Fidelity National Financial, Inc. (FNF) Q1 2011 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Fidelity National Financial 2011 First Quarter Earnings Conference Call. [Operator Instructions] And also as a reminder, today's teleconference is being recorded. Now at this time, I will turn the conference call over to your host, Treasurer, Mr. Dan Murphy. Please go ahead, sir.

Thanks, and good morning, everyone, and thanks for joining us for our first quarter 2011 earnings conference call. Joining me today are Bill Foley, our Chairman; George Scanlon, CEO; Randy Quirk, President; and Tony Park, our CFO. We will begin with a brief strategic overview from Bill Foley, George will provide an update on the Title business and our operating companies, and Tony will finish with a review of the financial highlights. We'll then take 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 a replay via webcast at our website at fnf.com. It will also be available through phone replay beginning at 1 p.m. Eastern Time today through May 6. The replay number is (800) 475-6701 and the access code is 199329. Let me now turn the call over to our Chairman, Bill Foley.

Thanks, Dan. This is our strongest first quarter in a number of years as our direct operations benefited from strong refinance closings early in the quarter and consistent closings throughout February and March. Open order accounts were relatively stable throughout the quarter although they showed some seasonal strength in the month of March, increasing more than 8% over the average for January and February. The Commercial business continued to be robust as Commercial revenue grew by 35% over the first quarter of 2010. This quarter shows that with generally steady order volumes, although at historic low levels, we can generate the 8% to 10% margins we target in difficult markets through our focus on strong expense management. During the quarter, we eliminated more than 600 positions in our Title operations and made significant progress on our previously stated $50 million cost-savings project, identifying nearly $55 million in run-rate cost savings. Our quarterly results also included one-time expenses of $9 million, or $0.04 per diluted share, representing our portion of the costs related to the Remy debt restructuring in late 2010 and early 2011. Overall, this is a very positive start to what most experts have predicted will be a very difficult year in the mortgage and real estate markets. We believe we have our company positioned for strong performance for the remainder of 2011. We made modest stock repurchases during the quarter, repurchasing approximately 800,000 shares at an average price of $13.84 for total proceeds of $11 million. We have a bond payment due in August of this year of approximately $165 million and, therefore, are conserving some cash to ensure that could be made on a timely basis. Under our current authorization, we can still repurchase up to 9.2 million shares through July of 2012. We will continue to monitor the market and repurchase shares from time to time. Additionally, Remy filed an S-1 registration statement in March to begin the process of selling common stock and becoming a publicly traded company. Remy intends to sell up to $100 million in common stock at a public offering. Because of rules surrounding an IPO, we are restricted from discussing any of the potential details of the transaction at this time. Let me now turn the call over to our CEO, George Scanlon.

Thank you, Bill, and good morning, everybody. We are pleased with our performance to start the year in what is normally our most challenging quarter of the year. While total revenue for the company was flat, we were able to almost double our pretax profits over the prior year. This resulted from a combination of favorable revenue mix and ongoing disciplined cost management and also highlights the upside earnings leverage in our business when Title volumes normalize in the future. We work hard to maintain our industry-leading margins even in the face of cyclical headwinds, and this quarter is a reflection of the success of those efforts. Despite forecast to the contrary as we entered the year, refinance open order volumes continued to be strong into the first quarter. Refinance orders were 52% of open orders for the entire quarter. Overall, open orders averaged 7,900 per day for the first quarter, with January averaging 7,700, February 7,600 and March 8,300. Open orders for the first 3 weeks of April averaged 7,700 primarily due to the expected softening in refinance orders as refi orders dropped to 48% of total open orders. Resale order activity for April has been consistent with March. We had another strong quarter in the Commercial Title business. Commercial revenue accounted for 20% of total direct-title premiums in the first quarter compared with 17% in the first quarter of 2010. We opened approximately 18,500 commercial orders in our national Commercial divisions and closed 10,600 commercial orders, generating nearly $66 million in revenue with a fee per file of $6,200. This represented a 24% increase in fee per file and a 35% increase in total commercial revenue versus the first quarter of 2010. We are encouraged by the strong start to the year in the Commercial business, and based on our pipelines are becoming more and more confident that the commercial market will continue to yield positive results in 2011. Specialty Insurance revenue was $96 million in the first quarter, an increase of approximately $7 million from the first quarter of 2010. Flood insurance generated $34 million in revenue, personal lines insurance contributed $37 million in revenue and home warranty produced $19 million in revenue. Pretax earnings were $9 million, reflecting margins of 9.3% compared with 6.9% in the first quarter of 2010. The Homeowners business produced a loss ratio of 69% for the quarter versus 77% for all of last year. Let's turn to our minority-owned subsidiaries. Because they are minority-owned, we do not consolidate the results of these operations. Overall, we recognized an $8.6 million loss from our equity investments. However, as Bill mentioned, that included one-time expenses of $9 million, representing our portion of the costs related to Remy's debt restructuring. Excluding that one-time charge, we realized an $11 million improvement in earnings year-over-year on these investments and generated a small profit for the quarter. Ceridian produced fourth quarter revenue of $394 million and EBITDA of $98 million, reflecting an EBITDA margin of nearly 25% and 30% growth in EBITDA over the prior year. Our 33% share of Ceridian's quarterly income was a profit of nearly $1 million compared with a loss of $7 million in the prior year period. For the 3 months ended February 28, Remy generated revenue of $289 million and EBITDA of $22 million. Our 47% share of Remy's quarterly loss was $11 million, $9 million of which was related to the previously mentioned debt restructuring. For the 3-month period ended in February, American Blue Ribbon Holdings produced revenue of approximately $190 million and EBITDA of $6 million. Our 45% share of their net income was less than $1 million this quarter. Finally, an update on our corporate cost reduction program. Through early April, we have identified nearly $55 million in run-rate cost savings with $22 million coming from personnel reductions and $33 million in non-personnel costs. We have achieved $33 million in annualized savings as of March 31, 2011, and expect to be substantially through the program by the end of the second quarter. Let me now turn the call over to Tony Park to review the financial highlights.

