Fidelity National Financial's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Fidelity National Financial (FNF)

Q3 2011 Earnings Call

October 20, 2011 10:00 am ET

Executives

William P. Foley - Executive Chairman, Chairman of Executive Committee and Chairman of FNF Holding

Daniel Kennedy Murphy - Senior Vice President of Finance and Investor Relations of Fidelity National Financial

Anthony J. Park - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Raymond R. Quirk - President

George Scanlon - Chief Executive Officer and Chief Operating Officer

Analysts

Nathaniel Otis - Keefe, Bruyette, & Woods, Inc., Research Division

Brett Huff - Stephens Inc., Research Division

Mark C. DeVries - Barclays Capital, Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the FNF 2011 Third Quarter Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I'll now turn the conference over to your host, Mr. Dan Murphy. Please go ahead, sir.

Daniel Kennedy Murphy

Thanks. Good morning, everyone, and thanks for joining us for our third quarter 2011 earnings conference call. Joining me today are Bill Foley, our Chairman; George Scanlon, CEO; Randy Quirk, our President; and Tony Park, CFO. We will begin with a brief strategic overview from Bill Foley. George Scanlon will provide an update on the Title business and our other operating companies, and Tony Park will finish with a review of the financial highlights. We'll then open the call for 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 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 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 fnf.com. It will also be available through phone replay beginning at noon, Eastern Time today through next Thursday, October 27. The replay number is (800) 475-6701 and the access code is 219468.

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

William P. Foley

Thanks, Dan. We produced another strong quarter in our title insurance business despite continued difficult operating environment. Our industry-leading pretax margin was 11.6%, including $7.2 million in realized investment losses and 12.2% before the impact of those realized losses. We again saw the strength in our commercial title business, partially offset the sustained weakness in the residential resale markets, and we exceeded our targets in shared services cost reductions. Additionally, with the meaningful decline in mortgage rates beginning in August, we began to see a significant increase in our refinance open order volumes as August's total open orders per day increased nearly 30% over July, and September total open orders per day remained nearly equal with those elevated August levels. We expect to see the majority of the revenue and earnings benefit from these increased open order volumes in our fourth quarter operating results.

In July, we announced the sale of our flood business for $210 million, which will generate an estimated $154 million pretax gain. That flood business has been the nation's largest flood insurance provider and a very profitable and consistent business for FNF for nearly 10 years. We feel this transaction is a great opportunity to realize the value we have created and redeploy the capital into other uses that can continue to create increased value for our shareholders. We are awaiting final regulatory approval and expect to close that sale in the next several weeks.

In August, we entered into a $300 million, 7-year, 4.25% convertible senior note. This issuance allowed us to prepay our maturing senior notes and continued our strategy of enhancing our longer-term liquidity profile conservatively managed in our balance sheet and liquidity position during uncertain times and maximizing holding company flexibility. Concurrent with the offering, we used $75 million of the proceeds to repurchase approximately 4.6 million shares of our common stock. We currently have 4.6 million shares remaining on our repurchase authorization.

Finally, in September, we filed a 13D disclosing that we had purchased a total of 2.1 million shares or a 9.5% ownership position in O'Charley's Inc., the operator of more than 220 full-service restaurants under O'Charley's Ninety Nine and Stoney River concepts. Our total investment is approximately $13.8 million or $6.65 per share.

I'll now turn the call over to our CEO, George Scanlon.

George Scanlon

Thank you, Bill, and good morning, everyone. We are pleased to report another strong performance from our title insurance business, although a bit of analysis is necessary to better understand the company's performance this quarter. For the third quarter, we reported earnings per share of $0.33 compared with $0.36 last year, and our very strong title operating performance was overshadowed by 2 items. First, we realized about $40 million in gains in last year's quarter. It was an exceptionally strong quarter for gains as we disposed of half of our position in common shares of FIS when they did their leveraged recapitalization. Now we realized a gain of $23 million. This year, we realized a loss of $6 million, primarily associated with mark-to-market adjustments for certain investment securities. As a result, there was a net change year-over-year of $46 million in realized gains and losses, which roughly translates into almost $0.14 per share. As you have seen in the past, there can be volatility in the recognition of portfolio gains and losses, but it is important to separate this line from the operating margins generated by our title business.

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