Q3 2019 Earnings Call
Thank you operator, and good morning, everyone. Thank you for joining us for our third quarter 2019 earnings Conference call.
Statements that are not historical facts, including statements about our expectations hopes intentions or strategies regarding the future are forward looking statements.
We undertake no obligation to update any forward looking statements are there 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 then the statement regarding forward looking information risk factors and other sections of the company's Form 10-K , and other filings with the S. You see.
This conference call will be available for replay via webcast at our website at <unk> Dot Com and will also be available through phone replay beginning at two PM Eastern time today through November sex.
A replay number is 804 7567, a one and the access code as for seven to 566, let me now turn the call over to our Chairman Bill Foley.
Thank you Jamie the third quarter is another strong quarter for our title business as we generated adjusted pretax title earnings of 407 billion and an 18.6% adjusted pretax title margin.
Both of which represent record quarterly performances since the third quarter 2003, I'll, let Randy go into more detail on the title business.
Turning to Steward information services as we announced in September we made the decision to terminate our proposed merger agreement with Stewart, given the insurmountable regulatory hurdles that we see.
Looking forward, we remain committed to creating meaningful long term value for shareholders are in the process of reviewing our capital allocation strategy with our board.
Our priorities for capital continues to be focused on share repurchases consistent dividend growth overtime.
Strategic M&A that enhances the growth profile diversification of the company.
As we announced yesterday afternoon, we increased our dividend 6%.
Three cents per share their previous dividend of 31 cents for sure as result of the very strong cash flow generation of our title business.
In July our board declared a 31.
For sure dividend.
The third quarter, 2019, which used 85 million and available cash for the holding company in September . We also repurchased 810000 shares of our common stock during the third quarter or approximately 35 million.
Cash inflows were 294 million, primarily from the 277 million, an underwriter and non underwriter dividends paid up at the holding company in the third quarter 16 billion principal and interest on the intercompany Servicelink note and 1 billion in interest on the Tonight line of credit.
Result was we ended the third quarter was approximately 984 billion.
Billable holding company cash I'll now turn the call if you're ready to discuss the settlement.
Thank you Bill.
Generated adjusted pre tax tidelands or 407 million, a $108 million, 36% increase over the strong third quarter of 2018.
Our adjusted pretax title margin was 18.6% 290 basis point or 18% increase over the prior year.
We had a 21% increase in direct orders closed comprised of a 2% increased in daily purchase orders.
Most 17% increase in total commercial orders clause and 114% increase daily refinance orders close.
Purchase stores opened increased by 1% person the third quarter of 2018, a sequential improvement of 2% decrease in the second quarter of 2019 versus the prior year.
We financed orders opened increased by 114% versus the third quarter 2018, as a client and mortgage rates continues to drive strong refinance volumes.
Lastly, total commercial orders open decreased more than 15% over the third quarter 2018.
This quarter produced improving trends purchase order so.
Strong continued quarter of refinance orders.
And it well as well as ongoing strength.
Commercial orders on.
Due to the strength of our third quarter, well position to continue producing strong federal business results for the remainder of 2019.
For the third quarter two total open orders averaged 9250 per day with July at 8700.
August at 9700 and September at 9300.
Purchase orders opened were up 1% and close were down 2% on a daily basis in the third quarter.
Purchase orders opened in July were down by 2.4% versus the prior year period, well August and September were up 1%, 4% respectively versus the prior period.
Refinance orders opened and closed increased by 114% 93% respectively.
Daily basis versus the third quarter or 18.
The best month of the corridor with August one refinance orders opened increased by 142%.
August 2018.
For the first four weeks of October total orders opened were approximately 8600 per day, David purchase orders opened increased by 2% versus the prior year data refinance orders opened increased by 123% over the prior year period.
Total commercial revenue of $301 million was a 9% increase over the third quarter 2018.
Driven primarily by a 17% increase in closed orders somewhat offset.
And offset by 6% decrease in the fee per file.
Commercial orders opened increased 15% in the third quarter versus the prior year position us well for the remainder of 2019.