Thank you, George. FNF generated $1.2 billion in revenue in the first quarter with pretax earnings of $82 million and cash flow used in operations of $21 million. Cash flow is normally seasonally weak in the first quarter due to the payment of bonuses and commissions associated with the prior year. That had a $73 million impact on cash flow in the first quarter. Additionally, title claims paid in the first quarter exceeded the provision by $38 million. Book value was $15.46 per share at March 31. The Title segment generated $1.1 billion in total revenue for the first quarter, a 2.5% increase over the first quarter of 2010. Direct title premiums grew by 15% over the prior year as closed orders grew by 12% and the fee per file increased 2% despite a higher mix of refinance transactions. The strong commercial revenue market had a positive impact on the fee per file. Agency premiums declined by $60 million or 12% due to a substantial decrease in the agency pipeline accrual in the first quarter. When agent commissions are considered, net agency premiums declined by $4 million or 4% as the agency accrual decline also affects commissions. The retention rate increased by 200 basis points over the prior year as we saw the benefit of canceling agents that have higher splits, and we also saw a stronger Commercial business and some favorable commission split states, particularly Florida. Pretax earnings were $103 million and the title margin increased significantly to 9.3%. Title segment personnel costs increased by $15 million or 4% versus the first quarter of 2010 and other operating expenses actually decreased by $6 million or 3%, while direct title premiums increased by 15%. While we did eliminate 600 positions during the quarter, we had added many positions during 2010 to handle the refinance volumes and overall headcount was only down about 100 people from the first quarter of 2010. Also, incentive compensation was higher in the first quarter of 2011 due to higher profitability. Offsetting that increase was the benefit of the $33 million in annualized run-rate cost savings realized from the previously announced $50 million cost savings program, $7 million of which is reflected in these first quarter results. Overall, personnel and other operating expenses rose only $9 million over the prior year while direct revenue increased by $73 million. Debt on our balance sheet remains the same as at year end, consisting of the $701 million in senior notes due in 2011, 2013 and 2017, and the $250 million drawn under our credit facility. Our debt-to-total capital ratio remained at 22% at March 31. Total title claims paid were $89 million during the first quarter, in line with our expectations. Overall, our reserve position is still within a reasonable range of our actuaries point estimate. We continue to provide for future claims at a 7% provision level and expect to do so throughout 2011. Finally, our investment portfolio totaled $4.9 billion at March 31. There are approximately $3 billion of legal or regulatory and liquidity constraints on some of those investments, including secured trust deposits of $400 million and statutory premium reserves for underwriters of approximately $2 billion. There are also some less liquid ownership interests in Ceridian, Remy and American Blue Ribbon of nearly $600 million. So of the gross $4.9 billion, approximately $1.8 billion was theoretically available for use with about $1.65 billion held at regulated underwriters and approximately $150 million in non-regulated entities. 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.

