First American Financial Corporation
Q1 2015 Earnings Call Transcript

Published: 16 Sep 2016

[Unidentified Company Representative:]

[Abrupt Start] we have First American Financial here. I happy to have Mark Seaton, CFO and Craig Barberio, Head of IR with us here and you know to cap it off for the day, Mark, could you take on.

[Mark Seaton:]

Thank you. And thanks for having us at the Barclays Conference. We had a really good turn out of well over one on one meeting today. First of all, I'll alert you to our Safe-Harbor statement as well as our use of non-GAAP financial measures. We thought we'd today is do a little something different. Typically we kind of – we give like the First American 101, or Title Insurance 101 and we thought we go a little bit deeper into some of the areas that our investors are really concerned about asking the questions about. So its not to going to be kind of a broad bust overview about who we are, there is a lot of materials already out there about that. But we want to go in deep in a couple of topics, namely strategy capital management and some of the order trends that we're seeing right now. So that's kind of how we design this presentation. We did have an overview slide here, we're company that’s being around a long time. We started in 1889 in Orange County, and we've been operating through many, many cycles. We've got 93% of our businesses in our Title Insurance segment, 7% of our business is in our Specialty Insurance segment. So our Title business, as you can see here on the left, we've got our direct business, our agency business and our commercial business, that’s like our core Title business. That's what you probably think of when you think of First American. We've got 800 offices, we just closed transaction. We also have an international business. We're really in the British Commonwealth countries, UK, Europe and Australia. We have a mortgage and data solutions, we call our business where we sell to lenders on a centralized basis. In our business if it's a purchase transaction somebody buying a house, typically the real estate agent will direct our Title, so one that’s one our marketing efforts go due to real estate agent. And with refinance the lenders typically to the side of the tunnel [indiscernible] we have a business it’s exclusively focused on lenders and we have a bank and that encompasses with our Title segment. In terms of our specialty insurance segment, we have a property-casualty visit, where we really write homeowners insurance in the Western states and then we have a home warranty business, we're the second largest provider of home warranty contract behind the company called American outfield. You can see our revenue on the left, 78% of our revenue comes from the US title and our core title insurance business. So that a little bit of an overview of the company. Now in terms of our - the strategic evolution of our business, we did a spinoff in 2000, we spun from a parent company and what we did in the spinoff in 2010 for the next couple of years we were really just focusing on increasing the efficiency of our business. So we had this launch of standardized, simplify, centralized, we want to standardized the processes, we want to simplify our processes, we want to centralize our back-office and that was really code for a cutting cost, we h ad become more efficient and I think we were very successful that between 2010 and 2013. We also increased one of our offshore leverage, about 70% of our orders that we get in our process offshore and we just to simplified our operating structure. We were really the result of a company that was the result of dozens of acquisitions over couple decades and we really during that period did 50 years of merger integration and we've seem the benefit from that. The last couple years between 2013 and 2016 we've been very focused on again becoming more efficient, strengthening our balance sheet, growing market share in very profitable way. And so we've grown markets about 100 basis points for last three years and in our business its very delicate balance of the year, we want to do it in a compliant way, we want to do it in a way that doesn’t compromise our underwriting standards. And so we have gained a little bit to share. And we've also grown our data capabilities, we have the largest property records database of anybody in the industry, property record database is a database that basically has the bedrooms and bathrooms and square footage, all the history of a property. We have more information than anybody and we're using that information to strengthen our core Title business now. And really going forward 2016 to 2020, we want to continue to grow profitably, we want to innovate, we want to use this data to make our visit more efficient, to change the way that we underwrite title, to make it more automated. And throughout this whole process you can see on the bottom arrow there, we focus on efficiency, improving our margin. We focused on our people, we have a people business of the day, we have 18,000 employees and if we have our – if we make our people happy, don’t make our customer happy, we'll make our customers, don’t make the shareholders happy, I think we've done a good job there. We're proud of the fact that we're – we were named one of Fortunes 100 Best places last year. And we're also - we feel like we've been prudently managing our capital, again to that, more in the next few slides. So this is our strategy of how we think about things today. Our vision is we want to be the premier title insurance and settlement services company, that’s our vision. We're not saying we want to be number one in every single market, we want to be the best in every single market. And so we define that as, we want to be the best place to work for our employees, be one of the best service to our customers, one of the best return for our shareholders. If we do those three things we feel like we're the premier company. Those three areas that we've decided to compete in, the first pillar is really our core title business, so want to profitably grow our core title and core settlem4ent service business, commercial agency direct, we want to profitably grow those areas and its very difficult to grow market share in our business, if you look at the markets share trends for the top four underwriters over last five or six years, it really hasn't changed that much, good news and bad news, I mean, bad news is since it's tough to gain share in our business, but the good news, since it is it's tough for other people from the outside to come in and take our business away. And so we want to profitably grow that, it’s a long-term plan. The middle pillar there is really it speaks to our data capabilities, we want to strengthen our whole business through our data assets, through our title plans, to the property, to record database and we are using our data to strengthen the other aspects of our business, as well as selling it to third party. And then finally our third pillar is we really want to manage and actively invest in complementary businesses. We are in some business that aren’t core title, but they just make sense for First American to be in and so we want to grow those and manage those as effectively as we can. And I just – as I read down the stack here, we want to deploy our capital to maximize long-term shareholder return, that’s the financial goal at the end of day, it long-term shareholder return, its not growing EPS which would be nice, its not growing market share that’s nice, its not growing margin which would be nice, all those could be nice, as long they don’t sacrifice our long-term shareholder return, that’s the goal at the end of the day. We