Fidelity National Financial Inc (FNF) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FNF 2011 second quarters earnings conference call. Later we will commence a question-and-answer session and instructions will follow at that time. (Operator Instructions). I would now like to turn the call over to your host, Mr. Dan Murphy. Mr. Murphy you may begin.

Thanks, and good morning everyone, and thanks for joining us for our second quarter 2011 earnings conference call. Joining me today are Bill Foley, our Chairman, George Scanlon, CEO, Randy Quirk, our President and Tony Park our CFO.

We will begin with a brief strategic overview from Bill Foley, George Scanlon will provide an update op the title business an our other operating companies and Tony will finish with a review of the financial highlights. We will then open the call for your questions and finish with some concluding remarks from Bill.

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 expectations, hopes, intentions or strategies regarding the future, 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 financial and operating results, 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 www.fnf.com. It will also be available through phone replay beginning at 2 PM Eastern Time today, through next Tuesday, August 2nd. The replay number is 800-475-6701, and the access code is 210285.

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

Thanks, Dan. We're pleased with our financial results this quarter, particularly in our title insurance business. Despite a continued sluggish real estate environment we were able to generate an impressive 11.7% pre-tax margin in our title business, a 200 basis point increase over the prior year, and a sequential increase of 240 basis points from the first quarter of this year.

While refinance orders represented 51% of closed order volumes this quarter, versus 46% in the prior year, we still produced a 5% increase in the fee for file. Much of this can be attributed to the strength of our commercial business, as we generated nearly $94 million in commercial revenue in the second quarter, a 38% increase over the prior year, and a sequential increase of 43% from the first quarter of this year.

The commercial business produced a fee for file increase of 26% over both the prior quarter and the first quarter of this year. The impact of cost reduction initiatives also contributed to our strong 11.7% pre-tax title margin. On a sequential basis from the first quarter title segment personnel costs and other operating expenses increased by less than 1%, while title gross operating revenue grew by nearly 11%.

We will continue to manage our title business with the same discipline seeking to maximize profitability in any market environment. Two weeks ago we announced the sale of our flood insurance business for approximately $210 million. That flood business has been the nation's largest flood insurance provider and a very profitable and consistent business for FNF for nearly ten years.

We feel this transaction is a great opportunity to realize the value of the business we have created, and redeploy the capital into other uses that can continue to create increased value for our shareholders. We are proud of the flood insurance business we created, and we wish them future success with their new investment partners. We expect the transaction to close during the fourth quarter and the sale will generate a pre-tax gain of approximately $154 million. Let me now turn the call over to our CEO, George Scanlon.

Thank you, Bill and good morning everyone. We are pleased to report a $17 million increase in title pre-tax earnings despite a $60 million decrease in title operating revenue, versus the second quarter of 2010. Additionally, the prior year was a particularly strong quarter for realized gains in the title segment, as we realized more than $24 million in gains, versus only $2 million this year.

Another sign of the strength of the operating performance in our title business this quarter. As Bill mentioned, the significant contributor was the strong performance in our commercial business. Commercial revenue accounted for more than 25% of total direct title premiums in the second quarter, compared with 20% in the second quarter of 2010.

We opened approximately 19,100 commercial orders in our national commercial divisions and closed 12,000 commercial orders, generating nearly $94 million in revenue with a fee for file of 7800. We are encouraged by the trend in the commercial business and expect the commercial business to remain strong in the second half of 2011. Another significant factor was the cost reduction initiatives that we have undertaken.

Through the month of June we have complete actions on $48 million of the $56 million of identified cost savings in our specific corporate initiative. The direct impact on the second quarter results was $11 million, and year-to-date incremental savings totalled $19 million. Separately, in our title field operations we continue to closely monitor order levels and manage title headcount accordingly.

During the second quarter we reduced an additional 250 positions, in order to balance head count with current order activity in the title operations. We believe our title business can continue to produce strong earnings in the current market environment and can produce significantly higher earnings when we return to a more normalized real estate market. Open order accounts increased each month during the quarter.

Overall open orders averaged 8,000 per day for the second quarter, with April averaging 7,600, May 8,100 and June 8,400. Those increasing open order accounts should have us well positioned as we enter the third quarter. Open orders for the first three weeks of July have averaged 7,900, with the last two weeks averaging 8,100. The mix of business was slightly weighted toward refinance orders as 51% of open and closed orders were refies in the second quarter, versus 50% open orders, and 46% closed orders being refies in the second quarter of 2010.

