Aug 3, 2010
Executives
Craig Barberio Director of Investor Relations Dennis Gilmore - CEO, Financial Services Group Max Valdes, CAO, Interim CFO Mark Seaton, VP of Finance
Analysts
Jason Deleeuw – Piper Jaffray Brett Huff – Stephens John Boisclair – Dominic Brokerage Mark DeVries – Barclays Capital Adam Klauber – McCrory Securities Matt Otis – KGW
Operator
Welcome, and thank you for standing by. All participants are on a listen-only mode until the question-and-answer session of today’s conference.
(Operator Instructions) We would like to remind listeners that copies of First American Second Quarter Press Release is available on the company’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 and for a short time by calling 203-369-0678.
We will now turn the call over to Craig Barberio, Direct of Investor Relations, to make an introductory statement.
Craig Barberio
Good morning, everyone. And thank you for joining us for our Second Quarter 2010 Earnings Conference Call.
At this time, we would like to remind listeners that management’s commentary in responses to your questions may contain forward-looking statements such as those described on page four and five of the accompanying news release and others statement that did 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 that may cause results to differ materially than those sent forth in these forward-looking statements, and factors that could cause evented results to differ describe in the forward-looking statements are also described on Page 4 and 5 of the news release. Joining us on today’s call will be Dennis Gilmore, our Chief Executive Officer; Max Valdes, Chief Accounting Officer and Interim Chief Financial Officer; and Mark Seaton, Vice President of Finance.
I will now turn the call over to Dennis Gilmore.
Dennis Gilmore
Thank you, Craig. I would like to welcome everyone to First American Financial first call as an independent public company.
As you know on June 1 we completed the separation from CoreLogic. The completion of the spinoff was a significant accomplishment for First American and our shareholders.
As we look forward, the company is well positioned to increase shareholder value, drive efficiencies throughout the business, and continue to execute against our strategic plan. In the spinoff, CoreLogic issued to us approximately 13 million shares of its common stock.
The value of this investment based on yesterday’s closing price is approximately $260 million. And as part of our broader capital strategies, we will look to monetize this asset opportunistically over the next few years.
Now turning to the second quarter results. First American earned $0.32 per diluted share during the second quarter.
This includes 3 million of net- realized investment gains which equals approximately $0.02 per share. The Title Insurance Segment achieved the pretax income of $62 million for pre-tax margin of 6.9%.
And this also include a net-realized investment gain of $4 million. Closed Title Order fell 30% when compared to the same period last year.
The decline in orders was partially offset by order mix shifting retail transactions; helping to drive an increase in our average revenue per order up 1565 an increase of 20% when compared to last year. Our open orders remain stable during the quarter as we opened approximately 6,300 orders per day in April, 6,400 order per day in May, 6,500 order per day in June.
After the homebuyer tax credit expired at the end of April and as interest rates trended lower during the quarter the open order mix began to shift towards refinance transactions. This trend has accelerated in July, driving open orders up 8% when compared to June.
Our Direct Revenue and our Title Segment were down 14%, while our agent revenues were up 4% when compared to the same period last year. Over the last few years we have terminated many underperforming agents.
But during the last two quarter we have focused on signing high-quality agents at appropriate clips, resulting in an increase in our agent market share. Our new agent controls continue to lower our risk profile and improve our profitability.
Our commercial title business performed well on the quarter with total revenue of $61 million. Up 17% when compared to last year.
Workout and distressed properties continue to represent the majority of our activity. But we are seeing an increase and a re-emergence of larger-sized non-distressed transactions.
And this positive trend continued in July. We are becoming cautiously optimistic that this could be the start of sustainable recovery in our commercial market.
Revenues in our international division were $91million, up 13% compared to last year. The growth was driven primarily by Canada where our residential title business continues to strengthen.
Our other key European market, the U.K. remains weak reflecting the state of their economy.
Turning to our Specialty Insurance Segment, continued to perform well in both our home warranty and property and casualty lines. Total revenues were $71 million with a pre-tax margin of 15%.
The Home Warranty Business completed a very successful operational turnaround and both of our lines are continuing to perform well and have good claims experience with loss ratios of just under 50% for the quarter. Looking forward, our key focus is to continually improve our pre-tax margin and title segment.
We continue to manage our workforce to current transaction volumes, while driving improved efficiencies across our company. We are making progress and improving our agencies split in key states and we continue optimize our direct branch network.
