Oct 22, 2009
Executives
Al Stinson - Chief Executive Officer Tony Park - Chief Financial Officer Randy Quirk - President Bill Foley - Chairman Dan Murphy - Senior Vice President & Treasurer
Analysts
Mark DeVries - Barclays Capital Bob Napoli - Piper Jaffray Nathaniel Otis - KBW Nik Fisken - Stephens Inc Doug Mewhirter - RBC Capital Markets David West - Davenport & Company
Operator
Ladies and gentlemen, we’d like to thank you for standing by. Welcome to the FNF third quarter earnings call teleconference.
At this time, all participants are in a listen-only mode. (Operator Instructions) I would now like to turn the conference over to your host Mr.
Dan Murphy. Please go ahead, sir.
Dan Murphy
Thank you, good morning everyone and thanks for joining us for our third quarter 2009 earnings conference call. Joining me today are Bill Foley, our Chairman; Al Stinson, our CEO; Randy Quirk, President; and Tony Park, our CFO.
We’ll begin with a brief strategic overview from Bill Foley, Al Stinson will provide an update on the title business and our operating companies, and Tony Park will finish with a review of the financial highlights. We’ll then open it up for your questions and finish with some concludes remarks from Bill Foley.
This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations are forward-looking statements.
Forward-looking statements are based on management’s beliefs as well as assumptions made by and information currently available to management, because such statements are based on expectations as to future economic performance, and are not statements of fact actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.
The risks and uncertainties, which forward-looking statements are subject to include, but are not limited to the risks and other factors detailed in our press release dated yesterday and in the statement regarding forward-looking information, risk factors and other sections of the company’s Form 10-K and other filings with the SEC. This conference call will be available for replay via webcast at our website at www.fnf.com.
It will also be available through phone replay beginning at 11:00 AM Eastern time today, through next Thursday, the October 29. The replay number is 800-475-6701 and the access code is 117639.
Let me now turn the call over to our Chairman, Bill Foley.
Bill Foley
Thanks, Dan. This was another solid financial quarter for our company.
Title order volumes increased nicely versus the prior year and so did modest overall sequential decline from the second quarter as refinance volumes slowed from their accelerated pace earlier in the year. However, we were able to reduce cost throughout the quarter, and our title business produced an 8.9% pre tax margin, very close to our second quarter performance of a 9.2% per tax margin.
We did see strength in open order accounts as the quarter progressed, as September showed the strongest open order volumes during the quarter. Additionally, open order volumes continued to accelerate in October reaching the highest levels in four months.
These elevated open order levels have us well positioned as we entered the normally seasonally slower fourth quarter and first quarter of next year. We announced the sale of our small leasing company Fidelity National Capital during the quarter for a total net proceeds of approximately $15 million.
Well, Fidelity National Capital is relatively small business for FNF, it’s strong growth had resulted in more than $200 million of primarily non recourse debt on our consolidate balance sheet and we believe that this sale was a great opportunity to continue to delever our balance sheet and to monetize an investment. Our debt to total capital ratio ended the quarter with 21%, as a result of the sale of this assets.
We are moving towards the completion of our price increase initiatives, we have now implemented price increases in 25 states averaging between 5% and 10% in those states in which we’ve accomplished increases. We are now seeing the full impact of the 10% price increase in California, our largest state.
Additionally, Texas has completed their rating review and we are optimistic for a mid to high single digit rate increase in that state. There are still only a few states with pending applications, but we’ve effectively completed the majority of the price increases.
Let me now turn the call over to our CEO, Al Stinson.
Al Stinson
Thank you Bill. In the title business, total open order volumes were very consistent in July and August.
It actually showed a nice increase in September and a further increase in October. We opened 8,700 orders per day in July, more than 8,600 per day in August and nearly 9,400 orders per day in September.
Open order counts continue to accelerate in October, as we averaged nearly 10,000 open orders for the first two weeks of October. We focused on moderate head count reductions during much of the third quarter eliminating about 850 positions.
