First American Financial Corporation (FAF) Q4 2014 Earnings Report, Transcript and Summary

Greetings, and welcome to the First American Financial Corporation Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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 in for short time by dialing 877-660-6853 or 201-612-7415 and enter the conference ID number 135-989-28. 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 2014 fourth quarter and year-end earnings conference call. Joining us on today’s call will be our Chief Executive Officer, Dennis Gilmore; and Mark Seaton, Executive Vice President and Chief Financial Officer. 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 fact. The forward-looking statements speak only as of the date they are made and the company does not 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 also described on Pages 4 and 5 of today’s news release. Management’s commentary contains and responses to your questions today may also contain certain financial measures that are not presented in accordance with Generally Accepted Accounting Principles, including personnel and other operating expense ratios. The company is presenting these non-GAAP financial measures because they provide the company’s management and investors with additional insight into the company’s operational efficiency and performance relative to earlier periods and relative to the company’s competitors. The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In the news release that we filed today, which is available on our website www.firstam.com, the non-GAAP financial measures disclosed in management’s commentary are presented with, and reconciled to the most directly comparable GAAP financial measures. Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. With that, I will turn the call over to Dennis Gilmore.

Thanks, Craig. Good morning and thank you for joining in our call. I will begin with the review of 2014 followed by our fourth quarter financial highlights and conclude with a few comments regarding our outlook for 2015. Total company revenues for 2014 were $4.7 billion, down 6% from last year. Our purchase revenues were up 5% and our commercial business had a record year with revenues up 9%. The growth in both of these businesses helped to offset the significant decline in refinance activity during the year. Despite the decline in refinance activity, we were able to build strong momentum throughout the year finishing with an EPS of $2.15 and a title pretax margin of 8.7% for the year. Turing to the fourth quarter, total revenues for the company were $1.3 billion, up 3% compared to the fourth quarter of 2013. Net income in the quarter was $81 million or $0.74 per share. Included in this quarter’s results were $7 million of realized investment gains and impairments totaling $20 million, which combined reduced EPS by $0.08. In the fourth quarter, total revenues in the title segment were $1.2 billion, a 3% increase compared to the fourth quarter of 2013. During the quarter, we benefited from the overall strength in our purchase business. Closed purchase orders were up 3% and the average fee per file increased by 6%. Our commercial business continues its strong performance, generating $199 million in revenue, up 13% compared to last year, driven by an increase in the average deal size. Our continued focus on driving an efficient cost structure produced significant operating leverage, allowing us to deliver a strong pretax title margin of 10.8%, our highest margin of the year. Revenues in our special insurance segment grew by 9% during the quarter, driven by higher earned premiums in both our home warranty and our property and casualty business. Pretax margins for our specialty insurance segment were 18.4%. Our home warranty business delivered record fourth quarter results driven by continued operating efficiency and a decline in weather-related claims. Turning to our market outlook, given the backdrop of an improving economy, we remain optimistic that the housing market will continue to strengthen in 2015. In January, refinance activity rose sharply in response to the unexpected decline in mortgage rates, driving total open orders per day up 27% compared with January of last year. While the increase in refinance orders will provide short-term benefits, it’s uncertain how long this level of elevated refinance activity will continue. With regards to the purchase market, our full year expectation is for modest growth with some increase in transaction levels and continued home price appreciation. We also are anticipating continued strength in the commercial market, but with some decline in growth rates. Based on our positive long-term outlook, our company’s Board of Directors recently approved a 4% increase on the common stock dividend to $1 per share, annually. In closing, the company concluded a successful 2014. Looking forward to 2015, the investments First American continues to make in our people, our technology, and our data assets positions us to capitalize on our ongoing housing recovery and to achieve our vision of being the premiere title and insurance and settlement service provider. I’d now like to turn the call over to Mark for a more detailed review of our financial results.