We are pursuing price increases in select states where our returns are inadequate and we continue to benefit from the lower claims experience driven by stronger underwriting standards in our recent policy years. As a result we’ve lowered our current loss provisioning rate to 4.8% for policy year 2010.
With regards with Capital Management, we will continue to evaluate the size of our dividends, a share repurchase program, capital expenditures and any potential acquisition. However, we will be cautious in our approach as we will look for greater clarity on the overall health of the real estate markets.
And we will continue to focus on improving our financial performance. Turning to our outlook for the third quarter, it’s good.
All accounts look stable and our commercial activity continue to strengthen. However, as we move out of the traditional home-buying season we are preparing for lower order volumes in the fourth quarter.
Now that the spinoff is complete, I expect our enhanced focus on our business will accelerate our execution of our strategies to improve our efficiencies while pursuing profitable growth opportunities. I’d know like to turn the call over to Max Valdes for a review of our financial results.
Max Valdes
Thank you, Dennis. On a consolidated basis, total revenues for the quarter were $970 million, down 5% from the same quarter of the prior year.
Net income was $34 million or $0.32 per diluted share as compared with $29 million or $0.27 diluted share in the second quarter of 2009. Results in the current year were higher by $0.02 per share to net-realized investment gains of 3 million while the results for the same quarter of the prior year were lowered by $0.13 per share due to $23 million net-realized investment losses.
Turning to the Title Insurances and Services Segment, revenues for the second quarter were 903 million, down 6% from the same quarter of the prior year. This decrease was primarily due to a 30% decline in the number of orders closed by our direct operations off-set in part by 20% increase in the average revenue per orders closed and strong agent remittances.
The increase in the average revenues per order closed to $1,565 for the current quarter, reflect that a higher mix of purchase transactions driven in part by the Homebuyer’s Tax Credit. Also adding to the increase in the average revenues per order closed was the increase in the mix of direct revenues contributed by our commercial and international divisions, which experienced revenue growth of 17% and 13% respectively when compared with the same quarter of the prior year.
The strong agent remittances primarily reflect the market share growth in that channel. Total expenses for the current quarter were $841 million down 5% from the same quarter of the prior year.
Salary and other personnel costs and other operating expenses combined were 469 million, down 9% compared to the same period of the prior year. This decline reflected lower production cost due to the decrease in orders, a reduction in salary and other employee related expenses, and other cost containment programs.
The provision for title insurance losses as a percentage of title premiums, escrow, and other related fees was 5.8% for the second quarter compared with 6.5% for the same quarter of the prior year. The current quarter rate reflects adverse development for certain prior policy years offset by a reduction in expected ultimate losses per policy years 2009 and 2010.
The lost provision rate for the 2010 policy year has been reduced to 4.8% in the current quarter as we continue to see lower than expected claims experienced for that year. We anticipate that the company’s financial results will benefit from a lower-loss provision rate going forward.
The title pre-tax margin was 6.9% in the current quarter as compared to 7.9% in the same quarter of the prior year. Excluding the impact of net-realized investment gains and losses, the margin decline was primarily driven by the decrease in direct revenues from our residential and default title businesses, offset in part by the relative strength in commercial title, expense reductions and lower loss provision.
Now, moving on to the Specialty Insurance Segment. Total revenues were $71 million, up 10% from the same quarter of the prior year.
Excluding a $6 million impairment charge taken in the second quarter of 2009, total revenues in the quarter were essentially flat. Expense control is good with total expenses down 4% from the same quarter of the prior year.
Primarily driven by lower claims which continue to benefit both home warranty and property and casualty pre-tax margins. The Specialty Insurance pretax margin was 15% in the current quarter up from 3% in the same quarter of the prior year.
To wrap up, corporate expenses were 16 million in the second quarter, which was roughly in line with our expectations of 60 million on an annual basis. I will now turn the call over to Mark Seaton, our VP of Finance, for an update on liquidity and our capital position.
Mark Seaton – Vice President of Finance
Thank you Max. In terms of liquidity, we currently have 25 million of cash in our holding company.
We expect to receive approximately 70 million in dividends from our operating subsidiaries between now and the end of the year. We also expect to make cash payments to the holding company of approximately $55 million, which include our common dividends, interest payments and other obligations.
So when you add that all together, we expect to end the year with approximately $40 million of cash at the holding company. In addition to this cash, we also have $104 million of our $260 million CoreLogic stock investment at the holding company, and 200 million available on our credit facility.