want to innovate, one way that we can continue to improve margins is through innovation. We want to be known as the company with the best compliance and risk management. If we can manage your risk through the cycle better than anybody else, then we'll have superior shareholder return. We're very focused on risk management and then obviously people, I think I talked to that, so we highlight that go there, because people without this company – without people we don’t have a company. Let me talk about the markets for a little bit, the refinance market it’s an impossible market for us to forecast with any degree of accuracy. The upper left graph here is our refinance orders per day, the blue line is our refinance orders per day, every month last year and the green line what we've seen so for this year. So you can see that last year it was a relatively steady year for refis, especially the second half of last year and we were hoping between 15 and 1700 today the whole second half of last year which was remarkably steady for refi business. Now refi there is a very, very high correlation between our refi orders and the tenure treasury rate, literally tenure treasury goes up and our refi orders go down the next day and vice versa. The green line, again in the upper left you can see we got a little bit of a spike in the beginning of the year and at peak in July, its some up a little bit in August, but were still opening refinance orders at an elevated level, certainly much more elevated now than what we were expecting at the beginning of the year. Now a lot of those orders have opened in the second quarter and even into the third quarter, but they haven't - now they starting to close though. So in the second quarter we got no benefit from refi activity, that benefit we'll realizing in Q3 and now in the Q4 the orders that we're opening now will likely close at some point in November. So we feel like we have a very good pipeline going into the second quarter. We're not adding any material resources, we're paying over time, because we have orders, were our hiring temps on a selective basis, but we're not convinced that this is going to stay around for long period of time and therefore we're not hiring a lot of full-time employees to service the orders, we're just doing it with the people that we have right now. But at the end of day the refis are very volatile and our long-term outlook is more pessimistic for refis over a longer period of time, we'll take volunteer. So the purchase market, we get paid about two and half times more for purchase transactions than we do a refinance transaction. We love refis, take them all day long, but the purchase market matters a lot more. This is really the reason why we have our office footprint in so many counties that we do is really to service the purchase market. So on the upper left graph here at the same data you can see our open orders, the blue line is last year, and the green line is so for this year and it really its mirror image of each other, we were little bit disappointed with the number of refis, we thought it would be up a few percentage point, its basically been flat. The reason why is that, there's just not a lot of inventory out there, there is lot of people who want to buy homes, there is not a lot of inventory out there, even on a broad-based basis when you look over the US. So that is also having an effect of rising home prices, heading to the year with our home prices we'd be up about 4%, they turnout to 6% and that has really translated into a higher fee profile. So at the beginning of the year we thought our orders will be up about 2%, we think our average fees were going to be up about 2% and that translated into about 4% revenue growth. Were getting 4% to 5% revenue growth, but its all coming from higher fees profile and not really from order growth. So overall we feel very optimistic about the long-term prospects of the purchase market. We feel like we're still in the kind of early innings of the long term recovery and this plays well for us, for First American, and this is really our core business. We also get a lot of questions about the commercial market here, the commercial market continues to be very strong. This is where were just facilitating the closing of either purchase or refi for the commercial transaction, many of which are here in this island in Manhattan. In 2009 we lost 1A commercial, there was not a lot of buyers and sellers trading commercial properties and ever since then we've been an incredible run on the commercial market, 2015 was an all-time record for us in terms of revenue, we had $696 million of commercial revenues you can see. So far this year the revenue growth has stalled, our revenue growth is down about 3% from last year and last year again was an all-time record for us in our 120 year history. The reason why the revenue was up a few points, is really because of fewer largest transaction. When you look at transactions where we get premium over $1 million, now if we're going to get - is typically anywhere from 5 to 20 transactions a year, where we get premium for a deal for one transactions its over $1 million, that’s a big deal for us and we're just getting fewer of those transactions. Last year I think we had 18 transactions over $1 million, this year we've only had a handful. If you strip those deals out, our bread-and-butter business is growing from last year, we're seeing fewer of these mega, multi site, multi-state transaction in the commercial side. That being said, it’s still a strong year for commercial, I mean, down 3%, it kind of what we thought it’s was going to be during this year just off a little bit from last year. So what's really driving the trend in commercial, we're seeing a lot of foreign buyers coming in and buying US assets and it's been like this for the last couple of years, foreign buyers that want to own US dollars, they want to own inflation protect that, they want to own comfort using assets. So as long as there is still a strong demand for foreign buyers out there, we feel like the commercial market will still remain above normalized levels. So our outlook over the next couple years, as we think its going to still continues to be strong and might even be down 5% or perhaps even 10% but that is still going to be a good commercial foot market for us because its performing at such a high level right now. And I would say, we're one of two companies that really dominate the commercial market space, you've got to have a big balance, you've got to have good ratings, you've got to have a network and a infrastructure to be able to facilitate these large multi state, multi site transactions and be able to coordinate it. The barriers to entry in commercial, I would argue much higher than the resident residential business and the residential business I would argue as higher very expensive as well. So we're optimistic on the commercial market, we just don't feel like we'll see the growth there over the next over the next few years. The next slide here is our title insurance margins, were very focused on our title margins, we have been for several years now, you can see our blue line here is the title segment GAAP margins and the gray line - the gray bars is the market for mortgage originations which correspond with the y-axis less. Our goal is to have 10% to 12% title margins, everybody in our company is focused on 10% to 12% title margins. We'd only really hit that twice in the last 15 years, we hit 10% margins in 2003. In 2003 were in a $3.7 trillion origination market, that’s the highest we've ever had. We also did in 2012, in 2012 we were in basically a two join our market, but it was coming off of 2011 and our purchase