Fidelity National Information Services Inc (FIS) 2005 Q2 法說會逐字稿

Good day. Welcome, ladies and gentlemen. Thank you for standing by. Welcome to the Fidelity National Financial second quarter's earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host today, Mr. Dan Murphy. Please go ahead.

Thank you and thank you for joining us, everyone. Joining me today on this call are Bill Foley, our Chairman and Chief Executive Officer, Randy Quirk, our Chief Executive Officer for Fidelity National Title, Al Stinson, our Chief Financial Officer and Tony Park, our Chief Financial Officer for Fidelity National Title.

We will follow our usual format this morning. Bill Foley will begin with a strategic overview. Randy Quirk will provide an update on conditions in the title industry and Al Stinson will review the financials for the quarter. We will then open it up for your questions and finish with some concluding remarks from Bill Foley.

This conference call may contain statements related to future events and expectations and as such constitutes forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the Company to be different from those expressed or implied during this call. The Company expressly disclaims any duty to update or revise those forward-looking statements.

The risks and uncertainties which forward-looking statements are subject to include, but are not limited to, the effect of government regulations, the economy, competition, and other risks detailed from time to time in the Management's Discussion and Analysis section of the Company's Form 10-K and other reports and filings with the SEC.

This call will be available for webcast replay at our web site at FNF.com and also will be available by phone replay beginning at 2:00 Eastern this afternoon through August 10th. That dial-in number is 800-475-6701 with an access code of 789158.

With that let me turn the call over to Bill Foley, our Chairman and Chief Executive Officer.

Thanks Dan. During the second quarter we announced that our Board of Directors approved a strategic restructuring that will result in the public distribution of a minority interest in FNF's Title Insurance operations. Since that announcement in May we have formed Fidelity National Title Group Inc. or FNT, which will act as the publicly traded parent company for our Title Insurance operations.

On July 6th, we filed a registration statement with the SEC related to the expected distribution of FNT stock to FNF shareholders. As detailed in that registration statement, we expect to distribute 17.5% of the stock in FNT to existing FNF stockholders. FNT will pay a $1 annual dividend to its stockholders. Also FNT plans to pay a $295 million dividend to FNF, prior to the distribution.

This will be accomplished through $150 million in FNT borrowings under a new FNT credit facility and a $145 million dividend from the insurance underwriters.

Additionally, FNT intends to either issue two $250 million intercompany notes payable to FNF with terms that mirror the existing FNF Senior Notes that mature in 2011 and 2013; or, alternatively, FNT may make an exchange offer in which it would legally convert the outstanding FNF notes, the notes that FNT would issue having substantially the same economic terms as existing FNF Senior Notes.

We expect that the distribution of FNT stock will take place before the end of the third quarter, subject to the receipts of all regulatory approvals.

At the FNF Board meeting yesterday, we formed a new and distinct Board of Directors for Fidelity National Title Group, that will be effective upon the distribution of the stock of FNT. The formation of this board sets the stage for FNF to truly operate as a holding company as we discussed on the conference call announcing the formation of Fidelity National Title Group back in May.

FNF will initially have majority ownership positions in Fidelity National Title Group and Fidelity National Information Services and 100% ownership of our Specialty Insurance business. As a holding company FNF will have the flexibility to make investments in other lines of business that it feels will allow it to best achieve its ultimate goal of maximizing FNF shareholder value. Attainment of that goal may involve investments in businesses that are not directly tied to or synergistic with our existing Title Financial processes or Specialty Insurance lines of business.

Last Wednesday we announced that we reached a settlement with the California Department of Insurance on their inquiry into captive reinsurance practices in the Title Insurance industry. Under the terms of the settlement, FNF will refund approximately $7.7 million to those consumers whose California property were subject to a captive reinsurance arrangement and will also pay a penalty of $5.6 million. As part of the settlement, FNF denied any wrongdoing. This settlement ends the captive reinsurance inquiry in California.

