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Fidelity National Financial Inc. (NYSE:FNF)

Q4 2009 Earnings Call

February 4, 2010 9:00 am ET

Executives

Bill Foley - Chairman

Al Stinson - Chief Executive Officer

Randy Quirk - President

Tony Park - Chief Financial Officer

Dan Murphy - Senior Vice President & Treasurer

Analysts

Doug Mewhirter - RBC Capital Markets

Brett Huff - Stephens

Jason Deleeuw - Piper Jaffray

Bill Clark - KBW

[Doug Mewhirter - RBC Capital Markets]

Operator

Ladies and gentlemen thank you for standing by, and welcome to the FNF 2009 fourth quarter earnings call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions and instructions will be given at that time. (Operator Instructions)

I would now like to turn the conference over to your host Mr. Dan Murphy; please go ahead.

Dan Murphy

Thank you and good morning, everyone and thanks for joining us for our fourth quarter 2009 earnings conference call. Joining me today are Bill Foley, our Chairman; Al Stinson, Chief Executive Officer; Randy Quirk, President; and Tony Park, Chief Financial Officer.

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 take your questions and finish with some concluding 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 March 4, 2010. The replay number is 800-475-6701 and the access code is 141910.

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

Bill Foley

Thanks, Dan. Despite operating against the difficult economic backdrop, 2009 was a year of difficult accomplishments that has Fidelity National Financial well positioned as we enter 2010. We generated revenue of $5.8 billion, pretax profits of $345 million, net earnings of $222 million, and cash flow from operations of $380 million. All of these were significant increases and improvements over our 2008 results.

The December ‘08 acquisition of Lawyers Title and Commonwealth Title was fully integrated during the first half of 2009. From January through March, we aggressively removed costs from these operations and were able to return them to operational profitability by the month of March. The integration of Lawyers and Commonwealth was completed during the second quarter, with an overall cost reduction of nearly $265 million.

We eliminated approximately 2,300 positions, more than 40% of the employees transferred at closing, and more than 240 offices as part of the aggressive integration. These underwriters are fully integrated into the FNF family and we look forward to their continued significant contribution to our market-leading title insurance business in 2010 and beyond.

In April, we were successful in issuing 18.2 million shares of our common stock for approximately $331 million in proceeds in order to produce strengthen our balance sheet. These proceeds were primarily used to reduce the outstanding balance on our credit facility, repurchase our existing public debt and to make a capital infusion into Lawyers Title to bolster that underwriter’s balance sheet.

Throughout 2009, we reduced our outstanding debt by nearly $490 million, while growing our equity by almost $460 million. As a result, our debt-to-capital ratio ended the year at approximately 21%, after beginning 2009 at more than 32% and book value per share increased by more than $1.10, or 8%, from the beginning of 2009, ending at $14.41 on December 31, 2009.

The summer in fall brought very consistent order accounts in our title business as we averaged nearly 9,000 open orders per day for much of the period for the month of June through the middle of December. We also generated solid financial results in that timeframe. Yet, the stock price continued to languish. As a result, we repurchased approximately 6.5 million shares of our own stock through June of ‘09 through January of ‘10, spending approximately $86.5 million or about $13.30 per share. We continued to believe that our stock offers compelling value, particularly with the trading below book value.

2009 also brought many successes in our portfolio companies. Sedgwick continued to perform well, generating $700 million in revenue and more than $110 million in EBITDA during 2009. Sedgwick is an attractive asset and we look forward unlocking more of its value in 2010. Ceridian spent much of 2009 focused on cost reduction and control initiatives. That cost focused allowed the company to produce EBITDA of approximately $300 million on revenues of $1.5 million and EBITDA margin of 20%.

Our specialty insurance group had another solid year, generating pretax profits of $44 million, a 25% increase over 2008, on essentially flat revenue of $380 million, as they’ve remained focused on profitability and risk management over pure top line revenue growth. The October investment of Fidelity National Information Services has already generated a tremendous return as our $50 million investment is now worth more than $75 million.

Cascade, our Timber investment, Remy, our auto parts company and American Blue Ribbon Holdings, the restaurant company, are all valuable assets that we are confident will return significant value to our shareholders in the future. We are proud of our accomplishments in 2009. The integration of Lawyers Title and Commonwealth Title was a daunting task, but employees were up to the challenge. We are now unquestionably the largest, most profitable title insurance company in the country.

However, we are never satisfied. We will continue to manage our title business as we always have with continued dedication to our weekly operating metrics as we seek to maximize profitability in any market environment. We strengthened our balance sheet during 2009, reducing debt by $490 million and growing equity by another $460 million, due in large part to the April equity offering and solid financial results for the year.

