Fidelity National Financial Inc (FNF) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Fidelity National Financial third quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If you should require assistance during the call, please press star, then zero, and an operator will assist you offline. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Dan Murphy.

Please go ahead, sir.

Thank you, good morning, everyone, and thanks for joining us for our third quarter 2005 earnings conference call. Joining me today are Bill Foley, our Chairman and Chief Executive Officer, Frank Willey, our Vice Chairman, Al Stinson, the CFO of FNF, Randy Quirk, CEO of Fidelity National Title Group and Tony Park, CFO of Fidelity National Title Group.

We'll follow our usual format this morning. Bill Foley will begin with a brief strategic review. Randy Quirk will provide an update on Fidelity National Title and Al Stinson will review the FNF financials for the quarter. We'll then open it up for your questions and finish with some concluding remarks from Bill.

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 achievement to 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 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 conference call will be available for replay via Webcast at our Web site at FNF.com. It will also be available through phone replay beginning at 12:30 PM Eastern time today through next Wednesday, November the 2nd. The replay number is 800-475-6701, and the access code is 798-807.

Let me now turn the call over to Bill Foley, our Chairman and Chief Executive Officer.

Thank you. We made significant progress on our restructuring of FNF into a holding company over the last several months. The distribution of Fidelity National Title Group stock was completed on October 17th, with trading beginning in FNT on Tuesday, October 18th. FNF distributed approximately 30.4 million shares of FNT to existing FNF shareholders while retaining the remaining 143.1 million shares.

FNT is now operating as a majority-owned, publicly traded subsidiary of FNF. As you have probably seen, we released standalone FNT earnings for the third quarter this morning. I will let Randy Quirk discuss FNT later in the call. We also announced the merger of FIS and Certegy on September 15th. On October 12th, we received notice of the granting of an early termination of the waiting period under Hart-Scott-Rodino. Additionally, we filed the initial proxy statement with the SEC on October 12th.

We have been notified that the SEC will perform a full review of that proxy statement, so the timing of a final proxy mailing and shareholder meeting is difficult to predict but will probably not occur until early in the first quarter of '06. Therefore, it is hard to estimate an actual closing date, as the length of the review process will determine the ultimate closing date.

Currently, FIS is operating as a majority-owned subsidiary of FNF and once the Certegy merger is complete, it will operate as a majority-owned publicly traded subsidiary of FNF. Finally, we disclosed in the proxy that current FNF board members myself, Ron Lane, Terry Christensen and Cary Thompson will be appointed to the board of directors of FIS upon the closing of the merger. Also, Tom Hagerty of Thomas H. Lee Partners and Marshall Haynes of Texas Pacific Group will be appointed to the board on behalf of the current minority owners in FIS. Current Certegy board members Lee Kennedy, Keith Hughes, David Hunt and Phillip Lassiter will be appointed to the board of directors of FIS upon the closing of the merger.

Our third business is Specialty Insurance, which operates as a wholly owned subsidiary of FNF. During the quarter, we began processing all flood insurance policies and claims in house after previously outsourcing those functions to a subsidiary of Fiserv. That will have a positive financial impact on the flood operation, as we will be retaining all of the revenue associated with processing policies and claims in the future.

Additionally, while Hurricane Katrina and Rita occurred in the third quarter, we recorded only $2.5 million of revenue associated with those hurricanes in our flood insurance business. We will see the revenue and pretax profit benefit of processing those claims in the fourth quarter. We conservatively estimate that we will generate in excess of $65 million in pretax profits for the processing of flood claims over the next two quarters.

In the property casualty business, the small losses that we did experience from those hurricanes were all included in the third quarter results. Organic growth for all of FIS was 6.6% for the third quarter, on the upper end of our expectation range. For the nine months, the organic growth rate was 4.4%. From a segment standpoint, Information Services led the way, with an impressive growth rate of 32.2% in the third quarter. The largest contributors to this performance were the valuation businesses, with a revenue increase of 23 million, or 44%, the tax business, with a revenue increase of 21 million, or 118%, and the 1031 exchange business, with a revenue increase of 14 million, or 143%.

Additionally, we achieved a pretax margin of 30% for the Information Services segment in the third quarter. Financial Institutions Software and Services had negative growth of 4.2% for the third quarter. There were a number of factors that caused this performance. First, the comparison to the prior year third quarter was a difficult one to start with, as we achieved a 10.5% organic growth rate in the third quarter of 2004. Enterprise Banking Solutions, our large bank group, had significant conversion and implementation revenue related to several clients in the third quarter of '04. We had a $9 million decline in conversion and implementation revenue among five large clients in the third quarter of '05 versus the prior year. Additionally, there was a $2 million revenue impact related to the loss of the Riggs contract due to the acquisition of that entity in the second quarter of this year.

