Fidelity National Financial Inc (FNF) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the FNF second-quarter earnings conference call. At this time, all lines are in a listen-only mode. Later, there will be a question-and-answer session and instructions will be given at the time. (OPERATOR INSTRUCTIONS).

At this time then I would like to turn the conference over to Mr. Dan Murphy. And as a reminder, today's call is being recorded. Please go ahead, sir.

Thank you. Good morning, everyone, and thanks for joining us for our second-quarter earnings conference call. Joining me today are Bill Foley, Chairman and Chief Executive Officer of FNF; Al Stinson, COO and CFO of FNF; Randy Quirk, CEO of FNT, and Tony Park, CFO of FNT.

On the call this morning, we'll begin with a brief strategic review of recent developments from Bill Foley. Randy Quirk will then review FNT's stand-alone results, and Al Stinson will finish with the review of the summary financial highlights for the operating subsidiaries of FNF. We'll then open the call for your questions and finish with some concluding remarks from Bill Foley.

This conference call contains forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future economic performance, and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The risks and uncertainties which forward-looking statements are subject to include, but are not limited to the possibility that the transactions that we announced in April will not be completed, or will be completed in a different form or with different effects on holders of the stock of FNF, FNT, or FIS, or will not be successful in achieving the goals targeted; changes in general economic, business, and political conditions, including changes in the financial markets; adverse changes in the level of real estate activity which may be caused by, among other things, higher increasing interest rates, a limited supply of mortgage funding, or a weak U.S. economy; our potential inability to find suitable acquisition candidates; acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus or difficulties in integrating acquisitions; our dependence on operating subsidiaries as a source of cash flow; significant competition that our operating subsidiaries face; compliance with extensive government regulations of our operating subsidiaries; and other risks detailed in the statement regarding forward-looking information, risk factors, and other sections of the Company's Form 10-K and other filings with the SEC.

This conference call will be available for replay via webcast at our website at FNF.com. It will also be available through phone replay beginning at 1:30 PM Eastern time today through next Wednesday, August 2nd. The replay number is 800-475-6701 and the access code is 835470.

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

Thanks, Dan. We continue to make progress towards the closings of the transactions we announced in late April. On June 26, we announced that FNF and FNT had signed a formal securities exchange and distribution agreement. Assuming the $275 million in cash is transferred, FNT will issue 45.7 million shares of FNT stock in exchange for FNF specialty insurance businesses, FNF interest in Sedgwick and related businesses and other assets.

Combined with the 143.2 million shares of FNT that FNF currently owns, FNF anticipates distributing approximately 188.9 million shares of FNT to FNF shareholders. This works out to approximately 1.07 shares of FNT for each share of FNF, giving FNF outstanding share count of [176 2 million] shares as of June 30th.

On that same day, we also announced that FNF and FIS had signed a merger agreement under which FNF would be merged with and into FIS. FNF shareholders will receive approximately 0.546 shares of FIS for each share of FNF, based on the 96.2 million shares of FIS that FNF currently owns and the 176.2 million outstanding shares of FNF as of June 30th.

Last Tuesday, we filed the Schedule 14C preliminary information statement related to the FNF/FNT transaction and the Form S4 registration statement and joint proxy statement related to the FNF/FIS merger with the SEC. Yesterday, we filed the Form S-1 registration statement related to the FNT shares that will be distributed to FNF shareholders.

All of the documents that have to be filed have now been filed with the SEC. We will now wait to hear back from the SEC with any comments they may have on the documents. We do not expect hear back from the SEC for about 30 days. Once the necessary documents are cleared with the SEC, we will set the annual meeting dates and expect to close the transactions as soon as possible after those meetings and the votes take place. We still expect to close this transaction or series of transactions early in the fourth quarter.

Randy Quirk will discuss the title business in more detail, but I wanted to touch on a few important points, as their seems to be significant concern about the title market judging from both the feedback from the market and the recent performance of FNT's stock. We remain confident that we can generate the 10% annual pretax margin in a 1.8 trillion trough mortgage market scenario. As we have for more than 20 years, we continue to monitor open order volumes, headcount, and productivity metrics for every single operation on a weekly basis. If the market and order volumes turn down, we are in a position to quickly reduce headcount as the metrics dictate.

To this point, we have not seen a downturn in order volumes. Additionally, our compensation system is weighted to variable compensation, as sales commissions and operational management bonuses decline as order volumes and profitability decline.

Finally, there seems to be a lingering impression that the title business is somehow perfectly correlated with the new home construction and performance of home builders. Currently, orders related to new homes are only about 10% of total orders that include resale, refinance, and new home construction and commercial transactions.