The first nine months in 2019 total commercial revenue of 818 million was the largest nine month revenue performance. Since we began tracking total commercial revenue in 2015.
Let me now turn the call over to Tony Park to review the financial highlights.
Thank you Randy we generated more than $2.2 billion and total revenue in the third quarter with the title segment generating all but the $47 million of revenue we generated in our corporate segment.
Net earnings were $250 million, which included $4 million unrealized gains adjusted net earnings were $304 million or one dollar and 10 cents per diluted share excluding realized gains of $3 million. The title segment generated over $2 billion in total revenue for the third quarter a 13.
Recent increase from the third quarter of 2018.
Direct premiums increased by 15% versus the third quarter 2018.
Agency premiums also grew nearly 15% at escrow title related and other fees increased by 15% versus the prior year.
Personnel costs increased by 9% and other operating expenses grew by only 8%.
All in the title business generated an 18.6% adjusted pretax title margin, a 290 basis point increase versus the third quarter of 2018.
Interest income of $57 million was a $13 million increase over the prior year as we continued to see the positive impact of higher short term interest rates on the interest we earn on the client exchange bonds. We hold in our 10 31 exchange business. The reinvestment of proceeds from maturing fixed income securities.
Ladies and from cash and short term investments.
FNF debt outstanding was $838 million on September Thirtyth for a debt to total capital ratio of 13.3%.
Our claims paid a $52 million were $15 million lower than our provision of $67 million for the third quarter.
The carried reserve for claim losses is currently $28 million or 2% above the actuaries central estimate.
We continue to provide for claims at 4.5% of total title premiums.
Finally, our investment portfolio totaled more than $5.4 billion at September Thirtyth included in the $5.4 billion, our fixed maturity and preferred securities of $2.5 billion with an average duration of 3.5 years and an average rating of eight to.
Equity securities of $700 million short term and other investments of $700 million and cash of $1.5 billion.
The $1.5 billion in cash nearly $1 billion currently sits at the holding company level.
Let me now turn the call back to our operator to allow for any questions.
Thank you, ladies and gentlemen, if you do wish US a question. Please press star one on your Touchtone phone you will hear tone indicates you've been placed in Q you maybe moved yourself from Q at anytime by pressing the pound key once again, ladies gentlemen, Jewish asked the question. Please press star one on your Touchtone phone.
First question will come from the line of John Campbell from Stephens. Please go ahead, hey, guys. Good morning, Congrats on a great quarter.
Next year.
I just want to touch on commercial for a second obviously, you're seeing continued good strength. There. If you could maybe just kinda unpack were that where the shrinks coming from on I guess, one of the region by region basis, or maybe asset class or you just kind of seeing across the board any any kind of color there.
Sure John It's Mike and it's really broad based I mean, we're seeing most asset classes are doing very well and depending on the quarter. Some are stronger than the others, but energy office multifamily industrials very strong.
Gaming kind of comes in and out, but but but very strong there and then in terms of geography.
You know as I look at our 21 national offices or California in Washington, NCS is they're doing very very well, Texas, DC, Virginia area, Pittsburgh Philly, Minnesota.
Just just a lot of markets around the country and and in New York in particular, the third quarter, we saw some really strong.
Deals exported out of New York and into our field operations throughout the country.
That's good to hear and then on the 15% open order growth on a commercial that that's probably the strongest result, I've seen in awhile.
It looks like it puts you guys are pretty good past, maybe through Fourq, you and indeed, maybe even one Q, but.
Any sense for the size of the deals in the mix now and then maybe the type of orders were purchased to refine how that how those two might influence the commercial fee per file for Fourq you.
Yeah. So we had some pretty big transactions in the third quarter, John but we also closed a tremendous amount of volume on him our closings were up 17% and 60% of those closings or local deals and that fee per file was off a bit. More then then you know and in other quarters so that.
Did pull it down for the quarter.
We have some large transactions or the pipeline I would anticipate the commercial fee per file to come back up in the fourth quarter. It's typically our highest for the year and I don't think we've had a commercial fourth quarter in a while where the the national fee per file was below 13000 sell.
