Fidelity National Financial's (FNF) CEO Raymond Quirk on Q1 2016 Results - Earnings Call Transcript

| About: Fidelity National (FNF)

Fidelity National Financial Inc. (NYSE:FNF)

Q1 2016 Results Earnings Conference Call

April 28, 2016, 11:30 am ET

Executives

Dan Murphy - Treasurer, Senior Vice President and Head of Investor Relations

Bill Foley - Chairman

Randy Quirk - Chief Executive Officer

Tony Park - Executive Vice President, Chief Financial Officer

Mike Nolan - President

Analysts

Eric Beardsley - Goldman Sachs

Jeremy Campbell - Barclays

Bose George - KBW

John Campbell - Stephens Incorporated

Chris Gamaitoni - Autonomous Research

Geoffrey Dunn - Dowling & Partners

Kevin Kaczmarek - Zelman & Associates

Jason Deleeuw - Piper Jaffray

Mark Hughes - SunTrust

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the FNF 2016 first quarter earnings call. During today's conference, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [[Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to Mr. Dan Murphy. Please go ahead, sir.

Dan Murphy

Thank you. Good morning, everyone and thanks for joining us for our first quarter 2016 earnings conference call. Joining me today are our Chairman, Bill Foley, CEO, Randy Quirk, President, Mike Nolan, Executive Vice President, Brent Bickett and CFO, Tony Park. We will begin with a brief strategic overview from Bill. Randy will review the title business and Tony will finish with a review of the financial highlights. We will then open it up for your questions and finish with some concluding remarks from Bill Foley. Please note that we are only focused on FNF on this call. We will follow this call with an FNFV call at 12:30 P.M. Eastern Time today.

This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions or strategies regarding the future are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of facts, 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 fnf.com. It will also be available through phone replay beginning at 1:00 P.M. Eastern Time today through May 5. That replay number is 800-475-6701 and the access code is 391052.

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

Bill Foley

Thanks Dan. This quarter was a solid start to what we expect to be another successful year for FNF as we generated a 9.8% pre-tax title margin in the first quarter. Given the normal slow first quarter seasonal pattern, a nearly 10% pre-tax title margin is a strong historical first quarter performance. TRID implementation has had a negative impact on our closing efficiency ratio as we continue to carry higher than normal headcount to help our customers navigate the new closing process. With a current backdrop of mid-single digit growth in the purchase market, an apparently softening refinance market and a relatively flat, but still very strong, commercial market, we are targeting a pre-tax title margin closer to 15% in the second quarter.

Black Knight continues its strong financial performance this quarter, generating 6% revenue growth in the first quarter. Adjusted EBITDA was $107 million or $11 million increase or 11% over the first quarter of 2015 and an adjusted EBITDA margin of 45.1%. FNF's Black Knight ownership stake is currently worth approximately $2.5 billion or more than $9 per FNF share and we continue to believe that Black Knight will generate long term value for FNF shareholders.

During the first quarter, we consistently repurchased 50,000 shares of FNF stock a day other than during the blackout period around our fourth quarter earnings release and parts of January and February. For the first quarter, we repurchased a total of 1.9 million shares at a total cost of approximately $62 million.

I will now turn the call over to Randy Quirk to discuss the title insurance business.

Randy Quirk

Thank you Bill. As Bill mentioned, this was a solid start to 2016 as we again led the title industry with a 9.8% pre-tax title margin. Our adjusted pre-tax earnings of $142 million were a $1 million increase over the strong first quarter of 2015 while the pre-tax title margins declined by 70 basis points. The 20% growth in agent revenue we generated in the first quarter was a benefit to the title earnings but was a drag on the pre-tax title margins as the agency business is a high single-digit margin business. Personnel cost remained elevated due to the TRID implementation that has negatively impacted our closing metrics compared to the prior year. We expect the impact to slowly improve in the second half of the year as the industry adjusts to the new closing process and makes better use of available technologies.

During the first quarter, we added 103 positions, excluding those added through acquisitions with 108 in our direct operations and reduction of five positions at ServiceLink. We reduced headcount by 73 in January, added two in February and added 174 in March as we entered the seasonally stronger spring months.

