Fidelity National Financial Inc (FNF) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF first-quarter earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given to you at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to over to Mr. Dan Murphy. Please go ahead.

Thank you. Good morning everyone and thanks for joining us for our first quarter 2009 earnings conference call. Joining me today are Bill Foley, Chairman of the Board, Al Stinson, Chief Executive Officer, Randy Quirk, President, and Tony Park, CFO.

We will begin with a brief strategic overview from Bill Foley. Al Stinson will provide an update on our operating companies and the title business, and Tony Park will finish with a review of the financial highlights. We will then open the call for your questions and finish with some concluding marks from Bill Foley.

This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management.

Because such statements are based on expectations as to future economic performance and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release yesterday and in the statement regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC.

This conference call will be available for replay via webcast at our website, at FNF.com. It will also be available through phone replay beginning at 11 AM Eastern Time today through next Tuesday, May 5. The replay number is 800-475-6701 with an access code of 995556. Let me now turn the call over to our Chairman, Bill Foley.

Thank you Dan. The highlight of the first quarter was the continuation of the strong open order volumes that began in very late 2008. The significant strength in refinance volumes has (inaudible) caused an increase in the time it takes to close and order, as we really only began to see an increase in closed order volumes during the latter part of the quarter. We expect that trend in increased closed orders to increase as we head into the second quarter.

Additionally, we saw an increase in open order volumes in the first three weeks of April, nearing our highest level of 2009 which has us extremely well positioned as we move through the second quarter.

We also made significant strides on integration of Lawyers and Commonwealth operations during the quarter, realizing run rate cost savings of more than $231 million as of March 31, 2009 versus our original synergy estimate of $150 million and our revised synergy estimate of $225 million.

Most importantly, the Lawyers and Commonwealth operations returned to operational profitability for the month of March, producing an operating margin in the mid-single digits for the month before the impact of $11 million of realized losses from the disposition of their equity portfolio. These underwriters are now positioned to generate increasing profit margins as we enter the second quarter and beyond.

As we mentioned on our last earnings call, we engaged in an overhaul of our claims management and processing functions during the latter part of 2008. In the first quarter we experienced a second consecutive quarter of significantly lower paid title claims, recording actual title claims paid of only $56 million for all underwriters for the quarter. After completing our actuarial and loss and reserve analysis we made the decision to lower our provision level from 8.5% to 7.5% for the first quarter. We will continue to monitor and evaluate our loss provision level, actual claims paid and the loss reserve position each quarter.

Finally on April 20 we closed on a public offering of our common stock for net proceeds of approximately $331 million. There were two primary reasons for the issuance of stock. First, we will repay $135 Million under our existing credit facility on April 30 which will immediately bring our debt to capital ratio down to 30%. We're also examining the option of repurchasing a significant amount of our existing bonds, which will further reduce our debt to total capital ratio from 30% to as low as 24%, a level more in line with our historic debt to cap targets. This reduction in leverage will provide increased financial flexibility for FNF.

Second, as the leading title insurance company in the country, we believe the strength of our balance sheet including unrivaled claim reserves, shareholders' equity, investment portfolio and modest financial leverage will allow us to differentiate ourselves in the marketplace particularly in the commercial area. At December 31, 2008 our cash and investment portfolio was larger than the next two title companies combined and represents 53% of the total cash and investments of the top three title companies.

As we discussed during our recent equity offering, operating performance in our title business began the quarter slowly but picked up as we got into the month of March. In January we recorded a pretax loss of approximately $11 million, as the legacy FNF business was profitable but the Lawyers and Commonwealth operations lost more than $17 million on a pretax basis.

In February we recorded a pretax loss of approximately $5 million as the legacy FNF was again slightly profitable and the Lawyers and Commonwealth operations improved to a pretax loss of only $5 million. In March we recorded $15 million in pretax earnings but those results included a $20 million synergy bonus and approximately $6 million in other than temporary investments impairment related to several equity securities. Before those two items we generated approximately $41 million in pretax earnings, which we believe to be a more meaningful representation of our operating performance in March.

Legacy FNF generated a high single digit margin for the month and Lawyers and Commonwealth operations recorded a mid-single digit margin before the impact of the $11 million in realized losses from the sale of the equity portfolio. I will now turn the call over to our CEO, Al Stinson.

Thank you Bill. Specialty insurance revenue was $87 million for the first quarter, a decrease of approximately $2 million from the first quarter of 2008. Flood insurance generated $32 million in revenue, personal lines insurance contributed $31 million in revenue and home warranty produced $70 million in revenue.

