According to accountant and author Steven Bragg, one tool the Department of Justice uses to assess whether mergers and acquisitions will result in a potentially anti-competitive concentration of market share is the Herfindahl-Hirschman Index, or HHI. The basic calculation ain’t rocket science: You square all of your major players’ market shares, and add them up.

The title insurance business was "highly concentrated" in the hands of a few companies even before Fidelity National Financial Inc. got the nod from antitrust regulators to take over LandAmerica Financial Group Inc.’s two primary underwriting subsidiaries.

That’s according to one measurement used by the Department of Justice to analyze whether mergers and acquisitions will result in a potentially anti-competitive concentration of market share, the Herfindahl-Hirschman Index, or HHI.

Accountant and author Steven Bragg explains that the basic HHI calculation is simple: Square the market shares of competitors in an industry, then add them up.

Before the third-biggest player in the title insurance business, LandAmerica Financial Group, filed for Chapter 11 bankruptcy protection on Nov. 26 and put its underwriting subsidiaries up for sale, five companies pretty much owned the business. LandAmerica and three competitors each commanded double-digit market shares.

According to the American Land Title Association, during the first nine months of 2008, First American Corp. had the largest market share (29 percent), followed by Fidelity (26 percent), LandAmerica (19 percent), Stewart Title Guaranty Co. (12 percent) and Old Republic International Corp. (6 percent).

That works out to an industry HHI of 2,058 (29² + 26² + 19² + 12²+ 6²).

Bragg tells us that an industry with an HHI of zero to 999 is considered to be a "competitive market with no dominant players." An HHI of between 1,000 and 1,800 is "moderately concentrated," while anything above 1,800 indicates a "highly concentrated" industry.

So, with the Department of Justice standing aside last week and allowing Fidelity’s acquisition of LandAmerica’s underwriting subsidiaries to proceed, it looks like a "highly concentrated" industry is about to become even more so, with an HHI of 3,046 (Fidelity 45² + First American 29² + Stewart 12² + Old Republic 6²).

As lawyers for Old Republic noted in objecting to the sale, in the 12 states with the biggest gross title insurance premiums the combined market share of Fidelity and First American will be 70 percent or more in all but one. The projected market share of Fidelity and First American combined in those 12 states: California (78 percent), Texas (70 percent), Florida (60 percent), New York (77 percent), Pennsylvania (82 percent), New Jersey (73 percent), Arizona (89 percent), Ohio (73 percent), Virginia (74 percent), Michigan (87 percent), Washington (87 percent) and Illinois (83 percent).

The alleged lack of competition in the title insurance industry is already the source of concern to regulators in Colorado, California, Florida, Washington and other states. A 2007 report by the U.S. Government Accountability Office concluded that consumers are in a "weak position in the title insurance market," and recommended that regulators step up oversight and enforcement to ensure price competition and prevent illegal activities.

Because consumers often don’t shop around for title insurance, regulators say they are often victims of schemes that provide incentives to real estate professionals who are influential in selecting a title insurer, such as real estate agents, mortgage lenders, attorneys and home builders. Regardless of whether the incentives are paid legally (through affiliated businesses) or are considered illegal kickbacks in the eyes of the law, they can add to the cost of obtaining a title insurance policy — a must for nearly every consumer buying or refinancing a home.

One of the Department of Housing and Urban Development’s primary motivations in overhauling the Real Estate Settlement Procedures Act (RESPA) was to help consumers shop around and avoid paying too much for title insurance and other settlement services.

Bragg says that in general, a transaction that increases HHI by more than 100 points in an already concentrated market "will raise antitrust concerns" with regulators. The calculations above suggest the title insurance industry’s HHI, already well into "highly concentrated" territory, is about to go up nearly 1,000 points.

Does this mean that the Department of Justice was asleep at the wheel last week in allowing Fidelity’s planned acquisition of LandAmerica’s two biggest underwriting companies, Lawyers Title Insurance Corp. and Commonwealth Land Title Insurance Co., to proceed without further review? Not necessarily.

We also have to take into account something called the "failing company doctrine," Bragg explains, which holds that a merger "is not likely to create or enhance market power if the imminent failure of one of the merging firms would cause the assets of that firm to exit the relevant market."

In other words, you might end up with similar market concentration if you tried to block Fidelity’s acquisition of Lawyers and Commonwealth, and they instead ended up going out of business.

This is essentially what LandAmerica argued in pushing for approval of a quick sale of the companies in bankruptcy court. Delaying a sale would have made the companies essentially worthless, LandAmerica argued, because lenders had become reluctant to do business with them and title agents were defecting.

Antitrust regulators don’t comment on the specific filings they receive under the pre-merger notification program established by by the Hart-Scott-Rodino Antitrust Improvements Act of 1976. But a Federal Trade Commission spokesman told Inman News that the failing company doctrine is a consideration in deciding whether or not to intervene in a merger.

Nebraska regulators had placed Lawyers and Commonwealth in receivership, and were looking at shutting them down and running off their assets without an injection of capital, LandAmerica said. In approving the terms of a sale of the companies to Fidelity, the Nebraska Department of Insurance said industry consolidation must be weighed against the "lack of guaranty fund protection for current (Lawyers and Commonwealth) policyholders nationwide and the risk of harm to them."

Fidelity announced today that the Nebraska Department of Insurance had issued an order removing Lawyers and Commonwealth from receivership, subject to the closing of the sale of the companies to Fidelity.

Fidelity said the sale was expected to close today, with the U.S. Bankruptcy Court for the Eastern District of Virginia approving amended terms reducing the previously agreed total purchase price by $47 million, to $235 million.

Is consolidation in the title industry a good thing for consumers? Engage in the Inman News Roadmap to Recovery project to share your views. Click here for details.

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