Business Context and Reporting Period
Company: Fidelity National Financial, Inc. (FNF)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: FNF is a holding company and the nation's largest title insurance provider through its underwriters (including Fidelity National Title, Chicago Title, and the recently acquired LandAmerica Financial Group underwriters). It also provides specialty insurance (flood, home warranty), claims management services (via Sedgwick CMS), and information services (via Ceridian Corporation).
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 |
Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2009 |
Six Months Ended June 30, 2008 |
|---|---|---|---|---|
| Total Revenue | $1,569.7 million | $1,168.1 million | $2,927.2 million | $2,293.2 million |
| Net Earnings (Continuing Ops) | $92.5 million | $7.9 million | $80.6 million | $37.4 million |
| Net Earnings Attributable to FNF | $91.9 million | $6.9 million | $79.5 million | $34.2 million |
| Diluted EPS (Continuing Ops) | $0.40 | $0.04 | $0.35 | $0.18 |
| Operating Cash Flow (6mo) | $283.2 million (2009) vs. $(62.0) million (2008) | |||
| Total Assets | $8,334.2 million (June 30, 2009) | |||
| Total Liabilities | $5,201.0 million (June 30, 2009) | |||
| Notes Payable | $1,088.1 million (June 30, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 34.4% year-over-year for the quarter and 27.7% for the six-month period. This growth was primarily driven by the acquisition of LandAmerica Financial Group's (LFG) title underwriters in December 2008 and increased refinance activity due to historically low mortgage rates.
- Profitability Surge: Net earnings from continuing operations attributable to FNF common shareholders increased from $6.9 million in Q2 2008 to $91.9 million in Q2 2009. This significant improvement reflects higher title premiums and cost synergies realized from the LFG acquisition.
- Order Volume: Direct title orders opened increased 61.2% to 745,800 in Q2 2009 compared to 462,600 in Q2 2008. Closed orders increased 70.4% to 524,100.
- Investment Portfolio: Total investments increased to $4.42 billion, largely due to the LFG acquisition. The company recorded net realized gains of $13.2 million in Q2 2009, compared to $17.8 million in Q2 2008 (which included a $24.8 million gain on the sale of a Sedgwick stake).
- Debt Reduction: In April 2009, FNF raised $331.4 million via a common stock offering. Proceeds were used to repay $135 million in revolving credit facility borrowings and repurchase $70.8 million in public bonds, reducing total notes payable from $1.35 billion (Dec 2008) to $1.09 billion (June 2009).
Guidance, Outlook, and Risks
- Market Outlook: Management notes that while refinance activity increased in early 2009 due to low rates, open order volumes decreased in the latter part of Q2 as rates rose. However, volumes have recently stabilized at levels higher than the prior year. The company expects the Home Affordable Refinance program to positively impact sales.
- Acquisition Integration: FNF continues to integrate the LFG Underwriters, having eliminated approximately 2,300 personnel and 240 offices. These measures are expected to generate estimated annual cost reductions of $263 million.
- Capital Allocation: The company maintains a quarterly dividend of $0.15 per share. A new three-year stock repurchase program for up to 15 million shares was approved in July 2009 (post-period end).
- Legal and Regulatory Risks:
- Class Actions: Numerous class actions are pending alleging improper premium charges, rate-fixing (via TIRSA), and overcharges for government recording fees. While management believes none will have a material adverse effect on overall financial condition, outcomes are uncertain.
- Regulatory Scrutiny: Various state insurance departments and attorneys general are studying title insurance pricing and practices. California is implementing revised regulations expected to take effect in Q3 2009.
- Employment Litigation: Putative class actions in California allege misclassification of title and escrow officers regarding overtime and meal breaks.
- Investment Risks: The company holds auction rate securities (Level 3 assets) with a fair value of $40.8 million. While currently not considered other-than-temporarily impaired, the lack of an active market presents valuation risks.
Investor Verification Checklist
- Acquisition Synergies: Verify the realization of the projected $263 million in annual cost savings from the LFG acquisition and the impact of ongoing restructuring on future margins.
- Refinance Sensitivity: Monitor the correlation between mortgage interest rates and order volumes, as the current revenue growth is heavily dependent on refinance activity which is rate-sensitive.
- Legal Exposure: Track the status of the multi-state class actions regarding rate-fixing and recording fees, as unfavorable rulings could result in significant retroactive liabilities.
- Investment Portfolio Quality: Review the status of the $40.8 million in auction rate securities and the broader fixed-maturity portfolio for potential other-than-temporary impairment charges given market volatility.
- Regulatory Capital: Confirm that the LFG Underwriters maintain sufficient surplus to meet state regulatory requirements, noting the recent $57.1 million capital infusion required in Q2 2009.