revenue grew 30% we really couldn’t spend that, excuse me. So historically First American 10% margins would like to be, I mean, if everything went well we could get 10% margin, so that was almost a ceiling. Now we feel like it before, now we're going to be disappointed unless we get this 10% margin. You can see in 2015 there we had 10.2% margins, that’s the third time we had it in the last 15 years and we weren't in a 3.7 in our market, we were more and one half in our market, markets after size and yet we still have record margins. So far this year were at 11% margin. And so we feel like we're going to continue to do everything we can to get higher up in that 10% 124% range and now we feel like 10% is really the floor and not the ceiling. And why is that, it’s because of all the structural changes that we've made over the last five and six years. We just have 30 accounting centers, now we have one accounting center in the US, we use to have 30 data centers, now we have two in the US and I can go on and on, on about all the structural changes that we've made, but they are real and they're not - these costs are not going to come back when the market comes back or market continues to improve. So gives us a lot of confidence that as the market continues to heal we'll have a record margins, record earnings and I think our cash flow is going to rise faster than earnings because are paid claims are falling, because of these legacy policy here. So that's something that really excited about. The only one thing we think, part about is what are we going to do with this cash flow, this company is generated over the next five years, which leaves us to capital management. So again, as I mentioned before the objective is to create long-term shareholder value, that’s where we're focused on. And how do we do that, our priorities are first of all we want to make value creating investments in our core business, we spent $120 million in capital expenditures and that’s about as much as we can spend responsibly and those are investments in our technology, in our title plans, in our databases, customer facing technology, equipment things like that. And we want to just continue to build a motor owner business, we've got a very strong market share, it’s a good industry and we want to continue to invest in barriers around our industry, that’s the number one priority. I don't see it going up a lot from that, the $120 million we spent, it’s a good amount and I think it will be consistent for the next couple years at that level. The second priority is to acquire businesses that fit within our core strategy. Historically going back decades we've been a very acquisitive company. Over the last five years we haven’t been as acquisitive, I think there's been four transactions that have been over $5 million in last five years. The businesses that were interested in are title businesses that are obviously in our core basement title, that’s what we do, third to sort of deepen our geographic footprint, so there's title company. The second bucket would be just other products that aren’t title, certainly our core title business, but this fit within the settlement process four sizes is an appraisal company that’s required. There is a lot of lenders whey they buy title, they want to buy appraisal too. Its just makes sense for us to be in that business. So other complementary products, we just announced the transaction called RedVision last week. That’s a very complimentary business to what we're doing. It will provide title information to agents. So we are interested in acquiring companies, we buy them, we integrate them, we don’t leave them sitting out like we use to, we integrate them and we're very disciplined in terms of purchase prices that we're paying, but that is something I think we'll do more over the next five years, we have over the last five years. And then we wan to return excess capital to shareholders through dividends and buybacks. So we just razor our dividend 31%, I'll talk more about that in a minute, but we felt like that was the right move to give capital back to shareholders and I think there will be more of those in the future. We want maintain our A minus financial strength ratings there. The financial strength ratings are really important for commercial business which is performing well, for our international business which is also was performing well. And we want to maintain a minimum through the cycle. So we never really want to drop below that. With the rating agencies two of them A, two of them A minus, so we're really right where we want to be, so that's important to maintain good ratings. We want to manage our capital structure prudently. Our adjusted cap as of the end of second quarter was 16%, our goal is 18% to 20%. That’s where we want to take our adjusted cap. I think by the end of the third quarter we'll probably be in that range. We would be very comfortable taking our adjusted cap higher than that with 25% or so, or even higher than that, if we did, we would be debt pay down mode, we want to be at 18% to 20%. We feel like that’s appropriate given our ratings, given the fact that we just raised our dividend to 18% to 20% is a good target for us and we also have an ample financial flexibility and holding company liquidity. So I'll go a little bit deeper on the dividends, again, a couple weeks ago we announced a 31% increase in our dividends to $1.36 per share and you can see on the graph on the upper left, we've raised the dividend every single year since our spinoff in 2010. Our goal is to raise the dividend every year, okay, we're not to sit here and say we're going to raise the dividend every year, no matter what – no matter what the market conditions, that's not - that's not how we think about that. Really what we look at was, we look at on a five year basis how much cash can we get to the holding company and how much of that cash do we need for the activities I mentioned earlier, investing in our business and acquisitions and its hard to judge acquisition but we have a estimate for how much we're going to need to build our business. And then what's left a big portion that went to increase the dividend. So that's kind of how we size up the dividend, we're not targeting a certain payout ratio or certain yield on our stock or raising the dividend every single year. Now when you look at the bottom left graph, it shows our dividend payout ratio, and when you look at the consensus estimate for '16 and '17 we're going to pay, with this new dividend increase we're going to pay about 40% of earnings this year and 45% next, so that’s just fall out, that’s just kind of a calculation that falls out, that’s not something we target. But I do think there has been shift in the company's strategy, just in the terms, in the sense that we do feel like we should pay more of our earnings and dividends going forward in the past, that is subtle shift that is happening and you've seen that over the last year too. Now when we raised the dividend we feel like its sustainable and we feel like we can sustain this dividend even a downside scenario. And I know there is lot of companies who are raising dividends and that’s a hot topic these days with interest rate so low, but that’s not the reason why we raised it, its just for some temporary stat, we raised it, because we do feel like this is the passage of our shareholders, we looked at kind of in a holding company basis like every year. So we're really happy about that. We wouldn't have been able to raise the dividend so significantly and we doubled it two years ago and no reason it was 30%, we would've done that if it wasn't for the activity to have it on the slide, we call the legal entity