I think it's looking very good for the pipeline. That's good to hear and then lastly, Bill I mean, obviously you guys kind of have a high class problem now with the cash at the holding company you mentioned that the board level you guys were kind of discussion your options, but just at a high level any sense for kind of what what you get where your hedge that on the M&A side and if you guys do have a.
Fine if there's anything kind of larger transformational outside the title that you might be looking at well would all be it would be complementary to what we're presently doing or counter cyclical to what were over personally engaged as you know.
Title of the tunnel businesses transactional in nature and when the rates are low we you know we reap the rewards and when the rates are higher the transactions slow down and if we could find the.
Find something that would balance that trend that would be very interesting to US then there are other other businesses that are really.
Service links.
Related in ways, but in in areas of business that we the presently don't have coverage.
Obviously that there's not going to be another large title deal.
We're also we increased the dividend doesnt seem like a lot there was up 6% two cents. This year, we want to make sure we never get in trouble in terms of a revenue to go backward on our dividend increases and this is the time of year. When we know it normally review and increase our dividend.
And then we're taking a good look at the increase in our share buyback, but it would be on a kind of daily consistent basis, just as we've been doing and so that's it that's the process we're going through so.
It was a great quarter generated a lot of cash fourth quarter is going to view of terrific quarter, we're already seeing that it from the for the month of October .
And so there will be more to be revealed that ex the next several months, Okay. And then I wanted to touch back maybe on the M&A commentary around the counter cyclical angle what are your thoughts on the on first American and their approach with.
Having a you know internal bank that anything that.
Could be an interest you guys from just the countercyclical legal with rates.
We are actually pursuing that.
We are pursuing the banks that would be a depository for similar words are escrow funds and it's a long it's along the city process and we've bid on it for about a year and a half and though we're close to filing but we're just not quite there yet.
Good to hear thanks, guys.
Thank you.
Our next question will come from line of market. There is from Barclays. Please go ahead.
Yeah. Thank you, obviously, a very strong margin on the quarter wanting to get your thoughts on how we should think about you need to add expense here you know to fulfill the pretty robust pipeline, you're obviously going to refile side.
Kind of implications for for the margin.
Yeah. This is this is Randy.
You are correct I mean, a strong second quarter and third quarter with with opening is I believe our third quarter openings were up 30% year over year Cogens up 20%. We added a couple of hundred a employees in the a in the third quarter.
But still are running a little over 200 less employees than a year ago. So as we go forward. The only real expense swing led revolve around labor costs, and we don't anticipate adding to staff in the fourth quarter. We are we're up about 50 employees.
So far and October well have a lot of closings.
We expect that that will level off as you go through the back end of the air So expense wise I don't see anything dramatically.
Changing outside of the labor costs.
Okay. So.
The implication as we should expect another pretty strong margin in Fourq in particular, as we think about leaving bigger contribution from commercials answer.
Well, we it as as Bill had said, it's going to be another very strong quarter of 18.6 of course was a record for us and you always have some seasonality impact as you get through a into the back in November and into December but commercial is gonna be a very strong and and we actually on the refinance side could end up with.
The more refinance closings in the fourth quarter than we had in the third quarter. So it it will be a it it should be a very a very good fourth quarter.
Okay, great. Thank you.
Thanks.
Q.
Our next question then we'll go from line of Mackenzie Aron from Zelman <unk> Associates. Please go ahead.
Thanks, Good morning.
Yeah, Bob on the strong margins. This quarter is there anything from a technology. Our automation standpoint that is helping to drive that really strong results that you can maybe point too.
Sure Mckenzie, it's Mike, particularly in a third quarter I'd point to two things first is just the great commercial performance that tends to be higher margin business for us, but on the automation side with all the re size that we're processing, we're really able to take advantage of our next stage title automation and also our ability to do work in India.
We're on our centralized rifai environments like Servicelink.
Roughly 70% of our refiners require little or no touch so they come in and then we can process. It may get the commitment out with with little to no human touch and then our distributed footprint.
