Fidelity National Information Services Inc (FIS) 2005 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF fourth quarter earnings conference call.

[OPERATOR INSTRUCTIONS].

At this time I would like to turn the call over to Mr. Dan Murphy. Please go ahead, sir.

Thank you, and good morning, everyone. This is Dan Murphy, Senior Vice President of Finance and Investor Relations for FNF. Thanks for joining us for our fourth quarter 2005 earnings conference call. Joining me today are Bill Foley, Chairman and CEO of FNF and Chairman of FIS, Al Stinson, CFO of FNF, Randy Quirk, CEO of FNT, Tony Park, CFO of FNT, Lee Kennedy, CEO of FIS and Dave North, President and CEO of Sedgwick CMS.

We will follow a somewhat new format this morning. Bill Foley will begin with a brief strategic review of recent developments at FNF. Randy Quirk will then review FNT's standalone results and Al Stinson will finish with a review of the summary financial highlights for the operating subsidiaries of FNF, much like we provided in our earnings release last night. We'll then open it up for your questions and finish with some concluding remarks from Bill Foley.

As you have probably seen, we have updated the reporting format in our earnings release. In an attempt to give better insight into the operating results of the FNF operating subsidiaries, we have also included all of the expenses related to each of those operating subsidiaries in their respective segments, including interest expense, eliminating the need to estimate what expenses need to be allocated from the corporate and other segment.

On our call will restrict the discussion of FIS to the results of 2005 and save any discussion of 2006 for the investor day next week on February the 15th. 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 and 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 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 governmental 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 will be available for replay via webcast at our website at FNF.com. It will also be available through phone replay beginning at 12:30 this afternoon through next Thursday, February the 16th. The replay number is 800-475-6701 and the access code is 815-471.

Let me now turn the call over to Bill Foley, our Chairman and CEO.

Thanks, Dan. This was a great finish to an exciting year for FNF and all of its shareholders. 2005 was a year in which we spent a great deal of time and effort attempting to maximize the value of the assets of FNF, create shareholder value, and provide the investment community with greater transparency and assisting it in its efforts to best value the individual operating subsidiaries that comprise the Fidelity National family of companies.

The first milestone in this process was the recapitalization of FIS, the minority equity interest sale on FIS to TH Lee Partners and Texas Pacific Group and the $10 special cash dividend paid to FNF's shareholders, all of which were completed in March 2005 This was the initial step in our effort to more effectively realized the embedded value of Fidelity National Information Services. The next in our effort to maximize the value of FIS was our September announcement of the merger of FIS and Certegy. That merger was completed last week on February 1. What we had considered an initial public offering of FIS for some time, we believe that the merger with the publicly traded Certegy has allowed us to more quickly and more fully move closer to our goal of maximizing the value of FIS than an initial public offering of FIS would have allowed.

FIS is now better positioned to capitalize on the significant and unique growth opportunities that the combined companies can offer the markets we serve. Certegy's payment processing businesses fill a gap in FIS's product set and Certegy's management provides additional expertise in the payment services space. This combination has strengthened our position in the financial services markets, increased the depth and breadth of the products we offer, deepened the relationships we have with our current customers and allowed us the opportunity to provide our expanded services to new customers.

FIS is now one of the largest financial institution technology and processing and services companies in the world, with more than $4 billion in annual revenue and $1 billion in annual EBITDA and it is uniquely positioned to offer a broad suite of data processing, payment and risk management services to financial institutions and retailers. Finally, with FIS operating as a majority-owned publicly traded subsidiary of FNF, we have a valuable currency to utilize in potential future acquisitions.

Another milestone in our efforts to maximize the value of FNF's assets, create shareholder value and provide greater transparency to the investment community was the October distribution of the stock of Fidelity National Title Group to FNF shareholders. FNF distributed 17.5% of the stock, or approximately 30.4 million shares of FNT to existing FNF shareholders while retaining remaining 82.5% ownership stake. FNT is now operating as a majority-owned publicly traded subsidiary of FNF. As we enter 2006,

FNF is now operating as a holding company with four distinct operating subsidiaries. FNT is 82.5% owned publicly title insurance subsidiary, FIS is an approximately 51% owned publicly traded financial transaction processing and outsourcing subsidiary, our specialty insurance operations, which include plan insurance processing, personal insurance, and home warranty insurance function as a wholly owned subsidiary of FNF. Finally, Sedgwick CMS is operating as a 40% minority-owned outsourced insurance claims management subsidiary.

While we have completed this phase of restructuring in 2005, and early 2006, our goal is of maximizing the assets of FNF, creating shareholder value and providing greater transparency for the investment community to remain the same and guide all of the decisions we make at the FNF family of companies.