For the first quarter, total open orders averaged approximately 8,300 per day with January at 7,300, February the strongest at 9,100 and March at 8,300. FNTG purchase orders opened and closed in the first quarter increased by 6% and 10%, respectively The mix towards purchase transactions was approximately 55% for both open and closed orders during the quarter. For the first three weeks of April, total open orders per day grew to approximately 8,900 and FNTG purchase related open orders increased by 5% versus April of 2015.

We had another strong quarter in our commercial business generating $211 million in total commercial revenue, a 1% increase over the first quarter of 2015, driven by a 4% increase in closed commercial orders. National commercial revenue of $121 million increased by approximately 2% as the fee per file grew by 7% and closed orders declined by 5%. As we said on our fourth quarter call, while the rate of growth has slowed the commercial market remains strong and we can generate significant profits in this market if it remains close to what we have today.

The total fee per file of $2,032 increased by 11% versus the first quarter of 2015, as the mix shifted to more purchase closings in the first quarter versus the strong refinance closings in the first quarter of 2015. Continued strong commercial fee per file provided a benefit as well.

Let me now turn the call over to Tony Park to review the financial highlights.

Tony Park

Thank you, Randy. We generated more than $1.7 billion in total revenue in the first quarter with title generating $1.45 billion in total revenue, Black Knight contributing $242 million in total revenue and our corporate segment generating $33 million, which is predominantly our real estate brokerage revenue.

Adjusted pre-tax title earnings were $142 million, a $1 million increase versus the first quarter of 2015. Adjusted net earnings were $94 million or $0.33 per diluted share and the adjusted pre-tax title margin was 9.8%.

Our tax rate for the first quarter was slightly elevated at about 38.5% by some one-time items and we expect that tax rate to move back down to about 35% in the second quarter. The higher tax rate had a $0.02 negative impact on first quarter EPS.

The title segment generated $1.4 billion in total revenue for the first quarter and 8% increase over the first quarter of 2015. Direct title premiums increased 1% while agency premiums increased by 20%. Personnel costs increased by 5%, more than we normally see from a 1% increase in direct premiums. As Randy mentioned, the impact from TRID implementation continued into the first quarter. Other operating expenses also increased by 4%.

ServiceLink produced revenue of $195 million, adjusted EBITDA of $18 million and adjusted EBITDA margin of 9%, adjusted pre-tax earnings of $14 million and an adjusted pre-tax margin of 7.4%. FNF Group debt outstanding was $2.5 billion with nearly $1.6 billion of that debt at Black Knight. Our debt to total capital on a consolidated basis was approximately 28% at March 31. On an FNF only basis, the debt to cap ratio was approximately 18%. The 23% on the guarantee on the $400 million of Black Knight debt is included.

Total title claims paid were $40 million during the first quarter, a decrease of $20 million or 33% from the first quarter of 2015. It is very early but we expect total claims paid to decline in 2016 versus 2015 total claims paid of $285 million. We continue to provide for claim losses at 5.5% of gross title premiums and we remain comfortable that our carried loss reserve position is adequate.

Finally, our FNF Group investment portfolio totaled $4.9 billion at March 31. From a regulated standpoint, we have $1.7 billion in statutory reserves, $1.5 billion in regulated cash and investments and $800 million in secured trust deposits for a total of $4 billion in regulated cash and investments. From an unregulated perspective, we have $400 million of unregulated cash at FNF Group as of March 31. There is also $200 million in consolidated cash and investments at Black Knight and ServiceLink and $70 million in cash at subsidiaries, both of which are restricted by minimum working capital, other regulatory requirements or to let those businesses run themselves autonomously. We also have approximately $140 million in equity method investments in the portfolio.

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

Question-and-Answer Session

Operator

[Operator Instructions]. The first question comes from the line of Eric Beardsley with Goldman Sachs. Please proceed with your question.

Eric Beardsley

Hi. Thank you. Just as we look at the year-over-year trend in the title margin, I guess last year second quarter you were running on 16%, revenues are up, it looks like residential purchase is still going strong and commercial is kind of flat. How should we think about those trends relative to the potential decline in the pre-tax margin?

