First American Financial Corp (FAF) 2011 Q2 法說會逐字稿

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). A copy of today's press release is available on First American's website at www.FirstAM.com/investor.

Please note that the call is being recorded and will be available for replay from the company's Investor website, and for a short time by dialing 203-369-1939. We will now turn the call over to Craig Barberio, Director of Investor Relations, to make an introductory statement.

Good morning, everyone, and thank you for joining us for our second-quarter 2011 earnings conference call. Joining us on today's call will be our Chief Executive Officer, Dennis Gilmore; Max Valdes, Executive Vice President and Chief Financial Officer; and Mark Seaton, Senior Vice President of Finance.

At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements such as those described on page 4 of today's news release, and other statements that do not relate strictly to historical or current facts. The forward-looking statements speak only as of the date they are made, and the company does not take undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements are described on page 4 of today's news release.

With that, I will now turn the call over to Dennis Gilmore.

Thank you, Craig. Good morning and thank you for joining the call. For the second quarter financial results, total revenues were $927 million, down 4% from the second quarter of 2010 with net income of $32 million, or $0.30 per share. Despite an 18% drop in closed orders, the Title segment's margin was 6.6% for the quarter, essentially flat from the second quarter of 2010.

Our open orders averaged 4,700 orders per day in the second quarter, up 2% on a sequential basis. Refinance transactions were 50% of open residential orders compared with 53% in the first quarter. Resale transactions were up 9% from the first quarter reflecting a weak selling season.

Our National Commercial division continues to perform well with revenues of $84 million, up 28% compared to the second quarter of 2010, up 25% on a sequential basis. Our commercial pipeline is strong with open orders in the second quarter at their highest levels since the third quarter of 2007.

In the second quarter, we executed on a $40 million annualized cost reduction initiative focused on our Shared Services and our Title segments. We expect cost savings of $9 million in the third quarter and the full $10 million run rate beginning in the fourth quarter. The savings from this initiative are in addition to our company's ongoing expense management efforts.

Our Specialty Insurance segment had pretax earnings of $10 million for a 14.3% margin. The overall loss ratio was 54% in the current quarter compared with 49% in the prior year. Both the property and casualty and home warranty businesses continue to perform well.

In regards to the Bank of America lawsuit, as in the past I can't say a lot about it, but I can tell you that First American, Bank of America, and Pfizer began a mediation process in June of 2011 that is scheduled to conclude by the end of August.

Turning to current market conditions, July open orders are down 7% compared to June with refinance orders running approximately 53% of residential orders. Our closed orders are trending essentially flat with June levels, and as I mentioned earlier, the commercial pipeline remains strong.

Going forward we will pursue opportunities for organic growth and strategic investments in our core business while we continue to focus on operating efficiencies while maintaining a conservative balance sheet.

I would now like to turn the call over to Max Valdes, for a more detailed review of our financial results.

Thank you, Dennis. The company generated total revenues of $927 million for the quarter, down 4% from the same quarter the prior year. Net income for the quarter was $32.3 million or $0.30 per share compared with net income of $33.8 million or $0.32 per share for the same quarter of the prior year. The results for the current quarter include $2.9 million in net realized investment losses and $6.8 million severance that on a combined basis reduced earnings per share by $0.05.

In the Title Insurance and Services segment, total revenues for the quarter were $857 million, down 5% compared with the same quarter of the prior year. Direct premium and escrow fees were down 8% driven by an 18% decline in closed orders partially offset by higher average revenue per order closed. Average revenues per order closed increased 12% to $1,548 compared to the same quarter of last year. This increase primarily reflected the strength of higher premium commercial title business.

Agent premiums were down 4% in the second quarter compared to the 8% decline in our direct premiums. The better relative performance in agent premiums reflects stronger title order activity in the first quarter of 2011 as compared to 2010 due to the normal reporting lag in agent revenues of approximately one quarter.

Information and other revenues totaled $157 million for the quarter, up 3% compared to the same quarter of last year. The increase in the quarter was driven by higher demand for title plan information and other non insured title products. Investment income totaled $19 million for the quarter, an increase of 4% compared with the same quarter of last year.

This increase was primarily due to higher interest earned on the investment portfolios. We incurred net realized investment losses of $1.8 million for the quarter compared with net realized investment gains of $3.6 million for the same quarter of last year.

Personnel costs were $275 million for the quarter, down $10 million or 4% compared with the same quarter of last year. This decline primarily reflects a reduction in US headcount, reduced incentive compensation, and lower healthcare expenses partially offset by higher severance costs. Total severance costs in the Title segment were $6.3 million in the second quarter.