As to Fidelity National Information Services, that Company continues to perform very well, particularly in the international and integrated financial solutions businesses. Organic growth for the quarter was 3.8% and 6.2% for the first six months of 2006. Additionally, the prior year quarter included a large termination fee from Riggs Bank. And after adjusting for that termination fee, the organic growth rate was 6.2% for the second quarter. On the FIS conference call this morning, organic growth guidance was increased by 1% to a range of 5 to 7% for the full year 2006 from the previous guidance range of 4 to 6%. EBITDA growth for the second quarter was 7.3% and 10.4% for the first six months of 2006. Adjusting for the Riggs termination fee, EBITDA growth was 16.7% for the second quarter. On the FIS conference call this morning, EBITDA growth guidance was also increased by 1% to a range of 10 to 12%.

The international marketplace represents a strong growth opportunity for FIS. In the past few months, FIS announced two significant transactions in Brazil that are expected to generate approximately 3 billion in combined total contract value over the next 10 to 12 years. Last week's launch of the new item processing and BPO operation in Brazil is a great example of leveraging existing customer relationships, technology, and management experience to broaden FIS market presence.

We believe that the combination of core processing, card and payment processing, and BPO services provides FIS with the most competitive product offering in the industry and one that can be deployed in other markets around the world. We're very pleased with the manner in which FIS and the Certegy businesses have come together and with the strength and enthusiasm of the combined management team. We believe that the strategies that are being put in place today will enable FIS to generate higher revenue growth and operating efficiencies in the future.

Our specialty insurance businesses continue to produce significant growth this quarter. Our flood insurance business continued to provide a recurring revenue stream as the nation's largest writer of flood insurance with more than 650,000 flood policies in force as of June 30th. This includes approximately 63,000 policies related to the June 28th purchase of the existing flood insurance policies of Southern Family Insurance Company through the Department of Financial Services in the state of Florida. Excluding the Southern Family purchase, in force flood policies grew by more than 7% for the second quarter over the prior year. It is also important to remember that we take no underwriting risk in the flood business.

Our personal lines business continues to grow profitably as policies in force as of June 30th totaled more than 207,000, an increase of 43,000 policies or 26% over June 30th, 2005. Finally, the home mortgage business generated strong growth, producing 11% topline growth for the second quarter over the prior year.

Sedgwick announced two acquisitions during the second quarter. The first was VPA, Inc., a privately held claims services organization specializing in absence and disability benefit management programs for large employers. VPA has annual revenue of approximately 20 million, and as of this date has been fully integrated within the Sedgwick business lines.

The second was the announcement of the signing of a definitive agreement to acquire CompManagement Inc. or CMI. CMI and its affiliates provide third-party claims administration in a variety of related claims risk and benefit consulting services to clients nationwide. 2005 revenue was 145 million.

Closing of the CMI acquisition is expected to occur late in the third quarter or early in the fourth quarter. After the CMI acquisition, Sedgwick will have a run rate of approximately 600 million in revenue, well over halfway towards our stated goal of seeing Sedgwick reach a revenue base of $1 billion over the next 18 to 24 months. We will then seek the most efficient means of maximizing the value of Sedgwick for our shareholders.

On July 3rd, 2006, the Commissioner of the California Department of Insurance proposed regulations governing ratemaking in the title insurance industry. We believe, and have been advised by counsel highly experienced in these types of matter, that significant obstacles exist which will likely result in the proposed regulations not being adopted.

First, we believe that the Commissioner does not have the authority under the California Insurance Code applicable to title insurance to propose ratemaking regulations. In fact, our counsel believe that the Commissioner violated California statutes by issuing the proposed regulations.

Second, the proposed regulations are not based on facts, and are actually contrary to facts or law, whether or not the Commissioner even has the authority to propose the regulations, which we believe he does not.

The law gives the industry a number of avenues to pursue through regulatory and judicial processes to demonstrate that the proposed regulations should not be adopted. This process has begun, and we're active participants in it. We believe in cooperating with our regulators. However, when they are flatly wrong, we respectfully disagree and challenge their actions.

Several other states are also evaluating title insurance rates. We believe that our rates are fair and reasonable.

Let me now ask Randy Quirk, the CEO of Fidelity National Title Group, to comment on the title business and highlights of the quarter for FNT.

Thank you, Bill. Order volumes were extremely consistent during the second quarter. We opened more than 697,000 orders in the quarter. We opened 217,700 orders in April, or 10,900 orders per day; 243,000 orders in May, or 11,000 orders per day; and 236,500 orders in June, or 10,800 orders per day.

For the first half of July, we are running a similar open order levels. In fact, we have been running a plus or minus 11,000 orders per day since February of this year, and our expectation is that we will continue to operate at somewhere near that per-day order levels for the next several months.

The focus remains on maximizing profitability in any type of market environment. As Bill mentioned, we continue to monitor order counts, headcounts, and productivity metrics every single week, and are prepared to make immediate headcount reductions if the metrics dictate such a move.