Operationally, FNT is currently focused on reducing headcount and minimizing of operating expenses, as most mortgage market experts expect a slowdown of the mortgage market in 2006. A unique aspect of FNT in the title insurance space is the significant cash dividend that it pays to its shareholders. The FNT board authorized a 16% increase in the annual cash dividend yesterday, raising that annual dividend to $1.16 per share. This is a current yield of approximately 4.9%. We believe the dividend increase is a strong statement about the future earnings power of FNT, particularly heading into what most expect to be a slowing mortgage market in 2006.

Organic growth for FIS was 7.9% for the fourth quarter, driven by continued tremendous growth in our mortgage information businesses. The information businesses grew by 28% in the fourth quarter. Areas of particular strength were the tax business, 1031 property exchange, our IDM, that's International Data Management Property Database, and the valuation business. Our financial transaction processing business grew by 1.1% in the fourth quarter of 2005. Areas of strength or mortgage loan processing, our community-focused financial institution processing business, and the commercial loan processing business. Growth in EBS, Enterprise Banking Solutions, our large bank processing business, was hindered by the loss of the Riggs contract and lower revenue from Citizens Bank.

During the fourth quarter of 2004, we earned approximately 18 million from the conversion work related to Citizens' purchase of Charter One, and the bulk of that work is now completed, as we only earned about 5 million in the fourth quarter of this year. International revenue also declined for similar reasons.

Two large projects for China Construction Bank and Chrome Tower Bank that produced revenue of approximately 6 million in the fourth quarter of 2004 were completed prior to the fourth quarter of 2005. As we mentioned last quarter, our pipelines are strong and we are confident that growth in our financial transaction processing business will accelerate during 2006. Growth in our mortgage outsourcing business, mainly default and centralized settlement services, was 2% for the fourth quarter of 2005, despite a slowing mortgage market and extremely low level of mortgage delinquencies.

Organic growth guidance for 2006 will be provided at the FIS investor day on February 15th here in Jacksonville. Specialty insurance has experienced significant growth in all areas. The personal lines business, which is primarily homeowner's insurance, sourced through leads from Fidelity National Title Group field operations, grew revenue by more than 100% in 2005. When we complete the processing of hurricane-related flood claims, and we will have processed in excess of 45,000 total flood insurance claims related to hurricanes that hit the U.S. last year.

The final piece is the home warranty business, which grew revenue by more than 25% in 2005. Our most recent acquisition is a 40% ownership stake in Sedgwick CMS, an industry-leading provider of outsourced insurance claims, management services, to large corporate and public sector entities. That acquisition was completed on January 31st. Sedgwick designs, implements and manages innovative outsourced third-party administration programs for worker's compensation claims, management, liability claims management and disability claims management. The company's services include claims administration, managed care and related services to clients with high-frequency, low-severity claim exposures.

With 2005 revenue of nearly 400 million and EBITDA margins of approximately 15%, Sedgwick is one of the country's largest providers of claims administration services and has more than 400 clients under multi-year contracts in a wide range of industries, including 25 of the Fortune 100 and 72 of the Fortune 500. Actually, they can make that 73, because Fidelity is going to move its business to Sedgwick.

Sedgwick provides FNF a very exciting opportunity in an attractive, growing market, while allowing us to leverage our core expertise in title insurance processing and financial transaction processing. The addition of TH Lee and Evercore as equity partners provides for further financial flexibility as we seek future opportunities in the third-party administration marketplace. We believe the acquisition of Sedgwick will further our continued goal of maximizing the value of our assets for the benefits of our shareholders. Let me now ask Randy Quirk, CEO of Fidelity National Title Group, to comment on the title business and highlights for the quarter for FNT.

Thank you, Bill. This was our first quarter as a public company as we began trading as FNT on October 18th. From a financial highlights perspective, we generated $126 million in net earnings, or $0.73 per share in the fourth quarter, and we had 539 million in net earnings, or $3.11 per share, for the full year. Total revenue for the quarter was $1.6 billion and $6.3 billion for the full year 2005. Our pretax margin was 12.9% for the fourth quarter and 13.7% for all of 2005.

Without the effect of the additional interest expense from exchange notes, the pretax operating margin was 13.6% for the fourth quarter. Cash flow from operations was 102 million for the fourth quarter and 698 million for the full year of 2005. Finally, our return on average equity was 20.7% for the fourth quarter and 20.9% for all of 2005. Open order buyings behaved as we had expected during the fourth quarter, peaking at 11,600 open orders per day in October, dropping to 11,100 in November, and then falling off to 9,000 as we hit a seasonally slow holiday season in December.

January order volumes picked up somewhat, moving back up to about 10,700 open orders per day, just below the November open order level. The focus remains on headcount and expense management. We reduced headcount by nearly 1,300 employees during the fourth quarter, a reduction of 8%. We had approximately 14,200 title employees at year end. In January, we reduced headcount by 300 employees. Since we began reducing staff in August, we have eliminated 1,700 positions, or 11% of our staff. As we always do, we will closely monitor our weekly open order accounts and make staff adjustments as those order volumes dictate.