Pretax earnings of $13 million were positively impacted by increased flood claim processing revenue during the first quarter, still driven by late summer 2008 hurricane related floods. The homeowners business produced a loss ratio of 59% for the quarter. While we do not consolidate the results of Sedgwick they produced revenue of $176 million and EBITDA of $26.5 million for an EBITDA margin of about 15% for the first quarter. Our 32% share of Sedgwick's first-quarter earnings was $1.6 million.

We also do not consolidate the results of Ceridian, but they produced revenue of $385 million, an EBITDA of $70 million and EBITDA margin of 18%. Ceridian's net loss of approximately $31 million included a $15 million foreign currency loss. Our 33% share of Ceridian's quarterly loss was $10 million, of which approximately $5 million related to our share of the foreign currency loss.

We are focused on taking the necessary operational steps to reduce the expense structure in Ceridian in light of the current economic environment. We continue to own an approximately 266,000 acres of land on the eastern side of the Cascade Mountain range through our 70% ownership of Cascade Timberlands. We're working on a number of initiatives to generate value from the land.

We have received preliminary approvals for a resort development on one tract and are in discussion on potential development scenarios on another. We also have several potential sale opportunities on other tracts, including a signed conditional option sale agreement on one tract and preliminary discussions on the sale of another large tract.

On March 27 we closed on an investment in the former VICORP Restaurants that is now known as American Blue Ribbon Holdings. We invested approximately $11 million for a 45% ownership stake. American Blue Ribbon Holdings operates 178 family dining locations, 133 under the Village Inn brand and 45 under the Bakers Square brand, as well as an additional 90 franchise locations under the Village Inn brand. We expect $280 million of revenue and $23 million of EBITDA in our first full year of ownership.

In the title business total order volumes were very strong during the first quarter. We opened 14,000 orders per day in January, 10,900 per day in February and more than 11,800 orders per day in March. Open order accounts continue to accelerate in April as we averaged approximately 13,700 open orders for the first three weeks of April.

Clearly refinance orders drove the sharp increase in the first quarter, as refis were approximately 70% of total open orders during the quarter. We did see the time it takes to close an order increase in the first quarter, as it appears that the significant increase in open order volume has caused a logjam in the funding of these refi transactions. The transactions are closing but they are taking longer than normal.

We focused on headcount reduction and the integration of Lawyers and Commonwealth operations for much of the quarter. During the quarter we eliminated approximately 2100 positions or nearly 40% of the employees transferred from those companies (inaudible) closing. We also close approximately 220 offices.

As Bill mentioned, we generated $231 million in run rate synergies in the first quarter and got the Lawyers and Commonwealth operations back to mid-single digit operational profitability in the month of March.

On the legacy FNF side we added some minimal headcount back, primarily in our West Coast direct operations due to the increase in order volume. We also added about 300 positions in our ServiceLink operation during the quarter as a centralized lender business saw a huge increase in order volumes. And that continued into April as open order volumes in ServiceLink were easily at their highest for the year in the first three weeks of April.

The commercial title business continued to struggle. We opened approximately 21,000 commercial orders in our national commercial divisions and closed approximately 11,300 commercial orders, generating approximately $50 million in revenue on a continued [depressed] fee per file figure of $4400. On a sequential basis the commercial business was relatively stable from an order perspective but the fee per file declined by 10%. Commercial revenue accounted for approximately 15% of total direct title premiums in the first quarter.

Let me now turn the call over to Tony Park to review the financial highlights.

Thank you Al. FNF generated $1.4 billion in revenue for the first quarter with pretax earnings of $141,000 in cash flow from operations of $128 million versus cash used in operations of $75 million in the first quarter 2008.

Our results include two significant items. First we recorded a $20.4 million synergy bonus related to the $231 million in realized synergies from the Lawyers and Commonwealth acquisition. Second, we recorded other than temporary impairments of $5.7 million related to several equity investments. Before the effect of those two items we generated pretax earnings of $26 million.

The title segment generated $1.26 billion in total revenue for the first quarter, an increase of 24% from the first quarter of 2008. The current quarter's results include the results of Lawyers and Commonwealth while the prior year's do not. Direct title premiums increased by 9% and agency premiums increased by 36% versus the first quarter of 2008. Without the impact of Lawyers and Commonwealth operations, direct premiums declined by 13% and agency premiums declined by 10% versus the first quarter of 2008.

Consolidated escrow and other fees increased by 27% versus the prior-year quarter and 14% before the impact of the Lawyers and Commonwealth operations. AssetLink, our REO default business, generated $51 million in revenue, $33 million of which was pass-through revenue that also shows up as an expense in other operating expenses. Without Lawyers and Commonwealth, personnel costs increased by $41 million -- I'm sorry, decreased by $41 million or 12% versus the first quarter of 2008.