It's about 40% so we're seeing nice lift.
From the automation and that was just matures over time, and then what will get better and better.
And then another question on agent.
The agent revenue strength I know, we don't have the full market share picture, yet, but seems like you all have been gaining share in that channel and just curious what you're hearing from the field as though they're gonna be fully sustainable do it goes off the table and how much it the strength was driven by agents reallocating gang.
At the American process, yes.
We feel like we're taking some share at agency we've seen good growth in a number of markets, particularly Florida, which is a great agency market.
In other markets in the southeast and the East as you know, we don't do a lot lower west relative to agency, but we've seen nice growth there and I wouldn't say its its its market share weve necessarily taken away from Stuart I don't know that it came from any dislocation. There I think we're just more broadly taking share.
Sure.
From the overall marketplace.
All right great. Thanks, so much.
Thank you. Our next question from the comfort line of Jack maybe the Cinco from aside you. Please go ahead.
Hi, good morning.
Asking other fee per file on the ready side sounds like with the pipeline.
On Rifai, where it's at.
We should see another maybe another year to year decline in resi fee per file and I think you said earlier just to confirm.
Maybe a rebound in commercial in the fourth quarter am I thinking about that's correct way.
Yeah, I think that's right I mean, we in the third quarter 60, or 45% of our closings were refinanced versus 30 in the third quarter last year and I would anticipate in the fourth quarter that that could be 50.
I'll move to 50 or maybe low 50, so that's certainly a headwind on the fee per file.
But it's just how much it gets offset by a lift on commercial.
Okay makes sense and then.
On the buyback going back to an earlier question I guess, maybe to ask it a different way what what do you waiting to see too.
You know to announce.
Or so think about something more substantial on the buyback side. It's obviously several you've got some things are the hopper on M&A, but.
Is it is it sustainability of volumes as it is at Fourq, you know help us sort of think about what some of the deciding factors will be.
I mean really our first allocation of the capitals been too.
<unk> maintain and increase our dividends so we were.
We're very proud with what we've done with our dividend over the last seven or eight years. The buyback we have a steady buyback program that we we're not blacked out we buy a certain number of shares per day, and that's really the number that we would look to increase that's your purchase per day.
We wouldn't do a.
Dutch auction, we wouldn't do you know a special buyback would rather just be a really kind of steady and consistent and so.
We don't announce the number of shares we buy for day, we just say that were in the market and the we're going to be looking to increase the number of shares we purchase per day, when we're not blacked out.
That's kind of that's as specific as I can get into the journal. Okay. Yeah. It makes sense. We we did by 810000 shares in the quarter spent $35 million.
And that automatic approach I guess.
That would suggest that you are pretty comfortable with intrinsic value and current valuation.
You are yep, absolutely okay. Thanks.
Thank you.
Our next question then will come from one of Jason to Lu from Piper Jaffray. Please go ahead.
Oh, Thanks for taking the question, what's the what's a good go forward tax rate.
Jason I think you can you can model, 24%, we did have an unusual tax rate in the third quarter at 18.8% that was up against actually a 17.8% in the prior year third quarter, which also had some I'll call them discreet items, we did have a $5 million, Florida state tax refund that showed up.
In Q3 that lowered our rate.
And we also had some increased stock option exercise activity. Following the really the prolonged blackout, we had for Stuart where we were blacked out for a long period of time and when that lifted we did have some some expirations that work that we're quickly approaching and so that that a exercise.
Activity does generate a tax benefit to us and so that's why we're kinda sub 20% at this point, but I think you can model at 24% going forward.
Alright, Thanks, and then marketshare going forward that mean traditionally and title insurance, it's been M&A that drives big drives a big changes in the needle in terms of market share.
And so that looks like that's all off the table, but is there anything I know you say, you're taking care any channel, but is there anything in terms of ramping up aegion acquisitions that it's interesting at this point or is there anything on a direct side that you could also do from a market share standpoint.
Yeah. This is Randy Yeah, now now that a store does behind us.