However, with the stability in order counts, our overall headcount has remained fairly consistent for the last several months. We ended the first quarter with approximately 13,500 employees in our title operations, and we are at approximately the same level today.

Productivity metrics are monitored every week for each of our operations. And while the total headcount numbers have remained the same, there have been additions and reductions to headcount in individual operations. Given the consistent open order volume, stable [stacking] levels, strong cash flow generation, and our sequential improvement in monthly financial results through the second quarter, we expect third-quarter pretax margins and overall financial results to exceed those of the second quarter.

On the commercial title side, we opened more than 14,000 commercial orders and closed more than 9,000 commercial orders in our national commercial divisions during the second quarter of 2006, generating more than $68 million in revenue. This translated into nearly 14% of total FNT direct title premiums for the second quarter, and a 3% increase in commercial revenue over the second quarter of 2005.

From an expense standpoint, personnel expenses decreased by $14 million or 3% for the second quarter of 2006 over the second quarter of 2005. As a percent of title and escrow revenue, personnel expenses were 31% for the second quarter of 2006 versus 29% for the second quarter 2005, and 34% for the first quarter of 2006.

Operating expenses increased by $1 million for the second quarter of 2006 versus the second quarter of 2005. As a percent of title and escrow revenue, other operating expenses were 16% for the second quarter of 2006 versus 15% for the second quarter of 2005 and 16% for the first quarter of 2006.

We continue to provide for claims, losses at 7.5% of gross title premiums in the second quarter of 2006 as we continue to build the absolute level of reserves on our balance sheet. We expect to provide for claims losses at 7.5% of gross title premiums for the remainder of 2006. This increased provision was a 1% drag on our pretax margin this quarter compared to the 6.5% provision level in the second quarter of 2005.

Actual claims paid during the quarter were $51 million, resulting in a $40 million increase to our balance sheet reserves to more than $1.1 billion.

Our debt at March 31st consisted of the $500 million face value in senior notes and 75 million in outstanding under current credit facility. We repaid $25 million under the facility on June 30th. Our debt to total capital ratio was 18% on June 30th.

Finally, our investment portfolio totaled $4.1 billion at June 30th. There are certain legal and regulatory restrictions on some of those investments, including secure trust deposits of approximately 1 billion and statutory premium reserves for underwriters of nearly 1.6 billion. So approximately 1.5 billion was theoretically available for use with about 150 million in nonregulated entities and nearly 1.4 billion held through regulated underwriters.

We have remaining capacity to dividend approximately 215 million of that 1.4 billion out of the regulated entities in 2006. So we should have access to more than $365 million in free cash for the remainder of 2006, made up of the 215 million in additional dividends out of underwriters, and the 150 million in cash currently available. We will also generate cash at the unregulated entities during the remainder of 2006 which will be in addition to the $365 million.

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

Thank you, Randy. Net earnings were 133 million or $0.73 per share in the second quarter, with cash flow from operations of 336 million. Those results include 3.7 million or $0.01 per diluted share in expenses related to the transactions we announced in April, and also the $0.01 dilutive effect of the outstanding options of our publicly traded subsidiaries, FNT and FIS.

We have three fully or majority-owned operating subsidiaries -- FNT, FIS, and specialty insurance, each of which is a reporting segment. Sedgwick, our minority-owned operating subsidiary, is treated under the equity method of accounting, and is not a separate operating subsidiary for segment reporting purposes.

FNT generated nearly 1.6 billion in revenue for the quarter and a pretax margin of 11.6%. Net earnings were 117 million, with earnings per share of $0.67. As Randy mentioned previously, we had -- there's a drag of an increased claim loss provision of 1%. That would impact pretax income by approximately $12 million.

Cash flow from operations was 222 million for the second quarter, and return on average equity was a very strong 18.4%. The annual dividend of $1.16 per share equates to a current yield of more than 6%. FIS generated more than 1 billion in total revenue for the first quarter, and as Bill mentioned, this resulted in an organic growth rate of 3.8%. If you remove the impact of the Riggs termination in the second quarter of 2005, the FIS organic growth rate was 6.2%. The transaction processing segment contributed approximately 615 million of that revenue, or 60% of total FIS revenue. And lender processing generated approximately 410 million or 40% of total revenue.

EBITDA for the quarter was 263 million with an EBITDA margin of 25.7%. Free cash flow, defined as net income plus depreciation and amortization less capital expenditures, was 96 million. And cash earnings, defined as net earnings plus amortization of purchase price intangibles net of income tax, were 95 million for the second quarter.

Specialty insurance revenue was 101 million for the second quarter, which was a 28% increase over the second quarter of 2005. Flood insurance generated 35 million in revenue and grew by 30% over the second quarter of 2005. Personal lines insurance contributed 39 million in revenue growing by 40% over the second quarter of 2005. And home marketing produce 20 million in revenue during the second quarter and 11% increase over the second quarter of 2005.