There was a 4 million organic growth impact from customer losses from the former Aurum platforms from last year. While we were aware of these future customer losses at the time of the Aurum acquisition, the organic revenue impact was not felt until this year. Finally, termination fees in the Integrated Financial Solutions segment, our community banking group, were down 2 million from the prior year. While this hampered organic growth in the quarter, it is a net positive for the future, as we had fewer customer losses due to acquisition. Additionally, we expect the InterCept acquisition to have a positive impact on the organic growth calculation in the fourth quarter and into 2006.

We have always emphasized that our revenue growth can be lumpy in individual quarters, particularly in the large bank quarters, and that it is important to look at our FISS revenue growth over several quarters rather than focusing on one great quarter or one below-average quarter. The negative third quarter gives 1.5% organic growth for the first nine months of 2005.

Despite the quarterly slowdown in FISS organic revenue growth, we generated a 15.1% pretax margin in the FISS segment, a 1.1% increase in the margin over the third quarter of '04. We completed a conversion of Webster Bank during the third quarter, a milestone for our company. The conversion included multiple elements, including core processing, mortgage processing, loan syndication, item processing and our TouchPoint suite of products. The importance of the Webster Bank conversion cannot be overstated.

We have successfully deployed an integration layer to the bank that seamlessly integrates all channel delivery to all core platforms. Webster Bank is a model for the type of relationships we are seeking from larger banks.

Additionally, we announced an alliance with Computer Sciences during the third quarter, for the marketing, maintenance and support of three of CSC's Hogan Core Banking components. Under the 10-year agreement, CSC and Fidelity will also develop and market new Hogan offerings aimed at lower banks' total cost of information technology. CSC and Fidelity will offer Hogan deposits to banks in North America and the Caribbean on an outsourced application service provider basis, the industry's first Hogan ASP solution that provides premier banks with real-time deposit processing. As a result of the Hogan transaction, 60% of domestic demand deposit accounts are now processed on a Fidelity platform.

Finally, the pipeline momentum in FIS is very strong, with several large potential transactions that could proceed to the contract stage during the fourth quarter. The LOS segment generated just under 1% organic growth for the quarter, the first positive organic growth quarter for LOS this year. We expect that trend to continue in the fourth quarter. The loan facilitation business of LSI generated 40 million in revenue, a 17% organic growth rate. Default management revenue was essentially flat with the prior year, reflecting the very low default rates currently existing in our country.

Additionally, the pretax margin improved to 22%, a 3.6% improvement over the prior year. Let me ask Randy Quirk, CEO of Fidelity National Title Group to comment on the title business and highlights of the quarter for FNT.

Thank you, Bill. This was a very good quarter for Fidelity National Title Group as we began operating as a public company on October 18th. I will highlight a few important financial metrics and let Al Stinson run through most of the financials.

Direct title premiums were up $122 million, or 24%, over the third quarter of 2004. This was driven by an 11% increase in direct orders closed and an 8% increase in our average fee per file. Open order volumes were fairly consistent during the quarter, averaging just over 13,000 open orders per day in July and 12,600 orders in September. With the recent increase in interest and mortgage rates, we have seen order volumes decline to about 11,800 orders in the first half of October, a 6% decline from September.

With the moderate slowdown in open order volumes, the forecast or the focus is on headcount. We began reducing staff in August as we saw order volumes softening slightly during the month. During August, September and the first half of October, we have eliminated approximately 270 positions in our field operations. We have just under 17,000 employees as of mid October. We will remain focused on order levels and productivity metrics on a weekly basis and we'll continue to eliminate positions if market conditions and order levels require such action.

Our personnel expenses did increase by 19% less than the 24% increase in direct title premiums. There were two major drivers in higher personnel expenses. The first was commission expense, largely a variable expense, which was driven higher by the increased order volume and the associated revenue increase. The second was bonuses, which are directly correlated with the increased profitability of our operations in the third quarter of 2005 versus the third quarter of 2004.

Operating expenses increased by 9.5% for the third quarter versus the prior year, well below the 24% increase in direct title premiums. On the commercial title side, we opened 15,100 commercial orders and closed approximately 9,000 commercial orders in our national commercial divisions during the third quarter of 2005, generating more than $73 million in revenue. This translates into 12% of total Fidelity National Title Group direct title premiums for the third quarter.

The fee per file on the commercial business was $8,100. Additionally, the fourth quarter has historically been the strongest quarter of the year for commercial business. In 2004, commercial revenue increased nearly 20% sequentially from the third quarter to the fourth quarter. In addition, we closed the acquisition of Service Link on August 1st, 2005. Service Link is a leading provider of centralized title and closing services to top national lenders nationwide - 2005 revenues are projected at a run rate of $84 million, with open order volumes in excess of 70,000 annually. The Service Link acquisition has added approximately 600 employees to our current headcount.

Let me now turn the call over to Al Stinson to discuss the highlights of the third quarter FNF financials.

Thank you, Randy. Net earnings were 214 million, or $1.21 per share in the quarter. Cash flow from operations was 467 million for the third quarter, and more than 1 billion for the first nine months of 2005. Total title premiums of 1.4 billion increased 11% over the third quarter of 2004. Direct title premiums of 642 million increased by 22%, while total agency premiums increased by 3%.