So holding-company liquidity remains strong and we will continue to move capital upstream to enhance our flexibility. Debt on our balance sheet totaled 308 million as of June 30th.
Our debt primarily consists of $200 million that we funded on our credit facility in connection with the spinoff; $50 million in trust-deed notes; and $58 million of notes primarily related to acquisitions. Our debt-to-capital ratio as of June 30th was a conservative 14.1%.
During the last two years, First American emerged or eliminated 14 underwriter subsidiaries. Collapsing underwriters reduces complexity and administrative costs, but also frees up trapped capital.
We intend to combine one of our larger underwriters, First American Title Insurance Company of New York into our primary underwriter by the end of the year. This transaction will free up an additional $170 million of liquidity and represent yet another step in our efforts to further simplify our operating structure.
We have been working on a few strategies to increase our investment returns. First, simplifying our operating structure has enhanced our ability to put cash to work in the portfolio.
Since the beginning of the year we have invested the 80 million of cash into the portfolio. Expect more on this front in the second half of the year as liquidity remains very strong.
Second, we intend to weight the portfolio more to investment-grade corporate and municipal bonds, and away from treasuries and agency mortgage-backed securities. We made progress on this initiative during the year as we currently have 19% of our fixed income portfolio in these asset classes up from 11% at the beginning of the year.
In terms of capital at our title underwriters, we expect statutory capital of approximately 800 million at the end of the quarter. Our premiums-to-surplus ratio remains conservative at approximately three times.
And we believe our statutory capital remains solid. In terms of share repurchases we have been evaluating a buy-back authorization.
However, when instituted we will be cautious in our approach to repurchasing shares until we feel more confident about the market. We will also weigh buybacks with other uses of capital, such as dividends and strategic investments.
At this time we would like to open the line up for questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) Our first question comes from the Jason Deleeuw with Piper Jaffray. Your line is open.
Jason Deleeuw – Piper Jaffray
Thank you, and good morning.
Dennis Gilmore
Good morning, Jason.
Jason Deleeuw – Piper Jaffray
The second quarter pre-tax title margin, 6.9%, I mean, with the order volumes up that were seen here in July, do you think it’s reasonable that you could at least do that same pre-tax margin in the third quarter?
Dennis Gilmore
Yeah, sure. Thanks for the question.
This is Dennis, and I’ll answer it. You know, we’re pretty optimistic moving into the third quarter.
Our order volumes are up, but you know, I’ll give you a little color; they are shifting to a refinanced-based set of orders right now. So we think that our orders will continue to rise in the quarter.
Our closing ratios will probably drop a little bit because I think these orders will be a little more difficult to close. And I also think that our average fee per order will drop probably about 5%.
Now, offsetting some of that change, we think will be a continued strong pipeline in commercial. So to kind of wrap it all up, we’re looking for another good quarter in the third.
We do think that we’ll see pressure in the fourth though.
Jason Deleeuw – Piper Jaffray
Okay. And could you give us the re-fi mix by months possibly for like April, May, June and July?
Dennis Gilmore
Well, let me start with July. We moved up in July to represent about 50% of our orders now are refinanced based.
And comparing June to July, our resale orders are down about 5%. And we think that trend will probably continue as we move forward.
Now, when I look back over the quarter, we started the quarter at a refinance mix of about 30% first month; second month we went to 35, June we went up to 44-45%. So you can see it’s growing all through the quarter.
Jason Deleeuw – Piper Jaffray
Okay. And then my last question, you guys are arguably under levered, and you mentioned acquisitions.
I’m just wondering if you can give us some more color on that. It also it seems with the share repurchase, if you seek authorization there it seems like you’re a little – still playing it a little cautious there.
But you know, anything with the debt-capital structure right now that would cause you to be cautious on moving forward on any acquisition opportunities that you see? And can you give us any color on what type of acquisitions are you thinking of?
It is it just primarily in the title space, or is there stuff out adjacent to the title space?
Dennis Gilmore
Sure. Two parts to your question.
I think one is about a capital strategy and the second is about acquisitions. So let me start with the capital discussion.
You know, as everybody is aware on the call, we are a brand-new public company operating in still volatile markets. And so we feel it’s in the best interest of our company and our long-term shareholders to be conservative on our capital base coming out of the gate.
