The New York Department of Financial Services (DFS) wrote Fidelity National Financial (FNF) Chief Compliance Officer Paul Perez on Jan. 31, detailing its response to the proposed acquisition of Stewart Title by FNF.
Five days later, FNF made the news public, announcing in a filing with the Securities and Exchange Commission (SEC) that it had been turned down by the state regulator.
“Receipt of approval from the NYDFS is a condition to closing FNF’s pending acquisition of Stewart Information Services Corp. FNF and Stewart are evaluating the appropriate course of action in light of the NYDFS’ determination, which may include a discussion with the NYDFS to better understand its concerns and respond to the letter,” according to the SEC filing.
Further details were not available at the time, but in response to a Freedom of Information Law request by The Title Report, DFS officials made available a redacted copy of the letter the agency sent to Perez. In it, DFS concludes that state policyholders would be “adversely impacted by the lack of market competitiveness.”
It states that the combined New York market share of nearly 50 percent would create “increased market power in one very large company, with that market power leading to greater profits rather than price competition and consumer choice.”
DFS added in the letter that it would be state policyholders who would bear the “potentially negative” consequences of the acquisition, resulting from the need for Stewart Title and its affiliates to repay any debt used to finance the transaction.
Demotech President Joseph Petrelli told The Title Report that he was struck by the way in which DFS laid out its decision.
“They followed the statutes, laid out the case as they thought it was presented to them and said we think we have everything we need to make this decision. That part of it was beyond methodical, it was very professional – whether you like the outcome or not,” he said.
In the opening of the letter, DFS states it has examined the acquisition and engaged in “extensive communications” with Fidelity. “Accordingly, the applicant has had a full opportunity to be heard regarding the proposed acquisition, and it has availed itself of such opportunity,” the letter states.
“Their reasons (for denial) were economic, and that struck me as unexpected,” Petrelli said.
FNF declined to provide additional comment for this story, but did reference Chairman Bill Foley’s remarks on the company’s earning call Feb. 14.
“The lady [Maria Vullo] who is the insurance commissioner has been no friend of the title insurance business in New York. On her last day in office, (she) signed a declination,” Foley told analysts on the call. “We can reapply and we think we have good reason to get an approval. We can certainly sit down with them and talk about alternatives, which could include a number of different paths, which I’d prefer not to go into, because we're still evaluating different alternatives.
“But the transaction is not blocked by the New York State Insurance Department’s lack of approval of the transfer of the common stock of – we call it Stewart Title of New York,” Foley added. “It’s a single state underwriter that only does business in that state, and it doesn’t stop our transaction, frankly.”
In the DFS analysis of the acquisition, it conducted a consideration of factors under Insurance Law 1506(b). The final section, the effect on competition, brought the biggest impact.
DFS reviewed market concentration based on the Herfindahl-Hirschman Index (HHI) analysis. It is the same analysis used by the Consumer Federation of America (CFA) when it wrote to federal and state regulators in April 2018, urging that the acquisition be blocked because the deal would create “an over-concentrated, excessively priced market even more expensive and abusive to American homebuyers.”
First, DFS said it conducted an HHI analysis of the market as is from 2012-2017. It found the HHI ranging from 2,100 to 2,300 – in the higher end of a moderately concentrated market, which is considered HHI results of 1,500 to 2,500.
When it conducted the same analysis for that five-year stretch considering a combined FNF-Stewart company, the results showed an HHI of above 3,200 for each year, “which is extremely concerning,” the agency wrote.
“This transaction would result in a change from a moderately concentrated market to a highly concentrated market and exacerbate consumers’ lack of choice and bargaining ability,” DFS stated. “Such high concentration would not result in greater price competition, nor is the applicant proposing to provide any benefits to the consumer.”
Petrelli said the concentration of the companies being even higher in New York than CFA’s national analysis might be related to Stewart’s creation of a separate New York entity, rather than licensing Texas-based Stewart Title Guaranty Corp., as it did in other states.
“Maybe (Stewart) was thinking that is something they felt they needed to do to gain market share there. It strikes me that the concentration is a success of Stewart’s marketing plan in New York,” he said.
DFS also found that the HHI increased by more than 1,100 each year, going from pre-combined to combined. An index increase of 250 is considered a meaningful decline in competitiveness, DFS wrote.
“The department finds that the proposed acquisition would increase concentration (and thus decrease competitiveness) significantly, which is harmful to the market and consumers,” the agency stated.