realignment. And on the left side it shows our legal entity structure in 2012 and in 2012 we are holding company and we really had to 2.5 subsidiaries of the holding company, we had our insurance - our primary insurance company or title company we call Sachiko, that’s our title underwriter and that was the primary source of cash flows for the holding company. We also had a property and casualty insurance company and we had 50% interest of our data businesses that were owned directly by the holding company. In 2012 we got $12 million of cash dividends from our non- FATICO entity, so that’s our P&C company and 50% of our data company, $12 million of dividend, in addition to what we've got from 50%. And in 2015 what we've done in the last three years is we've taken all of our operating subs and paid cash dividend and we feel them out from underneath, our title underwriter to directly under the holding company. Today you can see on the right side, this is the holding company or structure today, all of those other subs have basically come out of the - of our underwriter FATICO. So now we have a lot more diversified streams of cash flows to the holding company, you can see the bottom right there, maybe you can't but we got a $83 million of cash dividends from our non- FATICO subs last year of $12 million, right. And so that has really given us a lot of financial flexibility and its really improved the cash flow availability to the holding before a lot of our cash flows were trapped, now they are freed and it gives a lot more flexibility, its given us the confidence to raise the dividend as much as we have in really the last 2 to 3 years. The other thing that it's really done, its improve the quality of the capital at the underwriter, which is this slide, I know there is a lot here, but we posted in our website to go through it at your leisure. But on the upper left you can see our surplus has really increased almost every year since 2011. In 2011 we had $850 million of surplus, today we have $1.2 billion surplus, so our surplus has increased, but we've given a lot of non-cash dividends from our insurance company to our holding company and that’s that blue there. So over the last five years our main - our title underwriter has paid 145 million of cash to the holding company and 560 - 582 million of non-cash dividend to the holding company and I think the point here on the slide is going forward the next five years we don’t need to do any of this reshuffling with this, everything else being equal, that 582 million more cash dividend that we can get that we haven't gotten last five years and that cash available to holding company for M&A for share buybacks for dividends for more active capital management as oppose to [indiscernible] So this was a significant event for the company that we wanted to just give investors more detail on. You can see too in the bottom left graph, if you look in the bottom left there, the blue bars is our surplus which is gone up 850 to $1.2 billion over the last five years, and the orange line is our affiliates as a percentage of our surplus. This is accrued measure of the quality of capital. And back in 2011 we had 850 million of surplus, but 105% of it was tied up illiquid assets, illiquid subsidiary, operating subsidiaries that we could sell easily, they weren’t liquid bonds, they were investments in our home warranty and our data company and our bank and the other thing. Today not only that we have lot more capital were 1.2 billion on the far right there, but just 14% of our capital set of illiquid subsidiary and most of that into our international subsidiary. So not only has the amount capital improved, but the quality has improved dramatically and on the bottom right you can also see this is a different graph that shows the bars represent our reserves that have been pretty steady at $1 billion for last few year's, but the orange line on the bottom right shows our investment, now back in 2011 we had 1 billion reserves and we only had about 58% of that in liquid investments, liquid stocks and bonds. Today we still have about 1 billion of reserves, but we have 160% of that in marketable securities, so again, this kind speak to the quality of the capital that are underwriter. The last point I'll make on the slide, is when you look at all the cash flow that First American has generated over last five years on a consolidated basis 50% of our cash flow has gone to the investment portfolio. The reason why we did this was to plug a hole when we moved only operating subsidiaries. Now going forward, there is a couple things I'm pretty confident ,one is we're going to generate more cash flow over the next five years, in the last five years and the second is we're not going to need to put 50% of our cash flow into investment portfolio, that’s going to be used for other more value-added purposes. So we want to give a deep dive on this for our investment clearly. So our investment considerations, we're a pure play and title in the mortgage market, we're in the title and mortgage bucket. We are – we're not diversified in the sense that you know we don't own social media companies and restaurants and other stuff, we have all of our eggs in the title and mortgage market. But we are diversified in the sense that within title and we've got a strong refi business, purchase business, new home, international default. So within our market were very, very strong in all the different markets within the title and mortgage. Some are going to be up, like commercial now, some are going to be down like defaults, but through the cycle we played very well in all, we're very diversified within title. We've got a very good competitive position, the industry is strong in terms of the forces around industry and we feel like we're positioned really well within industry. We've been gained about 100 basis points of market share in the last two or three years and we want to continue to gain share and always profitable, meeting its compliance and we're not taken a new underwriting risk, we think we can continue to slowly gain share over the long period of time. We really invest a lot in our data capabilities and were using that data to strengthen our core title business and that’s a competitive advantage for us. We have many structural cost reductions that have began the earnings, we talked about that, collapsing our accounting centers, collapsing our datacenters and many other things. But we expect our earnings and margins to grow higher than they've been, really in a history of that three years. We've got a very strong balance sheet, good financial flexibility, we finish this legal realignment product that I talked a lot about today and we've got a commitment to return capital to shareholders, so we raised the dividend 31% more than 3.2% dividend yield, last time we checked and we got a 45% payout ratio. In the last slide here, this shows our shareholder return over the last one, three to five year period. We've significantly outperformed the S&P, and frankly our whole industry has know why this why this happened,. Well, we've had one, is we had a lot of tailwind, we've had tailwinds when you look at purchasing commercial refi, really over this period, we had a lot of tailwinds. But we would argue that we really managed the company very well, given the tailwind, given the market that we have and we've also - we think we have prudent investment decision during this time too. So we wouldn’t expect to outperform the S&P by this much over longer period of time but we've been really good one and we feel very good about where we are right now. So with that being said, I'd be happy to entertain any questions. Are we going to do this?