On the commercial title side, we opened 13,500 commercial orders and closed approximately 9,100 commercial orders in our national commercial divisions during the fourth quarter of 2005, generating nearly $81 million in revenue. This translates into 15% of total FNT direct title premiums for the fourth quarter. The commercial fee per file increased to nearly $8,900.

From an expense standpoint, personnel expenses increased by $69 million, or 17% for the fourth quarter of 2005 over fourth quarter 2004. As a percentage of title and escrow revenue, personnel expenses were 32% for the fourth quarter of 2005 versus 30% for the fourth quarter of 2004. The major increase was in salaries. While we have been aggressive in reducing headcount, there is a lag between eliminating the position and realizing the financial impact of the headcount reduction.

We expect to see the benefit of the late 2005 headcount reduction throughout 2006, particularly as we enter the seasonally stronger second and third quarters. The fourth quarter of 2005 also includes personnel expenses related to our August 2005 Service Link acquisition. Additionally, competition for experienced employees in the title business did intensify in the second half of 2005.

We provided for claims, losses, at 8.2% of gross title premiums in the fourth quarter of 2005 as we continued to build the absolute level of reserves on our balance sheet to remain in the range that our actuaries believe is adequate in relation to our title premium revenue stream. We expect to provide for claims, losses, at 7.5% of gross title premiums in 2006. Actual claims paid during the quarter were $62 million. Our debt at year-end consisted of the $500 million in intercompany notes that were formally exchange into a legal notes of FNT in January and $100 million outstanding under our credit facility.

During the fourth quarter, we repaid $50 million of the original $150 million borrowed under the facility back in October of 2005. Finally, our investment portfolio totaled 3.8 billion at year end. There are certain legal and regulatory restrictions on some of those investments, including secured trust deposits of approximately $900 million of statutory premium reserves for underwriters at 1.4 billion.

Of the 3.8 billion, approximately 1.5 billion was theoretically available for use, with about 100 million in nonregulated entities and 1.4 billion held throughout regulated underwriters. We have the capacity to dividend approximately 300 million of that 1.4 billion out of the regulated entities in 2006. So we should have access to at least 400 million in free cash in 2006, made up of the 300 million in dividends out of underwriters and 100 million currently available. We will also generate cash at the unregulated entities during 2006 which will be in addition to the $400 million.

Let me now turn the call over to Al Stinson to review the financial highlights of FNF's operating subsidiaries.

Thank you, Randy. Before the $100 million income tax impact of the FNT distribution, net earnings were 215 million or $1.20 per share in the quarter. Cash flow from operations was 271 million for the fourth quarter, and 1.3 billion for the full year.

As you probably noticed, we have changed the format of our earnings release to better reflect the results of the individual operating subsidiaries that make up FNF. We have three fully or majority-owned operating subsidiaries, FNT, FIS, and specialty insurance. Our recent Sedgwick investment, of which we own 40%, will be treated under equity method accounting and will not be a separate operating subsidiary or segment reporting purposes. FNT generated nearly 1.6 billion in revenue for the quarter, a pretax margin of 12.9%, or 13.6% without the incremental interest expense from the new exchanged senior notes, net earnings of more than $126 million and earnings per share of $0.73. Cash flow from operations was 102 million for the fourth quarter and $698 million for the full year 2005.

Return on average equity was 20.7% for the fourth quarter and 20.9% for the full year of 2005. As Bill mentioned, the FNT board authorized a 16% increase in the annual dividend to $1.16 per share, or $0.29 per share each quarter. This equates to a current yield of approximately 4.9%.

FIS generated 708 million in total revenue for the fourth quarter, achieving an organic growth rate of 7.9%. The largest components of revenue were IFS, the smaller financial institution processing business, with 127 million in revenue. The mortgage information services businesses, with 120 million in revenue, the EBS large bank processing business with 105 million in revenue, mortgage loan processing with 80 million in revenue, default outsourcing with 63 million in revenue, international bank processing with 41 million in revenue, and LSI Settlement Services with 38 million in fourth quarter revenue.

EBITDA for the quarter was $187 million. Free cash flow, defined as net income plus depreciation and amortization, less capital expenditures, was 65 million for the fourth quarter. Cash earnings, defined as net earnings plus amortization of intangibles net of income tax, was 63 million for the fourth quarter. Finally, the pretax operating margin, which does not include the interest expense on the recapitalization of debt that FIS carries was 15.4%.

Specialty insurance revenue was 184 million for the fourth quarter. Flood insurance generated 126 million, of which the revenue from the processing the hurricane related flood insurance claims was a significant component. We completed the processing of most of the hurricane-related flood claims during the fourth quarter. However, we do expect an additional 15 million in revenue from hurricane-related flood processing claims in the first quarter of 2006.

