Fidelity National Financial Inc (FNF) 2009 Q4 法說會逐字稿

Ladies and gentlemen, and welcome to the FNF 2009 fourth quarter earnings call. At this time, all participants are in a listen-only mode. Later, there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Dan Murphy, please go ahead.

Thank you and good morning, everyone. Thanks for joining us for our fourth quarter 2009 earnings conference call. Joining me today are Bill Foley, our Chairman, Al Stinson, Chief Executive Officer, Randy Quirk, our President and Tony Park our CFO. We will begin with a brief strategic overview from Bill Foley, Al Stinson will provide on the title business and our operating companies and Tony will finish a review of the financial highlights. We'll take your questions and finish with concluding remarks 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 dated 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 and will also be available through phone replay beginning at 11:00 a.m. Eastern time today through March 4, 2010. The replay number is 800-475-6701 with an access code of 141910.

Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. Despite operating against a difficult economic backdrop, 2009 was a year of significant accomplishments that has Fidelity National Financial well positioned as we enter 2010.

We generated revenue of $5.8 billion, pretax profits of $345 million, net earnings of $222 million and cash flow from operations of $380 million. All of these were significant increases and improvements over our 2008 results. The December '08 acquisition of Lawyers Title and Commonwealth Title was fully integrated during the first half of 2009. From January through March, when we aggressively removed costs from these operations and were able to return them to operational profitability by the month of March. The integration of Lawyers and Commonwealth was completed during the second quarter with an overall cost reduction of nearly $265 million. We eliminated approximately 2,300 positions, more than 40% of the employees transferred at closing and more than 240 offices as part of the aggressive integration. These underwriters are fully integrated into the FNF family and we look forward to their continued significant contribution to our market-leading title insurance business in 2010 and beyond.

In April, we were successful in issuing 18.2 million shares of our common stock for approximately $331 million in proceeds in order to further strengthen our balance sheet. These proceeds were primarily used to reduce the outstanding balance on our credit facility, repurchase our existing public debt and make capital infusion into Lawyers Title to bolster that underwriter's balance sheet. Throughout 2009, we reduced our outstanding debt by nearly $490 million while growing our equity by almost $460 million. And as a result, our debt-to-capital ratio ended the year at approximately 21% after beginning 2009 at more than 32% and book value per share increased by more than $1.10 or 8% from the beginning of 2009, ending at $14.41 on December 31.

The summer and fall brought very consistent order accounts in our title business as we averaged nearly 9,000 open orders per day for much of the period for the month of June through the middle of December. We also generated solid financial results in that timeframe. Yet, the stock price continued to languish. As a result, we repurchased approximately 6.5 million shares of our own stock from June of '09 through January of '10, spending approximately $86.5 million or about $13.30 per share. We continue to believe that our stock offers compelling value, particularly with the trading below book value.

2009 also brought many successes in our other portfolio companies. Sedgwick continued to perform well, generating $700 million in revenue and more than $110 million in EBITDA during 2009. Sedgwick is an attractive asset and we look forward to unlocking more of its value in 2010. Ceridian spent much of 2009 focused on cost reduction and control initiatives. That cost focused allowed the company to produce EBITDA of approximately $300 million on revenues of $1.5 million. And EBITDA margin of 20%.

Our specialty insurance group had another solid year, generating pretax profits of $44 million a 25% increase over 2008, on essentially flat revenue of $380 million. As they remain focused on profitability and risk management over pure top-line revenue growth. The October investment in Fidelity National Information Services has already generated a tremendous return as our $50 million investment is now worth more than $75 million. Cascade, our timber investment, Remy, our auto parts company and American Blue Ribbon holdings, the restaurant company, are all valuable assets that we're confident will return significant value to our shareholders in the future.

We're proud of our accomplishments in 2009. The integration of Lawyers Title and Commonwealth Title was a daunting task, but our employees were up to the challenge. We're now unquestionably the largest, most profitable title insurance Company in the country. However, we're never satisfied. We continue to manage our title business as we always have, with continued dedication to our weekly operating metrics, as we seek to maximize profitability in any market environment.

We strengthened our balance sheet during 2009, reducing debt by $490 million and growing equity by another $460 million, due in large part to the April equity offering and solid financial results for the year. We have a number of attractive companies and we are confident that they will generate meaningful value for our shareholders over the next several years. As always, we remain committed to our ultimate goal of continuing to create value for our shareholders.

I will now turn the call over to our CEO, Al Stinson.