Specialty insurance revenue was $111 million for the second quarter, a 6% increase over the second quarter of 2010. Flood insurance generated $47 million in revenue, personal lines insurance contributed $40 million in revenue, and home warranty produced $20 million in revenue. Pre-tax earnings were $4 million, as the strong earnings from the flood business were offset by losses in the homeowners operation. The property and casualty industry had an extremely difficult second quarter, due to several storms in the Midwest.

Our homeowners business produced a loss ratio of 100% for the quarter, versus 75% for the second quarter of 2010. Six separate spring storms in the Central and Southeastern US caused $13 million in homeowners losses during the second quarter. Let's turn to our minority owned subsidiaries, which we do not consolidate in our financial statements, overall we recognized $13 million in earnings from our equity investments.

Ceridian's first quarter revenue of $378 million was a 6% increase over the prior year quarter, while EBITDA of $84 million grew by 17% over the prior year. The EBITDA margin was 22%, versus 20% last year. Our 33% share of Ceridian's quarterly loss was $3 million, compared with a loss of $9 million in the prior-year period.

The three month ended May 31st, Remy generated revenue of $308 million, a 12% increase over the prior year and EBITDA of $56 million, a 51% increase over the prior year period. Our 47% share of Remy's quarterly earnings was approximately $15 million. The three month period ended in May American Blue Ribbon Holdings produced revenue of approximately $105 million and EBITDA of $7 million. Our 45% share of their net loss, was approximately $400,000 this quarter.

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

Thank you, George. FNF generated $1.3 billion in revenue in the second quarter, with pre-tax earnings of $110 million dollars and cash flow from operations of $30 million. Cash flow was negatively impacted because title claims paid in the second quarter exceeded the provision by $90 million.

The prior year results included a $98 million pre-tax gain on the Sedgewick sale, which added approximately $0.27 per diluted share to earnings. The title segment generated nearly $1.2 billion in total revenue for the second quarter, a 5% decline from the second quarter of 2010, but an 11% sequential increase from the first quarter of this year. Direct title premiums grew by 4% over the prior year. As closed orders declined by 2% and the fee for file increased 5%.

As we mentioned earlier, the strong commercial market had a positive impact on the fee for file. Pre-tax earnings were $141 million, a 13% increase over the prior year, and the title margin increased significantly to 11.7%. Despite the small increase in direct revenue versus the prior year, title segment personnel costs decreased by $8 million. Or 2% versus the second quarter of 2010.

And other operating expenses declined by $24 million or 9%. The combination of the corporate cost reduction initiative and continued headcount reduction in the field operations, had a significant positive impact on profitability in the second quarter. Debt on our balance sheet remained the same as last quarter, consisting of the $701 million in senior notes due in 2011, 2013 and 2017 and the $250 million drawn under our credit facility.

We have $166 million in senior notes maturing on August 15th. We have the flexibility to borrow under our credit facility to repay those maturing notes, or access the capital markets if that proves to be a more attractive repayment option. Our debt to total capital ratio was 21% at June 30th. Total title claims paid were $148 million during the second quarter.

Our reserve position remains within a reasonable range of our actuarial estimates and we expect to provide for future claims at a 7% provision level for the remainder of 2011. Additionally, we continue to see encouraging early results from the 2009 and 2010 policy years. Our income tax prevision rate of 36%, was consistent with the prior year and the prior quarter, and absent a substantial change in the components of pre-tax income, we expect to have a similar rate for the balance of 2011.

Finally, our investment portfolio totalled $5 billion at June 30th. There are approximately $3.1 billion of legal regulatory and liquidity constraints on some of those investments, including secured trust deposits of $450 million and statutory premium reserves for underwriters of approximately $2 billion.

There are also some last liquid ownership interests in Ceridian, Remy and American Blue Ribbon, of nearly $600 million. So of the gross $5 billion, approximately $1.9 billion was theoretically available for use, with about $1.7 billion held at regulated underwriters, and approximately $200 million in non regulated entities. Additionally, we have $70 million in underwriter dividend capacity for the second half of 2011.

We have significant flexibility at the holding company level and continue to maintain a strong balance sheet. Let me now turn the call back to our operator to allow for any questions.

Thank you. (Operator Instructions). Our first question comes from Matt Otis.

Yes. Good morning. I guess the first question on the commercial business fee for file was up materially and you've talked about commercial being solid for the remainder of the year. Is that a good fee per file commercial run rate that we can see for the remainder of the year?