The first quarter includes the 10% salary reduction. But it is important to note that the salary reduction was reversed as of April 1. Excluding Lawyers and Commonwealth, other operating expenses showed an $8 million increase versus the first quarter of 2008, much of which was driven by the $33 million in pass-through expense from AssetLink and the $19 million decline in earnings credits from escrow deposits versus the prior year.

The provision for title claims was $68 million for the first quarter. As Bill mentioned, actual title claims paid in the quarter declined significantly to $56 million, the second straight quarter of significantly lower paid title claims. Based on this trend and our actuarial analysis, we made the decision to reduce our provision for title claims to 7.5% for the first quarter. We will continue to monitor and evaluate our loss provision level, actual claims paid and the loss reserve position each quarter.

Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013, the $535 million drawn under our credit facility, the $50 million subordinated note issued to LandAmerica and debt at Fidelity National Capital, the vast majority of which is nonrecourse. The debt to total capital ratio was 32% at March 31, 2009 and 28.5% with respect to our 35% credit facility covenant.

After the repayment of $135 million under our credit facility on April 30, our debt to capital ratio will decline to approximately 30%. Assuming that all of the April equity issuance proceeds are used to repay or repurchase outstanding debt, our debt to total capital ratio would be approximately 24% and 21% with respect to our credit facility covenant.

Finally our investment portfolio totaled $4.6 billion at March 31. There are approximately $3.5 billion of legal, regulatory and other restrictions on some of those investments, including secure trust deposits of approximately $5 million and statutory premium reserves for underwriters of approximately $2.4 billion. There are also some other restrictions including less liquid investments like our ownership stakes in Sedgwick, Ceridian and re-me, cash held as collateral in our securities lending program and working capital needs [out from] underwritten title companies all of which total of approximately $600 million.

So of the gross $4.6 billion, approximately $1.2 billion was theoretically available for use with about $1 billion held at regulated underwriters and approximately $170 million in nonregulated entities. Let me now turn the call back to our operator to allow for any questions.

Bob Napoli, Piper Jaffray.

I guess trying to get to what we think operating margins would be for the second and third quarters and kind of the revenue ramp up and you gave some good details on the month of April. Do you think -- are the closings in the month of April -- or you said the closing rate obviously had slowed the time it takes to close. But are you seeing -- so are you -- March openings now, are you seeing the closing per month or the closings per day start to move up to the highest levels? I would expect them probably to looking to be the highest levels of the year right around now and probably move higher.

You are correct. We're starting to see the closings for the month of March and we are finding it is taking up to 60 days or even longer to close these refinance orders. The lenders are totally backlogged. But the transactions are being well documented and information from borrowers is being totally collated. So the transactions are closing.

There is an acceleration in closings. As our orders are picking up we anticipate we will have a normal closing ratio of 63 to 65% of those refinance orders. And as far as margins I'm going to let Al deal with that one.

I believe that at current order volumes we should be able to return to double-digit pretax margins in the second quarter. I cannot be a lot more specific than that. We do not give guidance as you know.

On the agency side, and there is one item -- you have a higher mix of agency with the LandAmerica acquisition. And the premiums to the agents were up to 80% of revenue, 80.2%. Last year or ago was 77.5%. I think that is an area that you and the industry had pointed out that you are looking for little better split. Is the 80% which -- is that a proper number and why is it so much higher than a year ago?

This is Tony. Part of that is that the LandAmerica portfolio always ran at about 81% versus the Fidelity, what we were close to 79%. So that 80% is really a combination of the two. We have made efforts in certain parts of the country to change those splits in our favor and certainly we have done some of that. But on average 80% is probably a fair run rate going forward and I think the industry runs somewhat close to that. I would not be surprised to see it go a little lower than that, but on average 80% is probably a pretty good number.

One thing that LandAmerica had, or the Commonwealth and Lawyers operations had is they had significant agents in the West and those agency splits were 91/9, 92/8, 90/10. Fidelity on the other hand or Fidelity group of companies really did not have any agents to speak of --Colorado, Nevada, Arizona, Washington, Oregon and California. And so now we have gone back to those agents and they have been asked to revise their splits to make them more profitable for our company.

We have also just in the first three months with the Commonwealth and Lawyers agents have canceled about 4000, 4500 agents out of their 8000 agents, so about 50% of their agents have already been canceled or terminated or asked to move on. Those are primarily high claims agents and also agents that are low premium dollars.

What percentage of your revenue, Bill, does that 4000 represent?

