Ladies and gentlemen, thank you for standing by and welcome to the FNF 2018 Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s call is being recorded.

Now, I’d like to turn the conference over to your host, Dan Murphy. Please go ahead..

Thank you and good morning everyone and thanks for joining us for our second quarter 2018 earnings conference call. Joining me today are our CEO, Randy Quirk; President, Mike Nolan; CFO, Tony Park; and EVP, Brent Bickett. We will begin with a brief strategic overview from Randy.

Mike will review the title business and Tony will finish with a review of the financial highlights. We will then open the call for your questions and finish with some concluding remarks from Randy Quirk. 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 1:30 p.m. Eastern Time today through July 25. The replay number is 800-475-6701 and the access code is 451401. Let me now turn the call over to our CEO, Randy Quirk..

Thank you, again. The second quarter was very strong performance for our title business as we generated adjusted pre-tax title earnings of $338,000 million and a 17.1% adjusted pre-tax title margin, our best quarterly performance on both metrics in 15 years. I will let Mike Nolan to go into more detail on the title business.

During the second quarter, we used $82 million to pay our June common stock cash dividend of $0.30 per share. We also spent approximately $39 million to repurchase $13 million of face value of our convertible notes and our diluted share count declined by approximately 2 million shares this quarter.

The remaining 40 million of those convertible notes come due on August 15. We expect to spend approximately $120 million to settle those maturing notes next month. We ended the second quarter with approximately $350 million available holding company cash.

We continue to work through the regulatory process related to the Stewart Information Services acquisition that we announced on March 19. On May 31, we received the expected second request from the FTC asking for additional information in documentary material related to their HSR regulatory review of the transaction.

We remain engaged in document collection and review and have been working cooperatively with the FTC to fully respond to the second request. The other significant filing or the Form A filings with the states of Texas and New York, both of which are now subject to review by those states.

As we mentioned on our last earnings call, our management and Stewart management have now held more than 40 town hall style meetings for Stewart employees at locations around the country.

At those employee meetings, we continue to reiterate our message to preserve and grow the Stewart legacy as part of our long time successful strategy of operating multiple title brands under the FNF umbrella. We continue to receive positive feedback from those meetings.

Let me now turn the call over to Mike Nolan to discuss the title insurance business..

Thanks Randy. We generated adjusted pre-tax title earnings of $338 million, a $28 million or 9% increase over the second quarter of 2017. Our adjusted pre-tax title margin of 17.1% was a 90 basis point improvement over the prior year and was our highest adjusted pre-tax title margin in the last 15 years.

The residential purchase and commercial markets continued to drive our performance in the second quarter as residential purchase orders opened and closed per day increased 3% and 2% respectively in the quarter. Total commercial revenue grew by 6% versus the second quarter of 2017.

On the refinance side refinance orders opened declined by nearly 19% and closed refinance orders fell by 14%.

We are encouraged to see the single digit growth in orders in both the residential purchase and commercial markets offsetting the double digit decline in orders in the residential refinance market and feel our title business is well positioned to continue to deliver strong financial results through the remainder of 2018.

For the second quarter total orders opened averaged 7,900 per day with April and May at 8,000 and June at 7,700, with the June decline entirely due to refinance orders. As I mentioned purchase orders opened per day increased 3% for the second quarter.

For the first two weeks of July total orders opened were 7,700 per day and purchase orders opened per day grew by 1% over the prior year period, additionally refinance orders opened per day increased 16% versus the prior year. During the second quarter we did add 107 people or 1% to our field operations to handle the seasonal increase in volume.

At June 30, we had 319 fewer employees in our field operations than June 30, 2017. Our direct business generated a 4% increase in direct title premiums versus the second quarter of 2017, while the agency business produced 1% increase in agency title premiums.

Direct revenue benefited from a 6% increase in the fee per file primarily driven by a higher percentage of purchased closed orders and the 6% growth in commercial revenue, offset by a 2% decrease in total closed orders driven primarily by the 14% decline in refinance closings versus the second quarter of 2017.

Total commercial revenue of $276 million was a 6% increase over the second quarter of 2017, driven by 4.5% increase in closed commercial orders and 1% increase in the commercial fee per file. Additionally with 7% increase in open commercial orders bodes well for the commercial business over the next several quarters.