Despite a 16% sequential drop in closed orders and $101 million or 7% reduction in total title revenue, we were still able to generate pretax title profits that only decline about $13 million and an 8.9% pretax margin that was only a 30 basis points or 3% sequential decline from the second quarter. The commercial title business showed some small signs of potential life during the third quarter.
We opened about 21,300 commercial orders in our National Commercial Divisions and closed about 14,200 commercial orders generating about $61 million in revenue on a continued to press fee profile figure of $4,300. On a sequential basis, open orders were down about 8%, closed orders were up 7%, the fee per file increased by 9%, and commercial revenue increased by 17%.
Commercial revenue accounted for approximately 16% of total direct title premiums in the third quarter. Specialty insurance revenue was $102.5 million for the third quarter, an increase of about $2 million from the third quarter of 2008.
Flood insurance generated $46 million in revenue. Personal lines insurance contributed $33 million in revenue, and home warranty produced $18 million in revenue.
Pre-tax earnings of $7 million were impacted by the summer hailstorms in Colorado, and smoke damage from wires in California. The homeowners business produced a loss ratio of 81% for the quarter.
While we do not consolidate the results of Sedgwick, they produced revenue of $174 million and EBITDA of $27 million for an EBITDA margin of approximately 16% for the third quarter. Our 32% share of Sedgwick’s third quarter earnings was $1.6 million.
We also do not consolidate the results of Ceridian, but they produced revenue of $362 million, and EBITDA of $83 million and EBITDA margin of 23%. Our 33% share of Ceridian’s quarterly loss was $4 million, significantly lower than the $11 million we recognized last quarter.
Ceridian continues to make progress on rationalizing their cost structure in the phase of a weak economy. Overall, we recognized $2.7 million in earnings from our equity investments on better results at Remy a significantly smaller net loss at Ceridian and consistent performance at Sedgwick.
Let me now turn the call over to Tony Park, to review the financial highlights.
Tony Park
Thank you Al. FNF generated $1.5 billion in revenue for the third quarter, with pre-tax earnings of $108 million and cash flow from operations of $85 million.
The title segment generated $1.35 billion in total revenue for the third quarter, an increase of 55% from the third quarter of 2008. The current quarter includes the result of Lawyers and Commonwealth, while the prior year results do not.
Direct title premiums increased by 32% and agency premiums increased by 86%, versus the third quarter of 2008. On a sequential basis, direct title premiums declined by 7% and agency premiums dropped by 5%, as a 16% decline in closed orders was partially offset by a 12% increase in fee per file.
Asset link generated $34 million in revenue, $23 million of which was pass through revenue that also shows us as an expense in other operating expenses. Excluding Lawyers and Commonwealth, title segment personnel cost increased by $19 million or 6% versus the third quarter 2008, and other operating expenses rose by approximately $2 million or 1%.
On a sequential basis, personnel cost declined by 5% and other operating cost fell by 6%, while total title revenue decreased by 7%. We did release approximately $74 million in title reserves during the quarter.
As we reached the conclusion that the consistently lower claims payments we’ve seen for the last four quarters have caused a redundant title reserve situation. Our provision level is now 7% of gross title premiums and we expect that to continue in the fourth quarter.
We offset much of the benefit of this reserve release through the reversal of an insurance receivable associated with the fraud claims that was previously paid in 2007 and 2008. Recent court rulings relating to specific insurance coverage have caused us to reassess our accounting position with respect to this insurance relievable, and we therefore have reversed approximately $63 million of the recorded balance as a charge to claim loss expense.
Debt on our balance sheet primarily consists of the $450 million in senior notes due in 2011 and 2013, the $400 million drawn under our credit facility and the $50 million subordinated note issued to LandAmerica. As Bill mentioned, the sale of Fidelity National Capital resulted in a reduction of more than $200 million in debt on our balance sheet.