Personal lines insurance contributed 33 million in revenue, growing by 65% over the fourth quarter of 2004, and home warranty produced 20 million in revenue during the fourth quarter, a 20% increase over the fourth quarter of 2004. The pretax margin for specialty insurance was 50.5% for the fourth quarter and pretax earnings were $93 million. Obviously, the significant increase in margins and profitability was driven by the huge increase in flood claims processing revenues, so the current quarter margin and earnings may not be matched in 2006.

Finally, the parent company, FNF, ended the year with available cash of approximately 471 million net of the pending tax payment due on the FNT distribution. After the FNF equity investment of approximately 130 million in Sedgwick, FNF has 340 million in cash available at the parent company level. FNF has no outstanding debt as the 500 million of senior notes were exchanged for FNT senior notes on January the 17th.

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

[OPERATOR INSTRUCTIONS].

Our first question comes from a line of Geoffrey Dunn from KBW. Please go ahead.

Thanks, good morning, guys.

Good morning.

A couple high-level questions. First, Randy, is there any way you might be able to give us an idea of the pick up of savings you might get if orders continue to run at about 11,000 per day? How much incremental drop off dollarwise might we see in the personnel and operating expenses into the first quarter?

Let me help you with that a little bit and give you a little guidance. Randy's goals are to open in excess of 15 orders per employee and close 12 orders per employee , so that is our goal for this year going forward. And what you're going to see is as Randy monitors - as the Title Group monitors their level of staffing is to try and hit those numbers. Those numbers are being hit as we speak today, and the movement is more toward resale business as we go further through the year, which requires a little more work in terms of closing the transactions.

So, as we talked yesterday in our board meeting, it is the 15, 16, maybe 17 openings per employee and closing 12 orders per employee and really as we talked, that's really your target. That's close to where you are today in terms of openings and closings.

Thanks for that, Bill. The mix of business we find is actually showing that it's more towards the refinance side, but it's really a drop-off on the resale market that is affecting that, so our productivity numbers will hold between 17 and roll down towards 15, but at that point we should be able to actually increase the margins on the type of business that we're closing at that point.

Okay, and that goal is for the year or on a continuous basis?

Well, as you know, it's a moving target as you move through the year, so it's very difficult to assign a number for year end, but if we are in that range of 15 to 17 open orders per employee by the end of the year, we'll have had a good year.

Okay, and then to Bill and Al, some more strategic questions. I guess on Sedgwick, initially I was surprised at the non-involvement of private equity players, and then when they did come in, I was surprised that you guys took a minority stake. You're not typically a company that likes being in a minority position. Can you talk about why that developed and why you didn't go for a majority stake there?

Sure, Geoff. The investment level required after debt was placed on the Sedgwick acquisition was about 335 million, plus or minus, and we really felt like for FNF to make the complete, total investment of 335, that would really have knocked our cash position way down and our flexibility to make further acquisitions.

After spending some time with Dave North, who's here today, the CEO of Sedgwick, that there were significant acquisition opportunities available within this claims processing space. It's a highly fragmented business. There are public companies that are potentially for sale. There are a number of private companies that are owned by financial sponsors or that are owned by individuals that potentially are for sale. And we feel we have a tremendous rollup opportunity, especially given the platform that Sedgwick provides.

There are specific opportunities in the managed care area, where Sedgwick outsources roughly $100 million of revenue to third parties that if we were to develop a line of business that supported Sedgwick's ability to move that $100 million or 60 to 80 million of it to one of our own entities, that would be very beneficial in terms of profit margins and revenue buildup for Sedgwick.

So, what we want to do is maximize the flexibility. We picked two financial sponsors who are willing to partner with us going forward on additional acquisitions. It may be that in the future that FNF uses cash and stock to make an acquisition to partner with a company that would be a partner of Sedgwick that we'd own 100% of. It may be that we'll make an additional investment in Sedgwick to provide capital to them to make acquisitions, increasing our ownership position. And we have terrific partners in TH Lee and Evercore that are very flexible in the way that they're allowing us to deal with the assets.

So we own 40% of Sedgwick today. I can't say that we're going to own over 50% at any point, at some point in the future, but as you note, we like owning controlling interests, not minority interests. Our partners have given us a lot of flexibility in terms of the way Sedgwick is managed and the way we interface with Sedgwick, and so we feel very comfortable with the relationship that we presently have, and I don't know if I answered Al's question, too.

I think you go it.

Our last question is, with regard to your ownership in relationship with FIS, to the extent FIS ever goes out and does an equity deal, your majority ownership position could be at risk. What is the strategy to deal with that ownership position? Are you looking to be actively in the market to pick up Certegy shares? Are you considering some sort of transaction with the existing private equity guys, or would you let that drop below a majority stake?