The total fee per file of $2,579 increased by more than 6% over the second quarter of 2017 as 71% of closed orders were purchase related versus 67% in the second quarter of 2017. Let me now turn the call over to Tony Park to review the financial highlights..

Thank you, Mike. We generated nearly $2.1 billion in total revenue in the second quarter with title generating more than $1.9 billion in total revenue and our corporate and other segment contributing $161 million from primarily real estate brokerage and technology revenue.

Adjusted pre-tax title earnings were $338 million, a $28 million or 9% increase over the second quarter of 2017. Adjusted net earnings were $239 million or $0.86 per diluted share. The title segment generated more than $1.9 billion in total revenue for the second quarter, a 3% increase over the second quarter of 2017.

Direct premiums increased by 4% versus the second quarter of 2017. Personnel costs increased by 5%, relatively in line with the 4% increase in direct title premiums.

Other operating expenses increased by just 2% as the major variable expenses in the ServiceLink pass-through businesses declined with the decrease in refinance related business versus the second quarter of 2017. All in the title business generated a 17.1% adjusted pre-tax title margin, a 90 basis point improvement over the second quarter of 2017.

Interest income of $45 million was a $12 million increase over the prior year as we continued to see the positive impact of higher short-term interest rates as we reinvest funds from maturing fixed income securities and also our higher interest on the escrow funds in our 1031 exchange business.

FNF debt outstanding was $734 million for a debt to total capital ratio of just under 13%. Our claims paid of $58 million were $2 million lower than our provision of $60 million for the second quarter. The carried reserve for claims losses is currently $49 million or 3% above the actuary’s central estimate.

The tax rate in the second quarter was artificially low due to a one-time change in tax estimate from the release of a deferred tax liability related to the re-domestication of our title insurance underwriters in 2017. We expect the tax rate to return to approximately 24% in the third quarter.

Finally, our investment portfolio totaled nearly $4.6 billion at June 30.

From a regulated standpoint, we have $1.4 billion in statutory reserves, $1.4 million in regulated cash and investments, $900 million in secured trust deposits, and nearly $90 million in deferred revenue at our home warranty company for a total of approximately $3.8 billion in regulated cash and investments.

From an unregulated perspective, we have $350 million of unregulated cash as of June 30. There is $300 million in cash and investments at ServiceLink and other subsidiaries and $145 million in equity method investments. All of which are restricted primarily by minimum working capital or other regulatory requirements.

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

Thank you. [Operator Instructions] Our first question is going to come from the line of Mark DeVries from Barclays. Please go ahead..

Yes, thanks.

I was hoping somebody could comment on what we should expect for buybacks going forward kind of when those might resume and what kind of pace you might undertake?.

Sure, Mark. This is Tony. Our expectation is during the kind of the pendency of the Stewart transaction, we are going to accumulate our cash, so that we could fund the cash portion of that transaction hopefully with entirely with cash on balance sheet. So, our expectation is we would resume the buyback once we complete the Stewart acquisition.

And then the expectation would be that we would be consistent buyers as we have done in the past and that might be 25,000 or even 50,000 shares per day on a kind of consistent basis as opposed to opportunistically..

Okay.

If the approval gets pushed out maybe towards longer end of your guidance might you start buybacks sooner, could you accumulate enough cash that you would have enough to meet the needs of the deal and then presume buybacks or should we just expect that even if it’s like through the end of 2Q when this closes that buybacks won’t start until then?.

No, I think it’s very possible if we are not in a blackout period and we have accumulated enough cash to fund the cash portion of the transaction that we would absolutely resume the buyback..

Okay, that’s helpful.

And then finally, I think Mike I think you indicated that at least the open orders in commercial, but wealth in the next couple of quarters, if you are interested in just giving some broader comments on the outlook for commercial through the balance of the year and into next?.

Yes, Mark, it’s been a very, very strong commercial market and I said in the past we are seeing a very broad-based market. 2017 was our second best year for revenue.

And as we stand to the first half, we are up 6% on revenue, but I would really point to the total commercial orders being opened up 7% as a real indicator that we have got a very strong market and we should expect it to finish strong in 2018.

It’s a little hard to call for 2019, you can look to forecasters like Urban Land Institute, I think they called for maybe a modest decline in 2019, but they are guessing kind of like everybody else, but right now, the orders look very strong commercial and I think it bodes well for the commercial..

