First American Financial Corporation (NYSE:FAF)
Q2 2011 Earnings Call
July 28, 2011, 11:00 a.m. ET
Craig Barberio – Director, IR
Dennis Gilmore – CEO
Max Valdes – EVP and CFO
Mark Seaton – SVP, Finance
Mark Devries – Barclays Capital
Welcome, and thank you for standing by. After the presentation, we will conduct a question-and-answer session. (Operator instructions).
A copy of today’s press release is available on First American’s website at www.firstam.com/investory.
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 dialing 203-369-1939.
We will now turn the call over to Craig Barberio, Director of Investor Relations to make an introductory statement.
Good morning, everyone, and thank you for joining us for our second 2011 earnings conference call. Joining us on today’s call will be our chief executive officer, Dennis Gillmore, Max Valdes, executive vice president and chief financial officer, and Mark Seaton, senior vice president of finance.
At this time we would like to remind listeners that management’s commentary and responses to your questions may contain forward-looking statements, such as those described on page four of today’s news release and other statements that do not relate strictly to historical or current fact.
The forward-looking statements speak only as of the date they are made, and the company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in the forward-looking statements. Factors that could cause the anticipated results to differ from those described in the forward-looking statements are described on page four of the news release.
With that, I will now turn the call over to Dennis Gilmore.
Thank you, Craig. Good morning and thank you for joining the call.
For the second quarter financial results, total revenues were 927 million, down 4% from the second quarter of 2010, with net income of 32 million or $0.30 per share.
Despite an 18% drop in closed orders, the title segments margin was 6.6% for the quarter, essentially flat from the second quarter of 2010. Our open orders averaged 4,700 orders per day in the second quarter, up 2% on a sequential basis. Refinanced transactions were 50% of open, residential orders, compared with 53% in the first quarter.
Resale transactions were up 9% from the first quarter, reflecting a weak selling season.
Our national commercial division continues to perform well with revenues of 84 million, up 28% compared with the second quarter of 2010, up 25% on a sequential basis.
Our commercial pipeline is strong, with open levels in the second quarter at their highest levels since the third quarter of 2007.
In the second quarter, we executed on a $40 million annualized cost reduction initiative, focused on our shared services and our title segment. We expect cost savings of 9 million in the third quarter and the full 10 million run rate in the beginning of the fourth quarter.
The savings from this initiative are an addition to our company’s ongoing expense management efforts.
Our special insurance segment had pre-tax earnings of 10 million, for a 14.3% margin. The overall loss ratio was 54% in the current quarter, compared with 49% in the prior year.
Both the property casualty, home warranty businesses continue to perform well.
In regards to the Bank of America law suit, as in the past, I can’t say a lot about it, but I can tell you that First American, Bank of America and FICA began a mediation process in June of 2011 that is scheduled to conclude by the end of August.
Turning to current market conditions, open orders are down 7% compared to June, with refinance orders running approximately 53% of residential orders. Our closed orders are trending essentially flat with June levels. And as I mentioned earlier, the commercial pipeline remains strong.
Going forward, we will pursue opportunities for organic growth and strategic investments in our core business, while we continue to focus on operating efficiencies, while maintaining a conservative balance sheet.
I’d now like to turn the call over to Max Valdes for a more detailed review of our financial results.
Thank you, Dennis.
The company generated total revenues of 927 million for the quarter, down 4% from the same quarter of the prior year. Net income for the quarter was 32.3 million for $0.30 per share, compared with net income of 33.8 million, or $0.32 per share of the same quarter of the prior year.
The results for the current quarter include 2.9 million in net realized investment losses, and 6.8 million in severance, then on the combined basis, reduced earnings per share by $0.05.
In the title, insurance and services segment, total revenues for the quarter were 857 million, down 5% compared with the same quarter of the prior year.
Direct premium and escrow fees were down 8%, driven by an 18% decline in closed orders, partially offset by higher average revenue per order closed.
Average revenue per order closed increased 12%, for $1,548, compared to the same quarter of last year.
This increase primarily reflects the strength of higher premium commercial title business.
Agent premiums were down 4% in the second quarter, compared to the 8% decline in our direct premiums. The better relative performance in agent premiums reflects stronger title order activity in the first quarter of 2011, as compared to 2010 due to the normal reporting lag in agent revenues of approximately one quarter.
Information and other revenues totaled 157 million for the quarter, up 3% compared to the same quarter of last year. The increase in the quarter was driven by a higher demand for a title plan information and other non-insured title products.
Investment income totaled 19 million for the quarter, an increase of 4% compared with the same quarter of last year. This increase was primarily due to higher interest earned on investment portfolio. We incurred net realized investment losses of 1.8 million for the quarter, compared with net realized investment gains of 3.6 million with the same quarter of last year.
Personnel costs were 275 million for the quarter, down 10 million, or 4% compared with the same quarter as last year. This decline primarily reflects a reduction in U.S. headcount, reduce incentive compensation, and lower healthcare expenses, partially offset by higher severance costs.
