Management Matters in Title Insurance
Fidelity National's moat is weakened by its leadership, while First American's is strengthened.
Fidelity National Financial (FNF) and First American Financial (FAF), the two leaders in title insurance, reached the top by pursuing different strategies. Fidelity bought market share through acquisitions, a strategy that resulted in quick increases but has failed to hold gains over the longer term. First American took the other path and internally expanded its business, a strategy that has led to more steady market share increases over time. What's more, Fidelity has attempted to diversify out of its main product line through a number of acquisitions in unrelated businesses, weakening its economic moat. While both companies are exposed to the same industry conditions, we think management style is a differentiating factor between the two and drives our more positive view of First American.
Buying Market Share Only Makes Sense When You Keep It
In 2000 and again in 2008, Fidelity made major acquisitions, each of which gave the firm the leading position in title insurance at the time the transactions closed. Acquisitions make sense in this industry, as economies of scale and cost reductions from eliminating duplicate functions can quickly add to margins. Some fall-off in market share immediately after the acquisition is expected, as a few sales representatives, agents, and even customers will seek alternatives. However, over time the combined entity should gain advantage from improved economies of scale, competitive position, and assimilating the best employees of the companies. But even though Fidelity made sound acquisitions of good title insurers on favorable terms, management has allowed these advantages to slip away. In 2008, after the LandAmerica acquisition, Fidelity's market share increased from about 27% to 46%. However, by the end of the third quarter of 2011, its share had fallen to less than 35%, with more than half of the gained market share gone.
Jim Ryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.