We also announced the acquisition of ServiceLink in June. ServiceLink provides national centralized mortgage and residential real estate title and closing services for major financial institutions at institutional lenders including six of the top 10 residential lending institutions ranked by loan origination volume.

The acquisition of ServiceLink provides FNF and its Title Insurance subsidiaries with centralized title and closing capabilities and improved direct access to national lender accounts.

ServiceLink will also utilize FNF and its subsidiaries for bundled service data needs surrounding the real estate and mortgage loan closing process, providing for cross selling of products and services, such as valuation and appraisal services, (indiscernible) determinations tax, services and mortgage credit information services. ServiceLink -- prior to its acquisition -- was an agent of First American.

As we told you last quarter, we have been primarily focused on two things at FIS. Organic growth and the repayment of debt from the March 2005 recapitalization of FIS. We've had great success on both fronts of the second quarter. Organic growth in our FIS segment was 9% for the second quarter with particular strength in our large BankGroup Enterprise Banking Solutions, our Mortgage Processing business and our Commercial Lending Processing Group. While it did not impact organic growth in the quarter, we signed a very large 10-year international license and maintenance contract with a major global financial institution during the second quarter.

The terms of the contract prevent us from disclosing the name or the actual dollar amount of the contract; but we are confident that this is the largest international software license contract ever signed. We are also pleased with the performance of our acquisitions as our Integrated Financial Solutions Group announced that they have added 45 new clients in the first half of 2005. The two largest contributors to that list are new clients on the Bankpack (ph) platform which we required in November 2004 InterCept acquisition and new item processing contracts.

Those item processing capabilities have been significantly strengthened through both the March 2004 Aurem acquisition and the November 2004 InterCept acquisition. These acquisitions have been integrated into our organization and we definitely have seen significant benefits in the first half of 2005.

Additionally, our combined Information Services businesses continue to achieve tremendous growth generating nearly 25% organic growth in the second quarter over the prior year quarter. The strongest contributors to that growth were our tax business and our 1031 exchange operation as both nearly doubled their revenue from the prior year. The IDM Data Business also grew very strongly.

Finally we have made significant progress on paying down the FIS bank facility in just four months. The original $2.8 million borrowed in March has been paid down to $2.64 billion, as of June 30th, a reduction of 157 million during the quarter. We made another fiscal payment of $75 million on July 11th, leaving us with a total balance of 2 billion 568 (ph) today -- $232 million less than the original borrowing. We expect to make another $75 million payment before year end which would leave less than $2.5 billion outstanding.

We will also use any proceeds from the FIS initial public offering to continue to aggressively reduce that debt. At this time there is no publicly stated date or timetable for that potential initial public offering of FIS. We will continue to evaluate the situation and initiate that transaction when we feel the timing is appropriate.

Let me now ask Randy Quirk to comment on the business conditions in the title industry.

Thank you, Bill. As expected, order volumes gained momentum throughout the second quarter. Open orders were approximately 14,500 per day in April, 15,300 per day in May, and peaked at 16,700 orders in June. Not surprisingly the 10-year treasury rate declined consistently throughout the second quarter from a high of 4.48% at the beginning of the quarter to a low of approximately 3.90% at the end of June.

In July the 10-year has moved back up above 4.25% and this has caused a moderate slowdown in a still very strong 16,000 open orders per day in the first few weeks of July. The Mortgage Bankers Association updated their mortgage finance forecast on July 12th. If the MBA forecasts are even remotely accurate, there will be no mystical trough mortgage market in either 2006 or 2007.

The MBA now estimates a $2.738 trillion mortgage origination market for 2005, which would actually translate into a 6% increase over the 2004 mortgage origination market of 5 -- of 2.589 trillion. This would make 2005 the third-strongest mortgage origination market ever, behind only 2003 and 2002. The MBA also forecasts 2006 total originations of 2.5 trillion and 2007 mortgage originations at 2.472 trillion with the forecasted increase in purchase originations in each year.

The forecasted decline from 2005 of 2.7 trillion to 2.5 trillion in both 2006 and 2007 is caused only by an expected moderate slowdown in refinance transactions, offset somewhat by the increase in anticipated purchase transactions in each of those years.