We want a few quarters to pass by. We want to see some stabilization in the real estate markets ultimately.
And while we go through that process, we’re going to be very focused on improving our operating performance. But when we step back from that, we understand that we have opportunities for redeployment of our capital.
We’ll continue to re-evaluate those opportunities as we go forward. Now, moving to your acquisition question.
I think we do have a few gaps in our product offering, you know, post separation. We have some potential gaps that we’re looking to fill in our default space and in some of our settlement service products.
But again, I’m going to give caution right now that we’re going to be very diligent and use our capital, you know, wisely here and make sure that we don’t overpay for any potential acquisitions as we move forward. So it’s kind of a cautious approach right now as we’ve moved forward.
Jason Deleeuw – Piper Jaffray
Okay. Thank you.
Operator
Our next question comes from Brent Huff with Stephens. You line is open.
Brent Huff - Stephens
Good morning, and congrats on a nice quarter.
Dennis Gilmore
Thank you.
Brent Huff - Stephens
Can you go through the loss provision’s puts and takes again? The way I understood it is prior to ’09 things got a little worse, or you reserved a little more, but you’ve taken down ’09 and ’10 to lower, or is it just ’10 to lower?
Can you just sort of go through that math again for me?
Dennis Gilmore
Sure Brent, this is Dennis. Let me give you some high-level detail on this one.
A little bit of noise in the quarter to start with, but at the high level we had very good policy development on loss development on years 2009-2010. And it’s our estimation that those years will ultimately prove out to be one of the highest quality books we’ve written probably in years.
Very strong on the writing book there. Now, offsetting that is we had a little adverse development in policy year 2007 and 2008.
And so that’s kind of what’s happened in the mix for the quarter.
Brent Huff - Stephens
Okay. That’s helpful.
And can you give us some detail on any incremental impacts or choices or actions you’d took on various cost initiatives? I know Mark mentioned some of the other margin initiatives or the investments that you all are working on.
But anything on the cost or other operational efficiency’s side that are notable?
Dennis Gilmore
Well, sure. Just high level, quarter over quarter I think we had a pretty good success ratio.
Our next revenue was down about 8% in the company and our expenses were down, between salary and other operating expenses, were down about 9%. So we hit our success ratios kind of quarter over quarter, or year over year.
Now, when we look forward, you know, as we also do, we’re going to continue to drive for efficiencies across the business. But to just give a little color on the third quarter, even though our orders are increasing, we have no intent to add any significant staff.
Actually, we’ll probably trend down every so slightly through the quarter. And that’s kind of how we approach most refinance markets.
We just don’t want to build infrastructure around a refinance boom.
Brent Huff - Stephens
Okay. That’s helpful.
And then can you – you mentioned that you were looking for some price increases. It sounds like fairly targeted.
I know you had good success last year, mid-year. Can you give us some more color on that?
Dennis Gilmore
Sure. Very similar to what I’ve said on a couple of calls.
But first, we start overall constantly re-evaluating our price structure in all states. And you know, one of our main objectives is to make sure we have a return on our capital.
And so the bulk of the activity actually occurred last year. We raised prices in about 28 states for an average of between 5 and 10%.
Now, when we look forward, we’re evaluating six or seven states right now that we still think that there’s some inadequacy in our pricing. And coupled with looking for some price increases in those states, we’re also looking to simplify our structures and our rates.
So I think you’ll see some benefit from price increases in the second half of the year, but it will be much less than what we saw in 2009.
Brent Huff - Stephens
Great. Thanks, that’s what I needed.
I appreciate your time.
Dennis Gilmore
Thanks.
Operator
Our next question comes from John Boisclair with Dominic Brokerage. Your line is open.
John Boisclair – Dominic Brokerage
Yes, Gentlemen. Just a follow up on the price increase potentials.
The six to seven states that you’re evaluating for potential increases, are those states that are significant, or you know, like California, New York, or Florida, or are those, you know, more minor states?
Dennis Gilmore
I’ll give you a little direction on that. They’re not the largest states.
I’d call them more mid-tier states.
John Boisclair – Dominic Brokerage
Okay. And going back to the investment gains and losses on the 6.9% for the quarter versus last year of 7.9.
In the release you stated that the loss was reduced last year by 150 basis points, and added to your margin this year by 40 basis points. Does that mean if you strip down the realized gains and loses that we’re actually at 6.5 this year versus 9.4 last year?
Dennis Gilmore
Yes. We are.