That 4000 in the first quarter represented net revenue to us of about $7 million. Net revenues (inaudible)

Last question on pricing. What do you expect the effects of pricing, do you have any update on the pricing and the various states and the effect that you expect later this year?

We would rather not really speculate on the expected pricing. We have been successful in obtaining a successful 10% rate increase in the state of California. I believe, Tony and Dan, that we have -- rates have been increased in (multiple speakers)

22 states with 14 states pending. We have made some good strides, 5 to 10% rate increases in some of our larger direct operations states in the West -- Colorado, Arizona, Nevada, California, Washington and also the state of Illinois.

Is that 10% in California, when did it go into effect and it is it on both refi and purchased titles?

It is on both. It went into effect I believe toward the end of January. But it is for orders opened after the end of January. So we will not really see the benefit of those rate increases until really about now. So we did not see that in the first quarter.

Thank you.

Bruce Harting, Barclays Capital.

Can you talk about the branch efficiencies and how you came to the number that you closed and which ones you're keeping open in which geographies? And just talk a little bit about the operational dynamics that go into that and what kind of buy in you get from the agents. Just talk about that strategy. Thanks.

I'm going to let Randy deal with the bulk of the call. I will say, as a general rule, when we started meeting with the Lawyers and Commonwealth individuals whether they be agency reps or direct operations individuals, that they totally bought into the Fidelity program. The Lawyers and Commonwealth employees were -- had been very distracted by the financial turmoil they had been going through with LandAmerica. And also a disengaged management structure at LandAmerica. It was not really in the field dealing with them on a day-to-day basis and solving their problems.

So, we really have not lost revenue producers really anywhere in the country. I'm talking a handful, five, six people that has really been very, very successful integration and amalgamation of two very significant companies. Now, Randy, you might want to mention -- might want to speak to the offices closed and why we closed them and where we consolidated and so on.

Sure Bill, thank you. What we really did is we started with the geographical locations of the Lawyers and Commonwealth branches up against our existing brands, the profitability of those individual operations, and then took into consideration the metrics which we typically use in the former FNF companies which is productivity -- open orders per employee.

So as we moved from the west to the east we had a lot of redundancies over on the West Coast. We had some strong Chicago, Fidelity operations and maybe some weaker operations on the Commonwealth and Lawyer side, so we would maybe close or consolidate some of those operations.

In other areas we had stronger Commonwealth or lawyers operations versus a Fidelity, or Chicago or a Tycor and would actually merge, or consolidate in the other direction. As we went through the Midwest, we saw some operations that were very spread out and actually closed offices in the Midwest and in the Southeast.

So, we used as the key to our staff reductions and a key to our closings of offices really the productivity which we have brought up now to the former Fidelity standard of running in the range of 18 to 20 open files per employee and also the profitability and the existing footprint of both organizations. Certainly the profitability of the direct operations on the Commonwealth side and on the Lawyers side as well as FNF side was a major consideration.

Does that answer your question Bruce?

Yes, thanks.

Nik Fisken, Stephens Inc.

Have you guys seen purchase pick up at all?

Well, as a percentage of total orders, purchase is not picking up. And purchase transactions are picking up because the total orders have picked up. So what we are seeing now particularly in the Central Valley in California and other kind of impaired areas in California is that the purchase transactions are moving from being the straight foreclosure purchases, purchased out of a foreclosure sale or what we would call short sale where the bank takes a discount on its loan to resale transactions. That is encouraging.

And we are seeing a pretty significant decrease in the value of homes in some of these distressed areas and the purchase transactions are picking up. I can tell you I am looking for a house for my son who's going to be going to Fresno State next year. And there are multiple offers on houses in Fresno in good areas. They are good prices but there are multiple offers. So it is actually very encouraging.

With the way the money is flowing from Fannie Mae and Freddie Mac and the incentives to put on loans with those two institutions that are conforming, we are confident. We feel good about an emerging purchase transaction market in the conforming loan arena.

So about 30% of the current run rate April orders are purchased you would say roughly?

Is that right Randy?

That is correct. And actually the volume of resales have picked up March over February and February over January.

How should we think about fee per file for 2Q?

It is a refi. You're going to see some improvement versus the first quarter. I don't know if we can give you a number for Q2. The fee per file in first quarter was -- what?

It was [1166] I think. That was impacted by a very strong refinance business, not a ton of purchase market, and then the commercial market which was pretty weak. You would expect that commercial to not get any weaker and probably improve as we move through the year. So I would think that we probably hit a low of fee per file and wouldn't be surprised to see that bump up a little bit in Q2 and beyond.

The only other thing I have is on the other operating expense of $285 million, is the right way to think about this as 80% fixed, 20% variable just like it was pre-LandAmerica?