[Unidentified Analyst:]

Yes. So we're going to start with those audience questions, if you want to grab a nearby clicker and join us here. First question, what you view the biggest catalyst for FAF over the next year? One, continue growth on purchase market, two, better than expected refis, three, better than expected commercial for M&A or five other? So number one answer is could you grow the purchase, followed by a M&A, that’s presently. Second question? I think its risk to shares you know, [indiscernible] residential mortgage origination, two, we're going to expect commercial revenue, three multiple compression, four recession or recessionary fears or five other? What does the survey say, number one, weakness in [indiscernible] and some mortgage origination for in a way. Next question? What's the best use of excess cash flow or dry powder? One increase the dividend further, two, buy back stock, three delever the balance sheet, four, M&A or five other? So number one answer is increase the dividend that followed pretty shortly by M&A activity. Last question, last year where you expect your position FAF to do? One, decrease, two, increase or three remain the same. We're in the same number one followed by a little bit of a decrease with increased brands over here. So wit that we're going to start with the Q&A, I'll kick it off. So please feel free to join in, like I said, we're not going to have a breakout session, we're just going to resolve all questions here. So I guess, you know, Mark, one of the things you kind of mentioned here is, having recently increased the dividend and saying that, there's potential further increases down the road, what payout ratio would you kind of view as the ceiling before you consider a potential cut in the cycle of a really [indiscernible]?