John Boisclair – Dominic Brokerage
So we actually declined by 290 basis point?
Dennis Gilmore
Yes.
John Boisclair – Dominic Brokerage
Okay. And just quickly on the – I noticed the agent premiums increased by 15 million in the quarter, but the premium retained by agents went up by 15.7 million.
Are we not getting leverage on the agent side? I know you’re trying to make some changes there.
Can we expect to see that improve?
Dennis Gilmore
Yeah. Thanks for the question.
This is Dennis again. It’s an effort that we’ve focused on now for the last couple of years, and we approach it really twofold.
First we look state by state for our return and we are moving up our agent retention objective in certain, mostly Eastern states right now. Now, the decrease from the year-over-year perspective is really more of a mix, where our business is coming in right now.
So we’ve had a little bit of an increase in some of the Western states that typically run at a full retention.
John Boisclair – Dominic Brokerage
Okay. And just one last one.
Are you going to break out escrow and other closing-related fees on the revenue steam going forward?
Mark Seaton
Yeah, this is Mark Seaton. No, we’re not going to break out escrow and other related fees.
Right now we break it out, you know, direct revenue, agency revenue and investment income. So we don’t have any intentions at this time of breaking out escrow revenue.
John Boisclair – Dominic Brokerage
Because your competitors do break it out. Is there a reason that we’re not going to have that visibility on it.
Mark Seaton
No particular reason. I guess we’ve just always done it that way and never had a reason to change in the past.
So you know, we just – we don’t really have any intentions of changing it right now.
John Boisclair – Dominic Brokerage
Could you at least give some guidance as to what percent of the revenue is escrow related and other fees? That’s going to be more of a constant.
You know where I’m going with that? In other words, that’s more of a constant whether you’re refiing or having a purchase, that’s more of a constant.
Mark Seaton
And I understand your issue. At this point, we are not intended to break it out, but let me take it under advisement and we’ll maybe give some better clarity as we move forward on that.
John Boisclair – Dominic Brokerage
Great. Thanks so much.
And congratulations on the spin.
Mark Seaton
Thank you.
Operator
Our next question is from Mark DeVries from Barclays Capital. Your line is open.
Mark DeVries – Barclays Capital
Yeah, thanks. Dennis, first one is just to kind of clarify the plan on capital.
Does the improving outlook around the residential-commercial side have any impact on the pace of which you might look to increase leverage and restructure, or do you want to at least get through the more challenging, you know, the more seasonally challenging fourth and first quarter before you even think about that?
Dennis Gilmore
Probably the answer is a little of both. I think they’re both primarily related; definitely the fourth and the first was more challenging quarters.
But we went back away just from a quarterly basis. When looking for clarity on overall markets, we’re optimistic that the bottom’s been hit and that we’re slowly but systematically improving.
But we just need some time to pass to make sure that the markets are showing stability with [inaudible]. So we’ll continue to give our investors updates as we go through 2011 on our capital strategies.
Mark DeVries – Barclays Capital
Okay. And just to clarify, you know, the implications or the comments around the commercial side, it sounds like you’re seeing both orders increase and you’re also seeing larger loan sizes.
Is that right?
Dennis Gilmore
That is correct. We’ve seen a real emergence of actually arms-length deals that are not distressed based.
And we’re seeing larger deals come through right now. And like I mentioned in my script, I’ll call it we’re cautiously optimistic that this market is showing some signs of recovery at a faster pace than we would have anticipated.
Mark DeVries – Barclays Capital
Okay. So you have the potential in commercial to have not only higher closed orders, but also a higher average fee on those closings, right?
Dennis Gilmore
Absolutely. And now, your average fee on a commercial will be fairly volatile on a quarterly basis depending on the size and the complexity of large deals closed.
That can cause lumpiness in your average fee on a quarterly basis.
Mark DeVries – Barclays Capital
Okay. And then just to the point you made earlier on the residential side about closing ratios potentially being lower in the third quarter just due to difficulties of actually closing some of these loans.
Can you just help us think through what the impact is on your expenses of opening orders but not eventually closing them? Is it just kind of marginal if you don’t actually get closer to a close?
Dennis Gilmore
You know, we will incur a fair amount of expenses as we go through the search, and the exam, and the issuing of the pre, or our product. But let me kind of give a little more color on how we’re thinking of closing ratios.