That's right. Roughly we look at, we don't break it down specifically. But generally speaking it is spent about 20% variable in other operating and about 33% variable on the personnel line item. That would generally be about the same.

And is this where or most of the additional land cost saves are going to come out?

They come out of both areas. We are certainly getting -- a big part of cost saves have come and are coming out of personnel line item. I think of the total $231 million I want to say over $150 million came from personnel savings and maybe about the rest, $80 million or so came from the other operating.

The one thing we want to make a point on or make clear on the synergies of $231 million, those are synergies that have been achieved. Those are not projected synergies beyond March 31, so those are in hand. In terms of some corporate synergies there is a bit more to come in April and May as we really move away from the LandAmerica Richmond office and fully integrate our operations down here in Jacksonville. We are running a few duplicate expenses as we bring people, get people trained to get them hired down in Jacksonville versus Richmond.

I forgot one other thing, on the writedowns on the equity portfolio, anything else you guys foresee?

If we haven't got it by now -- our total equity portfolio at this point is about $19 million and every time we get through a bit of a profit we sell an issue. Out of our $4.6 billion we have $19 million now in equities. I think we have got it, but I guess it could be $19, I don't know. We have pretty good stocks but (multiple speakers)

For all of our sake, I hope you guys don't have anymore. Thank you very much.

(Operator Instructions). Nat Otis, KBW.

Just quickly back on the losses, you were talking about you went from 8.5 down to 7.5 and you are kind of going to assess things on a quarterly basis from here. Does that kind of mean we should be looking at things in the 7.5 range right now just to gauge how things progress or should we be more cautious than that? Just getting an idea how we can read it if you are actually reading it kind of on a quarterly basis as well.

You can be comfortable with The 7.5. If we can do better than that we're certainly going to. We are having very strong claims experience at this time but of course our actuarial loss reserve analysis relates back to previous policy years and not the current policy years. We are being successful with our claims management processes and procedures. But 7.5 is where we settled out in the first quarter. You should not look for an increase in the loss reserve. I can assure you of that.

Okay, great. And them for Ceridian you talked about the foreign currency negative mark in the quarter. My guess would be we should expect that for at least the next several quarters as well.

Well, the negative mark really came from the UK and Canadian.

So it should be there for at least through Q3 of this year I would imagine?

Well, I mean I think we're sort of -- to hit it, I don't know if the dollar is weakening, sort of a current exchange rate. We take it each quarter.

I would not necessarily make that assumption. I think the right answer is we don't know. That related to the fourth quarter because we lag recording it.

That's right. A big part of that was in the fourth quarter where we're one quarter behind in terms of booking the earnings. What Ceridian has is about $150 million of US denominated debt that is actually in Canada that is serviced with Canadian dollars. So that is why you have the foreign exchange. So it really depends on our dollar up against the Canadian dollar is what caused that. So I don't know that I would expect that to recur. It may be a little volatile.

Okay, that's very helpful. Last quick thing on that American Blue Ribbon investment. Just a little bit of color, it seems a little bit outside of what your core businesses are. Any color on how you came across that type of an investment? Did they come to you? Were you looking around? Any color there might be helpful.

Sure. Actually we have a distressed properties group within FNF and that is where the re-me investment came and a couple of other investments we've had over the past several years. And VICORP actually entered -- we had a bond position in VICORP and VICORP entered a bankruptcy proceeding, and we became a stocking horse bidder. And ourselves and a financial sponsor that is a subsidiary or affiliate of Providence is our partner in this transaction. And we made a joint bid, the bid was certified by the bankruptcy court.

We obtained modest funding from Wells Fargo in the amount of about $20 million and invested an aggregate of around $24 million to $25 million to acquire this company. We just thought it was opportunistic. It is a -- the company has now emerged from bankruptcy and we have a strong management team in place and we have a fairly small investment. We wish we had a larger investment in it, but we have a fairly small investment. And we chose not to consolidate the position. We chose to have a 45% interest.

Great. That's very helpful. Thank you.

At this time, I'm showing no further questions. Please continue.

Thank you everybody. We believe we accomplished many things in the first quarter that have us well-prepared for the future. We quickly rationalized and integrated Lawyers and Commonwealth operations and returned them to operational profitability in March. Claims trends continue to be extremely positive and the equity offering will reduce the leverage on our balance sheet. In addition, order counts continue to surge and we feel well-positioned to take advantage of a stronger market as we enter the second quarter.

Thank you for joining us this morning.

Thank you ladies and gentlemen. That does conclude your conference call for today. Thank you for your participation and for using AT&T executive teleconference service. You may now disconnect.