Thank you, Dennis. Total revenue in the fourth quarter was $1.3 billion, up 3% compared to the fourth quarter of 2013. Net income was $81 million or $0.74 per diluted share compared with net income of $52 million or $0.48 per diluted share in the same quarter of last year. The current quarter results include net realized investment gains of $7 million or $0.04 per diluted share. In addition, investment income in the current quarter includes impairment of investment in affiliates of $20 million, which reduced earnings per diluted share by $0.12. In the Title Insurance and Services segment, direct premium and escrow fees were up 9% compared with last year. This growth was driven by 16% increase in the average revenue per order, partially offset by a 6% decline in the number of direct title orders closed. The average revenue per order increased to $2,171, driven by the continued shift in the order mix to higher premium purchase and commercial transactions. Additionally, the average revenue per order increased 6% for purchase transactions and 13% for commercial transactions. Agent premiums were down 3%, reflecting the normal reporting lag in agent revenues of approximately one quarter. The agent split was 80% of agent premiums. Information and other revenues totaled $155 million, up 8% compared with last year, driven by the impact of the recent acquisitions offset by lower demand for the company’s default information products. Personnel costs were $341 million, up $10 million or 3% from the prior year. This increase was primarily due to higher incentive-based compensation driven by the improvement in both revenues and profitability. Other operating expenses were $192 million, down $15 million or 7% from last year. This decline was primarily due to lower legal expenses as well as lower production-related costs given the decline in orders in the current quarter. The ratio of personnel and other operating expenses to net operating revenue was 71.7%, significantly lower than the 76.7% we posted in the fourth quarter of last year. The provision for title policy losses and other claims were $65 million or 6.5% of title premiums and escrow fees, compared with a loss provision rate of 5.8% in the same quarter of the prior year. Pretax income for the Title Insurance and Services segment was $125 million in the fourth quarter compared with $88 million in the fourth quarter of 2013. Pretax margin was 10.8% compared with 7.8% last year. Turning to the Specialty Insurance segment, total revenues were $95 million, up 9% compared with last year, driven by higher premiums earned in both the home warranty and property and casualty business lines. The loss ratio for this segment was 52%, a slight decrease from the 53% experienced last year. Pretax margin for the segment was 18.4% driven by continued strength in our home warranty business. Net expenses in the Corporate segment were $19 million in the fourth quarter, up 7% relative to the prior year, driven by lower net realized gains. For the full year of 2014, net expenses in the Corporate segment were $75 million. We expect this to increase to a $100 million in 2015, primarily as a result of two factors. First, we will incur $14 million as interest expense throughout 2015, as a result of the $300 million senior notes transaction we closed in November. Second, we will incur an additional $9 million of expense related to our defined benefit plans in 2015. Although these plans are frozen, we will record higher expense as a result of a lower discount rate used to determine the liabilities. This discount rate is selected at December 31 of each year to help determine the expense for the following year. If interest rates were to rise in the future, we would expect our defined benefit plan expenses to decline. The effective tax rate for the quarter was 34%, lower than our normalized tax rate of 36%, due to lower effective state and foreign tax rates. In terms of cash flow, cash provided by operations was $182 million versus $133 million in the fourth quarter of last year. The increase was primarily due to higher net income and lower paid claims during the current quarter. Capital expenditures were $33 million, up from $26 million in the fourth quarter of last year, due to increases in capitalized software, title plans and capitalized data. Turning to capital management, debt in our balance sheet totaled $587 million as of December 31. Our debt consists of $549 million of senior notes, $34 million of trustee notes and $4 million of other notes and obligations. Our debt-to-capital ratio as of December 31 was 19%. In November, we closed on $300 million, 4.6% senior notes due 2024. We used $150 million of the proceeds to pay down our credit facility, invested $25 million to expand the capacity of our trust company and remainder is currently held at our holding company. Today, we have the entire amount available under our $700 million revolving credit facility. I would now like to turn the call back over to the operator to take your questions.

Thank you. At this time, we will be conducting a question and answer session. [Operator Instructions] Our first question is coming from the line of Bose George with KBW. Please proceed with your question.

Hey guys, good morning.

Good morning.

First just on the title margin, the 10.4% you did was quite a bit stronger than we had expected, just year-over-year do you think you could generate a better margin than the little over 8% you did this year, leaving aside the comment you had mentioned about the deferred benefits and the interest expense?

