market share according to a 2007 measurement by the American Land Title Association.

While Fidelity has the largest market capitalization of its peer group at $2.58 billion, it has only the second highest market share in Title Insurance. First American has the largest market share, but also has more than double the number of employees than Fidelity (37,354 versus 15,500). ^[49] Trailing behind is LandAmerica, Stewart Information Services, and Old Republic with 11,050, 8,500, 5,700 employees, respectively. ^{[50] [51]}While Fidelity has a smaller market share than First American, Fidelity has had a higher operating margin of 2.87% over the past twelve months versus only 2.21% for First American. ^[52]

[edit] References

1. ↑ FNF 2007 10-K, Item 1: Business, page 1
2. ↑ 2007 Market Share by Family and State - DISTRIBUTION
3. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 40
4. ↑ Fidelity National Financial, Inc. Reports First Quarter 2008 EPS of $0.13
5. ↑ Fidelity National Financial, Inc. Announces the Sale of Approximately 20 Percent of its Ownership Stake in Sedgwick CMS
6. ↑ Fidelity National Financial, Inc. Reports First Quarter 2008 EPS of $0.13
7. ↑ Yahoo Finance Competitors of FNF
8. ↑ "A.M. Best Affirms Ratings of Fidelity National Financial Inc. and Its Subsidiaries" The Wall Street Journal, June 4, 2008
9. ↑ ^{9.0 9.1} November 7, 2008 merger press release
10. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 26
11. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 26
12. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
13. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
14. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
15. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 42
16. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 42
17. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 42
18. ↑ FNF 2007 Annual Report, page AR2
19. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 47
20. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
21. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 42
22. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 42
23. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, pages 106-108
24. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
25. ↑ FNF 2007 10-K, Item 1: Business, page 7
26. ↑ Piper Jaffray cuts estimates on title insurers June 27, 2008
27. ↑ Historical Federal Funds Rates from moneycafe.com
28. ↑ FNF 2005 10-K, Item 6: Selected Financial Data, page 24
29. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 42
30. ↑ FAF 2007 Annual Report, Item 1: Business, page 3
31. ↑ LFG 2007 Annual Report, Item 1: Business, page 8
32. ↑ LFG 2007 Annual Report, Item 1: Business, page 8
33. ↑ ORI 2007 Annual Report, Item 1: Business, page 3
34. ↑ STC 2007 Annual Report, Item 6: Selected Financial Data, page 13
35. ↑ STC 2007 Annual Report, Item 1: Business, page 3
36. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, pages 106
37. ↑ LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 44
38. ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 29
39. ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
40. ↑ LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 83
41. ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
42. ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
43. ↑ LFG 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 107
44. ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 46
45. ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
46. ↑ LFG 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 39
47. ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, Page 66
48. ↑ 2007 Market Share by Family and State - DISTRIBUTION
49. ↑ Yahoo Finance Competitors of FNF
50. ↑ Yahoo Finance Competitors of STC
51. ↑ Yahoo Finance Competitors of FNF
52. ↑ Yahoo Finance Competitors of FNF