Based on these MBA forecasts, it appears we will continue to operate in a very favorable mortgage market for at least several more years.

We were able to re -- achieve a 15.4% pretax margin in the title business in the second quarter, improving from 10.4% in the first quarter of this year. As we mentioned on the first-quarter earnings call we expected to see the benefit of increased open order volume in the month of March during the second quarter. Order volumes were strong throughout the quarter, which required additional staffing.

We added approximately 500 employees during the second quarter beginning the second quarter with approximately 14,200 employees in the Title business and ending the quarter with 14,700. We expect the favorable conditions to continue into the third quarter.

On the Commercial Title side we opened more than 14,600 commercial orders and closed approximately 8,800 commercial orders during the second quarter of 2005, generating nearly $67 million in revenue. This translates into 11% of total direct title premiums for the second quarter. We opened and closed orders with both 3% in-- decreases over the second quarter of 2004. The total commercial revenue increased by $16 million as the fee for a commercial file (ph) increased by more than $2000 per order.

Let me now turn the call over to Al Stinson to discuss the second-quarter financials.

Thank you, Randy. Net earnings were 190 million or $1.07 per share in the quarter. Cash flow from operations was 452 million for the second quarter. Total title premiums of 1.3 billion increased 4% over the second quarter of 2004. Direct title premiums of 583 million decreased by 3% while total agency premiums increased by 10%. Direct orders closed were lower by 17% in the second quarter versus the prior year, offset by a 17% increase by fee per file due to the mixshift toward purchase transactions.

Escrow and other title-related fees of 299 million increased by 1% over the prior year, driven by the increase in fee per file caused by the same mixshift toward purchase transactions.

Specialty Insurance revenue of 77 million increased by 32%, driven primarily by the continued strong growth of the Homeowners Insurance business. Flood insurance generated 27 million, Personal Lines insurance 28 million and Home Warranty 18 million.

FISS contributed 423 million in gross revenue and 405 million in external revenue for the second quarter versus the gross revenue of 315 million and external revenue of 296 million in the second quarter of 2004. The organic growth rate was 9% as Bill discussed earlier.

The Lender Outsourcing Solutions segment generated 97 million in revenue for the second quarter. Default Management Services contributed 60 million in revenue for the quarter versus 57 million in the first quarter of 2004, a growth rate of 6%, as our Defaults business continues to grow despite the record low in delinquencies.

LSI generated 32 million in revenue for the second quarter versus 59 million in the second quarter of 2004, a 45% decrease driven by the decline in refinance volumes in the second quarter of 2005 versus the second quarter of 2004.

Information Services generated 189 million in gross revenue and 176 million in external revenue for the second quarter compared to 159 million in gross revenue and 148 million in external revenue in the second quarter of 2004.

We generated a 25% organic review growth in the Information Services segment. As Bill mentioned the largest contributors to that growth rate were the Tax 1031 Exchange and IDM businesses. Interest and investment income was 31 million, an increase of 15% from the second quarter of 2004 due to the much larger fixed income portfolio in the second quarter of 2005, and the 80 basis point average increase in short- to intermediate term Treasury rates.

Net realized gains were 22 million in the quarter, resulting from the sale of several debt and equity securities during the quarter.

Pers (ph) Personnel cost of 808 million were 12% higher in the second quarter of 2005 versus the second quarter of 2004. Title and Escrow Personnel costs were 470 million -- a 21 million or 5% increase from the second quarter of 2004. Title Escrow Personnel cost of 449 million. The increase was driven by higher staffing levels related to the 7% increase in open order volumes versus the prior year. In FISS, personnel costs were basically flat with the first quarter of this year despite the sequential $43 million increase in revenue; and in Information Services personnel cost increased 4 million over the second quarter of 2004 while revenue increased 30 million, reflecting the leverage opportunities in both of these business segments.

Other operating expenses of 450 million were 27 million higher than in the second quarter of 2004. In Title and Escrow, other operating expenses were 240 million, a $13 million increase from the second quarter of 2004, and included 8 million related to the California Department of Insurance Captive Reinsurance settlement.