Out debt to total capital ratio was 21% at September 30. Finally, our investment portfolio totaled $5 billion at September, 30.
There are approximately $3.5 billion of legal regulatory and other restrictions on some of those investments, including secured trust deposits of approximately $400 million, and statutory premium reserves for underwriters of approximately $2.5 billion. There were also some other restrictions, including less liquid investments, like our ownership stakes in Sedgwick, Ceridian and Remy.
Cash held as collateral in our securities lending program, and working capital needs at some underwritten title companies, all of which totaled approximately $600 million. So, of the gross $5 billion, approximately $1.5 billion was theoretically available for use with about $1.25 billion held at regulated underwriters, and approximately $275 million in non-regulated entities.
Let me now turn the call back to our operator to allow for any questions.
Operator
(Operator Instructions). Our first question comes from the line of Mark DeVries of Barclays Capital.
Please go ahead.
Mark DeVries - Barclays Capital
Thanks. Seem to be a lot of moving parts that impact average fee per file, could you just talk about how the shift in the mix which presumably is going to be geared towards more refine in the fourth quarter.
Any kind of seasonal strength in commercials, and kind of the rolling impact of your rate increases might weigh on, or impact the fourth quarter average fee per file?
Randy Quirk
Sure, this is Randy Quirk. Let me address the mix in business.
On the closing side in the third quarter we closed about 57% of our transaction, but we refinance coming down from 66% in the second quarter. That added about $200 to an average fee per file in that third quarter.
We see now a run up in the refis in the month of September and the first couple of weeks of October that may have some impact as we go in to October and November in terms the fee per file. Turning to the commercial market, as Alan said the openings were off a bit, the closes were up, the fee per file is up in that.
We are having smaller, local commercial transaction versus the major sides and the multi side transactions.
Mark DeVries - Barclays Capital
Okay. Next question as you guys delever, could you talk about what flexibility if any that may provide you to return some of the capital share holders and what you would be considering at this point?
Al Stinson
Sure. I mean as we can keep on delivering, we’ve now got our liability side of our balance sheet down to something, in the order of $860, $870 million and the debt due in the 2011; the 7.3% notes are actually about $180 million.
So we’ve actually repurchased some of that debt over the last six months or so, and our goal would be to take a look at the dividend to see if we are in a position to increase the dividend, the payout ratio to our shareholders. We want to get through the next couple of quarters which traditionally are little softer, but take a good look at the dividend in the spring and then of course keep on working on the share buyback as we start building up cash reserves.
So we don’t have any acquisitions planned or pending, we feel like we’ve kind of made our last major acquisition in the title space. We do have a few other of these portfolio investments that we are trying to bring along to provision over the next year, to two years and hopefully disclose off, our engaging IPOs of more and more of those transactions, and continue to build cash reserves in the balance sheet and then return that cash to our shareholders in one form or another.
Mark DeVries - Barclays Capital
Okay, thanks.
Operator
Our next question comes from the line of Bob Napoli of Piper Jaffray. Please go ahead.
Bob Napoli - Piper Jaffray
Thank you, good morning. As far as the reserves release, is that it in your view.
I mean there have been some thoughts that there is a lot more to come in reserve releases and any idea to how. What would we need to see to have further reductions?
Tony Park
Yes, Bob this is Tony Park. I would say that certainly that is it for now.
Trends in claims payments have trended favorably. We paid $480 million in 2007 on a combined organization basis, paid $495 million in 2008.
Trends this year look to point more toward about $350 million. So certainly the trends have been favorable, and that allowed us to release $74 million.
I would say that some of that favorable trending was expected just because of timing or moving further and further away from the largest revenue years that the company had, the ‘03, ‘04,‘05 run up. So some of those trends make sense, of course some of it relates to some changes we’ve made as well in our claims handling processes.