This is Dennis, I’ll take that question. When we look back in 2014, we came in close to 9% margin for the title company and we actually had a slow start to the year, so we build all year long, so we’re happy with that. As we sit and look at 2015, we do think we can continue to increase our margin as long as we get the growth rates we’re expecting in the marketplace and we’re going to continue to try to get better leverage out of the business and continuing to try to improve our operating margin.

Okay, great and then just switching to capital, your debt-to-capital, I guess mid-teens, you’ve guided to a higher range that you’d like overtime. Just curious about your thoughts on capital management and where you stand on buybacks just given where the stock is on price-to-book?

Well in terms of debt-to-capital ratio, we finished the year at 19% and we’ve talked about our target of 18% to 20%. So we’re kind of right in line with where we want to be in terms of the debt-to-capital ratio today. And we used to be sort of mid-teens in the middle of the year, but when we did that bond yield in November, it brought us up to 19%. So we’re comfortable with where our financial leverage is right now. And in terms of the buybacks, it’s something that we’re always evaluating. We did a significant buyback in 2013. We didn’t do any in 2014 but we did significantly expand the dividends. So I would just say, in terms of the buybacks, it’s always something we’re evaluating.

And then sort of a related question, in terms of the proceeds that you have from the debt issuance, are there acquisitions or other things that you’re kind of thinking about?

Yeah. I mean, we – so we used, just to recap, we used a $150 million of the $300 million proceeds to paid down the line. We put $25 million into invest organically in our trust company. So we’ve got another $125 million of that, that’s at the holding company, that’s just really dry powder and we’re looking at acquisitions right now, which we do continually, but we’re going to be opportunistic in terms of how we deploy that excess cash.

Thanks and good quarter.

Thanks.

Thanks Bose.

Thank you and our next question is coming from the line of Mark DeVries with Barclays. Please proceed with your question.

Thanks. First question is a follow-up on the pre-tax margin for the title business, As with Bose, it was much better than we expected and Dennis, I heard you say, you think if you get the volume growth you’re are excepting, you could expect that to be higher. I’m just kind of wondering if there any call-outs, Mark, any one-time items that made that margin unusually strong in the quarter whether it reflects some sustained efficiencies that we could expect to see maintain its margins next year even if we’re in kind of a static environment?

Thanks for the question, Mark. Yeah, there weren’t any – I would say noteworthy items that happened in this quarter. I mean, there is always things that are benefits and things that happen in the quarter, but there is nothing that we felt like we needed to point out. So I would say that the fourth quarter margin is a real normalized margin. Now, when we look forward to next year, obviously, we’ve got seasonality, I mean Q1 is typically a tough quarter for us, just given volumes. But we think that generally with the expense structure that we have and the margin we have are sustainable going forward.

Got it. Although it looks like the seasonality is not going to [indiscernible] this year given the open order count you’ve got. Second question, just kind of wondering, Dennis, give us an update on, kind of your thoughts around market share opportunities in 2015 both kind of organic and inorganic?

Yeah, we actually had really nice progress in 2014 regarding our market share objectives. We set out for the company to growth in the 1% to 1.5% range per year. And on a trailing 12-month of our third quarter of 2014, we are up about 1.2%. So right in line with what we’re expecting. We hope for that and we expect that momentum to continue going forward into 2015. Specifically we’re driving for growth in the top 10 states and we had good success there. And then we continue to look for tuck-in acquisitions on the title side. We’ve looked at quite a few deals. We’re continuing to look at deals right now. We’re just being very disciplined on the capital deployment.

Okay, great. Last question is just on potential for growth in the average fee per file as we look into 2015. I think as we’ve talked about in the past, there is generally a kind of 50% relationship between HPA and the benefit to your average transaction, but I’m kind of wondering, do you have a mixed benefit where the greatest velocity that we’re seeing in transactions is coming from the states that are experiencing the highest home price appreciation. So if we think about kind of benefit of home price appreciation to revenues it may actually be better than if we just think about national home price appreciation.