For all of FNF, direct orders closed increased 15% in the third quarter versus the prior year and the fee per file increased by 5%. Escrow and other title-related fees of 324 million increased by 22% over the prior year, consistent with the increase in direct title premiums. Specialty insurance revenue of 95 million increased by 49%, driven primarily by the continued strong growth of both the flood and homeowner's insurance businesses. Flood insurance generated 41 million, with only 2.5 million of revenue associated with Hurricane Katrina claims. Personal lines insurance contributed 32 million and home warranty, 20 million.

As Bill mentioned, we expect to see the revenue benefit of increased flood claims in the fourth quarter. FISS contributed 393 million in gross revenue and 372 in external revenue for the third quarter, versus gross revenue of 324 million and external revenue of 307 million in the third quarter of 2004.

Integrated Financial Solutions generated 120 million in revenue. Enterprise Banking Solutions contributed 101 million and Mortgage Processing 78 million of the total segment revenue. The Lender Outsourcing Solutions segment generated 103 million in revenue for the third quarter. Default Management Services contributed 58 million in revenue for the quarter, flat with the third quarter of 2004. LSI generated 40 million in revenue for the third quarter, versus 34 million for the third quarter of 2004, a 17% increase.

Information Services generated 210 million in gross revenue and 194 million in external revenue for the third quarter, compared to 159 million in gross revenue and 144 million in external revenue for the third quarter of 2004. As Bill mentioned, the largest contributors to the growth rate were the valuations, tax and 1031 exchange businesses. Interest and investment income was 39 million, an increase of nearly 20 million from the third quarter of 2004, due to the much larger fixed income portfolio in the third quarter of 2005 and the more than 100 basis points average increase in short to intermediate-term treasury rates.

Net realized gains were 9 million, resulting from the sale of several debt and equity securities during the quarter. Personnel costs of 841 million were 20% higher in the third quarter of 2005 versus the third quarter of 2004. Title and Escrow segment personnel costs were 505 million, an 84 million, or 20% increase from the third quarter of 2004. The increase was driven by higher staffing levels related to the 12% increase in open order volumes and the 15% increase in closed orders versus the prior year.

In FISS, segment personnel cost of 221 million declined 4 million sequentially from the second quarter, which is the more meaningful comparison, due to acquisitions. Other operating expenses of 445 million were 41 million, or 10%, higher than in the third quarter of 2004. In Title and Escrow segment, other operating expenses were 240 million, a 19% or a 9% increase from the third quarter of 2004.

FISS operating expenses were down nearly 16 million sequentially from the second quarter. The total provision for claims was 135 million for the third quarter. The provision for claims for the title business was 103 million as we increased the provision to 7.4% of gross title premiums in the third quarter. Based on an analysis of the loss reserves as of September 30th and sensitivity models produced by our actuaries during that analysis, we decided to increase the provision for the remainder of 2005 in order to increase the absolute reserve level on the balance sheet.

The reserve for claims was 1.06 billion at September 30th, an increase of nearly 50 million from June 30th. The provision for claims in Specialty Insurance was 32 million in the third quarter. Actual title claims paid during the quarter were 63 million, a $2 million decline versus title claims paid during the third quarter of 2004 and an $18 million sequential decline from the second quarter of this year.

Interest expense was 48 million during the quarter. FIS interest expense was 37 million. The FNF senior notes interest expense was 8 million and other interest expense was 3 million. The largest components of minority interest were 15 million from FIS and 1 million from Cordova. Our investment portfolio was 5 billion, an increase of 1.1 billion from the end of the third quarter of 2004.

There are certain legal and regulatory restrictions on some of those investments, including secure trust deposits of approximately 1 billion, statutory premium reserves for underwriters of 1.2 billion, cash at international subsidiaries of 230 million and other restrictions of 150 million.

Of the 5 billion, 2.2 billion was theoretically available for corporate use, with about 630 million in non-regulated entities and 1.6 billion held through regulated underwriters. After the FNT distribution and the associated tax payment of approximately 100 million, the holding company will have approximately 475 million in cash on its balance sheet and no economic debt. Let me turn the call back to our operator to allow for questions.

Thank you. [Operator Instructions].

Our first question comes from Geoffrey Dunn with KBW. Please go ahead.

Thank you. Good morning, guys.

Good morning, how are you doing?

Good, thanks. First, on the FIS side, you completed the Webster conversion this quarter. You also signed the Hogan alliance. Can you give us an idea, did any of the Webster revenue actually hit this quarter, and what is your expectation for potential revenue addition from the CSC agreement.

Taking the second half of the question first, the CSC agreement, it's really hard to put a number on the revenue we'll generate from that. We will take over maintenance and we are going to go to number of customers and talk about ASP with those customers. Really, we're talking now about a 10 or $12 million run rate on Hogan revenue as it stands today. On Webster, no material revenue hit in the quarter other than some pass through charges to Webster Bank - no Webster revenue hit in the quarter, just some pass through charges to Webster Bank. And that's about, on the core processing side and the integration and TouchPoint pieces of business, that's an $80 million 10-year contract, give or take, and then we have items processing in addition to that and revenue on the second contract that was signed in conjunction with the Webster transaction, and I think items processing, Al, do you recall, it's 15 million a year or so?