The total provision for claims was 111 million for the second quarter. The provision for claims for the title business was 87 million as we continue to provide for title claim losses at 6.5% of gross title premiums in the second quarter. The provision for claims and Specialty Insurance was 24 million in the second quarter. Total title claims paid were 81 million and total Specialty Insurance claims paid were 26 million, resulting in an $11 million increase in the reserve for claim losses on the balance sheet.

Interest expense was 47 million during the second quarter. FIS interest expense was 37 million, the FNS Senior Notes interest expense was 8 million and Other Interest expense was 2 million. Included in the amortization expense for the quarter is a $9 million impairment write-off of intangible assets at HFN -- our company that provides mortgage origination services to builders. You will notice that this had a negative impact on the LOS segment pretax margin.

The largest components of minority interests were 14 million from FIS and $2 million from Cordova. Our investment portfolio was $5 million, an increase of 650 million from the end of the second quarter of 2004.

There are certain legal and regulatory restrictions on some of these investments, including secured trust deposits of approximately 1.1 billion, statutory premium reserves for underwriters of nearly 1.2 billion, cash at international subsidiaries of 225 million and other restrictions of 250 million. Of the 5 billion, 2.2 billion was theoretically available for corporate use with about 700 million in nonregulated entities and nearly 1.5 billion held through regulated underwriters.

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

(OPERATOR INSTRUCTIONS) Geoff Dunn with KBW.

First on the organic growth in FISS, can you talk a little bit about expectations for the second half of the year as you have that large international contract come on and I believe the Webster deal starts generating revenue as well?

The large international contract will start coming on in the second quarter. We can't -- we are precluded under the terms of that contract from specifically identifying the annual license revenue that we will generate. It's significant. It does start rolling in, based on a monthly basis, doesn't it? (MULTIPLE SPEAKERS)

We amortize it monthly and it's significant amount of money and it is a 10-year license agreement so it's really -- it's revenue that falls right to the bottom line.

It is basically 1/10 of the contract value every year.

So maybe from a high-level as you have that contract coming on and some other significant contracts coming on, do you think that the pace of organic growth for the second half of the year can remain on pace with this quarter?

We had a very very good second quarter and I believe that with -- our goal has been stated to be about between 5 and 7% organic growth. We are probably going to be moving toward the higher end of that range at this point.

On the title side with the headcount changes in the quarter and the slowing down a little bit in July what will be your expectations if a normal seasonality occurred for the third quarter with that headcount plan? And then, Al, can you rank the quarters of the year on a normal seasonal pattern? What would you expect to be the strongest to the weakest for the title business?

In terms of headcount, Geoff, we are going to have a very good third quarter because we are now going to start those closings on the openings that occurred late in the second quarter and headcount is either going to remain flat or even move up a little bit as we respond to those closings. Then as you move into the fourth quarter, the headcount starts working its way down. And September is known as a short month in terms of workdays. November is a short month. And so the modifications and headcount really need to be accomplished prior to December.

And then obviously next year, then, we work it down again in January and February while we are seeing how the market looks. In terms of ranking, first quarter is always the weakest. Second and third quarter are the two strongest. Fourth quarter, lighter than the second and third quarter but can be offset by very strong commercial closings and our Commercial business as Randy indicated has been very, very strong.

Last question, any update on efforts to purchase books of business in the Specialty line?

Continuing to negotiate with a number of different underwriters. A lot of the books of business that are available or in Florida which is not particularly attractive at this time of year, due to the hurricanes. So we don't have anything pending but that is our primary focus, is actually to look at books of business as opposed to acquisitions of companies -- although we have been presented with a couple of opportunities in the Specialty insurance area that we are evaluating. They tend to be a little bit on the expensive aside and so we are dragging our feet.

Robert Napoli from Piper Jaffray.

I just -- on your FIS organic growth, I was just wondering if you could give an outlook for what you see over the next several quarters? Obviously, a very impressive number this quarter.