Okay, got it. Thank you..

Thank you. Our next question comes from the line of Bose George from KBW. Please go ahead..

Yes.

Good morning, actually first just on the margin, when we think about the margin going forward, is there any reason why you shouldn’t be able to do a 17% plus margin just in the third quarter and then before the seasonal slowdown in the fourth and then going forward after that can you – how could we think about margin trends into 2019?.

Yes. Bose this is Randy, very, very strong performance for commercial in the second quarter particularly the month of June came on very strong.

The mix of business that moved over to the purchase side running from 70% to 73% purchase transactions in the second quarter and we positioned ourselves well in terms of our staffing, our expense load by making reductions in the fourth quarter of ‘17 and the first quarter of 2018.

As Mike had said we have very good momentum going into Q3 with our open order volume. Commercial looks good, purchases opened steady, we have already built in the refi fall off. So we expect we will have another very, very good quarter in the third quarter in terms of margins.

Whether we hit that number again is very difficult to tell, we need to have the timing of a lot of these events coming together, but we are coming out of some great momentum. We are very positive on it. We believe we are strong on the expense side and so without putting an exact number on it, we look forward to a good third quarter..

Great, that’s helpful.

And then just any thoughts on just the margin going out into ‘19?.

Well, that’s a little tough. We go through our budget process here in a few months and we will be looking into ’19. We are not quite in that process. You had again a lot of it, you are going to – we are going to be thinking about the impact of the interest rates.

If any interest rates actually have not affected us on anyone of these purchase titles of the refinance side going through the first half of this year. So it’s a little tough. We don’t quite look out that far just yet, but it could bode well for us to have another strong year in 2019 and we really expect that we will do that..

Okay, great. And then actually just on the investment income, that number was up reasonably well more so than we saw in first quarter versus fourth.

Anything unusual there and just can you remind us how rising rates in both long and short rates impact the investment income?.

Yes, Bose, this is Tony. We are as you noted getting a pretty nice benefit from rising short-term rates. It’s more like maybe $10 million a quarter year-over-year when initially we thought it was more like $5 million to $7 million.

Part of that is our 1031 exchange business which I mentioned in my comments we have about $3.9 billion currently in that off balance sheet portfolio earning about 170 basis points on that.

We have been fairly consistent in terms of balances in that business, it’s a very strong business for us, so we earned about $50 million in the quarter and I would expect that to probably go up a little bit in Q3 and then maybe a little bit more in Q4.

There was as you probably recall we get a one-time dividend from title plant investments in Texas each second quarter, so it’s in this second quarter, it’s also in the prior year’s second quarter of about $4 million.

So that will come off in Q3 and so interest income probably comes down a couple million maybe in Q3 and then maybe bounces back up in Q4 to kind of what we delivered in the second quarter.

Hopefully that helps?.

Yes, that’s helpful. Thanks..

Thank you. Our next question comes from the line of Mackenzie Aron from Zelman & Associates. Please go ahead..

Thanks. Good morning.

Best question, can you just give us some more color and then update on the real estate tech investment and what’s going through the revenue on the corporate side it seems like it was another strong quarter from the revenue as well as the pretax income?.

I will give you the numbers on the revenue and the pretax of really $161 million that we saw in the corporate segment, a lot of that is seasonal revenue on our brokerage side which we have talked about before, so we had about $133 million in brokerage revenue, about $161 million.

The technology revenue is growing, but it’s not nearly seasonal, so about $26 million on the real estate technology revenue in terms of pre-tax brokerage made about $7 million technology, made about $4 million and then of course the corporate expenses that we have in that segment, including $11 million in it, interest expense kind of offset that.

So, we delivered $17 million pre-tax loss which was actually better than we anticipated. We were thinking somewhere in the low 20s, so a little bit better profitability in that segment this quarter..

This is Randy. I can take the real estate tech side of that. Our Commissions, Inc. company again is doing very, very well. We have got good referral activity coming in at Commissions, Inc. from our sales reps and the FNF brands the revenue growth year-over-year for Commissions, Inc. is 30% on their software.

We have got an additional 30% clients awarded on the platforms. So, that’s coming on very well for us in our Real Geeks Company about 20% to 25% 30% growth in that company and a revenue growth of 63% year-over-year. So they are maturing.