Geoff, our goal is to maintain 50% plus ownership position in the merged FIS/Certegy, and we're going to work very hard to maintain that position. To date, we've acquired about 1.2 million shares of pre-merger FIS stock, rather, Certegy stock. We have done computations with regard to vesting of options that exist in FIS, and if those options were to vest and be exercised, it would necessitate us acquiring an additional 1.8 to 2 million shares of Certegy on the first phase of those option vestings.

And we are very serious about not only maintaining our 50%-plus position, but expanding that position. We have a lot of confidence in Lee Kennedy and the people he's brought with him from Certegy and also the people that are still with us from FIS. They're all still with us. All the managers we have at FIS. So we're focused on maintaining that ownership interest and we have a number of different ideas to accomplish that, and you'll probably see some of those ideas forthcoming over the next three or four months.

Okay, thank you.

Thanks, and we do have a question now from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Sure. Thanks, good morning.

Good morning.

Julio Quinteros; I just wanted to back through some of the detail that you gave on the performance of the FIS business, specifically the organic growth calculation that you referred to was around 7.9%, but I think related to that you also talked about some one-time items. I just want to make sure I understand that the 7.9 is a clean number that excludes any sort of one-time payments or conversion payments.

Julio, the 7.9% is a clean number. Did you want some breakdown of the components of that?

That would be great, actually. So that does answer the first question, and I guess related to that, then, if we could just kind of strip the layers a little bit to understand how the three sort of major segments performed underneath it. That'd be helpful.

Right now, the financial transaction group in 2005 Q4 grew about 1.1%. Our mortgage outsourcing grew about 2% and we had tremendous growth in the information services group of about 28%. I think you will see those numbers sort of normalized going into 2006. And, as Dan mentioned, and Bill, I think you're coming to our investor day next week, where we will be providing a significant amount of the information on what we believe those growth rates will be going into '06.

Okay, and then the increase, the 28% increase in the information services business, can you just repeat what drove that?

Well, we just continue to do extremely well in integrating those products and services with our financial transaction business. And, frankly, most of it is, again, in market share, where we keep adding more and more customers. Is 28% sustainable? I wish it was, but probably not. We have enjoyed a tremendous year in 2005 in that area.

Julio, in particular, the growth in the tax business and the flood business has been significant and that has been really leveraged off our mortgage servicing platform that is now engaged in a cross sale of tax and flood to our servicing customers that we have here in Jacksonville in the mortgage servicing platform. It's natural for us to go to large lenders in which we're not doing tax and flood business and do a bundled pricing program that allows them to acquire tax and flood - that allows us to sell them tax and flood determinations and tax information services in conjunction with renewals of various mortgage servicing business. And what we're doing rally is we've got one big target out there and it is the First American family of companies. They have a 75% to 80% market share in tax and flood. And they have a big bull's eye on them, and we're going after their major customers.

Got it. Okay. Just to understand the overhang related to the contract losses that you identified in the EBS business and I think you also mentioned two large projects in the international segment, what would be sort of the loss revenue run rate that you would face as an overhang headed into 2006 from both of those components that you discussed?

It is hard to calculate, Julio, but I know that our pipeline is going to fully offset that. I have no concern about that being that much of a drag when we look at some of the big projects, contract wins that will be forthcoming in the early part of 2006. Our risk revenue, and again, we're going to be going into a lot of detail next week, is no higher than really it has ever been in that segment.

Okay. And then, again, just on the EBS platform - I'm sorry, the BS side. You indicated a loss. One was related to Riggs and another one was related to Citizens Bank. Is that correct?

Well, the Citizens Bank actually was a conversion project that we entered into when the acquired Charter One last year, and that conversion project was basically completed around the third quarter of this year, successfully completed and it was a well-run conversion project. However, that is running out. That's running out - they're out of runway, basically. It's dropped off significantly. Citizens continues to be a very important partner of ours, and customer, and we continue to look for ways to penetrate Citizens Bank. It's a well-run bank and they're acquisitive and they're a large bank, so they're our perfect profile of a customer we'd like to do a lot of business with.

That was the 18 million conversion dropping down to 5 million that you referred to?

That's correct.

Okay, got it. All right, maybe if I could switch gears then to just a little more color or detail that you could provide on CapEx. I have been just noodling around the numbers for CapEx in 2005, can you just remind us what - I guess actually if you can tell us what the full CapEx rate was for Fidelity in 2005 and what the factors were that would have driven that, and I can't ask how it's going to look next year, but just I want to understand I guess how CapEx finished for this current calendar year? Just for the FIS business?

Oh, just for FIS?

Yes.

CapEx for FIS for 2005 was approximately 239 million.

Okay, and was there anything unusual in that that drove the number the number up versus '04. I guess I just don't have the comparison for '04 so I'm just trying to get a sense for how that changed year over year.

I think we had a little bit higher run rate than we typically what because of extensive projects that we've been doing on the mortgage platform, in upgrading that, I suspect that 2005 is a little bit higher than you would see on the run rate basis.