We're going to get back to where we were a couple of years ago looking at agents small midsize agency in filling our footprint. We have a we have a very distributed and pretty solid footprint, but there's areas, where we can complement our existing brands through acquisition. So.
Let me back on that track and then there's a recruiting you know we're always in the game to hire a good no revenue producing people. So it's a bit of inorganic approach at this point, but but we will be looking at a and are currently looking at acquisitions.
Great. Thank you.
Thank you.
Our next question will come from line of Geoffrey Dunn from Dowling and partners. Please go ahead.
Thanks have a few.
In the past to fidelity had a billion at the Holdco and mid teens debt leverage it would just be a matter of time before big deal was coming out US can you talk about how you think about I guess the possibility of a large.
Somewhat transformational transaction coming in the door versus more of a attack on strategy.
Well, that's very good job [laughter] I know you don't like sitting on money So [laughter].
Yes, we have the things that we're looking at our somehow related to there in the insurance space or related to the insurance space and there were trying to stay away from ideas that are presented to us that our transactional nature, we'd rather have.
Due to the recurring revenue model and if we can if we can move toward.
Acquisitions or investments in a in a company that we can grow that company that or counter cyclical to the title insurers.
Transactional low interest rate driven business, that's really what we're most interested in and that's what we're working on we're running a lot of screens right now and we're really trying to focus on what would what would make the most sense for the company, but you're not going to see anything that's.
Out of line as there's not going to be the restaurants, there's not going to be any oh.
Extraneous type investments these will be investments or an acquisition or acquisitions that will.
Really protect or fortress balance sheet. That's my kind of like my last school here My sense is this kind of.
Well you wouldn't rollout a a sizeable deal no no I would not rollout a sizeable deal Okay and then as as you plan to for the Stewart deal.
I think the buyback anticipation was to repurchase at least the amount of shares issued in the Stewart transaction.
Both because the valuation deemed was even attractive and to give it to the dilution.
What changes that appetite.
It seems to me like now you just have even more cash to go after buyback.
And we're going to increase the buyback.
We were going to but we have 280, some odd million shares outstanding and have to seven and so we buyback.
10 million shares it doesn't really move the needle you know.
As a big chunk of money, so we'd like to be consistent.
If we could buy back in the five to 10 million share range per annum that'd be pretty happy with that I think we've been consistent were being steady we're not.
Getting ahead of the market, we're not investing all of our funds that at a higher stock price is going to be is gonna be dollar cost average. So that's really the that's what we're seeing this interim I'm talking about and as Tony mentioned, we bought a about 800000 shares.
The third quarter, you can expect to see that move up as we move forward during the during this year. It into next year, we still have 22 million shares available under our authorization. So plenty of room right and then not just a couple of title specific I think as Randy indicated we can see higher closings and fourth quarter for re Fi is the October .
<unk> closed order per day pace exceeding September .
The.
It's pretty steady on the purchase side, a little softening in the last two weeks on the refinance side.
That's what we're seeing a we're seeing a steady on a week by week basis in October versus September on the purchase I just want to thing to add there Jeff on the close side you have the last week of the month as always our heaviest closing one so it really influence those those numbers and we're just going through that this week sure and then last quick.
And I.
I didn't see recently you announced the the launching of a digital closing hub could you talk little bit about that and how that incrementally benefits. Your business. Both I guess from I think it's I'm more focused on agency side, but also expenses, but it's really it's really early stage with all these these digital closing initiatives other technologies there as we've talked about.
For we've announced our initiative with Black Knight called expedite were fully digital closing capable.
We've we've got partnerships and things, we can do with remote online normalization, but what you really need for this to become.
More of a reality is clients and customers that want to use it and so we have a number of pilots underway in various in various states with with customers, but it's all all very early stage and I think the digital hub is really just a.
Kind of reach out to the agent committee to let them know they can take advantage of some of these technologies that we haven't play.
Okay. Thanks.
Thank you.
Our next question of mine of Bose George from KBW. Please go ahead.