Total severance costs in the title segment were 6.3 million in the second quarter. Other operating expenses were 179 million in the quarter, down 3% from the same quarter of last year.
Lower office related costs, and a reduction in consulting expenses were partially offset by increased production related expenses in the company’s commercial and default businesses, and by higher legal expenses in the quarter.
Agent retention was 80.3% of agent premiums, compared with 80.6% in the second quarter of 2010. The improvement in agent retention was due to the geographic mix of agent revenues, and our continued progress on improving agent splits on both new and existing agency relationships across a number of markets.
The provision per title losses was 5.9% of premium and escrow revenue, compared with 6.8% in the second quarter of 2010.
The second quarter rate of 5.9% includes an ultimate loss rate of 6% for the 2011 policy year, and minor favorable development for prior policy years.
Pre-tax income for the title, insurance and services segment was 56.9 million in the second quarter, a decline of 7%. The segment generated a pre-tax margin of 6.6% in the quarter compared to 6.8% in the same quarter of the prior year.
The current quarter includes net realized investment losses that reduced the pre-tax margin by 20 basis points, as well as severance expenses that reduced the pre-tax margin by an additional 80 basis points.
Turning to the specialty insurance segment, total revenues were 72 million, up 1% compared with the same quarter of the prior year.
Total expenses were up 2%, primarily driven by higher claim losses that were largely offset by lower personnel costs and other operating expenses.
The specialty insurance segment pre-tax margin was 14.3% for the current, down from 15% for the same quarter of the prior year.
Finally, corporate expenses were 17.9 million in the second quarter, including 2.1 million in one-time charges. With that, I will turn the call over to Mark.
Thank you, Max. I will provide a few comments on our capital and liquidity.
Cash provided by operations in the second quarter was $23 million, an increase in 40 million, relative to the second quarter of last year.
Capital expenditures during the quarter were 16 million, which includes investments in technology, software development, and title plan expansion.
In terms of liquidity, we had 37 million of cash at our holding company at the end of June. In addition to this cash, we have 6 million of our 8.9 million shares of CoreLogic at the holding company.
Based on yesterday’s closing price, our stake and core logic was valued at a $142 million, 96 million of which is held at the holding company.
In addition, we also have 200 million available on our 400 million line of credit.
Our cash in investment portfolio totaled 3.4 billion as of June 30th, which includes 1.5 billion of fiduciary funds. The portfolio was comprised of debt securities of 2.3 billion, cash and short-term deposits of 664 million, equity securities of 218 million and 186 million in less liquid long-term investments.
Overall, we have a high quality portfolio, with 73% of our debt securities rated AAA, and only 1% rated below investment grade. Debt on our balance sheet totaled 286 million as of June 30th. Our debt consists of 200 million funded on our credit facility, 47 million of trustee notes, and 39 million of other notes. Our debt to capital ratio, as of June 30th was 12.4%.
I would now like to turn the call back over to the operator to take your questions.
(Operator instructions). Our first question is from Mark Devries of Barclays Capital.
Mark Devries – Barclays Capital
Yeah, thanks. First of all, I just wanted to get a clear sense as kind of the trajectory for the average fee for file. If we were to assume that commercial is stable to growing from here, and residential maybe where trenching is going to come from a larger share of purchase, is it reasonable to assume that the fee for file will continue to migrate up, even though by our look it seems like there is just kind of a record fee for file over the last five or six years?
Yeah, thanks for the question, Mark, this is Mark. This quarter fee for file is like $1,550. Based on what we are seeing now, we think that is going to continue to creep up for the rest of the year.
That assumes that commercial continues to be strong, because our high commercial volume is really what drove that increase this quarter, but we also are going to benefit from the fact that we should have a better mix of resale versus refi going forward. So, based on what we are seeing now we think it will continue to creep up from the current level.
Mark Devries – Barclays Capital
Okay, great. This next question may be for you, also, Mark. I think coming out of the CoreLogic, I think one of the priorities was repositioning the investment portfolio to pick up yield. I’m just interested in getting an update on where you stand with – if you are done with that process, and if not, whether the volatility [inaudible] credit rates market is changing [inaudible] reassess some of your priorities there.
Yeah. Over the last 18 months, we’ve really made a big shift in our portfolio. 18 months ago, we had about twelve percent of the portfolio was [inaudible], today it’s about 22% [inaudible], so most of that effort is done. As we sit here today we still are pretty short on the curve. Our duration is about 2.5 years, and the duration of our liability is about 5 years or so, so we’re really short on the curve, and we’re really not making a whole lot on the portfolio right now because we’re still conservative. [inaudible] is about 2 to 2.25, something like that. So, the portfolio is something that we are continually annualizing, but I think we feel good that it is in a pretty safe position right now.
Mark Devries – Barclays Capital
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