Yeah, you’re actually right on that assumption. Again, we think of it along the lines on a global basis or national basis around that 50% mark. We’ve seen better performance over the last year because of where we’re getting our orders and what’s happening in that marketplace. With regards to price appreciation, our call right now is it will slow going into 2015, probably in the 3% to 5% range, somewhere in that range for home price appreciations, what we’re thinking for 2015 right now. So we do think we’ll see an increase in the ARPO in 2015 but at a slowing rate.

Okay, great. Thanks.

Thank you. Our next question is coming from the line of John Campbell with Stephens. Please proceed with your question.

Hey guys, good morning, congratulation on a great quarter.

Thank you.

So good opening orders for January, obviously, I think that was up about 31% sequential, little surprising to see that type of resurgent refi off a pretty modest decline in 30 years. So it looks like the 30-year might have lifted a little bit of late. So just curious, how that’s impacting this February to-date?

Yeah, let me give you a little insight. When we started our budget plan or when we wrapped up our planning from last year, going into 2015, we were actually anticipating refinances to drop in 2015. And like everybody, we were a little caught from the unexpected lowering of interest rates. We saw them immediately benefit going into January. Again, like we said, our total orders in January, up 27%. The trends continued into February, but again, I want to caution everybody, we don’t know how long this environment will last. It could end just as quick as it started, but at the end of the day, it’s going to help us a little bit in the first quarter and that’s always nice when it’s our toughest quarter.

Absolutely, that’s helpful. And then, Dennis, just a higher level question, what’s more important to you guys just kind of over the near term, is it gaining a point or two in market share or may be a point or two in title pre-tax margin and just if you guys are willing to trade a little bit of margin for some of that growth, Mark, you might be able to help us with this, but maybe if you guys could put us in a range or just general expectation for agent retention for the year?

Couple of parts to that question and then I’ll throw it over to Mark, but if you step back and at the highest level, we really don’t want to gain share to trade it to return. So we’re looking to both do better on our share and better on our returns. That’s how we’re thinking about it. On the agent…

On the agent retention, we’ve been at 80% for a couple of years now and I wouldn’t expect that to change in 2015. We can make very good returns on capital on our agency business at an 80% split.

Okay, that’s helpful. And then, last one from me. So another good result out of Specialty Insurance, notice the pretty big drop in salaries as a percent of rev, looking at last year. Is that something structural? I mean, did you guys reduce headcount in the quarter?

Yeah, we had some expense management activities that we did especially in the third quarter of 2014 when volumes really started to slow. And it was a little bit more in Q4 and so really what happened in Q4 is, we got the benefit of some of our expense management initiatives and it was also offset by strength in the market and so we have been managing the cost structure prudently, we think.

Okay, great. Thanks guys.

Thank you.

Thank you. Our next question is coming from the line of Eric Beardsley with Goldman Sachs. Please proceed with your question.

Hi, thank you. Just wondering if you’ve had to add any headcount to staff up further little refi wave we’ve seen here thus far?

So far, no, we’re watching the expenses really closely. Again, the jump in the refinance activity was a little unexpected. So I think it could end just as fast as the tenure moves on us. So bottom line, we’re managing this aggressively as we can. First step will be to add additional overtime, probably then some temps, and ultimately if we need to, we’ll add staff.

Got it. In terms of the ARPO growth trends, have you seen similar year-over-year increases thus far in 2015, as you had over the last few quarters where you’re growing on the purchase side 6% to 7%?

Well, so far, I mean in Q4, our average revenue per order for purchase transaction was about $1,900 and one month doesn’t really make a trend. But so far in January, it’s been about, little bit less than that, about $1,880. So I would say that we’re kind of started 2015 kind of how ended 2014.

Okay, great. Then I guess, in the past you’ve talked about the success ratio in terms of how you can manage your expenses as revenue grows? For having some of these ARPO benefits but your orders are some what flat, I mean, can you do better because you’ve less coming through the pipes?

We can potentially do better. In the past, we’ve talked about a 60% success ratio. When net operating revenue rises $1 we want to spend $0.60 in labor and OpEx expenses and we really hit that in 2014 for the full year, but that number is lumpy. In the fourth quarter, the success ratio was like negative 10%. So in any one quarter, it could be lumpy. But for a full year basis or trailing 12 month basis, we’re looking at 60% and we’re going to target that in 2015. There is always a chance we’re going to see that based on our ARPOs, but we are focused on the 60% number.