The overall pretax margin for specialty insurance was 15.3% for the second quarter, producing pretax earnings of 15.5 million. Our share of Sedgwick's net earnings was approximately $0.5 million for the second quarter. While we do not consolidate the results, Sedgwick had revenue of 112 million and EBITDA of approximately 15 million; interest expense of 5.5 million on the 315 million in debt from the acquisition; D&A of 6.6 million; and net earnings of 1.3 million for the second quarter.

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

(OPERATOR INSTRUCTIONS). Geoffrey Dunn.

Judging by the current cash situation at FNT and more cash coming over in October, as well as what looks like an underlevered balance sheet in the pro forma Company, what is your appetite for share repurchase once this gets closed in the new FNF? And are you looking into any kind of systematic plan that might allow you to start buying back stock right out of the gate in the blackout period?

Jeff, that's a very good question, and it's apropos in light of the share price of FNT and the anticipated share price of the combined companies. Obviously, if we're going to be a 6% dividend yielder, it makes a lot of sense for us to engage in a pretty aggressive share repurchase program assuming we don't have a more appropriate use for our cash resources. We do believe we're going to be making some acquisitions following the conclusion of these transactions -- of these combinations of transactions. Those acquisitions that we're taking a look at to date are nonstock issuance type transactions -- just cash transactions.

But for the first time in several years, really, we're taking a very, very hard look at a pretty aggressive stock repurchase program at the point in time when we can do so, which will be following the shareholder vote. And we should -- if the shares are going to be trading at a level like they are today, then it's time for the Company to do what did back in the mid '90s, and that's repurchase a significant number of shares.

Great. And then either for Al or Tony, the tax rate at FNT for the second quarter in a row, I believe, is running more towards the mid 30s. Is this a new trend in the title operations, or are we going to expect to bounce back up to 37.5?

Jeff, what's going on there is the tax provision for FNT, as you say, was 35.5% for the quarter compared to 37.7 in the prior year. The major reason for that is the increasing interest investment earnings which are, by and large, tax exempt. So as those earnings from investments go up, it decreases the tax provision because you've got an increasing amount of tax-exempt interest.

Okay, and last question --

(multiple speakers) We will be able to sustain that rate for the rest of the year.

Last question is second quarter, I believe, in a row with strong agency premium. Can you talk to what's driving that? Is that something specific to you, or is it more telling of what's going on in the broader U.S. market mix?

Sure, Jeff. This is Randy. What we see it is agency revenue in certain geographical parts of the country are still very, very strong. The Northeast, the Midwest, the north Midwest, and particular the Southeast, where we have most of our agency operations, and where the agency revenue is most prominent, are still very, very good. The falloff in title premiums for the most part are over on the West Coast, where we are more heavily engaged in the direct operations. So it's more of a geographical issue with -- actually, year-over-year, the title premiums being up on the agency side. It's really the marketplace in the South and the Northeast.

Mike Vinciquerra.

You mentioned kind of the regulatory issues out on the West Coast in your comments. But I'm just curious if you can give us some more thought on -- it seems to be a persistent amount of noise from a variety of states just over title pricing, over whether or not people got the appropriate refi rates and so forth. And I think that's, as much as anything, creating some problems for the stocks in the sector, particularly yours.

So can you just tell us how you feel this is going to play out over time? Are we going to continue to see other states and groups coming up with lawsuits because they've seen a few settlements by the industry and they feel like there's some potential money to be had there?

That's a very difficult question. On the California issue, we're just going to rely upon the statement that was made in the formal presentation.

With regard to other states, we really believe that the most -- the worst is behind us, that the most intensive intrusion into our business is really behind. And that is kind of evidenced by the New York result and the New York settlement. There just really isn't very much there in terms of overcharging or inappropriate behavior. We have been very aggressive about monitoring the performance of our employees and the performance of our agents over the last several years, and that monitoring and those improvements in systems are really beginning to take hold this year. And as we go forward, they will be even more prominent.

So it's unfortunate that there's a cloud, but we really aren't seeing anything very significant on the horizon.

Okay. And then just following up -- just on pricing a general, any particular trends there? Do we continue to expect to be able to hold the current rates that are filed out there among the various states over the next year or two?

Well, we really haven't raised rates. Back in the '80s and early '90s, rates were raised fairly consistently. And we just haven't raised rates really for more than 10 years in any significant fashion. And that being said, where there are promulgated rates -- rate programs like Texas, they will be reviewed by the Texas Department of Insurance. And rates do get adjusted periodically.