As those figures are greater than CFA’s national analysis, CFA Director of Insurance J. Robert Hunter told The Title Report that the analysis leaves little room for the companies to show a statistically competitive market.
“This is all so terribly noncompetitive. With the HHI nationally and the other data I’ve looked at, no matter what they give up, what’s left still causes a problem. That’s my view,” said Hunter, a former Texas commissioner of insurance and member of the National Association of Insurance Commissioners.
In considering an analysis of the competitive effects in New York, DFS looked into what appeared to be FNF’s proposal regarding a potential increased use of independent agents.
“The applicant contends that market concentration should not be considered dispositive in the competition analysis, as the independence of title insurance agents in the New York title insurance market effectively disables control through insurer market share,” DFS wrote. “This assertion, however, is inconsistent with applicant’s claim that the proposed acquisition will enable it to ‘grow the business.’ ”
The agency continued by saying FNF asserted that agent appointments are by non-affiliated title insurers, and that it claimed that insurers compete against each other for independent agents, and that independent agents and insurers’ direct business lines compete against each other for the consumers’ business. Because independent agents can have agreements with multiple underwriters, FNF said that was another level of independence for title search providers. DFS, however, appeared skeptical.
“The department’s analysis demonstrates that the applicant’s assertions fail to counter the concerns raised by the HHI market concentration analysis,” DFS wrote.
DFS said in a $1.1 billion New York market in 2017, FNF had a 30 percent market share, while Stewart had 19 percent. Independent agents’ production nationally over the past five years for FNF ranged between 49 percent and 52 percent, DFS stated, while Stewart ranged between 82 percent and 85 percent.
“Such small ranges indicate that the independent agents did not have any significant effect on those companies’ respective market shares,” DFS wrote, including the underlined emphasis on “not.”
What followed was a partially redacted section of DFS’ letter. Because the section contained records which DFS said in a letter to The Title Report were “gathered by or submitted to the superintendent concerning holding companies and controlled insurers” subject to Insurance Law 1504(c), the section had been redacted.
It began with “the department analyzing data to determine” … and then redacted text. It picked up again with “The department selected the top 10 independent agents for all FNF companies and Stewart Title for the last three years.”
After another redacted section, the letter stated, “It is the department’s conclusion that if FNF acquires Stewart Title, FNF will have more control of the New York title insurance market than prior to the proposed acquisition. With a larger pool of independent agents, all of whom would be aware that FNF would have near 50 percent control of New York state’s title insurance capacity, it is not reasonable to expect independent agents would risk their relationship with FNF.
“Accordingly, the department concludes, based on the actual experience of the industry and the department’s expertise, that the business practice of utilizing independent agents does not undercut the HHI analysis or the anti-competitive effects of the proposed acquisition.”
There were other aspects of the 1506(b) considerations by DFS. That began with the financial condition of the transaction. FNF told the state that the $1.2 billion used in the deal would be paid in cash, common shares and debt financing. But DFS stated it had not received relative proportions of each component.
“As the amount and impact of debt financing has not been demonstrated by the applicant, the department cannot make a dispositive conclusion as to this factor. The inability to reach a conclusion as to this factor accordingly militates against approval,” DFS wrote.
Next it moved to trustworthiness, in which DFS stated that FNF did not provide updated biographical affidavits of its officers and directors. Still, “given the discussion of the other factors,” DFS concluded that it did not need the additional information.
Next was the plan of operations, which was almost entirely redacted by DFS. What remained was the concluding line, “each of the above-described elements of the plan of operation weighs against approval of the proposed transaction.”
In addition, a footnote within the redacted was left open. The footnote appeared to reference a discussion in the redacted section over the cost of title insurance to consumers. It said, “Indeed, it is worth noting that the Appellate Division, First Department ratified the department’s determination that title insurers such as Stewart Title and the applicant’s subsidiaries have actually engaged in practices that inflate title insurance rates to the detriment of New York policyholders,” citing the recent court case filed by the New York State Land Title Association against DFS.
Next came the source of funds, with DFS stating that FNF had yet to confirm final details of the source of funding the acquisition despite “over nine months to do so.” “This lack of detail, in particular the lack of specificity as to debt financing, raises questions about the proposed transaction,” DFS wrote.
Under fairness of consideration, DFS dinged FNF for the lack of a fairness opinion submitted with the proposal. “The lack of an independent fairness opinion as to the level of consideration limits the department’s ability to fully analyze the proposed acquisition,” the agency wrote.