Understood. And then finally for me, the filing was put forth yesterday for FIS. I'm not sure this is right format to ask the question regarding the TPG and the Thomas Lee shares that were registered. What is sort of the intent behind that registration? I think they're still sort of locked up under a 90 and a 180-day lockup. Is there any plan in terms of how you guys plan on dealing with those shares as they come out of the lockup?

We expected both our partners to begin disposing of those shares as their lockup expired, and we'll be talking to them about possibly acquiring some portion of those shares as they begin to sell them into the open marketplace and do a private transaction. Obviously, it is a very large amount of money and a large amount of shares and FNF cannot address the entire number of shares moving into the marketplace. In a lot of ways, we are happy that they're going to be selling some shares. They're great partners. But the float of FIS is only about 63 million shares, give or take, and if their shares can move into the marketplace in an orderly fashion, and they're motivated to sell them in an orderly fashion that does not disrupt the marketplace, that gives us more float in FIS and allows your customers to take larger positions. We always expected it -- we are actually happy about it as long as it's done properly.

Julio, in terms of the timing of the filing we were of course required to make that filing under our agreements which the private equity investors.

Understood. And I guess related to the prior comments that you guys made at the FNF level, is that what you guys were alluding to in terms of keeping the stake at 51% or higher at the FNF level?

It is one of the options we have available. Open market purchases are another option, and then we have a couple of other ideas that we're playing with.

Great, thank you very much.

Thanks, and we have a question now from the line of [Darren Teller] with Lehman Brothers. Please go ahead.

Hi, how are you guys. Just a couple of quick question. First of all, I guess with the restructuring the line items have significantly changed. I was wondering if you guys could shed some light on going forward what type of line item you're going to be showing? I mean, you used to have the three segments broken down in the FIS segment. Will that be kind of changing now with the spin-off?

We're going to go into that in a tremendous amount of detail next week. But essentially we will have two reporting segments going into '06. We might let Lee Kennedy who is with us talk with us about those two segments briefly.

Sure, we will have two segments that will report to the market. One segment centers around what we would call transaction processing services. And that is core processing and some payments service processing also rolled up into one reporting segment. Then we'll also have another segment, which we entitled lender processing services, and that's more of our mortgage, our real estate, our data businesses that will roll up in that segment. We think it's a natural way to do it. It is an easily understood way to do it and you'll get complete details on what business units will roll up to that and what we'll disclose to the market and how we'll break that out next Wednesday.

I think you're split, Lee, on revenues like 2.5 billion to 1.5 billion.

It's about 2.5 billion to 1.5 billion. I think it simplifies the communication to the marketplace, very easily understood and we'll give you all the detail you need on how that is going to be communicated.

Great, and with margins on the specialty side, it came in, like you guys said, around 50% was related to the flood insurance. But you said within this quarter you see another 50 million or so coming in. And I guess, I mean, the margins there are certainly not sustainable at 50%. I know that. But can you give us any idea in terms of going forward if 50 million is coming for there what kind of range we should look for?

I think what you can think about is that in fourth quarter of '04, we generated $69 million in specialty insurance. That was the total net revenues that we retained and that was our at-risk revenue, plus our flood-processing revenue. In the third quarter of this year it was about $95 million, and that was before any impact from Katrina. And so we anticipate that that growth rate that you saw between fourth quarter of '04 and third quarter of '05 will be the growth rate going forward into '06 and beyond. So we have a lot of - we're finally at the size of specialty insurance in the personal lines and in the flood side that we are experiencing very significant penetration.

[Mark Gabey], who runs our specialty insurance business, generally runs his businesses at a combined ratio of 80% or better. So we have a very, very conservative book of business that is well run and well managed. That's where the margins come from.

And just quickly, last question. Do you guys have any comments on what is going on in California with Garamendi right now in terms of any types of actions going on? Is there anything upcoming that you know of or any concerns you have?

There are rate hearings in California to determine whether or not rats are too high. Those are kind of in the pipeline. Beyond that, we haven't heard much from California. They are in the midst of an election process, and so Mr. Garamendi is running for a different office and there's a new individual running for the insurance commissioner's office. I believe when they got into the title business, they started looking at it, they realized that it was much ado about nothing.

All right, well, thank you.

Thanks, and we do have a question from the line of Adam Weinrich with Basswood. Please go ahead.

Hi, thank you. Two questions, if you don't mind, on the title business. One, would you care to venture a rough estimate for where you think margins might be in 2006? And secondly, I think you may have said this, but if you don't mind repeating it, the amount of excess cash at FNT at the end of the year?

I would address the margins. Again, it's very difficult to project margins year out. We do look at 2006 as being a traditional year in the title insurance industry where you get off to a slow start in the first quarter, you build in the second quarter, you build further in the third quarter, and then in the fourth quarter it typically slows down. You get a pretty good commercial mix and commercial revenue. So we expect it to be perhaps the most traditional year than we have seen since 2001, 2002. It's virtually impossible to predict the margins.