Okay, great. Thank you.

Thank you.

Thank you. The next question is coming from the line Mark Hughes with SunTrust. Please proceed with your question.

Yeah, thank you very much. Was there any catch up in incentive compensation in the fourth quarter? You mentioned that was one of the things that drove personnel expense. Is that a little higher in fact in 4Q?

There was no catch-up, no.

Okay.

We had a few million dollars of some benefits that we flowed back that helped us roughly $4 million, $5 million, but other than that, it was a very normal quarter.

About your latest thoughts on the cash from operations, cash flow for 2015, you had a very good 4Q and presumably cash payments for losses will continue to moderate. What’s your latest thinking there?

Happy with the cash flow in the fourth quarter. As you know, first quarter is always difficult with cash flow, simply because we’ve got a lot of bonus payments that we make and on the operating side, it’s slower. So we’re typically cash flow negative in the first quarter. But for the full year, we’re happy with where our cash flow is. We would expect it to continue to increase over the next couple of years as our earnings rise and as our paid claims fall. So our paid claims in 2014 fell 8% from 2013. And paid claims are lumpy, but we would expect that to continue to decline over the next few years. Just given the fact that we are – some of these legacy policies we wrote are becoming seasoned.

Thank you.

Thank you. Our next question is coming from the line of Kevin Kaczmarek with Zelman and Associates. Please proceed with your question.

Good morning, guys.

Good morning.

Good morning.

Closed purchase orders in the fourth quarter seem like they accelerated pretty nicely year-over-year relative to the third quarter. But it looks like, I guess, January open purchase orders were flat. Can you give us some color on what was driving the fourth quarter purchases and any reason why the year-over-year strength wouldn’t carry-over to the first quarter?

There is really – I can’t give you any insight why the fourth quarter was up. It just probably more natural – just natural environment, as we got closing out to get done before year-end. The other part of your question is as you move into the January timeframe, our purchase order are flat and we’re actually projecting our purchase orders to be up slightly going into 2015, again we’re thinking mid-single digits and that kind of range, but we’ll have a much, much better idea on this as we look out over the next 60 to 90 days as the spring buying season kicks off. So we’re coming out of 2014, we basically had flat purchase orders, down just slightly on an order count and we’re looking for that to, again, modestly increase going into 2015.

Okay, great, thanks. And have you seen any effect of lower oil prices especially within commercial and some of the more energy intensive states like Texas and I guess at what pint do you start to change your thinking into expanding into some of those bigger states if the lower oil prices continue?

Couple of points, first, we’ve seen at this stage no impact to our business, but it’s our expectation that if we continue to stay at this kind of a price for oil that we’ll see some reduction in some of these energy-based states from a commercial transaction. I think that will be a natural occurrence. The second component is we’re watching our underwriting criteria very closely on all our energy deals right now.

Okay, great, thanks.

Thank you. Our next question is coming from the line of Chris Gamaitoni with Autonomous Research. Please proceed with your question.

Hey, good morning, guys. Thanks for taking my call.

Good morning.

I just want to clarify a comment you made earlier. When you said the title margin could grow in 2015, was that on a year-over-year basis or relative to the fourth quarter?

On a year-over-year basis.

Okay, thank you, that’s very helpful. And then on the – can you just give us some clarity on the continued impairment charges and maybe how much more could occur in the future?

Yeah, we had $20 million of impairment this quarter; all of it hit the title segment. It was really three or four investments -- legacy investments that we made over a decade ago in different title related companies that we just took a look at and realized that we can support the value. So we wrote it down and we don’t expect any similar impairments going forward.

Okay, perfect. Any outlook for the title loss ratio?

Yeah, so we’ve booked 6.5% in the fourth quarter. I think that’s a good number to use for 2015. So the way we’re thinking about it now is for the first half of the year we’re intending to book at 6.5% and then we’ll sort of reevaluate it. It can always be higher than that if we have adverse claims development above our expectations, but our expectation now is somewhere in the 6.5% range for 2015.

All right. Perfect. Thank you.

Thank you.