I believe it's in that range, 15 million.

So we have some good revenue picking up from Webster as we go forward. The biggest point about Webster I tried to make in the call, though, was this is an example of the way we can do a product offering, a complete and total product offering, to these banks and the number 15 to number 125 and fully integrate all products and services that we offer and third party products and services. Our architecture is an open architecture, and this is where we believe we're going to have a lot of success going forward in terms of major conversions with this product offering.

So specifically the Webster deal sounds like it will start contributing revenue in the fourth quarter with the conversion complete.

That's correct.

And do you still back - previous guidance has been you think that the FIS business can grow mid single digit organic, maybe higher, if you execute. Do you still think that holds for your '06 expectations?

Geoff, this is Al. I still think we're going to be in this range. It is lumpy growth, as you have seen. We've seen a 10% organic growth rate in one quarter, and we have a slight negative growth on FISS in another quarter. But what's very encouraging is how much we have in the pipeline going into the fourth quarter and into 2006, with the potential of signing a number of major contracts as early as the fourth quarter.

So I think your growth potential is still very much in that range.

And then, Randy, you mention that you have already started eliminating positions. I think the number was 270. Are you able to quantify versus the personnel costs that went up this quarter, how much of an impact that might have, and give us a rough idea of how quickly you can change that personnel and operating cost lines in response to the market slowing.

Well, Geoff, we're down 270 right now, and we look at the fourth quarter with the market continuing to settle down as we go through October and November to continue with reductions. There's about a 30-day lag on the impact of those reductions. I don't know if I could quantify it in terms of a percentage at this point, but we'll be moving swiftly as we move through the end of the year.

Well, Randy's target to reduce those staff by year end is another thousand people. So that's what he's trying to work toward. Additionally, part of the personnel increase in the third quarter was the 600 people that were added in conjunction with the Service Link acquisition and the Service Link piece of business has already been reduced about 550 people.

The increase in personnel is a little bit skewed by the fact that 600 were added in one acquisition.

Okay, great, thank you.

Thank you. Our next question comes from Mike Vinciquerra from Raymond James. Please go ahead.

Thank you. Good morning, guys.

Good morning.

First thing, just a housekeeping issue, looking at the releases between FNF and FNT, direct orders open for the quarter at FNF was about 977 and FNT was 822. What's the difference between those two numbers.

The difference is really LSI, the LSI orders, title orders being opened in the FIS business segment. Is that correct, Tony?

Yes, that's right.

I see, okay, so apples to apples, though, we're looking at FNF, it's the same type of numbers we looked at last quarter, the 977, correct?

Exactly.

Okay, so that looks actually very, very promising for the fourth quarter, and I presume what we usually see is that you have front-loaded expenses because you're processing a lot of those open orders, but not closing them, say, in the third quarter. Should we be anticipating a very nice quarter from the title segment in Q4 and can you give us a sense for if you think fee per file will actually rise due to higher commercial orders and just potentially more purchase or refi business? I'm not sure what we're seeing in terms of mix.

What we're seeing currently year over year that the resale closings are up 5% from '04. That's increased our average fee per file to the range of about $200 per transaction. On the commercial side, commercial again, we expect a strong finish commercially. The average fee on the commercial transactions is up about 6% over the previous quarter, so even though the order volume will slow on the closing side, we think we will be protected with increased fee per file.

Do margins naturally rise coming out of kind of a higher quarter for new openings? Going into the fourth quarter, as we expect margins and title to actually rise on that basis?

It's difficult to say. I think the margins will be good as we go through the first quarter. Again, we're expecting some pretty good closings on the resale side.

Okay, fair enough. And then on the - Al, other operating expenses at the corporate level, pretty much flat quarter over quarter, even though your revenues were up nicely. I'm just curious, what gets lumped into that and was there anything specific that helped keep those costs under wraps?

You're talking about on the P&L, not segment by segment? You're just talking in general?

In general, correct.

Well, it gets to be such a mish mash, because you've got all the operating reporting segments lumped together on the P&L, so it makes it very difficult to tell you exactly what went up and down. I think the better way to look at it is on the segment information we have in the release, where we compare each one quarter to quarter. I think you've got a little bit better basis for comparison. But I can't really point you to anything off the top of my head that would be a large item in that without going through each one. And we could probably do that offline with you.

That's fair, thank you. And then one thing that also you mentioned that sounds pretty positive for Q4 is this flood work that you're doing. I'm not familiar with exactly how you generate revenue from the claims side. Could you guys give us a little detail on that because certainly it's going to be a substantial ramp in revenues, it sounds like, over the next quarter or two, from that.