We ended the quarter, I think, in the mid-70s, 74 or so percent of the closing ratio for the second quarter. And as we look into the third quarter, we think that that ratio may drop, you know, mid-single digits.
So it’s not a material drop, but nonetheless it will drop because we do think these orders will be longer to close and just flat out more difficult to close.
Mark DeVries – Barclays Capital
Okay. Great.
Thanks.
Operator
Thank you. Our next question is from Adam Klauber with McCrory Securities.
You may ask your question.
Adam Klauber – McCrory Securities
Thank you. Good morning.
Dennis Gilmore
Good morning, Adam.
Adam Klauber – McCrory Securities
On agent, you mention the improvement was gaining some market share and that was related to appointing more agents. Could you give us, I guess, some clarity how many agents have you appointed?
And ultimately, are you going to continue to appoint more agents? And can we look for continued market-share gains?
Dennis Gilmore
Well, I can’t really comment on future market-share gains because we’ll have to play that out. But just overall, our agent strategy over the last couple of years, we have aggressively gone through our agency book and eliminated underperforming or high-risk agents.
Now, we’ve shifted our strategy over the last two quarters to focus on signing net-net new agents that are key for us, the key part of our distribution network, and it’s critically important to the company. And so over the last two quarters, you know, we’re net-net up a couple hundred agents when we take away the subtractions and add additions.
But again, just going forward, we’ll continue to focus on signing high-quality agents across our distribution network.
Adam Klauber – McCrory Securities
Okay. So we looked at, you know, add some more through the back half of the year.
Is that right?
Dennis Gilmore
Again, just limited because we have to net it out against anything we cancel.
Adam Klauber – McCrory Securities
Okay. And then another question.
You mentioned as you consolidate one of your [inaudible], you’re going to free up 170 million of capital. When do you think that will actually – when will that occur and when will you have access to that capital?
Mark Seaton
Hi. This is Mark Seaton.
You know, we’re planning on merging FATICO New York into our primary underwriter First Mercantile Insurance Company, our California underwriter by the end of the year. It might actually get done a little bit before then, buy you know, certainly we think we need to get it done by the end of the year.
So we’ll have access to that liquidity hopefully as of December 31st, and we’re going to look to try to upstream, you know, as much as we can up to the holding company thereafter. Now, of course, we’re restricted in the amounts that we can dividend up to the holding company.
But it just gives us, you know, further flexibility to accomplish our capital management goals.
Adam Klauber – McCrory Securities
And once the entities are merged, what’s your restriction going to be?
Mark Seaton
Well, right now our restriction is, you know, it’s roughly $250 million that we can dividend up to the holding company. It changes every year.
The calculation is based on the greater of your – the greater of your statutory net income, or 10% of your surplus. And so we’ll have t kind of see what that number is going forward as we enter 2011.
But we feel like it’s, you know, there’ll definitely be, you know, dividend opportunities in 2011 too.
Adam Klauber – McCrory Securities
Okay. Thank you very much.
Operator
(Operator Instructions) Our next question comes from Matt Otis with KGW. You line is open.
Matt Otis – KGW
Morning.
Dennis Gilmore
Good morning, Matt.
Matt Otis – KGW
Just a couple quick questions. Personnel expenses looks to be down year over year, which is good.
But it seems like there could be a little bit more room there to come down further and just getting a little color on how far you think they could come down in the backend of the year assuming as you said, that you know, Q3 should be solid but Q4 is actually, you know, will be tough on a seasonal basis.
Dennis Gilmore
Okay. Thanks for the question, Matt.
A little bit of a backdrop here. There’s a little bit of noise between our personnel and our other operating expenses between our year-over-year basis.
So what we do is we look at them as combined effort. And that’s kind of how we’re managing the business overall.
We always look at those as combined lines. We had a little bit of move because of the slip, so that’s kind of the first background.
Second is as we go forward, as I indicated earlier, I think we will trend down slightly, and it will depend on what our overall number counts are. So we’ll just have to see how the fourth and the first play out.
But like we’ve always done, we’ll continue to manage this business very aggressively against our metrics.
Matt Otis – KGW
Okay. Fair enough.
And just the second question, I know you normally don’t comment on legal proceedings or anything, but any commentary on B of A, and A, of how long this could go on. And B, assuming still everything from a business standpoint continues to flow through normally between you two guys, and I would imagine you’d expect that going forward still as you work with the company?