Thank you, Bill. In the title business, total open volumes were surprisingly resilient during the fourth quarter.

We opened 9,400 orders per day in October, nearly 9,100 per day in November and about 7,800 orders per day in December. The month of December saw the expected seasonal decline in order volumes in the last two weeks of the year. In January, we opened approximately 7,800 orders per day with the last two weeks of the month averaging more than 8,500 open orders per day. With order counts remaining strong through much of the fourth quarter, head count reductions were moderate as we eliminated about 200 positions. During January, we eliminated another 200 positions. For the fourth quarter, direct title premiums declined by 7% sequentially from the third quarter and personnel and other operating expenses fell by 6%. Resulting in a 8.2% pretax margin in the title business for the fourth quarter.

We had a relatively solid quarter in the commercial title business. We opened about 19,200 commercial orders in our national commercial divisions and closed approximately 13,700 commercial orders. Generating about $63 million in revenue, on a continued depressed fee for file figure of $4,600. For the fourth quarter, open orders were down 7% sequentially, closed orders were up 1%, the fee per file increased by 6% and commercial revenue increased by 7%. Commercial revenue accounted for about 18% of total direct title premiums in the fourth quarter. Specialty insurance revenue was $93 million for the fourth quarter, a decrease of approximately $4 million from the fourth quarter of 2008. Flood insurance generated $36 million in revenue, personal lines insurance also contributed $36 million in revenue and home warranty produced $18 million in revenue. Pretax earnings were $9 million and the homeowner's business produced a loss ratio of 73% for the quarter.

While we do not consolidate the results of Sedgwick, they produced revenue of $175 million an EBITDA of $30 million. Forr an EBITDA margin of about 17% for the fourth quarter. Our 32% share of Sedgwick's fourth quarter earnings was $2.2 million. We also do not consolidate the results of Ceridian but they produced revenue of $366 million, EBITDA of more than $77 million, an EBITDA margin of 21%. Our 33% -- 33% share of Ceridian's quarterly loss was $5 million. Overall, we recognized $2.3 million in earnings from our equity investments.

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

Thank you, Al. FNF generated $1.5 billion in revenue for the fourth quarter, with pretax earnings of $106 million and cash flow from operations of $13 million. The title segment generated $1.34 billion in total revenue for the fourth quarter, consistent with the $1.35 billion in revenue in the third quarter of 2009. Sequentially, direct title premiums decreased by 7% with a 9% decline in closed orders offset by a 5% increase in the fee per file. Agency premiums increased by 6%. Sequentially, title segment personnel costs decreased by $21 million or 6% versus a third quarter of 2009 and other operating expenses declined by approximately $17 million, also 6%. Overall, direct title premiums fell 7% sequentially while personnel and other operating costs declined by 6%. We generated an 8.2% pretax title margin in the fourth quarter.

Debt on our balance sheet primarily consists of the $411 million in senior notes due in 2011 and 2013, the $400 million drawn under our credit facility and the $50 million subordinated note issued to LandAmerica. Our debt to total capital ratio was 21% at December 31st. For the full year 2009, total title claims paid were $388 million. Roughly a $100 million decline from the nearly $500 million in pro forma combined claims we paid in both 2008 and 2007. We plan to maintain our 7% provision level as we enter 2010.

Finally, our investment portfolio totaled $4.9 million at December 31. There are approximately $3.2 billion of legal, regulatory and other restrictions on some of those investments, including secured trust deposits of approximately $400 million and statutory premium reserves for underwriters of approximately $2.2 billion. There are also some other restrictions, including less liquid investments like our ownership stakes in Sedgwick, Ceridian and Remy and working capital needs at some unwritten title companies, all of which total approximately $600 million. So of the gross $4.9 billion, approximately $1.7 billion was theoretically available for use with about $1.5 billion held at our regulated underwriters and approximately $200 million in non-regulated entities. We currently estimate approximately $150 million of dividend capacity from our underwriters in 2010.

Let me now turn the call back to our operator to allow for any questions.

(Operator Instructions) Your first question comes from the line of Doug Mewhirter of RBC Capital Markets. Please go ahead.

Hi, good morning. I noticed your investment income in your corporate segment added nicely to the total. Is there any particular investments or favorable comparison with maybe an unusually low investment income last year or is it your accounting for the FIS investment?

Actually, Doug, we made an investment in some bonds during the latter part of 2009. At a deep discount and we collected an interest payment on the bonds in the fourth quarter. I think that payment was $3 million or $4 million. When you look at that comparison, that is what you see there.

