Description

Elevator Pitch

Having been written up six times on VIC between 2003 and 2017, Fidelity National Financial, Inc (“Fidelity National,” “FNF” or the “Company”) and its founder, Bill Foley, should be familiar to many.

While the story changes a bit between those six write ups, they rhyme and can largely be boiled down to: Bill Foley utilizes the cash-generative, dominant title insurer to acquire other (mostly) financial businesses, those businesses are partially spun off, those spins create complexity when evaluating FNF, the title insurance business is operating near a cyclical trough, FNF becomes cheap, rinse repeat.

I believe now is one of those times due to the partial 2022 spin of F&G Annuities & Life Inc. (“FG”) coupled with the bust in mortgage origination volumes and thus recommend a long position in FNF (for the purposes of this write up, my recommendation assumes hedging FG exposure, 0.39 shares of FG for every FNF share, as FG will not be explored here). Consequently, I believe that one can buy FNF’s title business for ~11x what I believe are trough earnings.

History of Value Creation

While certainly not called out by the Company (and even doing it on one’s own took some time to piece together), the Bill Foley track record at FNF has been remarkable. I estimate that an FNF IPO investor has made ~200x their money over ~37 years if they had held all spins through today (or until they were taken out).

FNF currently consists of its Title segment and 85% of FG (15% was spun out to shareholders, which means it is still consolidated within FNF).

FG was acquired in 2020, based on FNF’s history and recent comments, I believe it is likely that it will be fully spun out after 5 years in mid-2025.

Thesis / Why the Opportunity Exists 

1. Title insurance is a good (albeit cyclical) business operating at or near trough operating levels

The title insurance business has been explored in detail on VIC several times (I recommend Ragner’s 2011 FNF pitch for additional industry background) with competitors FAF and ITIC both being pitched in the last several months.

I like to think about title insurers as toll takers on the US mortgage (both resi and commercial) origination market. Title insurers earn a fee on substantially all real estate transactions (mortgage lenders require it) to protect buyers and lenders against defects in a property’s title (liens, seller is the rightful owner, etc).

Title insurers differ from most insurance companies in that they are “insuring” against past, not future, events whose losses can be mitigated through thorough diligence of property records. As a result, when done correctly, loss ratios for title insurers are typically quite low (industry has been operating around ~3-6% post GFC) while generating significant investible float (which benefits from the recent rise in rates).

The title insurance industry is an oligopoly with the big four (FNF, FAF, STC and ORI) accounting for >80% of the market. Barriers to entry are high as most title information is found at a county level (comprehensive title plants are required for dependable underwriting), while pricing is rationale and represents a small part (generally <1%) of a real estate transaction.

These factors have resulted in relatively steady growth in title insurer fees per file (note that purchase transactions have significantly higher fees than refi transactions so mix also matters) and consequently margin expansion. Thus, despite near trough volume, FNF should still generate low to mid-teens pre-tax margins in the current environment and 15-20% margins with more normalized mortgage origination volume.

2. FNF is the preeminent title insurer

Relative its Big 4 peers, FNF’s mix skews towards more direct business, which has its own representatives selling its policies (vs an agent focused one where independents will shop the Big 4 as they are largely indifferent whose paper they are writing on), which enables FNF to capture a greater piece of the value chain. Coupled with its reputation as being almost ruthlessly cost-focused in during periods of declining originations resulting in consistently higher pre-tax margins as well as returns on equity.

Title insurance is fundamentally a local business on the residential side (on commercial, scale matters and only the Big 4 have the financial ware withal to write those policies) where local relative market share matters. FNF has leading market share in half of US states (including CA, TX, IL, PA and VA), which I believe is a key component of its industry leading margin structure.

3. Publicly traded title insurers are cheap and FNF is cheap relative to peers

As highlighted by the aforementioned FAF and ITIC pitches, mortgage purchase and refi applications have declined to levels not seen since the ‘90s as the result of the rapid rise in interest rates. I anticipate that FNF will close ~(60%) fewer direct orders in 2023 than in 2021. Using a historical lens, the title industry is operating at trough volume levels by almost any measure.

Despite these trough conditions, the market seems to be ascribing relatively low multiples to trough earnings. At current prices, I see FNF (ex FG) and FAF trading at ~11-12x ‘23E earnings (FNF is closer to 11x while FAF is closer to 12x). Looking back at the post GFC period, title insurers have typically traded for at a low-to-mid teens multiple of earnings. As such, I estimate that FNF is trading at 5-7x mid-cycle earnings, which feels like a bargain for this business.

While a case can be made for owning any of the title insurers, I prefer FNF to FAF as I believe it has more earnings upside to a normalized volume environment with a superior capital allocator at the helm (I don’t love FAF’s VC book or its willingness to continue to pump money into OPAD).

I believe part of the reason FNF trades in line instead of at a premium to FAF is due to the complexity around FG, which takes some work to unpeel, as it is not immediately obvious.

What is FNF Worth?

I want to be clear that I am not calling an imminent snapback in the mortgage industry as I think it is a fool’s errand to attempt to predict exactly when mortgage originations and housing transactions return to historical norms. That being said, I believe that mortgage volumes are likely to be higher than current levels at some point in the coming years making this a relatively low downside bet to a reversion to something approaching the long-term historical mean.

Historically, title insurers have tended to trade for a low-teens earnings multiples. For the analysis below, I assume 10x, which I view as conservative.

In 2019, FNF generated ~$8.25bn of Title Revenue on 1.45mm closed direct open orders (FNF’s direct vs agency split has remained relatively consistent outside of the post COVID spike in refi activity which skewed mix towards agents) at a 14.7% Pre-Tax ex NIG(L) margin. Between 2002-2022, FNF averaged ~1.8mm closed direct files per year and thus I believe that 2019 represents a baseline, if not slightly below average volume year. While FNF does not break out purchase vs refi residential fees per file, FAF does and since 2019 purchase transaction fees per file have increased by ~45%. Relative to 2019, the rise in rates has significantly increased investment income generated on its float. Consequently, I conservatively expect FNF to generate $8.5 – 10.5mm of mid-cycle revenue, while Management has reiterated its view that steady state pre-tax margins are in the 15-20% range.

Putting it all together, I believe that FNF’s Title business can generate at least ~$3.50 - $5.50 in EPS. At 10x, this represents ~30-100% upside on the FNF (ex FG) stub.

Catalyst

Higher mortgage origination volume

Full FG spin (likely June ’25)