The title and mortgage industries are not having the best of times in 2011, but you wouldn’t know that looking at the third quarter results from Fidelity National Financial. The total revenue for the quarter was down year over year, but its margins increased from 10.6 percent to 11.6 percent and open and closed orders were also up.
Beginning in August with the meaningful decline in mortgage rates, the company started to see a significant increase in refinance open order volumes, as August total open orders per day increased nearly 30 percent over July. Direct orders opened in the third quarter totaled 596,000, up from the 378,000 in the previous year. Closed orders nearly doubled the prior-year period, jumping from 408,000 to 711,900. The refinance to resale mix was about 65:35.
The theme throughout 2011 for all of the national underwriters has been the strong performance of commercial business, and the third quarter saw 11,700 commercial orders closed, compared to 10,300 in 2010, which brought in a fee per file of $8,500.
“We produced another strong quarter in our title insurance business, despite the continued difficult operating environment,” said William Foley II, chairman of Fidelity, during the company’s earnings conference call. “We again saw the strength in our commercial title business partially offset the ongoing weakness in the residential resale markets and we exceeded our targets in shared services cost reductions.”
Agent business
The non-direct agent title premiums did drop 22 percent in Q3 — from $546 million in 2010 to $426 million this year. Total title premiums were down $100 million from the prior-year period. The company cited its aggressive elimination of low remitting and high claim agents the last few years and the increase in commercial business, which weighted more toward direct shops.
Other factors that are playing into their agency numbers this quarter are the contributions of LPS and the state of New York.
“We’re generating less revenue from LPS, which is around a 12 percent margin to us,” said George Scanlon, chief executive officer of Fidelity. “They continue to write on their own internal underwriter, National, and move business away from our underwriters.”
He also mentioned that New York’s move to an 80/20 split was a big factor.
“We saw a modest decline in premiums but increases in profitability,” he said. “Overall our agency split improved by 170 basis points versus Q3 2010 as we continue to focus on improving our splits in less profitable markets.”
The company also noted that it is actively looking to increase rates in many states — it’s not a broad-based plan as it was in 2009, but more targeted. Specifically, the company cited California as a state with rates considered to be too low.
Negatives
There were two contributing factors to the drags on the company’s overall results in this quarter according to Scanlon.
“Our very strong title operating performance was overshadowed by two items,” he said. “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 leverage recapitalization. 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 to almost 14 cents per share.”
The second reason he highlighted was the company’s personal lines business, which suffered a pre-tax loss of $14 million due to claims relating to significant summer storms, most notably Hurricane Irene, compared to a $1 million pre-tax loss in the prior year. The personal lines business was a $9 million, or $0.04 per share, drag on Fidelity’s net earnings for the quarter.
Losses from claims also increased — from $101 million in Q3 2010 to $107 million, but total expenses did decrease to $1.14 billion from $1.26 billion. This exceeded the provision by $65 million.
The company noted that it’s in discussions with several parties in order to lower its profile in homeowner’s insurance. Until a solution can be reached in that way, it is raising prices, pulling out of certain markets and trying to reduce its exposure in that segment.