[Mark Seaton:]

I mean, its hard to say what the ceiling would be, we can pay 70% to 80% payout ratio for couple years, even how is the math, now that’s sustainable though, 70% or 80% that’s not sustainable. But you know, if you had a downdraft in our earnings for some unforeseen event, we could do it for two years and when we raised dividend, and then we stressed sensitive, we were pretty, we would have to lower it, but we wouldn't feel comfortable over longer periods time. I think that maybe again, we don't target a payout ratio and I think our dividend can increase in the future, but it would increase, I don’t see an increase like a big bang like we just did, I think it would just increase kind of normally and earnings grew. So I think as it kind of falls out, if you want to call 45% a good target that’s probably an easy way to think about it, all though that’s not exactly how we derive within that. So 45% might be a ceiling.

[Unidentified Analyst:]

And just to clarify, when you guys looked that pursuing this most recent increase and payout ratio or the dividend payout rate is sustainable to every kind of foreseeable outcomes?

[Mark Seaton:]

Yes. I mean, we've looked at real downside scenarios and you can obviously come up with like a horrible, horrible scenario, where we have the confidence, but we don’t see that for foreseeable future and we stress that it was a pretty down scenario where we would not be happy for a long period of time and we just don’t maintain it, so we have certainly expected to continue to pay that rate.

[Unidentified Analyst:]

Great. Questions in the audience. I think we have one over here.

[Unidentified Analyst:]

Yes, just talking about the dividend and maybe you can price some history here for me, you guys cut during the crisis correct? In '08 or '09?

[Mark Seaton:]

Technically no, I'll give you the long answer for that.

[Unidentified Analyst:]

Yes, if you could just walk us through, like what the portfolio of the business then and now, just put in the context of where you are going with the dividend increases now sustainability?

[Mark Seaton:]

Well, so we did a spinoff in 2010, prior to 2010, we have paid a dividend for decades and to my recollection, I don't think we ever cut the dividend. Now I've been here for 10 years and I am kind of a junkie in First American and I don't remember us ever cutting the dividend. Now in 2010 when we did the spinoff, we were kind of a new company, now we set the dividend at a lower rate right, then we had prior to this. So in 2010 there were still a lot of uncertainties in the market, our purchase market was falling, our claims were rising, there was a lot of uncertainty. And so the very first board meeting when the board came and said okay what are we going to set the dividend and we said its very low rate, right. So I think technically we did for economic purposes, maybe we did. Now the other company, which CoreLogic they don’t pay a dividend. So I guess the combined shareholders were getting less of the dividend after the spinoff. Ever since then we've been really increasing everything. Today we spend about $150 million of cash to our shareholders, our cash dividend $150 million a year, before the spinoff I think that number was about $100 million. So even today were spending about roughly about 50% more the dividend than we were post that, that gives us context.

[Unidentified Analyst:]

And then did your recent cleanup of liquidity in your investment portfolio at the title company and kind of moving around some of those other companies under hold co, does that you know, increase the cash flow philosophically hold co, or does that give you a more single ability to meet your or you know, continue raise dividend forward?