I'm not going to give you a forecast, Bob, but we are very encouraged by what we've seen in the second quarter. Those are great numbers. A couple of points. In our EBS group our Mortgage Lending and now IFS -- our Community Bank Group -- we are getting very good results. We think they will probably -- they will continue into the future as Bill said. We have talked about 5 to 7% growth rate in that group.

The other comment I would make is on IS, the growth rate of 25%. That is tremendous. The margins are great. It obviously shows two things. One, we're gaining market share in that group and two, that group is not as cyclical as what a lot of people have thought.

So I think we -- everything we are seeing is very encouraging for strong organic growth rates in the future.

With that kind of growth is there upside from the margins that we see today? You've got great growth. The margins appear pretty stable. Is there upside now?

There is definitely upside in the margins on FISS. There is no question about that and then as LOS returns to more of a consistent market, what you're going to see happen is -- last year as LS's revenues dropped down in the third and fourth quarter because refis go away we will start having a better comp, relative to what we're doing today; and the margins will also improve. IS, I can't say I believe we're going to get much better than 29%. But we are doing very well.

It seems like that kind of growth now that you haven't made any acquisitions in a couple of quarters you can really start getting a handle on what you have. Are you ready to start going back into the acquisition mode?

We have continued to look at opportunities in the FISS space. There are a couple of problems. First, of course we have a lot of debt and we are focused very strongly on paying that debt down. We don't have a marketable security to issue in conjunction with acquisitions because at this point we have a 25% minority owner in that business and for FNF, then, to acquire business using its stock, it becomes complicated dealing with our financial sponsor partners.

So the acquisitions would be cash acquisitions. And the good and bad news with regard to acquisitions is the good news is we made a lot of acquisitions over the last two years and nine months at what now appear to be very very favorable and attractive prices, because the acquisitions we're being presented with are very expensive in terms of multiples of revenue and multiples of EBITDA.

So I really like the position we are in today, in that we are executing against our business plan. We are paying down debt and we're demonstrating that now that we are focused on growing our businesses through organic growth -- as opposed through acquisitions -- we are achieving those goals and the 9% was an example of that. If we can hit 5 to 7% and maybe be at the high end toward the 7% range for the balance of the year and into the next year, we will demonstrate a very very successful company and a very successful operation.

These numbers making it increasingly likely you'll do an IPO in fourth quarter this year?

We are looking at the markets; we are evaluating the markets; and there'll be more to come.

Adam Weinrich with Basswood Partners.

Congratulations on what seems to be a pretty good quarter. Couple of questions for you. The agency business seemed to increase quite substantially especially relative to the year-over-year change in the direct business. Is there anything specific that happened that would have that business becomes so strong?

Adam, I'm going to get Tony Park, who's our Chief Financial Officer of Tyler Group to comment on that because there is a bit of an aberration in those numbers that he will go through. It has very little impact on profit but it does on revenue.

We did have a change in our estimate of recording agency premiums during the quarter. It was about a $50 million impact to agency revenue but only about a $2 million impact to net earnings so not a big bottom-line number but $50 million in gross agency revenue. It was a change in estimates so it's a prospective change not a retroactive change. (MULTIPLE SPEAKERS)

What we do, Adam, we continue to refine our methodology on booking the revenue from agents that we have not received yet in cash and we think we've got a much better handle on it now and this is just a refinement of what we have been doing all along.

So that would be a one-time adjustment in run rate margin of the agency business if you look at the commissions -- (indiscernible) commission?

That's right. It really doesn't have any effect on margins. It simply adds 50 million of revenue of which we then take the normal agent commissioned as an expense and it rolls down, as Tony said, to an after-tax number of about $2 million for the quarter.

What it really looked like was in the first quarter we were probably under -- (MULTIPLE SPEAKERS)

That's right (indiscernible). Exactly right.

So we had -- it was really a pickup, it's probably a shift that should've been allocated between the first two quarters as opposed to being just in the second quarter. Just a refinement of the process as opposed to anything else.