We are trading some additional software solutions, bringing these companies together to build out the technology platform. We have been looking forward. We are involved with integration with our operating systems, so revenue is growing and we are progressing nicely..

Okay, that’s helpful.

And then just looking at the purchase orders in the closing trends, it looks like you guys are growing maybe stronger than what the overall market or at least one of your peers has reported so far in the order side, is there anything to call out from either geographic mix or whether any recent M&A that’s flowing through there?.

Mackenzie, it’s Mike, a little bit of it is the M&A maybe 0.5% or so in terms of the growth, but we really saw some strong performance, particularly in the Midwest markets and our Southeastern markets, Texas and Florida in the quarter, some of the Western markets were stronger in the first quarter and have come off a little bit in the second, but it’s really been more as I said the Midwestern and Southeast..

Okay, that’s great. Thank you..

Thank you..

Thank you. Our next question will come from the line of Jason DeLeeuw from Piper Jaffray. Please go ahead..

Thanks for taking the question.

Just looking to get an update on the good number for the corporate expense run-rate going forward, there was the outperformance this quarter, so just any help you can give us on what we should expect going forward?.

Yes, Jason, this is Tony. I would say that the third quarter, I mean, we do have our strongest quarter probably of the year in brokerage in Q2, but the third quarter should be pretty strong as well. I would anticipate somewhere in the $20 million loss range in the corporate segment.

So, we will continue to see improvement on the real estate tech side, brokerage auto, out to be close to where it is maybe down a little bit and the corporate expenses are pretty stable for the most part. So, Q3 should look more like 20 and then we do see a seasonal falloff in brokerage in Q4.

So, I would expect that, that may get closer to kind of the mid 20 number..

Got it, thanks. And then there is you have talked before about building the end-to-end real estate transaction platform and you already have some of those pieces in place.

Can you just update us on the strategy there, is the investment thesis is it still the same as it playing out and do you think you will need additional tech investments to kind of see the strategy through?.

Well, yes, this is Randy. I think as Bill had mentioned in the last, probably last couple of earnings calls that this is going to take a little time. As I had already mentioned, we are developing out the platform, we have got immigration going between the three companies in our operating system.

So, we are still in that process of own this altogether to where you have a shameless end-to-end technology solution for Elite teams of realtors and agents that would take the process in the same system all the way from lead generation to the sale to the close to post-closing solutions. So that’s the strategy. It’s underway.

We may along the way we look at other opportunities to fill in some additional software solutions into the process.

However, it’s not a short-term play, so take a little bit of time to develop, not only to provide to that solution and endures ourselves to use – to our potential real estate customers, while it gives a nice offering for our title or title operations to come into the relationship with the real estate side of the market at a much higher level.

So there are two different strategies in the play here, one to develop the system, one to put the title in a better position with our real estate agency..

Got it.

But just to be clear, it sounds like you may not have all the pieces, so it sounds like it’s an evolving strategy still, so there – maybe there is other activity and as you kind of build out the platform?.

Yes. I think that’s correct, this is going to continue to evolve..

Got it. Thank you and good work on the good second quarter results..

Thank you..

Thank you. Our next question comes from the line of John Campbell from Stephens, Inc. Please go ahead..

Hi, guys. Good morning. Congrats on the great quarter..

Thanks..

Just back into the buybacks, if the Stewart deal, if I just assume it’s blocked, you guys would obviously be sitting on a pretty big position of accumulated cash, so just curious about the direction you might take just assuming that Stewart is a no-goal, I mean is it some type of accelerated kind of buyback plan or is it a larger kind of independent or regional title company that you guys might look to do?.

Well, as you probably saw in the release yesterday, we did have an expiring authorization, so we – our Board met yesterday and re-up that, so now we have $25 million share authorization and for some reason we weren’t able to close on the Stewart transaction, then kind of it puts a lot of different things on the table.

We have a very low leverage at so 13% debt to cap. We have cash flow generations of still very strong. We had cash on balance sheet, it of course will accumulate between now and when we would expect close Stewart.