[Mark Seaton:]

I think, I don't know if its gives us an ability to continue raise it, but I'll tell you, we would not be at $1.36 for sure today if it wasn’t in fact [indiscernible] Historically we've got about a roughly $100 million a year of dividends from our insurance company, the holding company as a primary source of cash flow. Now our cash flow – our dividends – our common share was about 150 million. So that would be sustainable unless we have this lease back.

[Unidentified Analyst:]

And you mentioned being active in the M&A market, obviously its been hot topic lately you know, one, can you – and you kind of centered your comments on the core title operation, whether its an underwriter or an agent, can you just kind of give us an idea of what you're looking for in a target acquisition?

[Mark Seaton:]

Well, specifically on my title companies, were focused on our top five states, so California, New York, Texas so those are the top four, the fifth one kind of off lease, but I would say the top four, California, Texas, Florida, New York. There is three agencies that we've acquired over the last five years, all three of them were of any size, all three were in the four markets. So we wanted to be in a good market. There needs to be a good cultural fit between the two companies, we have to be able to extract value, it has to be a good deal for our shareholders, we have to do it, were not interested in acquiring our way to get to number one in market share, that has no interest for us. We're interested in being opportunistic on the M&A side and making sure that our shareholders kind of reap the rewards of that, so cultural fit matters. We also look at the mix of business there in, I mean, if its a title company that has a 100% refi business, well we're just going to feel the pay, not that we wouldn’t do it, but the multiple that we would pay as much in that obviously it was 100% purchase, where we feel like it has grown. And so that’s one of the factor we look at.

[Unidentified Analyst:]

And when you contemplate, you know, acquisition in the space, obviously you know there's -+ the top line there could be some regulatory disposals, obviously there is a lot of excess energy, but I think the third component to that, and I think you are kind of maybe confused on or underestimating is the rate on count that goes on once any kind of company gets acquired? Can you just talk about that little bit and how they are going inform anything that you're bidding for the agents or otherwise?

[Mark Seaton:]

Yes, well for all our deals, whether it’s an underwriter or an agent, we always assume some dis-synergy with revenues and when we see that with smaller deals, we've seen that in some of the other big deals have gone on in our industry. It’s very hard to keep all the business that you get. And so there is always an assumption of the revenue dis-synergy that put into the model and were never able to keep all revenue. When we're buying a small agency there is always people that you don't want work for the big company, they want to work for a local agency. And so I think typically we – most of business we keep, we never keep all it and we factor that in the prices overall return.

[Unidentified Analyst:]

And are you going to see a return [indiscernible]?

[Mark Seaton:]

We start with attendant focus on returns, whenever were buying something we need a minimum 10% to 12% return and then if were very confident in the management team and were very confident about our ability to extract value then maybe 10% to 12% return is adequate, if there is not a lot of risk in that. If there is key main risk, if there is maker risk probably with refi where we can't really predict it very well, if there is register risk or litigation risk, whatever it might be then the return hurdle just goes up from there. So it could be up to 20% for some fields, but if its international underwriter for example we're not going to want a 10% to 12% return, we want something worth higher, but we start with the 10% to 12%. We don’t really look at it in terms of like accretion, dilution and you know, that’s not something we look at it, we look at the cash that we're investing in that entity and how much cash we're going to get out of that, and that’s where we put our margin and we look at accretion, dilution but that’s not where we – that’s not the metric in which we think buy.

[Unidentified Analyst:]

You highlighted the fact that you are earning close to prior peak margins, and in origination markets it’s still well below normalized. Can you speak to should we ever return to a origination market, like the early 2000, or something in between, what the upside is to that 12% just based incrementals to that success ratio you talked about?

[Mark Seaton:]