Mike, it will be. The way the flood processing business works is that we're really a representative of the National Flood Insurance Program and we issue flood policies on their behalf and we receive a commission on the sale of those policies of roughly 32.8%, and we pay our agents that originate the policy between 15 and 20%, and heretofore we have been paying Fiserv a processing fee of between 4.5 and 5%. Early in the quarter, we actually assumed the processing of our own flood policies, and we're doing that for about half the rate that Fiserv was charging, so that's the first incremental increase, and that started hitting in the third quarter.

However, going forward, we also received roughly 3.3% of the value of a claim, and that's a claim adjustment expense that is paid by the National Flood Insurance Program to our company to process and adjust flood claims, and of course there were a lot of policies in the wake of Hurricane Katrina and Rita and now Wilma will be the same issue. And so we now have something on the order of 32,000 claims that we are processing, and of those claims at least 15,000 are total losses, so it's 3.3% times the amount of the claim times the number of claims, and that number is still evolving, because we're still adjusting. But you can see it's a very, very significant number of claims, and the maximum policy liability is $250,000 per policy. The average loss probably is far less than that, because a number of the houses were not worth $250,000. There were lesser numbers.

But our conservative estimate for the next two quarters is that we'll generate at least $65 million of pretax profits, spread fairly equally over the next two quarters, as a result of our flood processing.

Okay, thanks very much.

Thank you, our next question comes from Chris Upides from Viking Global. Please go ahead.

Hi, guys, it's actually Dan Sundheim. I'm looking at FIS and the EBITDA number I'm calculating for the third quarter is about 217 million before corporate overhead. Can you give us a sense of how much corporate overhead we should attribute to FIS, and then can you also tell us, of that 217 million, can we use that as a run rate for what the business will look like once it's with Certegy, or is there any seasonality that we should be aware of?

Well, let's take the overhead first. What you've got, if you look at the segment information, about 37 million of that interest expense is FIS, and about 13 million of the costs are FIS. So if you want to annualize that, four times 1352 let's say $50 million of overhead cost, exclusive - not including interest. Does that answer that?

Yes, that's helpful.

Then on seasonality, you do see some seasonal trend at FIS, and traditionally we have seen the business be lower at the start of the year and increases as you get more confident of your percentages on conversion and so on, and fourth quarter is usually pretty fairly strong. It's not like a title seasonality where you more have the bell-shaped curve, but it sort of ramps up consistently throughout the year.

So a $200 million range is reasonable on a quarterly basis for FIS EBITDA, though.

Yes, and I think your number, though, I don't think you subtracted the overhead, did you?

Well, it was 217 minus, you're saying, 13 million of overhead, ex interest expense. I don't ..

You're pretty close, pretty close.

Okay. All right, great. Thank you very much.

Thank you, our next question comes from Nik Fisken from Stephens Incorporated. Please go ahead.

Good morning, everybody.

Good morning.

Bill, on FNT's use of cash on a go-forward basis, you're paying a buck dividend and we're going to generate north of two on a cash basis it looks like this year and next. Can you kind of walk us through your plans there?

On the FNT dividends?

On the FNT use of cash.

Well, FNT now has borrowed $150 million, which is in the process of being funded out to FNF, so the first goal is to repay that $150 million, and as you know, in the first quarter of the year, normally we're actually cash flow negative in FNT because of the actual cash payment of bonuses and just seasonality associated with the business. So our goal would be by June 30th next year to repay the $150 million.

Once that is repaid, then we're going to be in a position to really take a good look at the FNT dividend rate. It's in FNF's best interest and in FNT's third party public shareholders to keep increasing that dividend, and as we stated earlier, that's our goal, to continue to reexamine the cash flow of FNT and to increase the dividend at a rate which is sustainable going forward. So we certainly don't want to have one good year, increase the dividend by $0.50 and the next year decrease the dividend by $0.15 and then increase it by 20 and decrease it by 50. So we're going to be conservative in the way we examine our dividend-rate at FNT, but the goal at FNT is to run its business conservatively and operationally in a streamlined fashion, create cash flow, which can then be placed in the investment portfolio and can earn additional cash as we move into a higher-interest rate environment, and as an equal part of that, continue to pay at least a $1 dividend and to reexamine that dividend on a go-forward basis, all to the benefit of our public shareholders and to the benefit of FNF. Because FNF, frankly, wants to have that dividend paid upstream and it's done on a tax-free basis as long as we own more than 80% of the stock or 80% of the voting power of the stock of FNT. And then FNF's dividend payment ability is also protected.

In looking at that, are we also going to look at special divs?

That's an ongoing discussion that we have around here, and being totally forthright with you, we go back and forth on that to question whether or not if we have a big year and a big gain, to repay a special dividend out of FNT and to our public shareholders, or should we just try and increase the dividend on a consistent basis and work toward a higher yield to our shareholders. And that's the question we're probably going to ask analysts, what they think about it, we're going to ask our investment bankers and we're going to have an ongoing discussion internally. The one thing you can be sure of is that we're focused on shareholder return and increasing shareholder value, and that's the way FNT is going to be operated on a go-forward basis.

And if we look at merging FIS into Certegy, how should we weigh that against your outlook to do more acquisitions, both on an FNF level and on an FIS level?