Okay, and would you expect that to persist? Were they elongate bonds or was it a short-term investment?

Their bonds are due in April of 2012 it looks like again, looks like it was one of the -- what we consider a distressed equity or distressed investment. But the market turned around for this particular company and they have adequate cash flow. We anticipate simply being paid in full on the bonds upon maturity. We bought the bonds for $0.33 on the dollar, Tony, they currently trading for $0.8282, $0.83 and the next payment is due April of 2010. It's going to be at this point, we're going to hold a maturity. It's only a couple of years.

Okay, thanks. My second question to Tony, was there any significant ServiceLink gross-up in your operating expenses?

The gross-up, there is always some gross up. Because our asset-linked business which is the foreclosure business has passed through revenue. But the gross-up was significantly down in the fourth quarter versus fourth quarter a year ago and primarily because of the moratoriums in the foreclosure space. I don't recall -- I think the number, the gross-up number is $16 million both in the operating expense line item and the revenue line-item.

Okay, thanks and my last question, regarding the specialty insurance sector, do you -- was the loss ratio impacted by all of those California storms and was there any effect also in -- do you think there will be any effect in the first quarter of January and will there be a positive effect because of flood insurance claims?

We don't get too much flood insurance out of California, frankly. It's generally our flood insurance is skewed to the Gulf States in hurricane season. We didn't have any hurricanes to speak of last year and the losses were fairly typical. They were spread around the country and we were reasonably happy with the 73% loss ratio. It's about eight or nine points higher than we would like.

And just, the last -- any update on, the state of the specialty insurance group as a whole? Have you received any other feelers or still in negotiations or are you sitting on it for now?

We have received feelers. The process we went through a year -- or 15 months ago was so disruptive to the Company, we really penalized ourselves. We took the Company off the market when we could not arrange a sale that made sense to us. And we're always open to -- open to offers or open to suggestions, but we have nothing specific pending at this point.

Okay, thanks. That is all my questions.

Okay, thank you. And next question comes from the line of Brett Huff, Stephens, Inc. Please go ahead.

Good morning, and congrats on a nice quarter.

Thank you.

Two questions, number one, did you comment at all, I may have missed this -- on the potential dividend availability coming up from the title subs as you look out this year?

Yes, we have an estimate at this point. We haven't finalized our statutory statements for year-end yet, but our estimate was $150 million in dividends available from our insurance companies. We also have other dividends available from non-insurance companies that are not regulated and we don't, at this point, have an estimate of that number.

And the second question, I was impressed by the 8.2% pretax margin and title, you can give us just general thoughts on how do we get back more to the 10% or 12% range, what kind of assumptions on volumes, additional cost cuts, mix, that thing do you foresee in order to get back to what I think of as a middle range for you all?

There this is Randy. We're going to go through the next, through 2010 and continue as we have to aggressively manage our expenses, watch our weekly open order count in a realtime passion. If there is any change in the open order of volume, if it's downward, we'll make some adjustments in that regard. That is what we have always done and we've done that through the mid part of 2009 when the refinances started to fall off. We took out 850 positions in the third quarter, adjusted 200 in the fourth, and another 200 down in January. We'll continue with that and that some should allow us to develop even potentially better margins.

In addition to, that we have seen some opportunities around the country on a select basis to consolidate some of our title profits -- that is both on the direct side and agency side. This is a bit of a followup on the integration of Lawyers and Commonwealth at the beginning of the year, where we went to some markets where we were overrepresented and did some consolidation. We think that will also -- we haven't quantified this yet -- but, we believe this will add to our expense reduction in that we can take out infrastructure expense and at the same time, protect our revenue. So, in that regard, I think we continue to move on and in any kind of a market through 2010.

Okay. That is what I needed. Thank you for your time.

Okay, thank you. The next question comes from the line of Jason Deleeuw of Piper Jaffray. Please go ahead.

Good morning, everyone.

Morning.

Just for the use of cash and the share repurchase you've already made, how do you feel about -- with your stocks here below book value -- how do you feel about share repurchases going forward just given with the volumes and environment we're in now?

We're going to be engaging in share repurchases as we go forward through this year. We are working on a couple of credit facility amendments with regard to our holding company debt to extend that from the fall of 2011 out to mid-2013. And once that is accomplished, we'll feel more comfortable about using excess cash to buy stock back. It's on the radar screen and if our stock stays down here and it's below book value and it's $12.80 to $13, $13.50 a share, it just makes logical sense to keep on taking some shares out of -- retiring shares and anything we can do to move our share count down from 231 million or 232 million more toward 200 million is a good thing. Good thing for you as a shareholder and customers. A good thing for us and we make it easier when the market does comes back and we start earning a fair amount of money to start showing some serious earnings per share. We just got ourselves in the position where we have a lot of share and would like to retire them and we want to do it judiciously and not have any potential impact on cash flow during the year.