[Operator Instructions] And our first question in queue will come from Bob Napoli with Piper Jaffray.

Nice job in a tough market. Question on Canada, your large competitor took a significant write-off on a guaranteed product in that market, and I believe you guys are in Canada as well. And I just wondered if you have exposure to that product and what you've done differently there if anything?

Bob, this is George. We are in Canada, but we did not offer a product like that. And as a result, we have no exposure similar to what our competitor had.

Okay, thank you. That's helpful. You did look like you gained some market share in your direct business versus the trends that we see. On mortgage originations and at competitors, do you think you're gaining market share and if so, why?

Well, Bob, if you look at last year, we did pick up some market share. We came in at the end of the year over 39%. We don't play the market-share game, as I think, you know, we focus more on consistent margin delivery. But the market could be shifting as you look at the competitive landscape, you look at the financial performance of our competitors. Certainly, customers want a company that's financially strong and can stand behind the policies issued. So it's conceivable there could be some shift going on, but we work hard in the markets we're in. And I think we've got a great group of experienced employees out there who are focused on consistent service delivery, and maybe there's some differentiation going on that we're starting to see the benefit of.

What do you feel -- what's your feel for the market? It's hard to predict obviously the mortgage market, but the forecasts are for the market to trend down to about $1 trillion this year, so it's down like 40% year-over-year and you're seeing some of that. I think you're seeing more of that in April. As you said, you saw some tail off in the refi market. What do you expect? And do you -- have you cut enough expenses for the scenarios that are out there?

I would say that the MBA has already revised their forecast -- well, that they had coming into the year. I think we'll probably continue to revise it. There is no doubt that the refinancing market will come down this year. And it's everybody's hope that the resale market comes up and picks up some of the slack, we monitor our weekly order activity. And as you saw from the first quarter performance and what we've done consistently in the past, we manage our expense line to match the current level of activity. So as we look through the balance of the year, we don't try to predict where the market is headed. There's clearly a lot of markets that remain challenged, but it's improving in other markets. So we run the business to deliver a good consistent profitability and take what the market gives us.

From an investment perspective, last question, you guys buy back some stock, you have a debt payment in August, but are you seeing opportunities here for additional acquisitions in Title? Would you make additional acquisitions or outside in your non-Title businesses? And are there other areas that you find attractive to put capital work in?

Well, you know, Bob, I think that -- well, what we're presently doing is we're taking a look in the Restaurant sector and seeing if there is some opportunities there to just do some things with ABRH, which is Village Inn, Bakers Square and now Max & Ermas, and it's doing very well with a very strong management team. And so it's a segment that we believe we can grow our business fairly significantly. We're also looking at services surrounding the Title product and the performance of our title of escrow and close function. And so we have some ideas in that space, we just haven't executed on anything as yet. Other than that, we have a few distressed debt situations that we have made modest investments in to have a toehold and in every one of those cases we'd be happy actually if we could get control or take control of the company through some kind of reorganization process, and in every case we're the fulcrum security. So not large investments but large enough investments that we can be influential in terms of a restructuring should that happen. Or if it doesn't happen, we end up with a 15% to 20% yield on the investment over the term of the security, which are generally less than 2.5 years.

And our next question in queue, that will come from the line of Mark DeVries with Barclays Capital.

Bill, with your pretax operating margin in Title already at 9% in what's arguably the most challenging seasonal quarter of the year, is it going to be safe for us to assume that after you complete the $50 million of expense saves, you're pretty much done unless you get another leg down in mortgage activity?

No, I think -- Randy could speak to this as well as George. But the reality is we've just gone through -- well I mean just really 3.5 years of a constantly declining market with a couple of bumps up for refinance activity. And when we were all talking last week, we felt like, boy, for the first time in about 3 years, we kind of have things where we need them to be. And that was reflected in that pretax margin in the first quarter, which was -- has been really our target to maintain that during difficult times. It's just taking a long time to catch up and -- because the tail is so long. So we feel good about where we are. We don't like the fact that the market is so soft. And if there's not another leg down, we're in pretty good shape. But MBA keeps on modifying their forecast and we just have to be ready to respond to it. But we do have a profitable company that's running on really -- well, we only have 4 cylinders left but those 4 cylinders we're really running well on them. We'd like to modify the engine, add a couple of cylinders. But for the time being, we're just going to be a 4-cylinder company trying to respond to the marketplace.