We have a number of attractive companies and we are confident they will generate meaningful value for our shareholders over the next several years as always, we remain committed to our ultimate goal of continued degree of values for our shareholders.

I’ll now turn the call over to our CEO, Al Stinson.

Al Stinson

Thank you, Bill. In the title business, total open order volumes were surprisingly resilient during the fourth quarter. We opened 9,400 orders per day in October, nearly 9,100 per day in November and about 7,800 orders per day in December. The month of December saw the expected seasonal decline in order volumes in the last two weeks of the year. In January, we opened approximately 7,800 orders per day with a last two weeks of the month earning more than 8,500 open orders per day.

With order counts remaining strong through much of the fourth quarter, headcount reductions were moderate as we eliminated about 200 positions. During January, we eliminated another 200 positions. For the fourth quarter, direct title premiums declined by 7% sequentially from the third quarter and personnel and other operating expenses fell by 6%, resulting in 8.2% pretax margin in the title business for the fourth quarter.

We had a relatively solid quarter in the commercial title business. We opened about 19,200 commercial orders in our national commercial divisions and closed, approximately 13,700 commercial orders, generating about $63 million in revenue, on a continued depressed fee per file figure of $4,600.

For the fourth quarter, open orders were down 7% sequentially, closed orders up 1%, the fee per file increased about 6%, and commercial revenue increased by 7%. Commercial revenue accounted for about 18% of total direct title premiums in the fourth quarter. Specialty insurance revenue was $93 million for the fourth quarter, a decrease of approximately $4 million from the fourth quarter of 2008.

Flood insurance generated $36 million in revenue, personal lines insurance also contributed $36 million in revenue, and home warranty produced $18 million in revenue. Pretax earnings were $9 millions and homeowners business produced a loss ratio of 73% for the quarter. While we do not consolidate the results of Sedgwick, they produced revenue of $175 million and EBITDA of $30 million, or an EBITDA margin of about 17% for the fourth quarter.

Our 32% share of Sedgwick’s fourth quarter earnings was $2.2 million. We also do not consolidate the results of Ceridian, that they produce revenue of $356 million and EBITDA of more than $77 million and EBITDA margin of 21%. Our 33% share of Ceridian’s quarterly loss was $5 million. Overall, we recognize $2.3 million in earnings from our equity investments.

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 fourth quarter, with pretax earnings of $106 million cash flow from operations of $13 million. The title segment generated $1.34 billion in total revenue for the fourth quarter, consistent with the $1.35 billion in revenue in the third quarter of 2009. Sequentially, direct title premiums decreased by 7% with 9% decline in closed orders offset by 5% increase in the fee per file.

The agency premiums increased by 6%. Sequentially, title segment personnel costs decreased by $21 million or 6% versus a third quarter of 2009 and other operates expenses declined by approximately $17 million, also 6%. Overall, direct title premiums fell 7% sequentially, while personnel and other operating costs declined by 6%.

We generated an 8.2% pre-tax title margin in the fourth quarter. Debt on our balance sheet primarily consists of the $411 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. Our debt to total capital ratio was 21% at December 1.

For the full year 2009, total title claims paid were $388 million. Roughly a $100 million decline from nearly $500 million in pro forma combined claims we paid in both 2008 and 2007. We planned to maintain our 7% provision level as we enter 2010. Finally, our investment portfolio totaled $4.9 million at December 31.

There are approximately $3.2 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 $2.2 billion. There are also some other restrictions, including last liquid investments like our ownership stakes in Sedgwick, Ceridian and Remy and working capital need at unwritten title companies, all which totaled approximately $600 million.

So at the gross $4.9 million, approximately $1.7 billion was theoretically available for use with about $1.5 billion held at our regulated underwriters and approximately $200 million in non-regulated entities. We currently estimate approximately $150 million of dividend capacity from our underwriters in 2010.

Let me now turn the call back to our operator to allow for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Doug Mewhirter - RBC Capital Markets.

Doug Mewhirter - RBC Capital Markets

First question, I noticed your investment income in your corporate segment added nicely to the total. Are there any particular investments or is it favorable comparison with maybe an unusually low investment income last year or is it your accounting for the FIS investment?

Tony Park

Actually, Doug, we made an investment in some bonds during the latter part of 2009, at a deep discount and we collected an interest payment on those bonds in the fourth quarter. I think that payment was $3 million or $4 million. So when you look at that comparison, that’s what you see there.

Doug Mewhirter - RBC Capital Markets

Would you expect that to persist? I mean were they elongate bonds or is it sort of a short term investment?