Other operating expenses were $179 million in the quarter, down 3% from the same quarter of last year. Lower office-related costs and a reduction in consulting expenses were partially offset by increased production-related expenses in the company's commercial and default businesses and by higher legal expenses in the quarter.

Agent retention was 80.3% of agent premiums compared with 80.6% in the second quarter 2010. The improvement in agent retention was due to the geographic mix of agent revenues and our continued progress on improving agent splits on both new and existing agency relationships across a number of markets.

The provision for title losses was 5.9% of premium and escrow revenue compared with 6.8% in the second quarter of 2010. The second quarter rate of 5.9% includes an ultimate loss rate of 6% for the 2011 policy year and minor favorable development for prior policy years. Pretax income for the Title Insurance and Services segment was $56.9 million in the second quarter, a decline of 7%. The segment generated a pretax margin of 6.6% in the quarter compared to 6.8% in the same quarter of the prior year.

The current quarter includes net realized investment losses that reduced the pretax margin by 20 basis points as well as severance expenses that reduced the pretax margin by an additional 80 basis points.

Turning to the Specialty Insurance segment, total revenues were $72 million, up 1% compared with the same quarter of the prior year. Total expenses were up 2%, primarily driven by higher claim losses that were largely offset by lower personnel costs and other operating expenses. The Specialty Insurance segment pretax margin was 14.3% for the current quarter, down from 15% for the same quarter of the prior year.

Finally, corporate expenses were $17.9 million in the second quarter, including $2.1 million in one-time charges.

With that, I will turn the call over to Mark.

Thank you, Max. I will provide a few comments on our capital and liquidity. Cash provided by operations in the second quarter was $23 million, an increase of $40 million relative to the second quarter of last year. Capital expenditures during the quarter were $16 million which includes investments in technology, software development, and title plan expansion.

In terms of liquidity, we had $37 million of cash at our holding company at the end of June. In addition to this cash, we have 6 million of our 8.9 million shares of CoreLogic at the holding company. Based on yesterday's closing price, our stake in CoreLogic was valued at $142 million, $96 million of which is held at the holding company. In addition, we also have $200 million available on our $400 million line of credit.

Our cash and investment portfolio totaled $3.4 billion as of June 30, which includes $1.5 billion of fiduciary funds. The portfolio is comprised of debt securities of $2.3 billion, cash and short-term deposits of $664 million, equity securities of $218 million, and $186 million in less-liquid long-term investments. Overall, we have a high-quality portfolio with 73% of our debt securities rated AAA, and only 1% rated below investment grade.

Debt on our balance sheet totaled $286 million as of June 30. Our debt consists of $200 million funded on our credit facility, $47 million of trustee notes, and $39 million of other notes. Our debt-to-capital ratio as of June 30 was 12.4%.

I would now like to turn the call back over to the operator to take your questions.

(Operator Instructions). Mark DeVries, Barclays Capital.

Thanks. First I just wanted to get a clear sense of kind of the trajectory for the average fee per file. If we were to assume that commercial is stable to growing from here, and residential, while maybe retrenching, is going to come from a larger share of purchase, is it reasonable to assume that the fee per file will continue to migrate up even though by our look it seems like this is kind of a record fee per file over the last five, six years?

Thanks for the question, Mark. This is Mark. This quarter fee per file was about $1,550. And based on what we're seeing now, we think that's going to continue to creep up for the rest of the year. Now that assumes that commercial continues to be strong because our high commercial volume is really what drove that increase this quarter. But we're also going to benefit from the fact that we should have a better mix of resale versus refi going forward. And so based on what we're seeing now, we think it will continue to creep up from its current level.

Okay, great. And this next question may be for you, also, Mark. I think coming out of the Core Logic spin, one of the priorities you guys set was repositioning the investment portfolio to pick up yield. I'm just interested in getting an update on kind of where you stand with that, if you're done with that process. And if not, whether the volatility seen in the credit rates market has caused you to reassess some of your priorities there.

Yes, so over the last 18 months we've really made a big shift in our portfolio. 18 months ago we had about 12% of the portfolio was in corporates and munis. Today it's about 22% in corporates and munis, so most of that effort is done. As we sit here today, we're still pretty short on the curve. Our duration is about 2.5 years and the duration of our liabilities is about 5 years or so, so we're really short on the curve and we're really not making a whole lot on the portfolio right now because we're still conservative. Our book yield is about 2.0, 2.25, something like that. So the portfolio is something that we're continually analyzing, but I think we feel good that it's in a pretty safe position right now.

(Operator Instructions). At this time, there are no additional questions.

Well thank you all for joining the call today and we look forward to a strong third quarter.

Thank you. That concludes this morning's call. We'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 203-369-1939. The Company would like to thank you for your participation. This concludes today's conference call. You may now disconnect.