I think the other question was the cash on hand.

On the cash number, we talked about having $300 million available to us from our insurance companies next year and another 100 million that we have currently at our unregulated subs. So we have about $400 million there, not counting certain cash that will be available that we would generate from unregulated subs in 2006. Uses of that cash obviously would be the quarterly cash dividend that we've raised to $1.16. So that's $50 million per quarter. And of course we do intend to pay down some, if not all, of our $100 million line of credit.

Thank you very much.

Thanks, and we have a question from Nik Fisken's line with Stephens. Please go ahead.

Good morning, everybody, and congrats to everybody on the new roles. Al, the IS number at 210 million for fourth quarter, A, is that a good number, and B, you said 28%, you can't maintain it, but I'm wondering if you can give us any kind of outlook on that number for '06.

Nik, I want to wait until next week on giving you the guidance. We know what we're going to say, but we need to say it consistently in one time, so I'll just have to defer on that question.

But the 210 is the right number?

Yes.

Okay, and if I look at the new allocation of corporate into FIS, what was that number for fourth quarter?

Twenty-seven million.

And that compares to nine months, if I did it right, at about 45 million for the nine month period?

Sounds about right.

So why is the 27 so much higher than 45? If it was 15 million a quarter from Q1 to Q3 of 2005? Was there something related to the merger in that 27 that made it a big number?

I'm going to let Dan - Dan's dug into this.

What you are really seeing now is they are not allocations. Before, we had stuff in corporate and other when everything was 100% owned at FNF. Is it wasn't a huge deal when we did FIS, everything didn't get pushed down. Now for both FNT and FIS, everything that belongs in the segments, their particular costs are in those segments. So there is no more allocation. We were estimating when things are in that corporate segment. We don't have to estimate anymore. What's in there is actually what belongs there. We're not allocating things down.

And, Nik, if you look t our press release, the numbers for FIS are pure numbers. In other words, they've got all of whatever was allocated or is specifically identified now in these numbers.

Got it. Okay. And then default, looks like it went down sequentially, 70 to 63 million Q3 to Q4. That seems a little bit surprising in light of what we think's going on with the default rates

Well, I think the default is simply the impact of the slight increase in delinquencies simply hasn't caught up in terms of running through the pipeline of our customers. There's no question we have tremendous market share, and as those delinquencies start to hit, we're going to be gaining significant revenues from our customers. I think it's a timing issue as opposed to anything structurally wrong with us. It's simply we haven't started seeing those revenues yet.

Nik, our default share has gone from about 12% three years ago to about 35% at year end in '05. And we continue to take away market share from our competitors in the default segment. So when the defaults do start increasing and that pipeline starts filling up, we're going to see a very significant increase in revenue from default.

How much of a pickup are we seeing there?

It's very, very slight. It's just a few tenths of a percent so far, but if you listen to the marketplace and you hear about investor purchases going away and investors selling condos and houses that they purchased in competition with the builders and builders dropping prices, it's just a matter of time. It's a fragile market out there and if things proceed as we believe they will, there'll be a significant increase in defaults.

The last question I've got, Al, on the tax rate. What was the effective rate for 'Q4 and can you give us an outlook for '06.

Yes, you probably noticed the effective tax rate dropped significantly, and the reason for that is that we recorded in the fourth quarter the impact of the tax deduction we get for dividends received on stock that is in our own 401-K plan. Now, that's a rather odd tax treatment, but it increased dramatically this year because of the $10 dividend, and to be perfectly honest, we didn't catch it up until the fourth quarter. However, on an ongoing basis, we'll be back to about 37%.

Got it. Thanks so much.

Thank you, and we have a question now from the line of Bob Napoli with Piper Jaffray. Please go ahead.

Good morning, or good afternoon. This call is getting a lot more crowded than it used to be. A question, just to follow up on the title business, the margins for looking at 2006, as the most normal year that we've seen in a while, I would guess that - I would think that the margins would be a little bit easier to predict, but I was wondering if you at least could give your goals for the margins? The margin, I guess, in '05 turned out to be around 14%.

Going into this more normal environment, do you expect to maintain, or is your goal to maintain margins just slightly below what you would see in 2005?

Sure, I can answer that. Again, it is difficult to project because the mix of business changes obviously as we move through the year and the people file and adjust accordingly. We're going to maintain aggressive expense controls. We'll continue to move our staffing as necessary relative to the volume of orders and the volume of closings. We believe we can maintain our margins and shoot in that area of 13, 13.5% would be a target.

Okay, and on the California rate hearings, it sounds like you're not very concerned that there is a risk for adjustments to pricing in the title business. Did I hear that correctly?