Couple of things I'd say there, okay I'd say that we feel like we can get to call it 4% like the higher end of our range. In the market that were in with our losses continuing to go down, it’s a little bit more help on the investment portfolio, it just continued efficiencies in our business, with nothing changing too dramatically we feel like we can get to the top end of that rang. Obviously if we had a market that was $2.5 trillion market or like a one half showing our purchase market, we can get significantly higher than that 12%. We don’t see that that next year or the year after that. But we can get this cost structure has never been as efficient. If you layer in like the 2003 market in our cost structure today we would be well north of 50% margin, and I can say that very confidently. So there is two things that can get us you know, really higher than that 12%. One is better market perspective, the second one I would say is that we can drive some innovationists how we produce both our title product and our escrow product we can get higher there, those are more longer-term and we'll see that happening in the next, call it three years, so that’s anther opportunity that’s out there longer term. The one thing I would also point out on the margin is, last year we had 10% title margin, we don’t really think in our business of underwriting income versus investment income like every other insurance business and why we just never thought about that way, but if you - were going to break those two components out you would see that our investment income is never been lower, our book yield is 2% on our portfolio now, if you break that 10% margin down you get 2% on investments and you have 8% underwriting income. Well, the underwriting income of 8% has never been higher, that’s as high as it’s ever been. And so if We ever you know, one of the big misnomers in First American that I've talked over about, the market doesn’t seem to listen to me, is we're going to do well in high interest rate, when interest rate go up, our refis are going to fall, but today 10% of our revenue is refi, 10%. So if get cuts by 50% its not going to be a great thing to short term, but we have a lot of advantages on the balance sheet that I don’t think that are really incorporated to including our investment portfolio or off balance sheet deposits, the earnings we get in our bank, some of our pension and liabilities, all those are going to benefit in a higher industry environment.

[Unidentified Analyst:]

I know you alluded to your financial strength ratings, you senior debt ratings, no surprise were three notches lower but at a critical level still a BBB minus, with that I am surprised to hear you say, you can let your leverage go up quite a bit and so much as 30% to 30%, could – are you saying that because you are confident you could still stay at BBB minus or the agency is told back to you and if you were to slip BBB plus, could you still be very competitive?

[Mark Seaton:]

BB plus, if we slipped, BBB, well, I would say well, right now in terms of our senior debt ratings we're BBB minus [indiscernible] we're BBB for the senior debt ratings. I feel confident that we go to call it high 20s maybe even 30%at the cap and not lose the rating or get downgrade. As long as we had a credible plan to deliver, so I think we could go the rating agencies and say we're higher adjusted cap, [indiscernible] delever back to 18 to 20 and I think we would be little bit stand the rating. If we slipped from the plan we decided to run at 25% in perpetuity that will be different story. But I think if we had a plan, credible plan to delever, back to the 18% to 20% target deal. Now what happens if the rating does go to BBB plus on the financial strength side, it just presents more risk for our commercial in our international business. We were there with S&P at one point in the crisis, they downgraded to BBB plus, I wouldn't I don't think we lost any business because if it, there was a lot more conversations that were going on, we spent a lot more time talking to customers on the international side here near city on the commercial side is getting them comfort around their financial strength. I think if both Moods and S&P were to go than that would be – we probably [indiscernible] but the ratings are important. We're comfortable we can keep an even at a higher capital we had to delever.

[Unidentified Analyst:]

Can you maybe quantify or at least give an order of magnitude on the interest rate scenario you talked about earlier, just to say interest rates were to rise 100 basis points, maybe some puts and takes on the impact from the refis and the balance sheet inputs you talked about?

[Mark Seaton:]

I'll give you a little bit more color and I wish I had a really clear thoughtful sensitivity that I could hand you and I don’t have that. We did do an Investor Day deck last year and we had a slide in there that talked about here is all the benefit that we're going to get from higher rates and here is the negative things that come from our rate and so we did talk about that. We didn’t really quantify things, but I'll give you an example, I'll give you an example of how it’s tangible. We have $5 billion to $6 billion of off-balance-sheet escrow deposits that we have a third-party bank, so you open up a title order, you put your 3% down payment we hold the funds and we – a lot o those funds not all, lot of we put a third party and we put in our own bank. Well, the average deposit rating - the average rate that we get now, its about 35 basis points. There is been times where we've got t250 basis points, today in its lower interest rate 35 basis points. Now some of our lenders less than that, some of our higher than that, when the fed went from zero to 25 we went renegotiated with some of the lenders who were less than that and we were able to get some value. So as the fed on the short end of things rises, we are going to get like a better economics. In some way the ideal industry scenario for us is higher short rates and low and then following longer rates. But that’s one example. Another example is in our bank, we wanted to spread on our deposits, today we earn about – was around 115 basis points to spread on or deposits. Even with that, the returns on capital in our bank after tax was about 9%, very good business and really what we're doing is we're buying AAA mortgages that float. So we don’t take a lot of risks. In a normalized interest rate environment its historically it’s been like 2.5%. So as rates rise on the short end, we expect our banks profitability increase. So I don’t have a lot of exact numbers, but those some anecdotes. I feel confident that when short rate drive we'll generate higher revenue.

[Unidentified Company Representative:]

All right. We'll cut it there, but please join me in thanking Mark and Craig.