Tony Park

I think you really should be thinking in terms of our target of 15% pre-tax title margin. The one thing we are finding that we are still facing in dealing with is the TRID implementation. And while our employees have been well trained and they are doing a great job, a lot of our customers, frankly are still trying to navigate their way through TRID and sometimes we have to move documents from one system to another system. Sometimes we have six or seven extra emails or responses or replies that go back and forth between ourselves and customers and lenders. So it's a much more complicated and it's a more difficult process than we had anticipated. But as I said, we are onboard. We have got it figured out. It's more of a customer issue in training our customers than the new regulations. We believe the TRID is costing us 0.5% to 0.7% pre-tax title margin. We can't be exactly sure because it's difficult to measure, it's difficult to quantify. But that's sort of our feeling based upon the number of additional headcount that we have and really just the increased time involved in processing orders. I hope that answers the question.

Eric Beardsley

That's helpful. Thank you. And then secondly, on the agent revenue, you had some nice growth there in the quarter. What do you attribute that to? And is there any market shift in terms of more orders getting done in the agent world versus direct? Or is this more company specific, you think?

Tony Park

I don't think this is a change in that type of mix. I think it's really a result of the effort we have made over the last couple of years pushing our agency operations. We have added, we mentioned on the last call, we added pretty close to 300 agents last year. In this first quarter, we signed up another 100 agents. We continue to improve our technology and our offerings to the agents, recruit salespeople. And so we really believe it's a result of our effort. After market share numbers came out a few weeks ago and indicated that we had a 0.3% growth in agency revenue nationally. So we just believe it's just more effort and the results of that effort.

Eric Beardsley

Okay. Great. Thank you.

Operator

The next question is from the line of Jeremy Campbell with Barclays. Please proceed with your question.

Jeremy Campbell

Yes. Hi. Thanks guys. So just one of your competitors recently noted that TRID expenses were largely out of their P&L as of 1Q. When you guys look at your own operations versus some of your peers, what's the main driver why you guys would have elevated TRID expenses versus other people?

Tony Park

One thing is that we have a huge market presence over in the West where our most escrow branches are. We are pretty close to 50% market share in California, Washington and Oregon, Arizona. So that's where the footprint is. So we have got a lot of closings over there. So it does elevate the labor expense because of support that needs to be given in our escrow branches, as Bill mentioned. We are really walking a lot of customers through the process for the first time. As we go forward into the second and third quarter, it looks like the lenders are working with their employees to get a more quicker adoption of the technology that's available. So there is less manual work being done. But we have got a significant footprint lead on our competitors in the West in terms of our volume. And that's where most of the action is.

Jeremy Campbell

Still, in addition to your personnel expense being high because of this, is it still dragging on your close ratios?

Tony Park

Well, it's dragging on our productivity not necessarily our closing ratios. Ratios are still the same. The closing cycle has been potentially expanded by seven to 10 days on a typical purchase transaction. But it is more just productivity and the support for the escrow people and the escrow branches. We think still, like we mentioned on the last call, that it could be 10% to 15% load in these escrow branches but as the technology is embraced, those numbers will come down. So we came into the first quarter a little heavy because we just couldn't pull the people out as the first few closing cycles of TRID presented themselves, but we are watching it very closely. We are metrics driven. And as we see this, the technology being adopted more, we will start pulling some people out.

Jeremy Campbell

And then you guys are sitting on quite a bit of dry powder the whole quarter. I think you mentioned $400 million. Historically you guys didn't really sit on a ton of dry powder for very long. Can you just comment on your ability to either one, upsize your buyback, or two, look to deploy capital in areas like M&A?

Randy Quirk

I will take that one. We had $380 million of cash at the end of the first quarter. We spent $120 million in the quarter, $60 million roughly split half-and-half between our dividend and share repurchases. So we did use well over $100 million in cash. Our cash flow for the quarter was $73 million, after CapEx $35 million. So we believe that the steady 50,000 share per day that Bill mentioned is the proper course right now. We clearly have the ability to adjust as we react to conditions. We agree with you that a good use of cash is finding accretive acquisitions. We are deploying that in title agent acquisitions around the country in selected markets in which we want to fill in our market share where we have management and we have the ability to buy these things at very attractive rates. We are executing on that plan. And there are some larger opportunities that we have been investigating. They just haven't come to fruition yet.

Jeremy Campbell

Great. Thanks guys.

Operator

The next question comes from the line of Bose George with KBW. Please proceed with your question.