Okay, great. And then can you give us a little context on kind of where Commercial volumes have peaked in past cycles as a percentage of revenue? What I'm trying to get at is kind of what room there is for additional growth in Commercial to offset any additional weakness we may see in Residential this year?

I'd like to have Randy jump in here if I just give you an initial thought. What we're seeing in commercial are really a lot of distressed loans or loans that were potentially distressed loans of 5, 4, 3 and 2 years ago that were kind of rolled into something else on a short-term basis that are now going to longer term facilities at lower interest rates and a lot of power plant activity, a lot of large transactions. Casinos are now back in the mix. And we're in a fortunate position in that with the strength of our balance sheet and really having more cash and investments than the rest of the industry combined in terms of the Title sector that we are a company that developers and lenders go to for safety and security. Randy, do you want to pick up on that at all?

Sure, Bill. Yes, we're running now -- what is it, 20% of the direct title premiums and this can go higher. We built very well as we went through last year, each quarter being stronger than the previous quarter on the commercial side. Again, as you know, we've already given the numbers but we have 35% increase in our revenue over the first quarter of 2010. So that 20% number could go higher than it has been in the past as we continue to see some consolidation in the residential and the refinance market.

Okay, and I think the specific comment that was made about Commercial earlier was that you're looking for positive results. Does that imply you're looking for growth over current revenue run rates?

Well, our Commercial operations around the country are very optimistic on continued Commercial momentum and growth as we move through 2011.

And we expect to have a better 2011 than we had in 2010. But as you can appreciate, the commercial transactions tend to be lumpier. And so quarterly comparisons may not be as meaningful as where we end the year.

Our next question in queue, that will come from the line of Brett Huff with Stevens.

First of all, I just want to make sure I understood the cost cuts that are going on. There is, I think you said you've completed $33 million but then there was a $7 million number that you mentioned this quarter. I just want to make sure I understood the difference between these 2.

Yes, let me clarify that. We've taken actions on $33 million of the $55 million that we're currently targeting. I want to emphasize as well that this is coming out of our shared-services cost pool and is unrelated to the direct operations in the 600 people that Bill referred to yesterday. But of that $33 million, those actions taken contributed $7 million in savings to the first quarter and obviously that will incrementally benefit quarters 2, 3 and 4. And then assuming we can get substantially through this by the end of the second quarter, I think you'll see that run rate contribution get into the $12 million to $13 million range by Q3 in terms of what it's contributing to cost reduction in that particular period.

Okay, that's great. And then in terms of, if Remy ends up being monetized, if your share-price store is still hanging around these areas, around book value, traditionally that's -- you've seen that as a good investment, is that a reasonable assumption for us to make that you might place some capital there after any kind of debt payment?

Could you repeat the question?

Sure. If you generate some cash from monetizing Remy, however that might pan out, given your stock price, you've bought back stock when you've generated cash and investments like that and I just wondered if that was still a likely outcome in use of that cash.

Absolutely, [indiscernible] I misunderstood the question a bit. It's an inevitable outcome of having some excess cash, unless we have a way to deploy it to really return value to our shareholders. We've felt for many, many years that we've gotten ourselves in the situation with the various partial spinouts and the distributions and so on that we've made, that we just got too many shares outstanding. And we're just really focused on trying to get that share count down. At the same time, we want to ensure that we have plenty of resources to hit these debt payments and just keep on knocking down our overall debt while we're in an unsure economic environment. When the economy is back, whenever it comes back and we start generating these higher margins on our title operations up in that 15% range in much larger numbers, then we can start making some other serious investments. So we're being cautious. But repurchase share, repurchasing shares is a very, very high priority for us.

Okay, and then one last question, just on sort of the future state of the housing market. When you guys think about and look out and think about "normalized market", is that a $1.5 trillion market or is it a $2 trillion? When you're thinking about that 15% or mid-teens type pretax in title, what is kind of the assumption for the demand curve for the market?

My numbers are always in that $1.8 trillion to $2 trillion, and then we're there again. And what will happen is as the market does start coming back, whenever it does come back, there is a significant amount of pent-up demand for house purchases and it will be a -- we will have a couple of years of really, really strong market and significant margins because it takes us a while, just as it takes us a while to catch up on the way down, it takes us a while to catch up on the way up, and everyone really works hard and they're going 12 to 14 hours a day. But the results are that the cash flow and the profitability of the company will be exceptional.

And our next question in queue, that will come from the line of Doug Mewhirter with RBC Capital Markets.