But as a general rule, rates should be about where they are today -- although couch that and continue to think about the fact that we've continued to develop abbreviated products and products are designed to be quicker, faster, and more efficient evidence of title. And those products are generally at a lower price point, and they generally are being issued to lenders. So there are products that rates -- that pricing will be impacted. We don't see a big rate impact though.

Great. Thank you for those thoughts. One other thing -- shifting over to the insurance services, we understand the goal of getting to that $1 billion run rate in revenues. Where else -- what other types of products do you think you need in that business to kind of have a full suite for the claims management side? What else might you be considering?

Need to more of involved on the medical side and the managed care side of the business, and there are opportunities available to us. We continue to have about a 20 to 25% increase in annual revenue in Sedgwick, and that run rate is being maintained. So it's really -- we don't know that there's another significant acquisition, but there are efficiencies that we can develop with regard to the way Sedgwick runs its business and penetration of additional product lines with existing -- selling additional product lines to existing customers. So many of the very large customers we do business with -- we're not the only provider. We're not the exclusive provider. And that's going to be the major area of growth as we go forward.

[Darren Pellar].

Just a quick question about the provisioning. With refi volumes expected to come down, first of all, can you comment on your expectation for where you see just total refis going as a percentage of originations? And then, in addition, how is that going to affect -- you guys said there was an expectation of keeping the provisioning around 7.5%. But just curious how you're going to maintain that, given the expected slowdown in refi?

Well, the 7.5 reserve rate is really based upon an actuarial evaluation of our loss provisions. And what we are seeing this year is what we expected to see -- is an improvement in the number of claims being submitted, the level of claims in terms of the dollar volume of risk per claim, and also claims payments being made. So as Randy said, we have had an increase of 40 to $50 million -- is it so far this year, Tony --?

67, I think --

(multiple speakers) $67 million for the whole year in terms of our loss provision. So that's very, very encouraging. And part of that is the result of reserving at 7.5% instead of 6.5 or 5.5 as we reserved in 2003 and 2004. And so we're seeing the results we expected to see, and our loss reserves are very, very healthy at this point. So maintaining 7.5 -- we don't think there's an issue with that this year. If we continue to have positive development in our loss reserves and our modeling, then we would anticipate actually dropping that reserve rate sometime in the future.

So the refis -- the bubble in refis that occurred in '03 and '04 and a little bit in '05 created some claims that were really based upon just so much volume and not being able to handle that volume and making some mistakes -- particularly in our direct operations and also with our agents. And that's -- we're kind of working our way through that.

So we're feeling pretty good about where we are reserving, knock on wood. I mean, we think we're in pretty good shape, and we don't really believe falling refis or going to have an impact on the reserve rate or the amount of reserves -- really won't make much difference.

Okay. And then with commercial title, can you just comment on where you -- sort of your strategy on growing that out, and where you are with that right now in terms of overall percentages of premiums and where you see that going forward?

Do you have those numbers, Randy?

Yes. Our commercial revenue in the second quarter increased over the first quarter -- or year over year by 13%. We see a very strong market still in New York and the Chicago-area, and particularly in Southern California. So the average fee has increased by 15% year-over-year, and we expect more of the same in the second half. Our operators and our commercial units are very optimistic about all facets of the commercial business.

In the total percentage of the business, what does the commercial represent?

14% --

(multiple speakers) 14% on the title premiums.

Okay, then just a quick last question. Is there any concern going forward with the restructuring between losing synergies between the title business and the FIS business basically going forward, given the spin off?

Well, there are relationships that will no longer be as vibrant. And we have to be very honest about that. However, there are a number of contractual arrangements that are preset between the two entities. And we're attempting to maintain those synergies as much as we possibly can. We continue to have FIS be our IT sponsor, developer, Monitor. So software development is really being outsourced to FIS.

FIS, on the other hand, continues to have its LSI business which is underwritten by Fidelity National Title and by Chicago Title. So we continue to earn strong agency premiums at a very good rate, and that's a very long-term relationship.

So it's not going to be perfect, but even when we were all part of one Company, it wasn't perfect. And it was actually complicated because we had the FNF Board of Directors, the FNT Board of Directors in the FIS Board of Directors. And every time we needed to do a contract between FNT and FIS, it had to be signed off three times. So that wasn't perfect either.

And we really believe that restructuring is frankly in the best interest of our shareholders, that it allows FIS to operate as a separate independent processing business and trade at a P/E ratio that's appropriate to that line of business. It allows FNT to continue to produce the cash flow from new FNF and allow FNF to hopefully re-create another FIS over the next three years, and perhaps do the same sort of transaction again.

So we're realistic in terms of the fact that new FNF will be treated as a low-P/E yield value stock title insurance underwriter, and we'll continue to make acquisitions with the cash flows being generated by FNT and the other subsidiaries of FNF. And it will allow FIS to grow its business through the use of stock and cash.

So we believe it's a 70, 80% positive and a 20% negative to be totally frank.