Great and then I believe you said for Sedgwick, you're looking to unlock some value this year -- is there any color you can give us on that?

We're really in the middle of a quiet period so we just can't say anything about Sedgwick. Our goal this year is to unlock some value.

Okay. And on the fee per file, with the mix you're seeing right now, purchase refi, can we expect that to creep up higher from the current levels that we see?

I would say definitely. As the mix changes, more to a conventional resale market, the fee per file will go up and I think that is the way most people are modeling it out for 2010.

Great. And then just the last thing -- the tax rate seemed higher this quarter. Is there anything going there and can you give us any color on the run rate going forward for the tax rate?

I would say the run rate going forward is probably about 30%, give or take. The increase from 28.5%, which we have had year-to-date through nine months, versus 31% year-to-date to close out the year is simply a function of taxable income versus tax exempt income and as that ratio improves from an operating earnings level, it's going to increase the tax rate. It was a good problem to have to increase it during the fourth quarter.

Great. Thanks.

Your next question comes from the line of Nat Otis of KBW. Please go ahead.

Good morning guys, this is [Bill Clark] subbing for Nat . Could you share the headcount number at year end '09 in the title business versus year end '08, either pre or post the Lawyers and Commonwealth

Well --

You know where it is right now.

We finished '09 at 10,500 approximately employees in the Title Group and at the end of 2010, we were coming down. I don't have that exact number, but I think we were 200 or 300 higher at that point in time.

More than that. Because you bought Commonwealth -- and you laid off -- you were probably 13,000 people.

Combined, yes.

And that is true.

About 13,000?

Yes, you might call Tony just to get confirmation, that's the swag of on our part. It was after Commonwealth came in -- it was before we engaged in some serious layoffs that occurred following the Commonwealth Lawyers acquisition. I believe you're going to be in that 13,000 to 14,000 range.

We're had 2400 Commonwealth Lawyers side that came out during the year.

Okay, that is helpful, thank you.

(Operator Instructions) You have a question from the line of [Doug Rothchild with Koggin]. Please go ahead.

Congratulations on a good quarter, guys. I wanted to ask about the price increases you have gotten from the states. Have those all been shown in the numbers yet or can we expect some upside in 2010 as they roll in and ramp up?

They pretty much have been rolled in through 2009, your comps should be better. They were not all effective during all of 2009. The comps on the fee for file should be improving.

And some of the mortgage origination projections are down, up to 40% and I know you're going to look weekly at those orders and adjust accordingly -- but if they down 40%, are you able to adjust that much -- the business or is there a certain point where you just can't fire any more and you have some fixed costs and you just are going to have to live with it.

We're in the position, being in that 2010 and generally, we have three-year leases. The '05, '06, '07 leases are all -- the three, four, five-year leases are all rolling off. Fortunately, we're not in that really stressful period in 2008 where -- and earlier in 2009 -- where we were closing offices and having to take major lease impairment charges. The leases are rolling off.

And Randy has developed a plan to reduce his agency service centers from 67 to 19, his commercial offices -- consolidating commercial offices from about 47 to 17, something like that, Randy. And our direct operations going down from 260 to 200 that is in our plan this year right now. And, so we're anticipating a weak origination market and trying to maintain our coverage where resale transactions are strong so that we're not quite so heavily dependent on the refi piece. And of course, refis, we don't make as much money and we're seeing strength in a lot of depressed areas, in terms of the resale market, particularly in California, which is actually making a little bit of a comeback. So, we're going to keep on managing to the businesses that flows in and, we hope for the best and expect the worse.

Congratulations on a good quarter.

Thank you.

Okay, thank you. There are no further questions in queue. Back to you, Mr. Foley, for closing comments.

Thank you, we're proud of our accomplishments in 2009, particularly the successful integration of Lawyers and Commonwealth and the strengthening of our balance sheet. We'll seek to maximize profitability in any market environment and remain committed to our ultimate goal of continuing to create value for our shareholders. Thank you for joining us this morning.

Okay, thank you. That concludes our conference for today. Thank you for your participation and using AT&T executive teleconference service. You may now disconnect.