Bose George

Hi guys. Good morning. Actually the first question, just the 50 to 70 basis point impact from TRID, is there a way to think about when that can run off? If you look, say into 2017, is that most of that just potential upside, does that benefit or the drag goes away?

Randy Quirk

No. It should gone well before 2017. It really should be tailing off right now. It's just has taken longer to get the customers trained and to get them to adopt the technology that we are really providing in connection with TRID. So it's just a delay. It's not a permanent fixture. It's just a delay that is having an impact on our timing of closings and the additional personnel that we have got to keep on staff. I really wasn't exaggerating when I said here maybe six, eight, 10, 12 additional emails that go back and forth trying to get these documents squared away with our customers. And it's a complicated piece of legislation. But we are doing it right and we are making sure that we are in compliance and that our customer are in compliance.

Bose George

Okay. Great. That's helpful. Thanks. And then, actually just in terms of the margin impact of the strong agent growth that you are seeing, should we think of that as being earnings positive but potentially a little margin diluted this year?

Tony Park

Bose, this is Tony. I think that's fair, at least in the first quarter. I don't know where it plays out. But my rough estimate is probably about 20 basis points impact from that 20% increase in agency revenue year-over-year. So it isn't that it is bad, it's certainly positive to earnings. It just hurts the margin a little bit because, as you know, on gross premiums our agent margin is anywhere from call it, 7% to 8%, depending on the quarter.

Bose George

Okay. That's helpful. Thanks. Actually just one more, in terms of the corporate revenues, what percentage of that is the real estate brokerage business?

Tony Park

Bose, it's all of that and more. It's 100% of what you see in the corporate segment as real estate brokerage. But in addition, we have some eliminations that offset that that are also in that segment, about $15 million in the current quarter and that's an elimination between segments. So we have certain intercompany transactions. For example loan care, which is part of title buys MSP from Black Knight. So when you have those intercompany transactions, the elimination shows up in the corporate segment as a negative to wipe out both the revenue and the expense. Another example is Property Insight for Black Knight with title. This title things from Property Insight. So we eliminate it there. So you could actually gross up that $33 million to about $48 million which is the rough number for the real estate brokerage business.

Bose George

Great. Thank you.

Operator

The next question comes from the line of John Campbell with Stephens Incorporated. Please go ahead with your question.

John Campbell

Hi guys. Good morning.

Randy Quirk

Good morning.

John Campbell

Just back to 2017. I know that's many moons away. But if you guys can modestly grow the title rev and assuming the commercial hangs in there and then it sounds like obviously you lapsed some of the translated TRID cost, but just directionally, do you guys think you can shake out at or around, maybe a little bit higher than that 15% pre-tax margin goal?

Tony Park

We just hate to commit to more than 15% right now. That's our target and we should be able to get there, because we have been there in the past. The economy itself just feels a little bumpy to us. We haven't got big surges in refinance business. The purchase market is okay, but it's not fantastic. So if we can a little help from the real estate market, we could certainly expand that title margin. So we don't like to predict. We like to target margins. And as Randy said, we are metric driven. So we are targeting the 15% to get up to that level. If we can do better, we certainly are going to. But we just don't want to commit.

John Campbell

Got it. That's helpful. And then, I am really surprised to see and I am sure you guys are as well to see that continuing, even widening kind of discount from title business. I mean, clearly the market is not giving you guys credit where it's due. So any updated thoughts there? Any updates from the plans for the BKS Holding? And then also if you guys were ever to make a move on that, are you thinking more like a tax-free spend? Or is it something that you would be, maybe just an outright sale?

Bill Foley

So we wouldn't sell. Our tax situation is terrible. So we would have to terrible tax consequences. We would just be paying the government. So really the only potential alternative for Black Knight is the distribution to our shareholders, which is a great return to our shareholders and they can continue to own the stock or dispose of the stock. But the timing of it is somewhat off in the future. Again due to tax considerations relative to doing a spin after the point in time in which we took out Black Knight public and then acquired it about a year-and-a-half before that. And plus there are a series of bonds that are being held by Black Knight that really are not economic to prepay at this time. The first decent prepayment window is October 2017 and FNF is a guarantor of those bonds. So those bonds would have to be cleared before we could do anything. So it's another year-and-a-half before we could accomplish something like a spin-off. And it's something we think about. Our goal is to return value to shareholders, to a keep our shareholders happy. And all of the people at Fidelity, the senior management of Fidelity, they are all significant shareholders. So we are all pulling the same boat in the same direction.

