According to the latest 13F filing of Glenn Greenberg (Trades, Portfolio)'s Brave Warrior Advisors, the value investor recently acquired shares in Fidelity National Financial (FNF, Financial) for his portfolio. In fact, the hedge fund investor made this position a top-10 holding, acquiring 6.3 million shares during the second quarter of the year, giving it a 9.4% portfolio weight. Let's take a closer look at this company to see if it could be an attractive investing opportunity.
About Fidelity
Fidelity is a financial holding company providing title insurance, escrow and other title-related services. Title insurance is one of those obscure financial services that does not make headlines but fulfills a vital need in a large market. Put simply, title insurance protects against losses due to defects in title, which could be anything from a loss of documents to illegal building works carried out by previous owners.
Fidelity dominates the title insurance market with a 34% market share. Its next largest competitor is First American Family with a 23.3% market share.
Insurance can be a risky business if a company does not have an advantage over competitors in the industry. Most insurance companies operate at around break-even unless they have some advantage such as scale or in-depth knowledge of the market they operate in.
Fidelity clearly has the scale required to succeed in this market. It also benefits from significant tailwinds in the U.S. home sector as prices rise and transaction volumes increase.
As well as its title business, the group also sells annuities and life insurance under its F&G business. It acquired this company a year ago to diversify operations.
Recently, this business completed its first pension risk transfer deal. These deals are becoming more popular as final salary or defined benefit pension scheme providers seek to limit liabilities.
Essentially, the pension provider transfers the risk on to the insurance company for a fixed cash sum. The insurance provider can then use its scale and experience managing risk to manage the assets more effectively and squeeze cash out. This can be a steady, predictable, cash generative business for the largest companies in the sector.
A look at the valuation
In additon to having a dominant market position in title insurance, Fidelity is growing its position in the annuities market. The company is also returning cash to investors. The stock supports a dividend yield of 3% and has a $500 million share repurchase plan in action. Compared to its market capitalization of $13.6 billion, this is a significant allocation.
Insurance companies tend to have investment portfolios to support their liabilities. Income from these portfolios also supports the underwriting business through periods of losses.
At the end of June, Fidelity's cash and investments totaled $42 billion. After deducting liabilities, shareholder equity was $8.9 billion. This implies the company is trading at a price-book ratio of just 1.5, which does not seem too expensive or cheap for an insurance business. What's more, the stock is selling at a forward price-earnings multiple of 9.
The bottom line
All in all, the company looks to have a substantial competitive advantage in its primary market. Management is also investing in other initiatives to help improve growth.
Moreover, the company is prioritizing shareholder returns and is returning significant sums to investors through buybacks as well as dividends. On top of these factors, Fidelity's valuation looks pretty cheap.
Having said all of the above, life insurance and annuity businesses tend to attract low valuations because they are challenging to value. Even a small change in interest rates can have a significant impact on their assets and liabilities. With its growing exposure to this market, I would not be surprised if the stock's valuation remained under pressure.