The fee for file of 1373 is (indiscernible) above the number in the first quarter. Is there a good reason why it went up so much? I would assume that there were more fee for files in the second quarter than the first quarter which I would think would make this fee for file go in the other direction but maybe you can explain that?

Sure, let me address that. It's Randy Quirk. The closings in the first quarter -- refinance closings in the first quarter -- ran about 50% of our mix of business. As we got into the second quarter we were closing at about a 50-50 mix resell to refinance, so that would run the fee for file up anywhere from 150 to $200 just in terms of the shift in the closings.

So the shift in the first quarter was 55, 45 or --?

Ballpark yes.

50 -- not 50-50. 55-45.

55-45. (MULTIPLE SPEAKERS)

And second quarter was 50-50?

Correct.

One other correction, Al said our investment portfolio was 5 million it's actually (indiscernible)

(MULTIPLE SPEAKERS)

It's actually 5 billion.

Oh. A minor difference. Sorry, the refi percent in the first quarter was 45% refi?

No 55 refi, 45 resell. So that shift of 50-50 resulted in the increase in fee for file.

Final question, you mentioned the MBA's forecast in the mortgage market in '06 and '07. How important is what they say the market is going to be to your internal planning because I always find their numbers wildly optimistic. They've been right the last couple of years but sort of think it's going to turn out otherwise but especially '06 and '07 there are smart people like the Fannie Mae economists who I think is pretty good. Was your numbers that are several hundred billion lower, I'm just concerned that you're planning for capacity in a market that maybe a lot smaller.

Those numbers are relative to our planning process. We react to the marketplace based upon metrics, openings for employee, closings per employee, they're measured weekly. We get the numbers from the previous week on Monday morning and if we see variations in the marketplace or staffing increases, staff is too high, relative to orders coming in in particular locations, how many adjustments are made.

So we like to forecast. They make us feel more comfortable about what the future may hold but they're irrelevant to our planning process.

Nik Fisken with Stephens Inc.

Al, first question on personnel for Corporate and Other went up 10 million to 24 million year-over-year. Is there something specific going on there?

We have several things that impact that, Nik. The primary one is that we are now recording our FAS 123 Stock Option Expenses that are related to the FIS options. That would be the biggest part of that increase. Probably all of it.

Okay.

Because those options were granted March 9th of '05 in connection with the Private Equity sponsors investment in FIS.

Makes sense. Bill, can you give us and update on your process the evaluating new verticals like you have mentioned Mortgage Insurance, Insurance Brokerage in the past?

Mortgage Insurance has probably moved way down the list relative to things we're taking a look at. The -- Brent and his M&A team are looking at Insurance Brokerage especially insurance businesses. Businesses that would add products to our FIS, FISS productline. As you noted we acquired ServiceLink in the first -- in the second quarter actually we made a deal for ServiceLink in the second quarter and we closed at the end of this month. And that is a very interesting business in that they were not a large reseller of tax, flood, (indiscernible) and appraisal services and we will now put them in the position to be able to bundle was products and services.

But we are a little hampered by virtue of the fact that we are in the middle of a distribution of 17 1/2% of our FNT stock and we have quite a bit of leverage at FISS. You'll see some acquisitions coming down the path at the FNF level. We just don't have anything that's -- we don't have anything finalized at this point.

So this is probably a subject on everybody's mind. Would you ever use FNF stock or FNF cash to buy something non core like Callaway Golf?

We want to keep those options open. So we are -- that's part of the philosophy and rationale behind the whole formation of the holding company, the establishment of a separate Board of Directors is to really create operating entities under the holding company. One of course -- FNT run by Randy now, as CEO, and with Tony as our new CFO, and we are working that direction on FISS as well, in terms of establishing management, a core management group there that would run those businesses and freeing up time for Al and myself and Brent Bickett who runs M&A to take a look at other opportunities.

Would you say that your priority would be on things that would fit in like Insurance Brokerage or FIS new products or Specialty Insurance?

That's the priority. Yes, that's the priority. If we were going to move a field we would do it in conjunction with a financial sponsor partner ultimately.