John Campbell

Okay. That's helpful. And then just one more, if I can. Tony, as far as next year 35% tax rate, is that fair to assume?

Tony Park

Next year, like in 2017 or like next quarter?

John Campbell

Next year.

Tony Park

I will say this, next quarter 35% is fair. I think for the full-year, I think 35% is a good number. And beyond that, I don't know, but it's probably, if you are going to do something for 2017, then that's as good a guess as any.

John Campbell

Okay. That's helpful. Thanks guys.

Operator

The next question comes from the line of Chris Gamaitoni with Autonomous Research. Please go ahead with your question.

Chris Gamaitoni

Good morning. Thank you for taking my call. On the last call, you had mentioned some initiatives to improve the margin at ServiceLink and it declined again down to, I think 7.2%. Can you give us an update on what can return that to title margin more in line with the rest of the business?

Tony Park

Sure. I will take that. Well, one thing that can return it to those margins is more revenue. So we have begun a new cross-selling initiative with our sister company, Black Knight, to generate some additional revenue get more focused on the sale side. We are going to continue to look at consolidating some corporate of the functions that could be duplicative between ServiceLink and in FNF. Get them a little bit more involved in some of our technology and offshore title production capabilities. So we are looking at all aspects of the organization. Cost of goods sold in the field services division and appraisal division, we are going to do some work on that. So we have several initiatives that are underway that could that contribute to those increased margins.

Chris Gamaitoni

In which business are you trying to cross-sell?

Tony Park

Well, for the most part, the title originations closing and the default services.

Chris Gamaitoni

Okay.

Tony Park

But it applies to all the business units.

Chris Gamaitoni

And I think on the last call, you had mentioned an acquisition for that unit. Is there anything on the horizon? Or something you see that you might be able to add scale back to the business?

Bill Foley

We do have a small, not necessarily small, an acquisition un in New England, which is a ServiceLink type business. We are really determining whether that business should be done in ServiceLink or should be up at the title group level. So but we do have an acquisition that's going to be announced shortly. It's been signed and we will give you some details on it.

Chris Gamaitoni

All right. Perfect. That's all of my questions. Thank you so much.

Operator

And the next question comes from the line of Geoffrey Dunn with Dowling & Partners. Please proceed with your question.

Geoffrey Dunn

Thank you. Good morning.

Randy Quirk

Good morning.

Geoffrey Dunn

I wanted to follow up a little more on ServiceLink. In terms of the flexibility with expense base, everybody can see the forecasted refi volumes out there. So I guess first, when you are cross-selling, are you trying to bring on more centralized refi customers? Or are you trying to bring on customers that may be start adopting some sort of centralized purchase function?

Randy Quirk

Well, it's more of the centralized in terms of title, more the centralized lender product. However, with an acquisition that Bill just discussed, we would potentially see some purchase business being produced out of ServiceLink centrally. So a little of both. The purchase we have in there now is particularly a default related. So there is growth potential on the default side. But we maybe feeding some just traditional purchase volume into ServiceLink.

Bill Foley

And Geoff, I would also say that our cross-marketing efforts with Black Knight are really giving a lot of emphasis are being accelerated with dedicated specific, high-level individuals to accomplish this mission and we currently have Black Knight's complete cooperation and they are enthusiastically helping us in terms of when an MSP customer or RealEC customer or Closing Insight customer or Empower customer, transactions made with that kind of customer or just existing customers, but really trying to layer in the various products and services that we have at ServiceLink to penetrate, do a better job of penetration. So we are honest and we are going to work hard on it and it takes time but we are definitely on it.

Geoffrey Dunn

Okay. And then there is a lot of focus on the national commercial trends and made some stabilization in that market. Can you talk a little bit about trends in the local commercial? And I guess particularly, I am guessing it's mix, but the fee per file there was down this quarter off of recent trend, but how is the local commercial looking relative to national commercial?