Sure, Matt. This is Randy Quirk. Yes that fee for file was very good. As we came through the back end of the second quarter we actually did get over in the month of June over $8,000, on a fee for file basis, as well as in the fourth quarter of 2010. So you know it's pretty close to our highest levels and there could still be some room. It depends on, obviously, the size of the closings in any given quarter, but a good improvement for us and close to where June and the fourth quarter were last year.

And then.

(inaudible) Matt, you should expect also we say the second half will be better, that there will be a bias toward the fourth quarter, as there usually is in the commercial business.

Okay. Great. Absolutely. And then, just on the corporate expense side, looks like corporate expenses were up a little. Any way you could give a little color on what drove those corporate expenses, and kind of what we should see going forward?

Sure, Matt. This is Tony Park. Just a couple items in that. We did have a couple non-recurring charges in that area. A couple million dollars worth of non-recurring charges that we don't expect to see again.

We also had a couple million dollars in realized losses on a few disposals of some assets, so that's about $4 million that we don't expect to see again. We also had some incentive accruals, both related to the cost saving initiative that we initiated at the end of last year, and also because of increased profitability, so personnel costs ran a little higher. Keep in mind that our shared services cost saving initiative, those savings are actually reflected in the title segment.

So I don't want there to be confusion about corporate costs because the shared services are entirely allocated into that title segment. So that's where you see the benefits. From a run rate perspective, I think we're probably about $5 million higher this quarter than we would expect on a run rate basis.

So somewhere in the $30 million per quarter run rate is to be expected. Maybe even a little lower than that.

That's very helpful. I appreciate that Tony. And just last question. Now with having sold the flood business, any thoughts on going forward with the homeowners business, especially in light of a little bit of elevated losses in the quarter? Is that something that maybe you're going to try to keep around or is that something that is on the block as well?

Matt, this is George. I think the way we're looking at it as you can see, over the last three quarters we've had really significant earnings volatility and we're looking for ways to mitigate our exposure to the market, and there's some various alternatives we're kicking around, but I would say our objective is to shrink that business, and make it less meaningful to the Company and, therefore, less variable to the earnings.

Okay. Thank you. Very helpful.

Thank you. The next question comes from Brett Huff. Question, sir.

Good morning and congrats on a very nice quarter.

Thanks, Brett.

The question on the expense accruals in corporate, I understand that you guys had kind of a bonus program in there and people who identified and helped get the job done, I think you guys were compensating them for that, so I want to make sure that's true. If it is, why would the expense continue to be a little higher, or my assumption is that would be kind of a one time accrual, why would that necessarily continue through the next couple of quarters or am I misunderstanding that.

I think you've got most of that accrued through the second quarter. I think the other component that Tony referenced was because the year-to-date earnings are exceeding last year, our normal bonus programs have higher accrual levels. So obviously the future quarters are dependent on continuing the performance relative to the prior year, but the incentives for the cost savings program are substantially accrued at June 30th.

Okay. So just generally the profitability looks better than you thought sort of going forward.

That's right.

Okay. That's helpful. And then can you give us commentary on the July month-to-date purchase volumes in particular? Is refi still providing most of that? I'm not sure if you commented specifically on July mix, but I wanted to get specifically your thoughts on purchases, because I think that's what a lot of folks have their eyes on.

Sure. Brett, this is Randy Quirk again. Through July we're still running very close to a 50/50 mix resale to refinance. Up just a little bit on the refinance side, but as we came through April, May and June the resales continued to increase. So we're really at a run rate about where we were finishing up the second quarter at really it's about a 51%, 49%. mix. 49% being resale.

And of those purchases, do you guys have a rough guesstimate of the amount that is distressed in some way, I mean short sale or foreclosure or whatever. That's still a meaningful portion of that purchase stream I'm assuming.

Well, I would say Brett, we don't have that specific number. I think it varies by market, and the more distressed markets logically have a greater percentage of those sales, but there are national statistics that are out there, I think they go as high as 30% on average, but we don't track that separately.

Okay. And then last question for me on the claims paid is that a timing thing? I think Tony, did you say $90 million cash paid exceeded the provision?

Yes. That's right. And it really is timing. It has to do with multiple years.