Bob Napoli.

Thank you. Following up on the thought process, Bill, of acquisitions, you seem to have some things lined up there for the new FNT. And I was wondering what areas in particular -- are you talking primarily related to Sedgwick or other areas?

There will be -- Sedgwick will continue to grow on its own and will continue to fund our proportion of cash necessary to grow Sedgwick. We will with Sedgwick attempt to use leverage to the extent possible. And that's kind of based upon what our partners want to do. And it's really what we want to do too. It's not going to be a big cash drain on new FNF.

We believe with the markets trending the way they are that there may be some distressed opportunities for us take a real good look at. And we're actually setting up a small internal distress group to look at various properties that may been overleveraged, that there's a chance for us to go and restructure and in effect create a value purchase. And that really what was done with the Cascade Timberlands purchase.

We also believe as the markets softens in the title business that there will be opportunities in the title industry. And we're primarily a title insurance underwriter in new FNF, and just don't know what the future might bring in terms of acquisition possibilities, even from other large underwriters. So we'll have to wait and see and see what the opportunities are.

So the distressed opportunities could be in a wide range of different types of industries.

Could be. But they will not be in the technology sector. They will be in what you would consider value type investments.

Okay. And with regards to be California Insurance Commissioner, what kind of a process do you think is going to happen there from -- and what kind of timeframe does --?

I think we have some days on that. It was like -- did you know, Dan?

August 30, Bob, is a public hearing that the Commissioner has set up. And then after that, I don't know that we're too sure on the timeframe. We're just going to -- it's not something that we've gone through before. That's the one date that we know for sure -- is August 30th, and then we'll just have to see how things go from there.

And how would it affect your business if he's successful in his endeavors?

It would result in rates being decreased, and probably increasing opportunity with regard to California situations, because the biggest impact this is going to have is going to be on agents. And we have a very small agency base in California. And other underwriters have a much larger agency base, and those agents are going to be really impacted.

So every situation, there's always opportunity if you just look at the situation in the right way. And so out of adversity sometimes comes great opportunity.

With regards to FNT -- I don't know if you gave this, but under the new structure, the new FNT, what is the pro forma book value? We have the share count at 220 million shares. And I don't know if you have the pro forma -- if that's right, if you have the pro forma book value, intangible book value for the new FNF.

Bob, this is Al. I don't think we've got it at hand. The current book value of FNT is (multiple speakers) 14 64. I think we'll have to handle that one with you off line. We just don't have that at hand -- what the pro forma would be.

Okay.

Probably 3.25 billion, maybe, of equity. So you could calculate it from that.

Okay. And last question -- the New York agreement -- has that been implemented? And now, do you have any better clarity on the effect on your business from that agreement?

Well, that has actually been implemented. But we're now in the process of rate discussions with New York and a hearing process that will be concluded by the end of the year. So that part is still in process.

That's something in addition to the --?

No, that's included in the original agreement.

Okay. And what are the hearings -- the hearings are validating the agreement or --?

Validating rates on a go-forward basis through the rate board in the state of New York.

Validating rates in line with the agreement?

(multiple speakers) Correct. And actually again, the largest impact of these rate adjustments is on agents. And they're the ones that are really screaming about this. So again, opportunity.

Thank you.

Adam Weinrich.

You mentioned earlier that you expect in a trough market of, say, 1.8 trillion [any] originations that would have a pretax margin of 10% at FNT. Just so I'm clear, is that a net margin, an EBIT margin? What is that?

That would be an EBIT margin.

I guess because the reason I ask is because the margins looked the little light the last two quarters, or the average of the first two quarters -- it's something like 10.5%, maybe 11% in what I expect is probably a considerably larger market than that -- maybe something that's running at 2.3 trillion or more. Do you have an expectation for where the EBIT margin may come out in 2006?

Adam, I don't want to get in projecting a margin on the call. But we're very confident due to the great amount of modeling that we do that we can maintain that 10% margin in a trough or close to trough margin.

Adam, just keep in mind that the first quarter is the toughest quarter of the (multiple speakers) in the business. It's the quarter in which orders are -- we've closed our inventory in the fourth quarter, and we're trying to build inventory by opening orders. And we have a real short month in the month of February. January is a very low closing month. And so that's a tough quarter.

In the second quarter, we continue to downsize and close offices, and so that had an impact on the margins in the second quarter. And so as we get to a more leveling off mode in terms of the volume of the business, then the margins should start increasing again.

Okay. What would you expect for a -- like a 2.1 or a $2.2 trillion market? Where would the EBIT margin come out in that type of environment?

It would be above 10%, Adam.

Because you guys in the past have talked about 10 in a trough market, 20 in a peak market. If we considered 2.2 to be more normal market, are you talking about 11 or 13 or -- can you give me any --?