Yeah. Good afternoon, I'm, just going back to capital and dumb meet to beat a dead horse here, but just given the cadence of the buybacks would you suggested.
I'd really suggests that you'll be basically we are holding a fair amount of dry powder for.
For M&A as opposed to returning more capital in the near term.
Yes, I'd say that so that's an area. That's an accurate statement, we really want to kind of looked at a couple of transactions that have.
Come before is that were there, we're thinking about and and if they don't come to fruition, we're going to be very cost conscious and value oriented than we would probably be a relook at our or capital allocation strategy.
I mean, I like our fortress balance sheet I like our little deposition.
I love the cash on the balance sheet. It's just a just gives us a lot of flexibility to do a lot of different thing.
Okay and help thank you and then just actually switching to the margin I can I get the margin on your from decentralized Wi Fi Channel and then did the did the premium is in the in that channel and how do they vary versus just the regular Wi Fi a premium.
First on the margin so in our and our centralized rifai in the third quarter, we had a 33% margin, which is phenomenal margin and that was probably up against about an 18% margin the year before I mean, 33% is up.
Kind of running what's your sense of our national commercial operations. For example, so just shows you what you can do with volume and and you know that taking advantage of automation as I talked about before on a premium side.
It's probably pretty consistent with what.
The average fee per file in our distributed mile ideas around a thousand a a an order Tony Yep. So I think is pretty consistent Bose.
Okay. Thanks, and then actually with the changes in the Texas premiums I guess that went into effect.
This quarter.
Do you see that is being material at all to fee per file going forward I think it's pretty immaterial I you know overall it was about 4.9 or 5% decrease it it's not I I do not see it is impacting fee per file a whole lot. Thank the annual revenue impact was something like $17 million it was pretty AG eligible.
Yeah, we could you get a couple of commercial deals could take care of that.
Okay makes sense great. Thanks, guys.
Thank you.
And just as a reminder, <unk> Joe if you do it has a question. Please press star one on your Touchtone phone.
Have a question one of Chris Gamaitoni from Compass point. Please go ahead.
Thanks for taking my call.
I wanted to follow up on one thing on the margin is clearly amazing right now.
In EAME and in line or Refinances go back down how fast will you'd be able to reduce employees that are.
How fast will reduce employees.
Yep.
Yes, Randy well move very quickly as we have in the past a it'll probably push into the first quarter versus what traditionally I takes place in the fourth quarter, but as we knew that volumes.
It will stay with our metrics and make the.
Appropriate.
In the field, we never we never allow ourselves to get too far too far behind the the open order count so it'll happen in a real time fashion and.
Maybe touch on it a bit at the back to the fourth quarter, but I think it'll probably be more of a first quarter event.
Okay.
And go into year end commentary assuming.
Assuming the approvals go well do youve any idea of the size of the deposit balances on average that can move into my back.
There's some studies on as a I mean, we get we had to be the kind of slow and steady yes.
Yeah, Chris we're still looking at that I'm, a little bit moving target, but it could be potentially couple billion dollars and potentially more over time, but it's probably a little too early to.
To fix a number there.
Okay and.
Just assuming assuming that all went through it as we knew we capitalize the whole capacity the source of capital to capitalize into banquet.
Billion plus the models.
Yeah, I think it what it would have to come from somewhere Ami probably need something like an 8% capital or something you know eight 910% capital started out so that will probably come from Holdco [noise].
Hi, Thanks, so much.
Thank you.
And at this time I'd like to turn the conference back over to management for any sort of closing remarks. Please go ahead. Thank you.
We're very pleased with our third quarter results. The best performance on a quarterly basis for our title business and 16 years, we're well positioned for the remainder of the year to capitalize on the strong third quarter was significant refinance orders opened a continued upward trend and purchase orders opened and the strength in commercial orders open. Additionally, really.
Focused on.
Following our growing capital base to maximize value for shareholders. Thanks for joining us today, and we look forward to updating everyone on our fourth quarter call.
Thank you and ladies and gentlemen that does conclude or conference for today. If you participation for using <unk> executive teleconference. You may now disconnect.
Okay.