FNF

Fidelity National Financial, Inc. - Q1 2010 10-Q Summary

Business Context and Reporting Period

This report covers the three-month period ended March 31, 2010. Fidelity National Financial, Inc. (FNF) is a holding company and the nation's largest title insurance provider, operating through segments including Fidelity National Title Group, Specialty Insurance, and Corporate and Other. The company also holds minority interests in information services (Ceridian) and claims management (Sedgwick) affiliates.

Key Financial Metrics

Margins: Personnel costs represented 30.6% of total revenue in Q1 2010, down from 31.3% in Q1 2009. The net margin from agency title premiums increased to 20.5% from 19.8%.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by $133.1 million (9.9%) primarily due to a $190.9 million drop in the Fidelity National Title Group segment. This was driven by a 15.8% decrease in title insurance premiums ($765.2M vs $909.3M) resulting from lower real estate transaction volumes.
• Profitability Turnaround: The company returned to profitability with $16.5 million in net earnings, compared to a $12.4 million loss in Q1 2009. This improvement was aided by a $28.6 million net realized gain on investments (vs. a $5.7 million loss in 2009) and reduced operating expenses.
• Expense Reduction: Total expenses decreased by $177.1 million. Personnel costs dropped $50.5 million, and agent commissions fell $77.1 million, reflecting lower business volumes and the absence of $20.4 million in synergy bonuses paid in Q1 2009.
• Cash Flow: Operating cash flow turned negative ($88.1 million used) compared to positive ($128.3 million provided) in the prior year. The outflow was primarily due to $54.8 million in annual bonuses paid in Q1 2010 for 2009 performance, whereas Q1 2009 included $73.2 million in income tax refunds.

Guidance, Outlook, and Risks

• Subsequent Event (Sedgwick Sale): On April 20, 2010, FNF agreed to sell its minority interest in Sedgwick CMS to private equity funds for approximately $220 million, expecting a pre-tax gain of $95 million. Closing is expected in Q2 2010.
• Market Outlook: Management notes continued weakness in real estate activity and a forecasted 38% decrease in mortgage originations for 2010, driven by reduced refinance activity. However, fee per file in direct operations increased to $1,339 due to a higher mix of purchase transactions.
• Dividends: The Board declared a quarterly dividend of $0.18 per share (up from $0.15), payable June 30, 2010.
• Legal Proceedings: Significant litigation remains, including class actions regarding title insurance rates, recording fees, and attorney agency fees. Notably, an Illinois appellate court reversed a lower court decision and granted class certification in a case regarding attorney agency fees; the company intends to vigorously defend this matter.
• Debt Management: FNF amended its credit agreement in March 2010, reducing the facility size to $951.2 million and extending the maturity of a $925 million tranche to March 2013. The company also paid off a $50 million subordinated note in full.

Investor Verification Checklist

• Real Estate Volume Sensitivity: Verify the correlation between declining mortgage origination forecasts and future revenue guidance.
• Investment Realized Gains: Assess the sustainability of earnings given the $28.6 million realized gain in Q1 2010, which was largely driven by a single $26 million bond sale.
• Legal Exposure: Monitor the status of the Illinois attorney agency fee class action and other pending rate-setting litigation for potential reserve impacts.
• Cash Flow Volatility: Review the timing of bonus payments and tax refunds, which caused significant swings in operating cash flow between periods.
• Dividend Sustainability: Evaluate the ability to maintain the increased dividend ($0.18/share) amidst declining core title insurance revenues.