That's a double question, and as you know, we own about 50.3% - will own about 50.3% of the outstanding stock of FIS, and our auditors have advised us that we can continue to consolidate, provided we own 50% of the outstanding shares. Certegy will pay about a $0.20 dividend, and so that's additional cash flow for FNF, although it's fairly nominal. We own about 93 or 95 million shares, and so $0.20 a share is $20 million or $19 million.

We have also advised our shareholders that we're going to continue to examine increasing our ownership interest in FIS, because we believe it's in the best interest of FNF shareholders that we continue to consolidate these subsidiaries. And so we're in a blackout period at this time with Certegy just having released their earnings, but we view the Certegy stock value as attractive at this level, and we're going to be taking a look at increasing our ownership in Certegy, which would give us more flexibility in terms of making acquisitions in FIS.

At the same time, FNF is going to look at I'd say more modest-size acquisitions, because as you can see, we have about $415 million, give or take, of cash on hand and a $400 million plus or minus line of credit at FNF. And if we got some expansion of our multiple at FNF, it's possible for FNF to do a decent-sized transaction, but we may do several smaller transactions that will continue to diversify FNF. The acquisitions we make will be subject to leverage on their own behalf, so we would look at acquisitions but have good cash flow that could repay leverage that was placed on those acquisitions.

So, right now, we've sort of finished the restructuring of the holding company. We're taking a deep breath and we want to get the Certegy merger closed and get Lee Kennedy up here in Jacksonville and turn over the reins to him so he can really run an efficient operation. And then, next year, you can look for us to do a few things.

Great, and congrats on the quarter.

Thank you.

Thank you. Our next question comes from Sam Garfinkiel from Investor. Please go ahead. Sam, your line is open, please go ahead.

We'll go to the next line of Bob Napoli from Piper Jaffray. Please go ahead.

Good morning.

Good morning.

Okay, more and more information every quarter. You guys keep us busy, that's for sure. I wonder if - I guess, Bill, if you could go over again on the tech side the trend in organic growth and margin expansion, obviously you had talked about it up front about the slowdown in organic growth. I just wonder if you can give a little more color on that, and then the margins were up very sharply in the tech business. What was the driver of the margin expansion?

Taking the second part of the question first, the driver of the margin expansion is really related to the fact that our last major acquisition was the InterCept transaction last November, and since that point in time all of our business units have no longer been focusing on the distraction of doing due diligence and thinking about who's working for who and where business units are going to move after they're acquired, but they've been running their business. And what you're seeing is exactly what we hoped would happen last November after we slowed down the acquisition pace, is that we're running all the businesses more efficiently in the FISS business segment. The other thing that happened with regard to organic growth, and this is very important, is that Aurum was a distressed property when we acquired it, and the MISER platform, their ABS core processing platform, the Mercury platform, the Premier platform, which is really a reseller of ITI, and the Bemis platforms were all under distress, and Aurum was losing a lot of customers.

And what's happened is that those customers, the roll off has stopped, but through the second and third quarter - and we acquired Aurum roughly the end of the first quarter of '04. Through the second, third and fourth quarter of last year, we were rolling off a lot of customers that had given notice they were deconverting. So that was not a good thing, but we're basically through that now and now we're picking up customers on those platforms. The biggest win for us are the InterCept platforms, and that's where the strong organic growth is coming from.

Now, InterCept doesn't roll over and become a one-year subsidiary or a one-year acquisition until early November, or in a few weeks, and at that point you're going to start seeing organic growth being generated out of the InterCept business units. The other area that's growing strongly, and this is also part of InterCept, is item processing. And so we're gaining a lot of item processing customers and contracts, and you'll start seeing that organic growth kick in in the fourth quarter.

So there are positives ahead, but really we were fortunate in the second quarter of this year to have a very strong quarter, have some big termination fees with the Riggs contract, and in the third quarter we paid for it a little bit, and we knew we would because we knew we had lost those customers a year earlier and organic growth in some of the Integrated Financial Solutions business was going to be impacted.

Okay, another question on the Specialty Insurance business. You had dramatic growth there. Was some of the growth in Specialty Insurance this quarter tied to the hurricanes and the flood business? I think you said most of that was going to be in the fourth and first quarter.

Bob, I think we picked up less than $2.5 million of revenue in the third quarter, so it's all going to come, as Bill says, in Q4 and Q1 of next year.

What is driving the substantial growth, then, in specialty insurance?

We've really got ourselves now seamlessly integrated now to our title of direct operations, and the specialty insurance, the base of that business on the property casualty side has always been getting the referral order, or referral information, from our direct operations and title business to our specialty insurance business and selling resale customers homeowner's policies. So that's continued to be refined and we're doing better and better every month in terms of repaying those referral leads from title direct operations to specialty insurance.

The other thing that's happened is we continued to have strong organic growth in flood and homeowner's from third-party agents, and we have an excellent fellow who's CEO of our Specialty Insurance business. He's very conservative. He takes the minimum risk, he takes prudent risk, and so the result of that was for example in the wake of Hurricane Katrina and Rita, we had total losses in property casualty of about 3.5 million, but we're going to have in excess of $65 million of pretax profits from the flood insurance.