Most of my questions have been answered. My one question is regarding the reserves you incurred in paid claims, I noticed that your paid claims are lower, have gone down a little bit from a year ago, however, they do remain relatively high relative to the incurred claim ratio. And I know that a lot of times, if paid claims stay elevated then the actuaries start putting pressure on your reserve picture. And how long is that -- I mean I realize that a lot of it is from past paid claims, 2008, 2007, but how long do you think you could sustain this before you might have to look at your reserves?

Doug, this is Tony. We look at our reserves every quarter. I think what you're comparing is the provision rate, which is the current expense that we put up relative to the payment. And it's really an apples and oranges comparison. The payments that we're making in the first quarter of 2011 still relate to 2005, 2006, 2007, 2008, et cetera. So we feel like payments in the first quarter came in as we would expect. And as long as we continue to have payments that come in at what we expect from an actuarial standpoint, we don't feel like we've got exposure to the reserve side. We've been in the same position for the last 12 to 15 months in terms of performance in each of our various policy or groups. And I'll just kind of put it in some perspective, if you look at 2009 and 2010, they continue to trend very favorably at around the 5% level in terms of loss ratios. 2008 and 2005 are fairly consistent at about the 7.5% in loss ratios. And then 2006 and 2007 continue to have some minor adverse development and they're a little bit above 8% in terms of loss ratios. So again, we monitor it closely. We work with our actuaries every quarter. And at this point, I'd say we're cautiously optimistic that we're well-positioned within a pretty broad range as you can expect in this business with such a long tail. So we feel good about our position currently.

And our next question in queue, that will come from the line of Nat Otis with KBW. Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.: Most of my questions answered, just a couple of very quick ones. First, just confirming what I think you already said, which is that $55 million in expense reductions has nothing to do with your seasonal reduction in those 600 heads, is that correct?

That's correct, Nat. That's just focused on the Shared Services costs, which is completely separate from the Title operations. Nathaniel Otis - Keefe, Bruyette, & Woods, Inc.: All right, great. And then just lastly going back to your monthly order accounts, you talked about April at 7,700, the first 3 weeks. Anything, maybe looking for a little bit of silver lining in there, but any thoughts on how the holiday week last week could have impacted and what you might be looking for to come back for the last week of the month?

Yes, I think if we look at last week specifically, we kind of treat it almost as a 4-day week because of the Good Friday holiday. So we normally get a little uptick toward the end of the month and we're hopeful we see that this month as well. I don't know, Randy, any color?

Yes, I would agree. The orders did fall off last month because of that -- last week because of that Friday. So they should come up a bit in the last week of the month here.

And our next question in queue, that will come from the line of Ben Hunt with Iridian Asset Management.

On the earnings call earlier today, Lender Processing Services talked about underwriting some title insurance directly. And I know the history between the two companies, but maybe give me a sense of what the ongoing working relationship was and if there was any change in that relationship?

The Lender Processing Services, for some time has been shifting business to their underwriter, National. It's a very small underwriter. I believe it's a New York domiciled company. And a lot of it relates to our resolve to be very careful in terms of the way we write policies and what we right policies on and the pricing of those policies. And they've elected to move away from, what I would call very strict, high-level specific underwriting guidelines and standards to a slightly different standard, which apparently fits their business mode and business operation. And so they have moved away fairly significantly from writing their policies on our underwriters. And that's really part of the reason why our market share has dropped 3% over the last year and a half or so. So their anxious to get into the underwriting business, and I'm sure that that they know exactly what they are doing. They have the depth of management to take care of it. The word [ph] As you know, or as our audience knows -- we've been working very hard and been very careful about the types of risks we take with agents and internally. And our risk profile that we're willing to assume is very, very high. We just are not going to take any risks.

And our next question in queue, that will come from the line of Jimmy Baker with B Riley & Co.

I just had a quick one on the Remy reported number, the EBITDA figure that you reported, is that inclusive or exclusive of the $19.4 million debt charge that they had?

That would be exclusive of that charge.

With this time, I will turn the call back over to Mr. Foley for any closing remarks.

Thanks, everybody. We produced our strongest first quarter in a number of years. This quarter shows that with generally steady order volumes, although at low historic levels, we can generate the 8% to 10% profit margins that we target in difficult markets through our focus on strong expense management. We believe we have our company positioned for strong performance for the remainder of 2011. Thank you for joining us this morning.

Thank you. And ladies and gentlemen, that does conclude your conference call for today. We do thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.