June 6 (Bloomberg) -- Fidelity National Financial Inc. has beaten every stock in the KBW Insurance Index this year by attracting investors who want to bet on a U.S. housing recovery without owning assets tainted by subprime mortgages.

Fidelity, the second-largest insurer of titles to U.S. homes, was profitable in the first quarter, while record defaults by homeowners led to more than $10 billion of combined losses at American International Group Inc., the biggest U.S. insurer, and MBIA Inc., the No. 1 bond guarantor. Fidelity rose 7.4 percent this year, as KBW's 24-stock index declined 13 percent.

Investors backed Fidelity because title insurance claims aren't directly linked to slumping prices or whether mortgages get paid on time, and its holdings have kept their value. Fidelity and First American Corp., the largest company that protects homebuyers from challenges to their ownership, paid out less than 20 percent of revenue in claims last year, while Travelers Cos. and AIG paid more than half.

``Claims go up and claims go down within a modest range,'' said Jerome Bruni, president of Colorado Springs, Colorado-based J.V. Bruni and Co., which manages $650 million and holds 1.27 million shares of Jacksonville, Florida-based Fidelity. ``It's not like Hurricane Katrina can come up and wreak havoc.''

Title insurance stocks declined at the end of last year to their lowest in a decade relative to book value, or assets minus liabilities, data compiled by Bloomberg show. Fidelity and Santa Ana, California-based First American both trade at their book value.

Job Cuts

Most of title insurers' revenue is spent on commissions and salaries. They've been slashing costs by firing workers as home sales fell.

Fidelity eliminated 8,500 jobs since 2003, a 46 percent cut, said Vice President Daniel Murphy. The insurer has room to trim expenses to ride out declines in the housing market, said Alan Fournier, whose Pennant Capital Management LLC hedge fund owns more than 4 million Fidelity shares.

Title guarantee companies incur most of their expenses before actually issuing a policy, according to the American Land Title Association in Washington. While this leaves them with less money to invest than traditional insurers, they haven't been as prone to losses on securities. The three biggest title insurers reported a combined $2.5 million in first-quarter capital gains, compared with a $655 million loss at Allstate Corp., the largest publicly traded U.S. home and auto insurer.

Investments by title insurers ``are very, very clean for the most part,'' said Gerald Glombicki, a credit analyst at Fitch Ratings.

Housing Slump

Glombicki and his colleague Douglas Pawlowski cut Fitch's outlook on the industry to ``negative'' in March, saying revenue will probably decline 20 percent this year.

Home sales fell to a nine-year low in April when properties changed hands at an annualized rate of 4.89 million, the Chicago- based National Association of Realtors said.

Prices slumped as defaults climbed, making banks less willing to extend new loans. The number of mortgage originations probably will drop 18 percent this year from 2007, according to the Mortgage Bankers Association in Washington. The trade group said this week that applications are running at the lowest level in six years.

``I don't see that we've reached a bottom,'' said Mark Heaselden, who helps manage $6 billion as director of equity research and portfolio manager at Associated Banc-Corp. The firm sold more than 400,000 Fidelity shares since September. ``The slowdown even caught them off guard,'' said Milwaukee-based Heaselden.

Protecting Collateral

Title insurers play a role in home sales and refinancing transactions because lenders, seeking to protect their collateral, often require a title search.

The insurers use their databases and public records to verify a seller is the home's true owner, and that property is free from liens. They collect a one-time premium at the closing of the purchase.

In return, they pay costs that may arise if someone disputes the new owner's right to the property -- claiming, for instance, that that the boundaries weren't properly recorded.

The housing slump cost the three biggest title insurers more than $1.7 billion of revenue during the past two quarters. As sales dropped, the companies cut more than 12,000 jobs since the start of 2007.

Better Preparation

``This is not an average cyclical downturn, and they are taking the opportunity to make themselves better prepared going forward,'' said Nathaniel Otis, a Hartford, Connecticut-based analyst at KBW Inc. Otis has an ``outperform'' rating on Fidelity and No. 3 LandAmerica Financial Group Inc. of Glen Allen, Virginia, and a ``market perform'' recommendation on First American.

Fidelity's first-quarter profit dropped 67 percent to $27.2 million. First American's earnings declined 65 percent to $29.3 million, and LandAmerica posted a $24.2 million loss.

Fidelity declined 72 cents, or 4.4 percent, to $15.69 at 4:06 p.m. in New York Stock Exchange composite trading. First American slipped 80 cents to $31.96 and is down 6.3 percent on the year. LandAmerica fell $1.21 to $27 and has slumped 19 percent since Dec. 31.

``There's so much relative pessimism among homeowners,'' LandAmerica Chief Executive Officer Theodore Chandler said in an interview during May. ``It's much like last year. Last year was the summer that never came.''

Pennant Capital's Fournier, who profited betting against the housing market in 2006, said sales, not homebuyers' solvency, is what matters to title insurers.

``Transaction volume is likely to get better,'' he said.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

Last Updated: June 6, 2008 16:29 EDT