Cynthia Erdley from October Research.

You had mentioned that claims were at 6.5% in the Title Insurance and that seems like that figure is up substantially. Could you talk about that a little bit and what you're anticipating to the end of year?

Sure. Tony I believe we've raised it to 6.5 at the start of this year --

That's correct.

Up from 5.5 the prior year and that simply reflects our ongoing analysis of where we are as claims trend particularly with refi volumes. We believe currently we are trending pretty -- almost exactly what we thought we were so that's what the provisioning percentage is. You notice we did build balance sheet reserves with that provision in percentage. But it is based on just our hours and our actuaries and our auditors continue the valuation of what we need for claim reserves.

One of the things we might add to that is one of the things that became apparent over the last year over the last year and a half or so is that we thought there would be a very very low (indiscernible) of claims, relative to refinance activity. And in reality, the refinance activity has generated some claims. It was high-volume business. It was done very quickly and some mistakes were made. We are now -- and because also refinance claims hit more quickly than claims associated with the resell transaction or commercial transaction we are getting a flow of refinance claims coming through our claims processing centers.

That's again another reason why this claims percentage was adjusted upward just to make sure we had proper coverage for the bubble of refinance claims that are coming through our system today.

Right. The tail on refinance claims is fairly short fortunately and we should be seeing some positive results as we move into the third and fourth quarter into next year.

Thank you. Could you also just say -- speak to if we're going to see any more regulatory actions in the second half that is going to impact earnings?

We have -- there are a lot of investigations going on right now. We feel like we are running a very very upfront, straight, honest, forthright company. It appears that the Title Insurance industry has hit the radar screen of a number of different states in terms of state regulations. And every chance we have, we ensure that our operations' performance and the conduct of our operations is in complete and total conformity with state and federal law.

Oftentimes we're placed in a position of having to make settlements that -- if they were private parties bringing these types of claims -- we would not settle. They would be litigated. It is almost impossible to engage in that kind of activity with governmental entities. We are really placed in a position that we have to settle and put those types of regulatory inquiries behind us.

There are a number of regulatory inquiries continuing. I can't say that we anticipate any more settlements but I'm not going to say there won't be any, either.

Mike Vinciquerra with Raymond James.

Couple of unrelated questions if I might. First of all are there any penalties at all, prepayment penalties for the early paydown of your debt?

Are you talking about the 500 million of senior debt?

The stuff issued by FIS, actually.

Oh no. There is not. (MULTIPLE SPEAKERS)

Can you provide any details -- switching to a different subject -- realized gains was the biggest piece was in title I guess out of the Title Investment portfolio. Can you give us any details on where that came from and, also, if you have additional unrealized gains that have built up in that portfolio that might be recognized in future periods?

The gains for this quarter were -- the bulk of them were equity, equities. The biggest one was like a $3.1 million gain so there were just a number of smaller ones. A couple of them, interestingly were airline stocks. But other than that it's just the normal sale of securities. Some losses, some gains. In terms of a pipeline I don't have a lot of visibility relative to what we might have in the third and fourth quarter.

One thing to keep in mind is with the $5 billion investment portfolio our total equity adjustments in the title company are about $100 million. So we had a very good quarter. Normally you wouldn't see that kind of quarter.

We do have a few investments that we have made at the FNF level and there are some unrealized gains in those equities. They were primarily the positions we've taken in a few processing type companies or channel companies that just so we would have those investments and be aware of developments as they occur within those companies.

Switching again to a different subject. You mentioned to Al the 1031 Exchange driving the IS revenue growth or part of it, at least. Is that business tend to be substantially lumpier or are we in a period of time now where you see more of those types of exchanges within the commercial real estate market?

We see a lot of IPX or a lot of exchange business. We are the largest exchange player in the country. We continue to increase market share, open offices and exchanges are a terrific way for investors to defer taxes. And as our reputation builds and as our market penetration expands, we are just doing -- we are getting a bigger piece of the national business and the exchange business is growing significantly.