I guess the short edge answer, is we just need to wait and see if claims continue to trend downward there’s potential for another release, but at current levels we are satisfied with our balance sheet position.
Bob Napoli - Piper Jaffray
Okay, the fraud this quarter. Can you give a little more color on where that came from?
Is there any inward cost that, are there any other related issues on the balance sheet that we need to be aware of?
Tony Park
Certainly no to the latter question, the first question this is a claim that it didn’t come about this quarter, it’s actually a claim that came about in 2007. It was a large claim, one where the cash has been paid a long time ago, but we had an accounting position that had us record a full recovery of $83 million.
We had a receivable book for that. We had a couple of recent developments in court cases that changed not our legal position necessarily, but our accounting position.
The threshold from an accounting standpoint is very high in terms of booking and insurance recoverable when it’s in litigation. These happen to be in litigation, there are two rulings, one that went in our favor, one that went against us, I can’t say a whole lot more about the litigation part of it, but we have reduced that $83 million receivable down to $20 million.
Bob Napoli - Piper Jaffray
Okay and then last question, I guess a little more color on Ceridian. I’m not sure; I think you may have said something about the trends.
Are you seeing any improvement in Ceridian trends and I know that business is pretty leveraged and, Bill you mentioned potential IPOs of some of your investments. I’m not sure what you are thinking.
A little color on how Ceridian’s performing and what your plans are with your investment there?
Bill Foley
Sure. In terms of what’s going on at Ceridian, we’re seeing about 11% decline year-over-year in HRO participants, in other words the number of employees that we actually process payroll checks for.
So, obviously that the revenue continues to be somewhat challenged. Our revenue retention is excellent, however running about 98%.
We are in a market though where nobody is much making a change right now in their processing, because they are worried about other things. So, we have concentrated more on the cost side and I think we’ve done quite well in continuing to improve margins.
So, as the recession eases we’ll obviously see some of these volumes coming back. The other thing that we’ve done, Bob is we’re rolling out in ’09, and also in the 2010 a new very sophisticated platform at Ceridian, which I think gives us a leg up on the competition.
It’s already resulted in Ceridian getting one major new customer. So we are excited about that, but obviously we’ve got lot of headwinds, I guess what we are doing, but they are doing okay.
Bob Napoli - Piper Jaffray
They have some, I guess some non-core segments. Would you sell any of those to deleverage it?
Bill Foley
We have taken a look at some of those opportunities; we’ll continue to do so. You are probably speaking more of the comp data company, and we continue to look at those possibilities.
Bob Napoli - Piper Jaffray
Thank you.
Operator
Our next question comes from the line of Nate Otis of KBW. Please go ahead.
Nathaniel Otis - KBW
Good morning, gentlemen. Two kind of quick follow up question, just on that Ceridian level.
I think you said that the EBITDA margins at Ceridian are 23% right now. Any thoughts on where those can go forward as you continue with your cost savings plans?
Bill Foley
We’re going to keep driving them up. I hate to say a number out there, but I know we’ve talked at the company mid-20s, upper 20s and certainly possible.
Some of our competition gets there, that’s our reason we couldn’t get there.
Nathaniel Otis - KBW
Okay, then just a quick follow up with that insurance receivable reversal, I just want to be as clear as possible. It seems like that is very specific to those that the claims for ’07 and ’08 and the court case is around that.
So, that really wouldn't be translated anywhere else to any other claims outstanding or anything like that.
Randy Quirk
There was a specific insurance receivable related to a claim known as the Norton claim in San Diego that we felt very comfortable that we had a full recovery of funds advanced through some of our cap towers. The reality was we had one negative case, one case one against us, one case went for us on some re-judgment and the one that went for us results us having the confidence that the $20 million, the remaining as receivable is recoverable even under the most stringent accounting standards, and the $63 million while still a receivable, and we’re still fighting our way through it from an accounting standpoint no longer can be booked as receivable.