I think 11 to 13 is a very good -- that's a good range.

Okay. And just lastly, when your mention of possible distressed acquisitions -- now, would these be things that would be quite small, and you'd consider part of the investment portfolio, or something larger as an opportunity to take on another line of business?

Well, it could be -- it could run the gamut. They won't be buying distressed bonds and putting the investment portfolio. That's not really our program. Our programs always deal with our investment portfolio -- be very conservative, have 95% or 90% of our debt investments in AAA, AA, A bonds, whether munis or governments or corporates.

But they could be investments made in conjunction with financial sponsor partners. They could be investments we would make independently. And they would -- as a general rule, would be modest in size. So we would be looking at situations in which we can buy a subordinated debt position and end up with all the equity of the business and then go back to the senior lenders and renegotiate the senior loan and end up in a very, very strong financial position. So that's really our target area.

In terms of growing a whole new business, we're looking at a number of different ideas in which we can have a base business such as Sedgwick was, and then grow that business into a significant enterprise. And the goal would be to try and create another FIS over the next three years or so. And if we could do that, I believe our shareholders would be very happy about the results.

What I'm trying to figure out is you guys have historically discussed acquisitions as usually being something within the general range of your prior expertise in your financial services information processing. But the way you have described possible opportunities in a credit downturn sounds somewhat broader than that.

It's broader than that, but it's going to be -- there are going to be value investments, and there will be investments that will have tangible assets behind them. So they won't be software assets or IT type businesses. They will be what you would consider classic value investing, and hopefully taking advantage of LBOs that have been done over the past several years in which they've been overleveraged and just can't perform with the amount of leverage involved.

Nik Fisken.

This is actually [Brett] for Nik. Most of the questions have been answered. Just one quick one and just some color on something in the press release. You mentioned that -- and some of it was mentioned earlier, that 3Q is going to better than 2Q for the title business. Is that purely a function of seasonality or other specific processes or items that are going to improve beyond the seasonal improvement that we usually see going into the third quarter?

Well, we see the seasonal improvement going into the third quarter. We also recognize that if order levels maintained at their current level, that a lot of the downsizing that was occurring in the first and second quarter and rightsizing is already behind us. And so we won't be chasing our tail quite to the same extent as we were as order volume goes down. So it's a combination. But by and large, the improvement will come from seasonality and that type of benefit that we receive as we move into the third quarter.

Okay, so you're saying that if orders stay the same, you feel like your organization is -- you're just going to see some leverage because the organization is the right size?

That's right.

Okay. That's all I needed. Thank you.

Bill? This is Nik -- or Randy; I don't know who wants to take it. But what surprised you guys on the order activity year-to-date?

That it was so strong. (laughter) It was actually maintained in the face of 17 or 18 rate hikes, and that we're continuing to get very strong order volumes. That's probably the biggest surprise -- that we aren't having to downsize more. I mean, we downsized a lot. But honestly, with the way that the economy is going and the high gas prices, high commodity prices, the war in Iraq, interest rate increases -- and we continue to see good, strong order flows.

Is that -- and it looks like everybody else is putting up pretty good numbers, but not as good as yours. Do you guys think it's a combination of the market not going down much and your taking some share?

I don't know that we're taking share, because actually in California, we are losing market share because we're choosing not to be as competitive as some of the agents and some of the other underwriters are in the state of California which, of course, is the largest title insurance market in the country.

We believe that the lowest common denominator always gets itself in trouble, and we're just going to maintain our program and look for opportunities as we go forward. So we honestly don't believe we're taking share. We think we are losing market share at this point in time, but we're being more efficient about it.

[Noam Wachen].

You have addressed a lot of the things that I was wondering about, especially connected to the refi market. But about the purchase market, we have been using the numbers from the Mortgage Bankers Association. And over the last 10 years, we haven't seen any declines in purchase originations, and they're predicting two years down. I'm wondering if you're using those numbers, or if you have some different numbers, or if you're not as concerned as I think that you might be about where that market is headed.

Well, we think the purchase market is going down. And it's going to be offset by an increase in the default market. And that's going to show us some benefit as we go forward as well. But we do think the purchase market will decrease. But if it decreases to a $5.5 million annual rate, that's still a lot of houses and we're going to get our fair share of that business.

[Jim Ryan].

Randy, I have a question regarding staffing and headcount. You said it's 13 5. But I'm looking at last year's report -- it says 19 5. Could you give me a handle on what I'm missing there?

The 13 5 number is reflective of our direct title operations, where we count the open orders and the closed orders. So that's all of our direct operations throughout the U.S. It does not include corporate functions, nor does it include our agency staffing numbers. We brought our staffing level approximately down by 2,000 employees on the direct aside from August of '05 through June of '06.