So on that line item, for instance, looking over the next quarter, unless we think that originations are going to drop off a cliff we might expect something along similar lines, give or take a few percentage points vs. the current quarter?

I think we can say that about the Exchange business. It's a very strong business.

I guess I was referring more to the overall investment Information Services. I mean the variable items are going to be related to mortgage originations not necessarily the -- I guess -- 1031 and so forth, right?

That's correct. Of course the (indiscernible) business it's tax and flood and those businesses are also growing nicely.

If I can ask just one more then I will let someone else jump in here but the ServiceLink acquisition I just want to get a sense. I understand the opportunity to cross (indiscernible) all your closing products there. My question's, really, it sounds like it's more of a business geared towards refinancing of centralized title. Correct me if I'm wrong there. And if that's true, do you risk at all moving more heavily into the more cyclical piece of the market? And what are you looking at in terms of adding more purchase business and Realtor business?

The distinction from LSI in terms of its closing process is that LSI is primarily a second mortgage, a second mortgage house and did not have the first mortgage origination business. So the ServiceLink business rather than being refi is actually first mortgage originations for very large lenders across the country and what it does for the title business is it gives a national product and program that then can result in referrals to our local operations. And it is a closing business in and of itself. So as opposed to being refinance-oriented or second mortgage-oriented as LSI is, this is actually a first mortgage-focused business that's more in the resell transactions that are being originated by national lenders.

It's a very good business especially in light of the high number of resells that are occurring. They are occurring in our marketplace and the demographics shifts that are working in our favor.

(indiscernible) Lehman Brothers.

Very nice quarter. I'm wondering if you could talk about a return on equity in the title business in the longer-term? Looks like this quarter it was very nice. It's obviously above 20%. Longer-term how should we think about the return on equity of title business?

Let me see if I can tackle that one. Typically in our better years, we are going to be running 20, low 20% return on equity. Probably worst-case now and we have gone into this whole trough analysis which used to be a very popular topic. We are probably in the 13 to 15% return on equity. And then just sort of extrapolate where you want to be within those ranges. So I would say somewhere 13 to 15 to probably a high of 22 to 23%.

Basically that corresponds to a pretax margin in the midteens.

Yes it does. That's about right. We are running 15% as we speak.

Geoff Dunn with KBW.

Al, on that same vein, can you update us with what the equity was with the title company at the end of the quarter?

I believe the equity at title was 3.1 billion at the end of the second quarter.

And when you talk about that worst-case scenario, if I remember right we are using a trillion dollar total market?

I think we've -- Dan and I have taken that up to 1.5. We don't see a scenario today where you get back down to a 1. I think that is long over with. (MULTIPLE SPEAKERS)

The only reason I mentioned it is when you originally did that worst-case though we were saying 1.

We were, but I think we also were saying a lower ROE at the trough level when we used to talk about that a couple of years ago.

And can you update us with the amount of cash to the title company and currently the amount of cash in liquid investments of the parent?

Starting at the parent, we have approximately 300 million of cash available. After we do the recapitalization and the distribution of a stock, we would be bringing up another 300 -- or 295 rounded to 300 -- from FNT up to FNF as a dividend. So you would end up with approximately 600 million and cash continues to build. So you would be 600 million plus at the parent.

Then we would have title, you just continue to generate very good cash flow. And then we have our ongoing dividends out of the Title Insurance group up to FNT. Then FNT would be paying its dividend to FNF.

I think the other one indicated about 411 million at the end of the first quarter -- so.

I think that's right.

About the same place right now?

We have about 610 million at June 30th, 370 of which is pledged cash. So 250, roughly unpledged.

(OPERATOR INSTRUCTIONS) Mr. Foley, there are no further questions at this time.

Thank you. We continue to be excited about the prospects for all of our businesses. The mortgage market forecast bodes well for the Title Insurance industry and the organic growth performance of our FIS business is very strong during the second quarter. And we continue to expect 5 to 7% organic growth for the second half of 2005. Thank you for joining us and we look forward to speaking with you next quarter.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.