Al Stinson

Their bonds are due in April of 2012 and again it was one of our, what we consider a distressed equity or distressed investment, but the market turned around for this particular company and they have adequate cash flow.

We anticipate simply being paid in full on the bonds upon maturity, where if we bought the bonds for about $0.33 on the dollar. Tony, they’re currently trading for about $0.83 and the next payment is due April of ‘10. At this point we’re going to hold a maturity because it’s only a couple of years.

Doug Mewhirter - RBC Capital Markets

My second question to maybe Tony, was there any significant ServiceLink gross up in your operating expenses?

Tony Park

The gross up, there is always some gross up, because of the asset linked business, the foreclosure business has passed through revenue, but the gross up was significantly down in the fourth quarter versus fourth quarter a year ago and primarily because of the moratoriums in the foreclosure space. The gross up number is about $16 million both in the operating expense line item and the revenue line item.

Doug Mewhirter - RBC Capital Markets

Regarding the specialty insurance sector, do you, I guess, was the loss ratio impacted by all of those, I guess, California storms and was there any effect also - do you think there will be an effect in the first quarter of January and will there be a positive effect because of flood insurance claims?

Al Stinson

We don’t get too much flood insurance out of California, frankly. It’s generally our flood insurance is skewed to the Gulf States in hurricane season. We didn’t have any hurricanes to speak of last year and the losses were fairly typical. They were spread on the country and we were reasonably happy with the 73% loss ratio. It’s about eight or nine points higher than we would like.

Doug Mewhirter - RBC Capital Markets

Just, I guess, any update on, I guess, the state of the specialty insurance group as a whole? You should any other feelers or still in negotiations or have you sort of, I guess, sitting on it for now?

Al Stinson

We have received feelers. The process we went through a year, or 15 months ago was so disruptive to the company, we really penalized ourselves. So, we took the company off the market when we could not arrange a sale that made sense to us, and we’re always open to offers or open to suggests, but we have nothing specific pending at this point.

Operator

Your next question comes from Brett Huff - Stephens.

Brett Huff – Stephens

Two questions, number one, did you comment at all, I may have missed this on the potential dividend availability it coming up from the title subs as you look out this year?

Al Stinson

Yes, we have an estimate at this point. We haven’t finalized our statutory statements for year end yet, but our estimate was $150 million in dividends available from our insurance companies. We also have other dividends available from non-insurance companies that are not regulated and we don’t, at this point, have an estimate of that number.

Brett Huff – Stephens

The second question, I was impressed by the 0.2% pretax margin and title, can give us just general thoughts on how do we get back more to the 10% or 12% range, what kind of assumptions on volumes, additional cost cut mix, that kind of things, do you guys for see in order to get back to what I think of is a middle range for you all?

Randy Quirk

Well, this is Randy. We’re going to go through the 2010 and continue as we have to aggressively manage our expenses, watch our weekly open order count in a real time passion. So if there is any change in the open order of volume, if it’s downward, we’ll make some adjustments in that regard. So, that is what we have always done and that mid part of 2009 when the refinances started to fall out. I think we took out 850 positions in the third quarter and just 204 and other 200 down in January. So, we’ll continue with that and that should allow us to continue to develop even potentially better margins.

In addition to, that we have seen some opportunities around the country on a select basis to consolidate some of our title profits centers both on the direct side and on the agency side, and this is a little bit of a follow-up on the integration of Lawyers and Commonwealth at the beginning of the year, where we went to some markets, where we were over represented and did some consolidation.

So we think that will also add. We haven’t quantified this yet, but we believe this will add to our expense reduction. In that take we can take out infrastructure expense and at the same time protect our revenue. So in that regard, I think we continue to move on in any kind of a market as we go through 2010.

Operator

Your next question comes from Jason Deleeuw - Piper Jaffray.

Jason Deleeuw - Piper Jaffray

Just for the use of cash here and the share repurchases you’ve already made. I mean, with your stocks here below book value, how do you feel about share repurchases going forward, just given with the volumes and the environment that we’re in right now?

Al Stinson

We’re going to be engaged in share repurchases as we go forward through this year. We’re working on a couple of credit facility amendments with regard to our holding company debt to extend that from the fall of ‘11 out to mid ’13, and once that’s accomplished we’ll feel more comfortable about using excess cash to buy stock back. So it’s on the radar screen.

If our stock stays down here in this below book value, then this $12.80 to $13.50 a share, it just makes logical sense to keep on taking some shares out of retiring shares, and anything we can do to move our share count down from $231 million or $232 million more toward $200 million, is a good thing. Good thing for you as a shareholder and customers, and it’s a good thing for us because we just make it easier when the market does come back and we start earning a fair amount of money to start showing some serious earnings per share.