Mike Nolan

Hi Geoff, this is Mike. We have put a lot more emphasis in the past year on growing our local commercial operations. And these are the deals that are embedded in our traditional residential shops and we have seen some good growth in order volume that's made up a little bit for the orders that have slightly fallen off in national. And then tend to be smaller. So the fee per file is going to be down compared to national but there is a lot of good activity even in the office segments, local, retail and it's a very positive segment for us. We grew it 24% last year. And we think it will be another good year in local commercial.

Geoffrey Dunn

Okay. And my last question, if we see a decelerating refi market, I think historically what we have seen is a rebalancing East Coast, West Coast of volume, which would suggest an acceleration of the agency mix beyond adding agents. So with the agency efforts that you have, how much of a mix shift could we see as we go into the back of the year, if all of a sudden we go to a 60& or 70% purchase mix versus 55%, 60% now?

Bill Foley

That's a tough question to answer. It would be a good problem for us to have, if the purchase market continued to expand as we go through 2016. In terms of the mix, I think we will just the revenue. It's not really something we measure, but I think we will just take the revenue on the agency side and the just stay with it.

Geoffrey Dunn

But does that relationship still hold that you would expect the agency mix to pick up if that kind of market developed?

Randy Quirk

Not necessarily, Geoff. Really we have such a strong direct operations based into it, particularly in the West in the Texas, the Illinois and we are continuing to acquire title agents. So those move from being agents to being direct operations. I honestly don't see much of a change in the split of the business relative to revenue. If the purchase market expands or accelerates a bit, our revenue is just going to go up. It's going to go up in both segments.

Geoffrey Dunn

Okay. Helpful. Thank you.

Operator

The next question comes from the line of Kevin Kaczmarek with Zelman & Associates. Please proceed with your question.

Kevin Kaczmarek

Hi Guys. It seems like you have been gaining some share within residential purchase. Can you give us a sense of where you have been gaining? Is this just geographic fluctuations? Are you gaining share in particular geographies?

Bill Foley

We are gaining share in the agency business. So we have made a big push to acquire good agents that are significant in size and really from 2007 to 2014 we were shedding agents. And with the LandAmerica acquisition some years ago, our agent base doubled up to 10,000 from 5,000 and then we have taken it back down to closer to 5,000, but now it's moving up. So our share is increasing in agency. It should continue to increase and that increase should, if we are successful in our programs, should be more than 0.03% next year, but of course we can't guarantee that. But on the other hand, we look at our West Coast operations and in California we have a 50% market share. And that's direct operations. And Washington and Oregon is not far from 50%. Arizona another 50% state. Nevada. So we are just a dominating feature in terms of directs in the western part of the country. So our business model, we are very happy with the business model and we are focusing now on growing ServiceLink by cross-selling and we are focusing on growing both our direct operations and our agency business.

Kevin Kaczmarek

Okay. And I guess on the commercial side, I know you guys had a pretty strong second quarter last year and there obviously has been a slowdown in the market. How should we think about the second quarter of this year? Are open orders a good indicator to look at? Or is there some lumpiness we should try to take into account as we look to the next quarter?

Mike Nolan

Hi, this is Mike. So our open orders are very steady compared to the first quarter and really coming out of the backend of last year. Pipeline is good. But it's a little hard to predict when transactions are going to close, particularly some of the bigger transactions. And that can really make a difference in terms of what the revenues might look like in the second quarter versus second quarter of last year. So we think it's going to be a good quarter. But we can't really predict how it matches up to the prior year.

Kevin Kaczmarek

Okay. And in terms of just a broad range, what kind of commercial assumptions are you making with the target at 15% or closer to 15% margin within title?

Bill Foley

We are really thinking that commercial this year is going to be basically flat to last year. We have had such good years in commercial that if we can maintain the same rate of commercial business that we have had the last year and which is larger than the year before, we would really be happy with that because we have such a dominant, again we have such a dominant share in the commercial business that just as in the direct operations business in the West, we like every deal, but we can't get every deal.

Kevin Kaczmarek

Okay. All right. Thanks a lot. Go ahead.

Operator

The next question comes from the line of Jason Deleeuw with Piper Jaffray. Please proceed with your question.