Thank you. Our next question is coming from the line of Jason Deeleuw with Piper Jaffray. Please proceed with your question.

Good morning and congrats on the strong quarter. On the title adjusted pretax margin, very strong, 12% this quarter versus 8% a year ago and your title revenue was up about 3% year-over-year, so there is a lot of operating leverage there. And I’m just trying to get a better sense for how much of that is due to commercial and how much of that is just due to that you’ve improved the title margin performance in the residential side also?

Hi, Jason. I’d say the combination of both. We had a strong commercial quarter, really strongest commercial quarter we’ve ever had. And the commercial business has higher margin than the residential business, so some if it is certainly a mix that helps us. But in addition to that, I’d say that our residential margins are stronger now just because of the fact that we are running it more efficient and we have them before. So I think it’s coming from both areas.

That’s great. And then when I think about the total company pretax margins with the corporate expense increase, I mean, do you guys think you can overcome that? And on a company-wide basis have pretax margin expand in 2015?

It just depends on what the market does. I mean, obviously, if the revenue and the market is going to be flat in 2015, no, we are not going to be able to overcome that additional corporate expenses. But if we get some help from the purchase market and from the commercial market, it depends on what happen with refis, I think of it as a chance, but it all depends on the market.

Okay. And then on the commercial side, could you just give us a little bit of sense for how much of that is just new commercial title activity versus refinance?

This is Dennis. It’s really both.

Okay. I mean when you think about 2015, you think there would be any kind of change in terms of that mix as we go into 2015 versus what you just had with this past year?

I really don’t – I think again going into 2015, we are going to see strength in our commercial business, really kind of across the board product types NGO. I think this trend will continue. As I said in my script though, I do think since we are running at such an elevated level of commercial right now, I do think that we will start to see slowing growth trends in that segment.

And then on the energy impact to commercial, I mean, how important is energy to your commercial business? Is there anyway you can help us kind of understand the size?

It’s a component of our business, but we don’t anticipate there’d be a material change in our revenue base going into 2015.

Okay. And then on the share gains you guys talked about, is that coming from the direct channel, agent channel, or both? Could you just give us a little bit of color on that?

It’s coming actually from both. And we are going to get again – I will just restate it, we are going to continue that without effort going into 2015. And we think we have good momentum going into 2015.

And then, the last thing on the – it sounds like you are expecting, I think you said mid single-digit increase in purchase orders for the year, but so far it looks -- sounds like we are running about flat year-over-year. And I guess, we shared a same view that you guys have and I guess, what you guys looking at? What are the considerations you have when you think about that forecast you have for this year on purchase units?

We look at what’s happening in our marketplace across the country, number one. We look at all the external forecasts. We look at our current pipeline. We have a great visibility of 90 days. Again, our take is kind of the lower end of the range in that mid single digits on transaction grow. We will have a much better idea what really is going to happen over the next 60 days, 90 days. But we are probably taking a little bit more conservative approach in some of the external forecasts. But we are conformable where we are right now.

Okay. That’s great. Congratulations on a great quarter.

Thanks, Jason.

Thank you.

Thank you. Our next question is coming from the line of James Spalton with Odey Asset Management. Please proceed with your question.

Hi, there. Can I ask a follow-up question to the one about the paid claims, which is, what is the relationship or what relationship do you expect over the next couple of years between the provision rates of 6.5% that you set out and the paid claims rate. Would you expect that to trend in line? Or would you expect it to diverge as it did perhaps at the back end of the last cycle?

Right now, I would say, the paid claims ratio is running higher than the provision ratio simply because we wrote a lot of policies back in 2005, 2006, 2007, 2008, when revenue was much higher and the market was stronger, but those policies end up having significantly higher loss rate than the current -- last few years. And so, last year, in 2014, we paid $272 million of title claims. The normalized level of paid claims is somewhere around $215 million give or take. So we would expect --

Is that $215 million or $250 million?

$215 million.

$215 million?

$215 million, yes. And so we would expect our paid claims to, over the next couple of years, gradually come down to that normalized level. And once it does, then our paid claims ratio, our loss expense ratio will come in line.