And the reason we had some homeowners policies in the Katrina and Rita wake is the result of dealing with agents that basically say, if you're going to get our flood business, you have to take some homeowner's business as well, so that's kind of the balance.

Okay, and last question, just on the acquisition front, out of FNF, I guess at this point, when you say diversification, it could be something totally unrelated to what you're doing now, or are you focused on adding to Specialty Insurance or are you just kind of looking at with the capital you have there kind of acting as a bit of a leveraged buyout kind of a shop with that capital?

We'd like to get involved in various types of processing, whether it's insurance claims processing, it's outsourcing type businesses, all related to things that we're already involved in, and those are the areas that we're specifically focused on at this time. If we were to do a - and the companies we buy would have leverage. We wouldn't put leverage at FNF, but we'd have leverage down at the companies we acquire, assuming they have adequate cash flow, and we're always open to dealing with our financial sponsor partners or other partners with regard to acquisitions. We're more focused on owning a majority interest, though, in the acquisitions, as opposed to a minority interest and being part of a club-type acquisition where we would be a 25% owner. That's not as attractive to us.

We're also interested in strong and heavy asset-based companies that have strong assets that could be sold to pay down debt, so there have been a lot of things that we're looking at. We haven't executed against anything at this point.

Thank you.

Thank you. Our next question comes from Carla Cooper with Robert Baird. Please go ahead.

Good morning.

Good morning.

I wonder if you could talk about - you mentioned potentially returning to acquisitions in '06, and if that applies to FIS, could you talk about what you'd be interested in looking at as part of that?

Well, Carla, with the Certegy transaction, obviously we're going to be interested in the payment space. The companies are very, very expensive, but there are some large and small entities that are public that would be of interest, and we need to get Lee up here and we need to sit down and really put a game plan together. We've talked about a game plan, but we're very focused right now on getting our merger put together and finished.

The other thing, the other point is, that once FIS is a public company and if it trades at a comparable P/E ratio to its peers, then FIS has a security it can issue in conjunction with acquisitions, and we believe that there are some kind of orphaned public companies that are a little bit smaller that are both in the FIS space and the Certegy space that could be interested in talking to us. And anything we do, of course, is going to be friendly. It's going to be a positive for both the shareholders of the company we approach and for our own shareholders. But at least we now have flexibility, as opposed to using FNF stock with a low P/E or all cash, we do have the flexibility of using stock and cash at the FIS level, or perhaps have FNF make additional investment in FIS to maintain its ownership position and have FIS issue additional shares.

So we have a lot of flexibility now, which is the precise position we wanted to be in.

Right, and could you talk a little bit about - you mentioned pipeline strength and you talked a bit around some of those things, but particularly no the item side and the InterCept, I think you mentioned those were strong. What do you think is really driving that?

Well, I was talking to Gary Norcross the other day, who runs IFS, and basically he's telling me that we're getting about 35% of the de novo banks are going on the BankPac, one of our other platforms, so that's very encouraging, because that says that we're getting the banks as they're first being formed and they're coming to us to move on one of our platforms. And so that is of course an InterCept platform.

Item processing, we now have - we have our 53 or 55 centers across the country. We're working very hard on integrating our entire product suite of offerings into those processing centers, and unfortunately we only have about five of the centers that have been fully converted from, for example, AFS to Bankware and so we've got a ways to go there. But every time we do one of those transactions, we basically take revenue that was going to a third party and we bring it back into the FIS fold.

So - and item processing, while checks are a declining business, in terms of the way we attack the check business, it's going to be very, very positive, because as the mid-size banks are no longer able to effectively and economically do their check processing, we become an outsource solution for them. So we believe we have an eight to ten year program of having a very, very strong items processing business before we start being impacted by check declines.

Great, and then, sorry - two more quick ones, if you don't mind. The default business, bankruptcies have ticked up, but can you give us some sense of the timing on when you might expect that business to - on kind of what your thought is there I guess with respect to kind of nationwide bankruptcies?

The dark side is lurking. We saw the first tick up in the rates of defaults, and we're talking about - I think it's about a third of a percent in the third quarter. That's the first increase in the default rate in several years, and it's small, but the rates keep moving up, there are people that are over leveraged, and the default rate will move up. We do not get involved in a default until about 90 days after the loan has gone in default. That's when it really gets referred to us, because a lender goes through the first 30 day program of giving grace periods. Then it goes through another 30 to 60 day period of trying to work with the borrower. Sometimes working with the borrower is outsourced to us, but generally that's retained by the lender who has got the loan that's in trouble. Then, finally, it's referred to us. So whenever the default rate increases, you can figure that 90 to 120 days later, our business is going to go up.

Thank you, and then just finally, if you've got it, you mentioned termination fees I think were - it's been a long day, either up or down 2 million. Could you talk about the actual growth number amount of term fees in the quarter, in FIS?