So we just got ourselves in a position where we have a lot of shares and we would like to retire them, but we want to do it judiciously and not have any potential impact on cash flow during the year.

Jason Deleeuw - Piper Jaffray

I believe you said for Sedgwick, you’re looking to unlock some value this year, is there any color you can give us on that?

Al Stinson

We’re really in the middle of a quiet period right now, so we just can’t say anything about Sedgwick, but our goal this year is to unlock some value.

Jason Deleeuw - Piper Jaffray

Then on the fee per file, with the mix your seen now, purchase refi, I mean can we expect that to creep up higher from the current levels that we’re seeing?

Al Stinson

I would say definitely. As the mix changes more to a conventional resale market, the fee per file will go up and I think that’s the way most people are modeling it out for 2010.

Jason Deleeuw - Piper Jaffray

Then just the last thing, the tax rate single or higher this quarter, is there anything going on there, and can you give us any color on the run rate going forward for the tax rate?

Tony Park

I would say that run rate going forward is probably about 30% give or take. The increase from 28.5% which we have had year-to-date through nine months versus 31% year-to-date to close out the year is simply a function of taxable income versus tax exempt income and as that ratio improves from an operating earnings level, it’s going to increase our cash rate. So it was I guess a good problem to have to increase it during the fourth quarter.

Operator

Your next question comes from Bill Clark - KBW.

Bill Clark - KBW

Just a one quick question; could you share the headcount number at year end ‘09 in the title business versus year end ‘08, either pre or post the Lawyers and Commonwealth acquisitions?

Al Stinson

You know where it is right now…?

Tony Park

Yes, we finished ‘09 at 10,500 approximately employees and at the end of 2010 we were coming down; I don’t have the exact number, but I think we were two or three hundred higher at that point in time.

Al Stinson

Probably a bit more than that because you thought Commonwealth was being laid out and there were probably 13,000 people.

Tony just gave confirmation, but that’s sort of a sway in our department. It was a couple that came in before we engaged in [Inaudible] following the Commonwealth Lawyers acquisition, so I believe you’re aiming at 13,000, 14,000 roughly.

Tony Park

Yes, we had about 2,400 on the Commonwealth Lawyers side that came out during the year.

Operator

Your final question comes from [Doug Mewhirter - RBC Capital Markets].

Doug Mewhirter - RBC Capital Markets

I wanted to ask about the price increases you guys have gotten from the States. Have those all been shown in the numbers yet or can we expect some upside in 2010 as those all roll in and ramp up?

Tony Park

They pretty much have been rolled in through 2009, but your comps should be better, because they weren’t all effective during all of 2009. So the comps on fee per file should be improving.

Doug Mewhirter - RBC Capital Markets

Some of the mortgage origination projections were down up to 40%. I know you guys have taken a look weekly at those orders and adjust accordingly, but if they’re down 40%, are you guys able to adjust that much the business or is there a certain point where you just can’t fire anymore, and you have some fixed costs and you just going to have to live with it.

Tony Park

We’re in a position being into 2010, and generally we have three year leases, so the ‘05, ‘06, ‘07 leases, just the three, four, five year leases are all rolling off. So fortunately we’re not in that really stressful period in 2008, wherein earlier in 2009 where we were closing offices and having to take major lease impairment charges and the leases are rolling off.

Randy has developed a plan to reduce those agency service centers from about 67 to 19 consolidating commercial offices from about 47 to 17 or something like that Randy, and then our direct operations going down for about 260 to 200, and that’s in our plan this year right now. So we’re anticipating a weak origination market. We’re trying to maintain our coverage where resale transactions are strong, so that we aren’t quite heavily dependent on the refi piece.

Of course refies, we don’t make as much moneys, and we are seeing strength in a lot of the depressed areas in terms of the resale market, particularly in California, which is actually making a little bit of a comeback. So we’re just going to keep on managing till the business flows in and we hope for the best and expect the worse.

Operator

There are no further questions in queue; back to you Mr. Foley for closing comments.

Bill Foley

Thank you. We’re proud of our accomplishments in 2009, particularly the successful integration of Lawyers and Commonwealth and the strengthening of our balance sheet. We will seek to maximize profitability in any market environment and remain committed to our ultimate goal of continuing to create value for our shareholders. Thanks for joining us this morning.

Operator

Okay thank you and that concludes our conference for today. Thank you for your participation and using AT&T Executive Teleconference Service. You may now disconnect.

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Source: Fidelity National Financial Inc. Q4 2009 Earnings Call Transcript

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