BUSI 510B Managerial Economics Week 7 – Assignment: Final Project
December 5, 2010
John Doe Columbia College of Missouri BUSI 510B Managerial Economics Week 7 – Assignment: Final Project
Executive Summary
In today’s economy that was and still is hurt by the housing market, it is very difficult for Fidelity National Financial (FNF) to remain profitable. FNF is a publicly traded company that focuses on title insurance which is directly tied to real estate sales and refinancing. Since the housing market downturn in 2006, this firm’s total revenue declined by 67% while total costs remained constant with overhead and operating costs. Sales and marketing are not a factor in revenue generation as the firm deposits more cash into a given bank and negotiates earnings credit rates. FNF asks that the bank to refer their mortgage customers to use this firm’s title and escrow services at closings. Thus, the more money the firm deposits at the bank, the more referrals will be generated which increases revenue. Since late 2006 to present day, the number of new mortgages has severely declined thus lowering the FNF’s value. However, it’s not over for FNF quite yet. The firm was able to lower costs by closing local offices and reducing staff in certain depressed markets like Michigan, California, Pennsylvania, and so forth. In addition, they able to reduce operating costs using technology breakthroughs such as increased networking solutions and more effective collaboration tools that reduced the need to travel. Moreover, cost reduction was accomplished by re-negotiating enterprise agreements with Microsoft and McAfee.
Introduction:
Fidelity National Financial, Inc is a leading, Fortune 1000 provider of title insurance, specialty insurance and claims management services. Nationally recognized as one of the best managed and most admired companies in the U.S. FNF was established in 1984 by a group led by entrepreneur Bill Foley, who remains the company’s chairman and CEO. With historic roots of predecessor title insurance and escrow businesses leading back to 1847, over the decades FNF has grown to become a multi-billion-dollar corporation, with operations and agents from coast to coast. Currently, FNF is divided into three primary insurance-related business functions:
Title Insurance: As one of the nation’s largest title insurance companies, Fidelity National Title
Group (FNTG) manages over one-third of all residential and commercial real estate transactions in the United States through its title insurance underwriters. FNTG consists of the following companies: Fidelity National Title, Chicago Title, Ticor Title, Security Union Title, Alamo Title,
Commonwealth Land Title and Lawyers Title. In addition to the FNTG family of companies also includes ServiceLink, a leading provider of centralized title and closing services to national lenders. Specialty Insurance: As a nationwide provider of a broad range of specialty insurance products,
Fidelity National Property and Casualty Insurance Group offers homeowners, flood, auto, umbrella and assorted insurance coverage. Rated A- (Excellent) by A.M. Best, Fidelity National
Property and Casualty prides itself on providing immediate quotes.
Claims Management Services: Known as the leading North American provider of innovative claims and productivity management solutions, Sedgwick CMS and its affiliated companies deliver cost-effective claims administration, managed care, program management, risk consulting and related services to clients throughout the U.S. and Canada. The company specializes in workers’ compensation; disability, FMLA and other employee absence; and general, automobile and professional liability claims services. FNF’s success is due in large part to the commitment of every employee to provide our customers with a level of satisfaction that is unparalleled in the industry. The quality of FNF’s customer service and the level of employee loyalty and commitment are enhanced by our employee stock ownership program. Stock ownership serves as a motivational force for employees who recognize that the success of the company is dependent upon their individual efforts and contributions. Since its initial public offering in 1987, the company has experienced explosive growth and unprecedented financial results. Most importantly, FNF is committed to proudly upholding the six corporate precepts upon which the Company was founded: * Autonomy and Entrepreneurship * Bias for Action * Minimize Bureaucracy * Customer-oriented and motivated * Employee Ownership * Highest Standards of Conduct
These six precepts represent the cornerstone of our management philosophy and operational success. Through our united dedication to these corporate precepts, FNF will remain strong, successful and profitable.