Carla, this is Al. I don't think we had any significant termination fees in the third quarter. I think what we said was term fees were down quarter over quarter, which was one of the drivers of the lower growth rate, but I can't think of a single termination fee of any consequence.

These are just the individual fees based upon IFS customers that were being merged.

Right. You could have a few small ones, but that would be about it.

Did I hear you say they were down 2 million over the quarter a year ago?

Correct, that's right.

Great, thank you. Thanks.

Thank you. We'll now go to the line of Lu Sykes with Pennant Capital. Please go ahead.

Hey, guys, good morning.

Good morning.

Could you help us understand the balance sheet at the various levels a little better, starting with FNT, I see about 1.2 billion in net cash and investments after taking out the debt, the claim loss reserve and the secure trust deposit. How much of that do you need to run that business, and what are the restrictions on that cash?

And we're talking at the FNT level. Tony, do you want to try that, or - it gets pretty complicated. We could also take one like that offline.

I would say most of that is in the regulated (inaudible)which comes up systematically, usually on a quarterly basis, as dividends from our subsidiaries. We probably have about 80 to 100 million that's currently available at the FNT level.

But how should I understand this? Does this basically mean that you don't really need it to run the business, but there are restrictions in how fast you can dividend it out? Is that sort of how I should think about it?

That's right. We're definitely cash flow - we've generated about $600 million in cash flow at FNT for the first nine months, so we clearly build cash and then dividend it up periodically, usually on a quarterly basis.

Eventually, you get all of the cash from the operating entities, net of what has to be there for statutory purposes, but it's just sort of a cycle that times to flow through to the cash flow statement.

And at the hold corp level, if you take out the net debt for FIS, what is the net cash there?

We would be at 475 million of net cash after the 150 million comes up to the parent and after we pay the taxes relative to the gain on the distribution.

And that 475 still excludes the promissory note or the note receivable from FNT, which you included as debt on the FNT balance sheet, right?

No, that would be zeroed out. In other words, the money would come up to holding first. That note, the $150 million note, goes away. And then if you're talking about the mirror notes, you've got the mirror notes of $500 million between the parent and the sub. And then that's going to go away when we get our exchange done. We're filing our S-4 on the exchange probably today, and then the title company, title group, assumes that debt.

Right, so does the 475 include that 500 million as an asset?

No, it does not.

And at the FIS level, what are the net debts there?

Well, your net debt is about 2.6 in debt net of cash. I think it's more like 2.5, and we continue to pay that down on a discretionary basis every six months.

Okay, so with the total FNF consolidated you have about 200 million in net debt after taking the claim loss reserves, the secure trust deposits, et cetera, into account. So if you have 2.5 billion in net debt in FIS, that leaves about 2.3 billion or $12, $13 or so in net cash at FNF and FNT.

You're going pretty fast on those. I suggest what we do in sort of filling in the blanks there is just do that offline. You can call Dan Murphy or myself.

Great, appreciate it. Thanks, guys.

Thank you. Our next question comes from Roger Harris with Porter OrlandInc. . Please go ahead.

Hey, Al, can you do me a favor and walk us through the internal growth that FIS has, again? I saw the 6.6% in the press release, and then I thought I heard something about averaging it over nine months to get a better indication, and 1.5% in the third quarter, and so just so we're all perfectly clear, can we walk through that?

Yes, I can do that, Roger.

Thank you.

For the quarter, FIS, including all the business units, grew by 6.6%. What we disclosed was a lot of people focus on FISS, which is the bank processing piece, by and large, and that had negative growth for the quarter of 4.5%, but growth for the nine months of 1.6%. All right. Now, we said we had a tough comp against the prior year third quarter in FISS, the processing piece, because in that quarter we had grown it 10%. So what you're seeing is sort of this lumpy pattern. We still stick by our estimates of 5 to 7% because of the strength of the pipeline that we have and just what we see into the future.

The one thing, though, Roger, that I want to emphasize is if you look at where we are in all of these business units compared to our plan, we are slightly behind on revenue, but we are very much ahead on profit. So in terms of EBITDA growth, we've got the EBITDA, we're just lagging a little bit on the revenue growth. So I think both are important, but we're very encouraged on the profit side.

Terrific, thank you.

Thank you. And our final question in queue comes from Geoffrey Dunn with KBW. Please go ahead.

Actually, I had the same kind of cash questions, why don't you give it to another.

And we have no further questions in queue. I'll turn it over to Mr. William Foley for any closing comments.

Thank you. We made significant progress on our restructuring FNF into a holding company over the last several months. FNT is operating as a majority-owned publicly traded subsidiary of FNF. With the announced Certegy merger, we are on our way to having FIS also trade as a majority-owned publicly traded subsidiary of FNF. That should give our shareholders very good transparency relative to our particular assets.

Finally, FNF also has 100% direct ownership of our specialty insurance business. We will continue to look for acquisitions at FNF with the continued goal of maximizing shareholder value. 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, as well as for using AT&T's Executive Teleconference Service. You may now disconnect.