So yes, I mean we pay a dividend and we typically look to increase that dividend in the fourth quarter every year and that consumes about $325 million or so in cash annually, but we would still have a lot of dry powder as I just noted to the extent and we would probably revisit other acquisitions that we have done kind of over the last 3 years in terms of smaller agents, but there would still be plenty of cash to be aggressively in the market on the buyback and I would expect us to do just that..

Okay.

And then eliminating the rest of the convert next month that obviously is kind of indirect buyback for you guys, what was the share count reduction that’s cleared?.

So currently, in our diluted share count are just about 1 million shares in the second quarter and year-to-date we have about 2 million shares related to the convert that’s still outstanding. We have about 40 million of principal outstanding which will take about $120 million to retire that during the third quarter.

And once that’s gone then we won’t have that dilution in our numbers anymore..

Okay.

And then last one for me, in the title business the escrow line, it looks like it’s growing faster than title premiums I guess in the last three quarters, what’s driving that, is that sustainable and then any kind of color on the margin that comes out of that escrow line?.

From my recollection our escrow fees are running pretty consistently with title and the title premium number, so 4-ish percent that I saw growing there, so then you get into kind of other areas. And in there as you know we got a lot of different things. We have FNF Canada. We have a number of ServiceLink businesses.

I would say LoanCare is a big driver of that. We have evaluations in that. We have field services in that. We have home warranty in that line item. I am trying to think of what else.

There are a lot of bits and pieces auction in that, but I would say for the most part I think growth is fairly consistent, maybe a little bit stronger than what we see on the title side. But you had to probably see or expect to see more the same with maybe just a little bit more seasonality so Q2 and Q3 might be a little stronger than one and four..

Okay, great. Thanks guys..

Thank you. [Operator Instructions] We have a question from the line of Geoffrey Dunn from Dowling & Partners. Please go ahead..

Thanks. Good morning. Randy, can you – I wanted to just dig into a little bit of the, I think you mentioned that the June drop-off in open orders was refi driven.

So, can you give us an idea of purchase open per day for the 3 months in the quarter as well as refi, just to see how those results trended?.

Sure. The first was open as I think Mike has said was in July – the first 9 days of July, of course we had a holiday in the middle of the first week are running – the local orders are running flat, which ended about 7,700. On the purchase side, we are up 1%. So, that’s holding well.

April and May, we are running – April and May we are consistent and we are up slightly in June. So, June is running at the same level.

Again, it’s very early on in July, but we are optimistic the volume as Mike has said in the Midwest in Texas, they are running over 80% mix of business towards the purchase act and California in the West are still running at that sort of 72% level. So, we think that’s going to continue through July, August into September..

Alright. So, I am not sure I completely follow that.

So purchase was consistent kind of April through early July or dropped off a bit in June?.

It dropped off in June and is holding 1% up in July..

Okay.

And then with respect to refi, was it is a big drop off in June or consistent slide through the quarter?.

Pretty consistent, in fact, refi has been consistent for last 4, 5 months, little over 2,000..

Yes, it’s been flat for the last 3.5 months. It fell off a bit from the first quarter, as rates moved up a little bit as you can call..

Got it. Okay.

And then with respect to the 1031 business, Tony, is there anywhere to see those off balance sheet assets, stat filings or anything?.

No, there really isn’t. As I said, they have been pretty consistent at anywhere from kind of all $3.5 billion to $4.2 billion. It’s been a strong business for us for a long time.

So that isn’t a number that moves around a whole lot and we continue to work with our banks to take advantage of rising rates and so we are – that’s kind of an ongoing process, but no, there really isn’t anywhere to see those, but you could kind of use $3 billion and $3.25 billion or so of balance and assume that 170 basis points currently and we kind of – we stay close to that to the extent we continue to see short-term rates rise, we are going to get benefit on that..

Alright.

And on that basically a short-term deposit rate, are you sharing any of the interest yield with the 1031 customer or do you take the whole thing?.

Yes, the customer gets some I think a small portion of that..

Of the 170 or 170 is your net?.

170 is our number..

Got it. Okay, thanks..

Thank you. At this time, I have no further questions in queue..

The second quarter was our strongest financial performance in 15 years for our title business. We also continue working through the regulatory process with Stewart Title acquisition and believe this transaction will create meaningful long-term value for our shareholders. Thank you for joining us today..

Thank you. That does conclude our conference for today. Thanks for participation for using AT&T executive teleconference. You may now disconnect..