But it was very specific to a fraud situation, a massive fraud situation in San Diego, California and it occurred in 2007 and early 2008. So it was very, very specific.
Nathaniel Otis - KBW
That’s very helpful, thank you.
Operator
Our next question comes from the line of Nik Fisken of Stephens Inc. Please go ahead.
Nik Fisken – Stephens Inc
Good morning everybody. Bill on the low debt to cap one thing you didn’t mention was going out and doing some more private equity investments.
Does that mean this is over, kind of talk us through that?
Bill Foley
What we really want to focus on right now is get ourselves in the position that we’re comfortable when 2011 roll around, that we are going to be able to replace or payoff the term debt that we have, the 7.3% debt and ensure that our banks are comfortable with the renewal of our line of credit, which we really don’t feel there is any issue in that regard. So, I would be more comfortable if we had either refied or paid off, or purchased back in the 2011 bonds prior to time we make any kind of significant investment in another joint venture or partnership arrangement.
The negative that we are seeing as the economy has been more difficult over the last couple of years, is that when the title business is not producing the level of cash flow that produced in ’05 and ’06 these portfolio investments end up coming back to haunt us and they have non cash charges every quarter, in terms of an earnings hit. It’s really distressing to Al and Tony and to myself that we have these charges whether it’s a $4 million loss from Ceridian that we book through or $10 million or something from Remy, and so what we’re doing right now is focusing on these three key portfolio investments and determining how we can monetize these investments and we are very focused on this.
I guess at this point in time, you’d say we are in a shirking mode on our balance sheet in terms of our debt position and also thinking about how to dispose of one or more of these portfolio investments, and focus on our core business. Does that kind of answer the question?
Nik Fisken – Stephens Inc
Yes, that’s great and the three are the Sedgwick, Ceridian, Remy right?
Bill Foley
Exactly, Sedgwick is probably the most mature of the three. We’ve been in that company for 3.5 years, and the debt has been paid down from $0.5 billion to about $375 million, we have about $63 million of cash on hand on the balance sheet, it’s showing growth this year.
Their runway looks very good for 2010; they have got a number of large contracts that have acquired that won’t come out in the books till 2010. So that’s an investment that has matured for us, and we feel that over the next 12 months, something should happen with that particular investment.
Nik Fisken – Stephens Inc
Then on the insurance claim, is there another case where we are going to get a judgment or to adjust these two?
Bill Foley
There is a series of lawsuits, we are now suing the insurance companies because they have not, some have paid, and this was actually a much larger claim than the $83 million. A number of them have paid, some have refused to pay and the one place where case we won is the summary judgment in our favor, and included that state element that we can go after that particular insurance company, and the one that we lost, it was different part of the same claim, original claim and the court determined that the coverage that representation did not need to be provided to the company, which is basically an indication that they don’t feel the company as liable.
So, on those circumstances we reversed that receivable. It’s not to say we are not so going after those insurance companies.
We have two other towers that we are going to be attacking until we get insurance to recover some of the money we’ve paid. However, we must first exhaust our remedies against the first tower before we can move against the second tower and the third tower.
This is a little confusing, but we’re going to be delayed, it’s going to take long time, but we are not giving up.
Nik Fisken – Stephens Inc
I know you wont. Thanks so much, have a good day.
Operator
And our next question comes from the line Doug Mewhirter. Please go ahead.
Doug Mewhirter - RBC Capital Markets
Hi, good morning. It’s a revenue related question and a couple of small cost related questions.
First, I noticed your fee per file went up sequentially and there has been some discussion about the leverage behind that. How much do you think is solely attributable to price increase and how much is just the underlying value of the total mortgages that the insurance policies attached to have gone up or down for that matter?
Bill Foley
Yes, we’re seeing a stabilization in sales prices and home sale prices. We’re not seeing any increase in resale home prices, but they are stabilizing.