Dennis Gilmore
Sure. As I disclosed in our previous 10Q, in March Banc of America filed a lawsuit in connection with claims they made on insurance products we issues in connection with HELOC Loans that are now in default.
In our answer we filed, our responses in April, but also in April we also filed a response against Fisher who issued these certificates in our evidence and title on our behalf. So we’ve brought Fisher into the lawsuit.
Since that time, we have been working on developing a structure for discussing this dispute outside of the at the courthouse. But unfortunately, I really can’t provide any more detail and you know, but I will give one last comment.
As we look, as I previously said, we value our relationship with Banc of America both as a customer and one of our largest wonders of the credit facility. And we’ll give shareholders additional updates when we have additional information to pass on.
Matt Otis – KGW
Okay. Thank you.
Dennis Gilmore
Okay. Thanks.
Operator
Our next question comes from Jason Deleeuw with Piper Jaffray. You may ask your question.
Jason Deleeuw – Piper Jaffray
Yeah, thanks. I think it’s interesting that you’re seeing an increase non-distressed commercial transactions.
I’m hoping to get a little bit more color on that. Are you seeing it – what geographies, what types of properties, any color that you can provide?
Dennis Gilmore
Yeah. I can just a little bit.
And you know, put it in a perspective too, when we say an increase will come out of very low volumes from 2009. Okay, so they’re coming from a very low base.
Our increase is interesting enough for coming a lot from the Southwest right now and they’re, I think, opportunistic purchases. When I say they’re full of value, they’re at far lower values but not distressed property.
And it’s across, you know, different segments. So I can’t just focus in on any one segment.
It’s across different segments, and again, we’re seeing a re-emergence here to some degree in the Western states.
Jason Deleeuw – Piper Jaffray
Okay. And it sounds like the momentum into – July was pretty solid and generally the third quarter is weak seasonally for commercial.
I mean, do you think that the commercial activity can still be up in the third quarter from the second quarter in what have you seen so far this year?
Dennis Gilmore
Again, I really can’t speculate on that. I mean, all I can tell you is we had a good pipeline building in July.
Jason Deleeuw – Piper Jaffray
Okay. Thank you.
Dennis Gilmore
Okay. Thanks.
Operator
Our next question is from John Boisclair with Dominic Brokerage. Your line is open.
John Boisclair – Dominic Brokerage
Yeah, just two followups, Gentlemen. One on the tax rate.
It looked to be like 40% versus I guess 46 or 48. So we got a nice benefit from that in the quarter.
What should we be modeling going forward?
Max Valdes
This is Max. I think we can actually model this year to be around the 40 to 41% range.
And going into next year, I think we can reduce that rate. Our goal is to try to reduce that rate to closer to 38 or 39 percent.
John Boisclair – Dominic Brokerage
Okay. And then you know, between the ’09 and ’10 book of business being better, and a little slippage in the ’07 and ’08, in looking at the reserves from Q1 to Q2, did we have a decrease of about 70 million?
It just looked like on the balance sheet, it looked like that went down by about 70 million. Is there any noise with that?
Max Valdes
No. There shouldn’t be any noise.
Obviously, you know, we’ll – that includes known claims, so it’s combination of claims that we paid out plus the reserves that we’re putting up for the current policy year and in any slight reserve strengthening for the prior years.
John Boisclair – Dominic Brokerage
Okay. Great.
Thank you.
Max Valdes
Thank you.
Operator
Our last question comes from Brent Huff with Stephens. You may ask your question.
Brent Huff – Stephens
Hi. Thanks for taking my followup.
You had mentioned agent remittances and I wanted to make sure I understood the dynamic of that. It sounds like they were good in Q2.
Will they – should we expect a change in that in 3 and 4Q just from a timing point of view?
Dennis Gilmore
No, actually we’re intending that our agent remittance will still be strong, continue to be strong and bill probably into Q3. Most of the remittances that are represented in the second quarter are from activity occurring in the first quarter.
Brent Huff – Stephens
Okay.
Dennis Gilmore
So we’ve got the normal lag here.
Brent Huff – Stephens
Okay. That’s what I needed.
Thank you.
Dennis Gilmore
Thank you, Brent.
Operator
That’s all the time we have for questions today. That concludes this morning’s call.
We’d like to remind listeners that today’s call will be available for replay on the company’s website or by dialing 203-369-0678. The company would like to thank you for your participation.
This concludes today’s conference call. You may now disconnect.