You know, if you look at our revenue stream over the course of the last several years, you know, we grew from 2002 up through 2005, and dropped off a little bit in 2006 and 2007, but still very strong premium years, and then in 2008 through really the current period, revenue levels are well off. So right now we have a situation where revenue is down, and so provision levels are down, and yet claims paid from those big premium years are still running through. Now, we are getting toward the end of some of those larger years, but we continue to pay more cash out than we're providing in terms of current provision levels.

And then in terms of capital deployment, as you look forward, can you give us more thoughts on that. Obviously we have to pay the note one way or another coming due of $166 million I think you said in August, beyond that what's the order of capital deployment desires of the various things you could do?

Well, I think as we've done in the past, first objective is to maintain a strong balance sheet. To go into the market and buy our shares back when we think that they're priced at a level that makes sense to our shareholders, continuing to look at opportunities, both inside the title business and outside the title business, that can create value for shareholders and those tend to be opportunistic sometimes, but we've got our eyes out and we get presented with lots of opportunities.

So, you know, we're encouraged with our balance sheet right now and the flexibility we've got in being able to go to the capital markets as Tony referenced if we need to, but we've got a lot of capacities in our revolver, so we've got lots of options as we look at this second half of the year and into 2012, but the first objective remains to generate the operating earnings that can continue to support that balance sheet.

Great. And last question. On the earnings for minority interest, that was higher this year than even last quarter. It sounds like Ceridian was the primary driver of that. A, is that true and B, given the cost containment that you guys are working over there, should we expect that minority interest to continue to be higher than it was say last year?

Well, I would say Ceridian is a part of it, certainly Remy is too. Those are going to be the primary drivers year-over-year. Ceridian, as you saw, had both revenue and margin improvement. The revenue side is encouraging, and we're looking for continued forward progress there. Whether it's a meaningful trend right now, it's hard to say, but certainly both those companies are having better year-over-year performance and we're the beneficiary of that.

Great, that's what I needed. Congrats on a nice quarter, and thanks for your time.

Thanks, Brent.

Thank you.

Thank you. Our next question comes from Doug Mewhirter.

Hi this is Doug Mewhirter from RBC. Just a couple questions. First, it looked like your other expense, both on an absolute and a ratio revenues basis, performed I guess better than your personnel expenses. Were there any large cost cuts? Did you close like a big office or were there any gross ups with your Service Link that went away or anything like that, or just normal fluctuation in your program.

I think what you're seeing there is just a continued trend downward in those more fixed costs. You know, we've been closing offices over the last two or three years. We haven't closed any recently, but we get the benefit of those office closures, you know, in the comparable numbers. So a lot of our costs in that area are facilities expenses so we see the benefit there.

You know, I think the trend there has been downward for a few years now and it probably continues to go in that direction. Personnel costs are more variable so when we have a real profitable quarter like we've had this quarter, you know, incentives both on the mission side and the bonus side, tend to run a little higher and that's why you see that difference.

The other piece, Doug, of the $56 million that we're targeting to takeout about 60% of that was non personnel related, so you will see that flow through the other operating expense line as well.

Okay. Thanks for those answers. I noticed your investment income had the first positive year-over-year performance in awhile, and your asset base, your investment base, hasn't really moved by much. Was there a change looking at slightly higher yields, because I know interest rates really haven't moved that much either?

Yes. Actually what we've done is we tried to redeploy some of our liquidity into higher yielding instruments, but still maintaining either investment-grade, or very high level non-investment grade paper, and that redeployment of about $150 million or so, $175 million is really has helped that overall yield and we're going to keep on looking to that. What we're trying to do is we're trying to maximize the amount that we have invested in the underwriters, to the regulatory limits of particular investment-grade or non-investment grade securities, and we're trying to be very careful about the type of non-investment grade securities we do acquire, and normally they are bought at a discount and they're bought with fairly high yields but as a general rule we're buying paper in natural resource industries.

So we feel comfortable about the underlying security. We also attempt to acquire these securities as ensure that they're fulcrum security, so that the worst case if something doesn't workout with a particular investment we're going to be in a position to own the company or dictate the manner in which the company is restructured. Does that handle the question?

That's a very helpful answer. Thank you. My last question is a little less numbers focused. I guess George or Randy, what are your strongest and weakest geographies? I guess maybe if you look at a year-over-year basis.

Well, it's Randy. I'll take a shot at that. I don't know if we have strongest or weakest. Our direct footprint in the West is very robust. A lot of refinance activity over there.