Okay. And secondly, I'm looking at the order count for the second quarter. And it kind of appears to be deteriorating. I noticed that open orders were down 22% in June and closed orders 19%.

Well, the orders on a per-day basis have leveled off really from February through June on a per-day basis. And some of that discrepancy is the swing from a 21-day month, 19-day month, 22-day month.

Okay, but for the quarter, it was down 16% open and closed, and yet the staff cost is about the same.

Well, again, that's on a -- what we measure is the open orders per day. And really, the swing there is in the number of days in the month

Jordan Hymowitz.

Most of my questions have also been answered. A few cleanup -- what was the purchase versus refi mix in the quarter?

No, on the purchase/refi mix is -- I'm sorry -- actually, as we got through to the month of June, it got much closer nationally to a 50-50 mix.

I know it nationally. (multiple speakers) What was it for you guys?

I'm sorry?

What was it for you as opposed to what the national numbers are?

That is for us.

Oh, I'm sorry; I apologize.

Yes, that is for us -- higher in the west, in the California market. It's closer to 56% on the closing side of refinances. And it's been dropping as we move through the second quarter.

The one thing that is continuing to happen though is these zero interest rate mortgages and the adjustables -- about 25% adjust in '06 and '07 of all the adjustable loans. And so that's part of refi. And so there's a built-in refi business based upon adjustables and people being knocked up by 3 percentage points in their base rate, and they go back and get a new start rate from another lender.

So it was a 50-50 mix purchase/refi for the quarter?

It was not for the quarter. That was actually for the month of June. It started the second quarter at about 53%.

Okay. And if I understand correctly, the purchase business has closer to like an 1,800, 1,900 fee per file, and the refi is like a 1,200 fee per file?

Correct.

Okay. Do you have the exact numbers by chance of that in the quarter? I wanted to ask in our public forum, because Dan said a couple times you can't give that out just to me.

I do not have that exact number. I'm sure we could get that number to him.

Mike Vinciquerra.

Just a couple of line items I wanted to look at a little more closely. In your personal lines business, you have great growth there. And I think, if I'm not mistaken, is has all been organic. What has been your concentration in terms of where you -- geographically, and then second of all, the types of products -- auto, home, that type of thing?

Well, the personal lines business has been derived from deeper penetration of referrals from our title operations. So when a purchase transaction occurs, a resale transaction occurs, our personal lines employees are doing a better job and our title insurance employees, our branch operations employees are doing a better job of generating referrals and information to the personal lines group, and that's really the -- that is the bulk of it. We're becoming more efficient in the way we deal with our referral business.

Our sale rate is still about the same. We sell between 15 and 20% of the referrals that are generated.

Additionally, there are a few agents in the Southeast that are expanding. So we're doing a modest expansion in terms of personal lines through an agency business, but it's primarily branch operations referrals, and in the state of California -- or wherever we have direct operations.

Predominately -- I mean, it's almost all homeowners then?

It's almost all homeowners. Very little auto.

Okay. And then just the other thing -- with the big jump in interest and investment income, I just wanted to get a sense for whether or not it was purely based on higher rates in your fixed-income portfolio, or whether or not there was a gain in there that I may have missed.

On the investment, there are no gains. They're disclosed separately. But it's simply a function of the increasing size of the investment portfolio and higher yields.

Bob Napoli.

With regards to the default market, FIS had put built up a pretty big default business. And I just -- make sure, that's going with FIS, and will not be at FNF -- the default?

That default business that's currently in place is going with FIS. The trustee sale guarantees that [our issuer] is actually a policy issued by Fidelity National Title or Chicago Title, where FIS is actually the title agent. So FNF (multiple speakers) will benefit from the issuance of those trustee sale guarantees.

Additionally, FNT is developing its own default business -- not quite as broad in scope as FIS's. But nonetheless, FNT needs to penetrate the market as well. And there's plenty of room out there for both companies to do very, very well.

Is there any noncompete with FNT with new FNT and the FIS businesses?

No, there's no noncompete.

Okay, and Sedgwick -- make sure I'm clear on that. Sedgwick is going with the new FNT as part of that overall agreement?

That's correct.

And the ownership percentage of the new FNT of Sedgwick is 50%?

40%.

40% -- okay. And just last question -- on agent/direct mix, and there's nothing -- it looks like the trend is kind of similar to last year. Do you expect any shift in mix between agent/direct from what you've had recently historically?

No, we really don't. It should run just about as it has through the first half of the year.

Thanks. And at this time, I'm showing no further questions in queue.

Great, terrific. Thanks for being with us. We remain committed to continually seeking to maximize shareholder value. We continue to make progress towards the closing of the transactions to eliminate the FNF holding company structure, and for new FNF and the existing FIS to become independent companies. We expect to have the transactions closed by the time we speak with you again on our next quarterly conference call in late October.

Thank you again for joining us this morning.

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.