Scope
In late 2008, title insurer Fidelity National Financial completed its acquisition of Commonwealth Land Title, Lawyers Title, and United Capital Title from a competitor in bankruptcy, LandAmerica. Initially, the combined operations captured 46% of the national market, although that has already fallen to about 40%. Past experience shows that one plus one does not equal two in title insurance mergers, but even if it only equals one and a half, over time Fidelity still has reason to celebrate. The firm has already eliminated more than $260 million in duplicative costs annually through combined operations and will easily dominate the lucrative commercial title insurance market. Given the bargain price Fidelity paid, these costs savings paid for the acquisition within the first full year.
Market Forces
The title insurance industry is an oligopoly, with the top three firms contributing 91.7% of the industry's revenues.
Resource Market Forces Labor * The national job supply for administrative skilled workers is low while the demand is extremely high. Therefore, FNF can hire administrative workers at a lower salary. Assets & Capital
Summary of Market Forces (using Porter’s 5 Forces Analysis):
Threat from substitute products
Due to the current government regulations stipulating that all home properties must have title insurance, there is no real threat of a substitute product.
Threat of entry
The threat of a new entrant for the title insurance industry is high. It takes many years and millions of dollars in new capital to start a title insurance company. Next, it takes many years to acquire alliances with banks for referral business.
Bargaining power of buyers
The bargaining power of buyers is very low in the title insurance industry. There are millions of buyers (mainly homes) that need title insurance under regulation. Therefore, the buyer has no choice except which company to purchase title insurance from.
Bargaining power of suppliers
The bargaining power of suppliers is very high due to the fact that there are very few suppliers of title insurance and FNF has the highest market share.
Intensity of Rivalry among existing competitors
Within the title insurance industry, rivalry with First American, Old Republic, and Stuart Title barely exists. All companies strive to individually grow the company and new business through bank referrals. However, there are no advertisements, direct communication, or any other media threats going back and forth that would generate new business.
SWOT Analysis Strengths * Fundamentals: FNF remains the nation’s largest title insurance and escrow services company. * Stronger Order Volumes: FNF is well positioned to see better order volumes and shift of product mix to include an increased percentage of purchase volumes (generating higher fees) relative to refinance volumes. * Acquisition of underwriters: Acquisition of Commonwealth Land Title, Lawyers Title, and United Title from LandAmerica Financial Group, Inc. made FNF the nation’s largest title insurer by market share.
Weaknesses
* Cyclical Pressures: Revenue and operating income of FNF’s Title division are cyclical and pressured when mortgage origination volume declines. * Execution Risks: The Fidelity Information Services division suffers from risks associated with business execution, and the integration of recent acquisitions. * Seasonal Fluctuations: Mortgage activity is typically slow around the holidays, resulting in a depressed pipeline at the beginning of the year. Opportunities * Cash Positions: Utilize cash balances as leverage to strong-arm banks in providing more referrals.
Threats * Unemployment: As long as the unemployment rate remains high, real estate sales that generate orders will remain slow. * Raising interest rates: With the state of the economy, if interest rates climb with the same rate of unemployment and consumer confidence, new home and existing home sales will remain slow.
Recommendations for Managerial Strategy and Tactics * Acquisitions: FNF needs to diversify their revenue flows. Acquisitions should be considered in technology (financial systems) companies that have the potential to compete in the finance and banking industry. * Marketing: FNF should focus on establishing better relationships with banks at the executive level since that is where the referrals happen. Direct marketing does not apply to end consumers as they do not ask for a specific title insurer at closing most of the time.
Summary
In conclusion, FNF will have to continue hedging against inflation relating to overhead. They continue reducing operating costs however, it remains to be seen how effective their efforts as unemployment slowly inclines. They still manage to make a profit but, not like they did in the high-flying real estate bubble. As long as the unemployment rate declines and more jobs are created, FNF should make it through the storm. If the US sees a double-dip recession, then things can turn sour quickly. All in all, FNF is a solid company with a book value around $20 per share. They are currently at $13.85 per share.
References
Fidelity National Financial, Inc.
Investor Relations: Third Quarter 2010 Earnings Release. Web. 6 Dec 2010