There is still a large volume of foreclosed properties and short sales that are in the pipeline, and before we can start getting an increase in home prices the country needs to work its way through the short sales and foreclosures and that is going to take some time, it’s just going to be a while. There are certain parts of the country that are starting to see some recovery and some stabilization.
California went down first, and California and the Central Valley is showing sings of stabilization and actually a fairly robust markets on primary residences in the bay area and some of the Central Valley counties. So it’s playing out, it’s just a long slow process and it always takes longer than you think it’s going to take or hope it’s going to take as you work your way through these tough situations.
At least we are now seeing some stabilization in revenue. We’ve gotten our price increases, we continue to be aggressive relative to our commercial business and quoting higher fees on commercial transactions, attempting to take less risk whenever we possibly can and keep on working our way through the next six months when the first quarter of next year may be pretty tough, because it’s normally sequentially difficult quarter.
So that’s kind of the long way around, even though if I really kind of got to your question, but that’s sort of where the business is.
Doug Mewhirter
Okay, thanks. Tony, a couple of cost related questions.
First, your effective tax rate has bounced around quite a bit, kind of have an idea what a normalized tax rate might look like?
Tony Parker
Well, it’s hard to normalize the tax rate, because it depends on earnings certainly, but earnings shut up in the second and third quarters from the first, so we in effect went from a 0% rate in the first quarter due to the projection that non-exempt or tax-exempt earning is big part of our earnings base to a second quarter which is solid, moved our cash rate up to 26%. Now we stand at 28.5%, because of earnings generated in the third quarter and anticipated fourth quarter.
I would give you sort of, to benchmark that I would say 30% roughly is a pretty good model to use for 2009, but it’s really hard for me to tell you what we ought to project for 2010.
Doug Mewhirter
That’s fair enough, I mean there is lots of moving parts. The second question is Tony, the $75 million reserve release, how much of that was legacy FNF reserves and how much was I guess legacy LandAmerica reserves, just approximately?
Tony parker
I don’t have the rough numbers. We look at it on a consolidated basis.
Certainly I would say a larger portion of it was actually legacy LandAmerica. I don’t have the specific numbers in font of me, but it was a little of above.
Doug Mewhirter
Okay, thanks. That’s all my questions.
Operator
(Operator Instructions). We do have a question from line of David West of Davenport & Company.
David West - Davenport & Company
Good morning. I was curios regarding your commercial activity, while we know that’s depressed obviously.
Are there any geographic areas at a country where you see it being a little bit more robust and others at this point in time?
Bill Foley
Well there are power deals originally now at New York City primarily, but they are nationwide but there are energy related transactions. There is a fair amount of activity on that front.
The other key area of order generation, are really I would call the more in the workouts mode. So for example, the large home builder that needs to refi and move through a number of properties comes to us with their lenders and they get some capital from a third party, and the lenders then put a new loan on say 30 or 40 properties.
So we’re getting energy deals and workouts, is really where the business is coming from and it’s not specific to particular area of the country.
David West - Davenport & Company
Very good, thanks for that color. And just one confirmation, I know you earlier had struck a deal with FIS regarding a $50 million investment related to the closing a Metavante.
Has that deal been closed?
Bill Foley
It has been closed, and we’ve issued our shares which is about 3.3 million shares Tony that cost $50 million and that we’ve now got an unrealized gain of about $25 to $30 millions on that investment.
David West - Davenport & Company
Thanks very much.
Operator
Gentlemen of the panel, there are no further questions in queue at this time.
Dan Murphy
Thanks everybody for taking time to be with us. This was another solid quarter for the company.
Open order accounts improved late in the quarter and further into the first three weeks of October. These elevated open order levels have us well positioned as we enter the normally, seasonally slower fourth quarter and first quarter of next year.
Thanks for joining us this morning.
Operator
Ladies and gentlemen, that does conclude our conference call for today for today. On behalf of the Fidelity, I would like to thank you for your participation and thank you for using AT&T.
Have a wonderful day, you may now disconnect.