Jason Deleeuw

Thank you and good morning. A question on the direct channel versus the agent channel and competition between the two in any geography. If you just have such big market share for the direct channels, is that just a limiting factor in how big you can get the agent channel? How much conflict or channel conflict is there?

Randy Quirk

No. There is really not too much channel conflict. As Bill had already indicated and as I am sure you know, we are very big in the West with our direct operations and in the East, it's more agent centric. But we are in Florida, we have got great market share in Florida on our agency side. And we have our direct operations across the street. So there is really not, we don't run into any real channel conflict. We have got four brands and a lot of markets on our direct side and they just go after increased market share. So regionally it works a bit different in different parts of the country. But we don't bump into that very often. We are focusing, again as Bill had said, to grow our direct and to grow our agency and that has not been an issue.

Jason Deleeuw

Great. And then on the TRID expenses, the 50 to 70 bips of margin impact there, is that what you are assuming that same type of impact in the second quarter guidance on 15% pre-tax title margin?

Randy Quirk

Well, I don't know if it's really the second quarter guidance, but we are going to make every effort to bring that labor expense down as we move through the second quarter and into the third quarter. And that's very important to us to get that done. But that will depend on the adoption of the technology from our business partners. So we are going to work hard at that.

Jason Deleeuw

And then what types of customers are still having problems with TRID? Can you segment it out? Is it just certain types? Or is it just kind of across the board?

Bill Foley

Actually, it's the licensed real estate professional that are simply having the most problem with TRID. And then there is some of the smaller lenders that really have not figured TRID out. The large lenders are on board. They understand TRID and they have implemented TRID. The problem with them is that everything slows down. It's the smaller lenders, the local smaller banks and the licensed real estate professionals.

Jason Deleeuw

And then switching up to the claims, they continue to trend lower and you guys said you are comfortable with the provisioning rate. But is there any change to that outlook over the next couple of years that we can think about? Or just can you give us a sense, what are the vintages, the post financial crisis vintages, what are they trending at versus what you guys are provisioning that? And how much are we still dealing with the pre-financial crisis vintages?

Randy Quirk

Yes. Good question. We still have two separate groups of years or vintages. You have the 2005 through 2008 years that were really high historically and I will call it roughly 10%, give or take 10% loss ratios on those years. Since then, so starting in 2009, which came down from call at 9% or so in 2008, 2009 came all the way down to 6% or maybe slightly below 6% and then it has continued to trend down to 5% and now possibly even below 5%. It's early to call a couple these more recent years. And so if they are trending at 4.5% or 5% in that range, it's hard because they are not matured at all. So it's hard to make the call. But 5.5% feels a little bit conservative even now given what we have seen in the last three or four years and especially what we paid in the first quarter, which was unusually low. So we monitor this closely. We do carry roughly, I think we disclosed in our 10-K about $80 million above our actuary central estimate at this point. So we have to monitor that. Obviously, we cannot allow that to get too large. But the good news is, since 2009 ratios have been very low and there is still some leakage because we are still paying some claims, believe it or not, in 2006, 2007. But those years are becoming more and more complete. Still some leakage in those years, but it's been more than offset lately by positive experience in the more recent years.

Jason Deleeuw

All right. Thank you for that.

Operator

The next question comes from the line of Mark Hughes with SunTrust. Please proceed with your question.

Mark Hughes

Thank you. Sorry if I missed this earlier in the call, but what should we anticipate in terms of corporate expense in the pre-tax trends? Is this a pretty good level going forward?

Tony Park

We had adjusted pre-tax profits in the corporate segment of $29 million after pulling out at a loss of realized gain or loss, that's 29 million. That's probably a little light. In other words, it ought to be a little bit better than that, maybe $25 million to $27 million. We do have real estate brokerage businesses included within that segment and that's a very seasonal business with the first quarter being the weakest. They don't get the benefit of refinance business and so typically inventory levels are pretty low as they work their way into the first quarter. So probably somewhere between $25 million and $27 million loss is a good run rate.

Mark Hughes

Great. Thank you.

Operator

[Operator Instructions]. There are no further questions, please continue.

Bill Foley

Thank you. Both our title insurance business and Black Knight generated strong financial performance in the first quarter. We look forward to maximizing profitability from both businesses in 2016 and beyond. Thanks for joining us today.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T TeleConference. You may now disconnect.

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