You actually did hear that correctly. As we start moving into a weaker environment and there are reductions in staff across California, which title insurance actually employs a lot of people in the closing function in California, the pressure, we believe, is going to obviate relative to any kind of rate reductions.

Okay, a follow-up on the flood business, and I think you said this, but you had flood revenues in the fourth quarter, I think you said, of 126 million. Is that correct?

Yes.

And how much of that, Al, do you feel was abnormal in nature due to the hurricanes?

Well, I'm not sure with our living in Florida now was that normal on the hurricanes. Somewhere between 90 and 100 million came from claim processing, which related primarily to Katrina.

Okay, 90 to 100 million out of the 126. And the last question, and thank you for breaking down the corporates between the sectors. What would also be helpful is if our could give us that breakdown historically for maybe eight quarters, or at last four quarters and two years or something like that.

Bob, we may have to do that one offline. I don't think I can rattle off that.

I just don't know if you could do that in an 8-K format or something so it would be easy for everybody to have.

We'll see what we can do.

Great, thank you.

Thanks, and we have a question then from the line of [Steve Velgo] with [Cafe Financial]. Please go ahead.

Yes, just one point of clarification. I think you said 15 million related to hurricanes still to be processed in the first quarter. Was that correct?

That is correct.

It was 15, okay, thank you.

Thanks, and we are showing a follow-up question from the line of Adam Weinrich with Basswood. Please go ahead.

Hi, thank you. Related to the comments about pickup in defaults, I'm assuming that in many of your businesses, you have a pretty good read on month to month changes or trends in home prices. I was wondering if you might comment on what you might be seeing in the country overall, but maybe California specifically, and then also how that might relate to the title insurance business for '06, insofar as if you see California's prices down on average 5% versus flat or up 5% how that might affect the profitability of the business.

Well, if we actually got California home prices to start dropping, the demand would pick up and you'd have a higher velocity of transactions, so that would be a good thing. The reality is in California to date is billing is half of this, houses, instead of selling within two weeks to two months, are selling in a timeframe of two months to six months. So the pressure hasn't really started building yet, but houses are staying on the market longer, expensive houses are not selling as they were selling, so that the velocity of transactions is decreasing.

Again, if you look at it, if history is any teacher of what's going to happen in the future, in California in particular, as the velocity of transactions drop, houses stay on the market longer, default rates inevitably pick up and inevitably housing prices come down to some extent. And your 5% number is probably a realistic number for later this year in terms of home prices dropping. Instead of bidding for houses in California today, there are single offers and the offers are coming later and they're coming below asking price and sellers are starting to respond if they're in a position where they need to sell their house because they're moving or because they have financial pressures.

We see the same thing occurring in certain markets in Florida and we see the same thing in Colorado, which has actually moved into a very depressed market. So while we've got a great market for the last several years, and there's a low unemployment rate, the housing market is fragile, and if the rates keep on increasing, then you're going to see more and more pressure on defaults and less and less velocity of sales.

Okay, thank you very much.

Thanks, and we are showing a question from Geoffrey Dunn with KBW. Please go ahead.

Thanks. I wanted to actually ask a couple of questions on Sedgwick and the expected profitability there. I think you're running a mid-teen EBITDA margin on that. Can you translate what that means into a pretax margin, and what is the outlook for the margin and the growth of that business when we compare it to somebody like Gallagher Bassett, who has close to a 20% pretax margin and growing low single digits.

I think that Dave North is going to address what his pretax margin has been in the past but would rather not project in the future, and he can also give you some color on his revenue growth rate over the last couple of years, which we do anticipate continuing into the future.

Thanks, Bill. Our pretax margin over the last several years is running in the low 20s. The historical growth that we've seen we expect to continue in the 20% plus range. It's looking forward to our new relationship with the Fidelity family of companies and the new market opportunities that they can bring to us.

So, am I misinformed that you were running a mid-teen EBITDA margin?

Mid-teen EBITDA I think is correct. He's asking pretax. EBITDA is actually about 13%, something like that.

Correct.

EBITDA margin is about 13%, Geoff.

Okay, thank you.

Great, thank you, and at this time, then, we have no further questions in queue. I'd like to turn the call back over to Mr. Foley for any concluding remarks.

Thank you. It's great having you with us this morning. We have completed the initial transformation of FNF into a holding company with multiple operating subsidiaries. FNT and FIS are focused on their respective businesses and are now publicly traded, providing greater transparency for the investment community in its efforts to value the operating businesses that comprise FNF. We are focused on continuing to grow our specialty insurance and Sedgwick operations, and we believe that there are opportunities to add to our Sedgwick investment through further acquisitions in the outsourced claims management marketplace.

During 2006, we will remain focused on our goals of maximizing the value of FNF assets, creating shareholder value and providing greater transparency to the investment community. Thank you for joining us, and we look forward to speaking with you next quarter.

Thank you, and, ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference. You may now disconnect.