If you take the Midwest and the Eastern part of the Country, certainly there's more of a commercial focus. So I think our footprint allows us to be strong in all markets, and it would be dependent on whether you have a refinance, resale in the commercial market, but I don't believe we have a strongest or weakest. We look all the them all pretty much the same.

Okay. Thanks. That's all my questions.

Thank you. (Operator Instructions). Our next question comes from Mark DeVries.

Yes. Thanks. I just want to get some sense for like how big the commercial business could get. Where are your volumes tracking right now relative to kind of where they were pre-recession, and does the Land America acquisition make you any bigger in that business?

I would say that on the commercial side any significant commercial transaction that occurs in the United States, we either have all of it or a big piece of it. With the Land America acquisition a few years ago, it gave us a stronger commercial footprint that we integrated with our Fidelity in Chicago and Ticor commercial footprint, and with the weakening of a couple of the other underwriters and the lack of underwriting capacity, it really is kind of a game between FNF and First American, and of course we're a bit larger than first American in terms of underwriting capacity. So the commercial business is robust and we believe is going to continue to develop and the other important feature about the commercial business is that some years ago pre-recession, we were doing a fair amount of mechanics lien, ensuring mechanics liens and issuing creditors rights, and creditors rights is no longer a piece of our insurance policy, and mechanic's least that risk is just not accepted any longer.

So we get serious indemnities. We get cash on deposit, guarantees and so forth when mechanic's liens are an issue, so the business that is being written today is much stronger business than it was three or four years ago with less risk, and we continue to attempt to push rates higher, as we believe it's a little silly for us to risk our balance sheet on behalf of a commercial piece of business that an inadequate or insufficient rate structure. So we believe the commercial business is going to get better and better for us over the next three to four years, particularly as we start coming out of the recession and if we get any kind of economic growth going, our commercial business will really, really take off.

Okay. Is it safe to say that you're generating better pre-tax margins in commercial than in the residential business?

Randy, I think that's something, I don't know that that's necessarily true, but Randy what do you think.

Yes. Our margins out of our national commercial units run in the 30%, 35% range, so it's slightly better than what you get typically in the resale and refinance market.

Okay. And finally if we saw a shift in the residential market towards more of like a 60/40 purchase refi split, or even higher, what could that do to your average fee for file in that business?

Well, that would run us up into the $1,600 range like I mentioned earlier, we were a little over $1,600 in June, so that would get us up into that $1,650 range. We've been there before, but it's been a couple of years.

Okay. Thank you.

Thank you. Our next question comes from David West.

Good morning. I wonder if you could provide a little bit more color regarding the proceeds that you should be getting from the sale of the flood insurance business in the fourth quarter. Are you likely to try to do a new investment, new minority investment, debt reduction, stock buyback. Just wonder what your feelings are there.

Like I said, we're going to be opportunistic about it. Our first goal is to ensure that we've got our debt structure , our cap structure in a good position. As George mentioned a little earlier, we get kind of bombarded with opportunities, and what we're really looking for are recurring revenue type investments that may not necessarily be related to the real estate business, and we've made a few of them in the past. We're not always happy with everything we've done, but we are going to keep on looking for these kind of diversification kind of opportunities.

And again, another priority is our stock buybacks. That's important to us. And debt repayment. So it's a nice amount of proceeds we're going to be getting, but it's not a game changer. It doesn't really change our profile. But it will give us flexibility in terms of the redeployment of

And then just lastly did you buyback any stock in Q2?

No, we did not buy any shares in Q2.

Okay. Great. Thanks very much.

Thank you. (Operator Instructions). I show no further questions in queue, sir. Actually, I do show a question from Travis Hogan. Question, please.

Hi, guys. I was wondering if you could just repeat the contributions from Remy again. The top line and EBITDA numbers, and then your net income contribution.

Sure. Remy, and again we're on a one month reporting lag with Remy, just to clarify that, so these will be the three through May 31st. The generated revenue of $308 million, which was 12% over last year, EBITDA of $56 million, which was 51% higher than last year ,we own 47% of the company so it contributed about $15 million.

Okay. Thank you.

You're welcome.

Thank you. (Operator Instructions). I show no further questions in queue at this time, sir. You may continue Mr. Foley.

Thanks. We were pleased with our financial results this quarter, particularly in our title insurance business where we produced an 11.7% pre-tax margin. We will continue to manage our title business with the same discipline, seeking to maximize profitability in any market environment. Thanks for joining us this morning.

Thank you. Ladies and gentlemen, for attending today's conference. This concludes the program. You may now disconnect. Good day.