Thanks very much. And I could ask a second question, which – apologies if you covered this earlier in the call, but just for modeling purposes, should we think about the structure of the commercial ARPO being similar to the residential in terms of the it’s -- the feed for it has from loan size or from valuation movements in the underlying market?

I’ll answer this way, our average fee for our commercial transactions for last year was about $7,700. Now it was much higher in the fourth quarter simply because we just had a lot of bigger deals closed in the fourth quarter. But for the year, it was $7,700. The average fee that we get for purchase transaction all of last year was about $1,900. So it’s a few times higher on the commercial side than the purchase side. I’m not sure that answered your question.

Sorry, just to clarify, what I was meaning was in terms of the variability between say $7,700 and over $9,000 -- in terms of -- what I was asking was could you explain to us how we can model that? Is it a percentage of the overall loan amount that comes through? what are the particular drivers?

It’s difficult to model, it’s based on a per thousand of liability, that’s kind of how we charge, so it’s just a difficult think to be able to model.

Okay.

And I would say, it generally increases through out the year. So the commercial ARPO is going to start lower in Q1 and rise throughout the year. But other than that, it’s just – it’s tough.

Okay, thank you.

Thank you. Our next question is coming from the line of Geoffrey Dunn with Dowling and Partners. Please proceed with your question.

Thank you. Good morning, guys.

Hey, Geoff.

I guess first on the loss provision, it stayed up here probably longer than I would have expected and now we are looking at somewhere in levels of 15%. How can we think about what we need to see to have that provision start coming down more in line with where your peers are?

We just need more time to go by. I mean we feel good about the adequacy of our reserves right now, we feel good about the rates that we are getting for the current years. But we are just kind of at the higher end of the range simply because of the history that we’ve had of reserve strengthening in the past. So we feel good about the reserves on the balance sheet, we’re just reserving a higher rate until we are – sure, that when we take it down, it’s going to stay down.

Okay. And then, just to get a little more granular, excluding the impairment, your revenues were up in title this quarter, you are able to take operating expense down $10 million. And I think it looks to me like the margin was actually almost closer to 12% if you make that adjustment. Was there any specific cost that you are able to squeeze out of the operating expense side in the quarter? I’m trying to getting the feel for what might be sustainable here.

We feel like the current quarter is sustainable for our fourth quarter. Now if you are looking at year-over-year trends, Q4 of last year, we had a $5 million legal settlement that we had, we also had a premium tax true up for about $4 million. So there was $9 million of expense that we had in the fourth quarter of last year that we didn’t have this year. So on a year-over-year basis, I think the expense management, if you will, is a little bit over stated. But when you look at the Q4 P&L, there is really no noise in it, it’s a normal P&L, other than the impairment in the top line.

Okay, so looking at it sequentially, just having probably some sort of variable adjustment?

Yeah.

Okay, great, thank you.

Thank you.

Thank you. Our next question is coming from the line of Ryan Byrnes with Janney Capital Markets. Please proceed with your question.

Great. Thanks. Good morning, guys. Just had one question for you guys. On an earlier title insurance call, they kind of pointed out to meaningful expense for kind of CFPB expected changes and kind of the cost associated with getting prepared for those new regulations. Just want to see what your thoughts on that change.

Well, yeah, we are incurring expenses associated with upgrading our technology, training our people. There is a lot of work that’s going into the integrated disclosures rules [ph] in August 1. So there is an expense side of that equation and then there is a revenue risk side of that equation, maybe, Dennis, can comment on?

So, we’ve been -- on the first part of your question, we have been really focused on this over the last part of 2014, that focus will continue going into 2015. Specifically, so our shareholders understand, we’ve got new disclosure forms coming online in August 1 and so we’re going to make sure our company is ready to go and we’re well positioned for that. The second part of that question is, there is some discussion about the concept of an owner’s title policy being optional. Owner’s policies have always been or buyer policies have always been optional. We really don’t see that as an issue. As we sit here today, probably the biggest issue we think that could disrupt things would be just the implementation of the new disclosure forms and could have slowdown the market in the temporary basis in that quarter. We will have a much better feel as we get closure to that implementation date.

Great. Thanks for your answer guys.

Thanks.