Fidelity National Financial Inc (FNF) 2007 Q3 法說會逐字稿

Welcome to the FNF third-quarter earnings call. (OPERATOR INSTRUCTIONS). As a reminder, this 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. Thanks for joining us for our third quarter 2007 earnings conference call. Joining me today are Bill Foley, Chairman of the Board; Al Stinson, CEO; Randy Quirk, Co-President; and Tony Park, CFO. We will follow our normal format. Bill Foley will begin with a brief strategic review, Al Stinson will provide an update on our operating companies, Randy Quirk will provide a more in-depth analysis of the title business, and Tony Park will finish with a review of the financial highlights. We will then take your questions and finish with some concluding remarks from Bill Foley.

This conference call may contain 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, 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, high or increasing interest rates, a limited supply of mortgage funding, or a weak US 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 regulation 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 Web site, at FNF.com. It will also be available through phone replay beginning at 1:30 PM Eastern Time today through November 10. The replay number is 800-475-6701, and the access code is 890149.

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

Thanks, Dan. We were primarily focused on three things during the third quarter -- cost reductions in the title business, managing our other companies with a goal to maximize profitability, and working towards the completion of the Ceridian acquisition.

Fidelity National Title had to navigate a very difficult real estate and mortgage market during the third quarter. I will let Randy Quirk provide details on our responses to the challenges we face in this current environment.

Our specialty insurance group, which includes flood, personal lines and home warranty insurance, continues to focus on profitable growth and disciplined risk management. We did experience increased losses in the homeowners business in this quarter, primarily from increased fire losses in July and August. Our home warranty business also suffered from the significant slowdown in the real estate markets, particularly on the West Coast.

Sedgwick, our minority owned workers' comp claims management business, continues to grow profitably, as it is nearing 700 million in annualized revenue while providing a stable, attractive 15% (technical difficulty) margin.

Fidelity National Real Estate Services, or FNRES, our majority owned real estate technology company, continues to move forward in the evolution of the Cyberhomes Web site. I encourage all of you to go online to Cyberhomes.com and investigate the site.

Finally, Cascade Timberlands, our majority owned timber company, is actively engaged in seeking entitlements for resort and residential development on two parcels of real property, totaling more than 10,000 acres. These entitlements would potentially allow for the sale of this property at prices significantly higher than the original purchase price. In addition, Cascade is currently negotiating to sell a number of parcels at prices well in excess of its timber value and our cost basis.

From a strategic standpoint, we remain committed to maintaining our dividend at its current $1.20 annual rate. We ran a stress test scenario wherein we reduced our 2008 earnings by 30% from an estimate of earnings for the second half of 2007, and based upon that analysis, we are confident that we can maintain the dividend at its current level through 2009.

A second use of cash during the third quarter was share repurchase. We repurchased 5.3 million shares for a total of 102 million during the third quarter, bringing our repurchased total to 6.7 million shares out of the original 25 million share authorization. As of September 30th, we have put the repurchase program on hold as we reevaluate our fourth-quarter cash needs for the Ceridian acquisition and the common stock dividend. Interestingly, Ceridian has performed above our budget baseline, resulting in additional cash on hand in excess of $100 million.

We made two material acquisitions during the third quarter, Property Insight and ATM Holdings. Property Insight manages the FNF title (inaudible) and had been a subsidiary of FIS. After the split of the two companies, we felt it made sense for Property Insight to be owned by FNF, so in September, FNF acquired the business from FIS for approximately $95 million. ATM Holdings is a provider of nationwide mortgage vendor management services to the loan origination industry, including centralized title and closing services, and a full suite of valuation appraisal services to national residential mortgage originators, banks and institutional mortgage lenders. The ATM acquisition, which has been combined with ServiceLink, our existing national lender platform, enables FNF to provide its lender customers with a broader suite of centralized title and closing services, as well as access to a full suite of valuation products and appraisal services for both refinance and emerging lender-driven purchase transactions.

While we continue to move towards a fourth quarter closing of the Ceridian acquisition, the shareholder vote was completed on September 12, and we are confident it will close prior to 12/31/07. We look forward to this partnership with T.H. Lee Partners and the Ceridian senior management team as we seek to materially improve the financial performance of that company and create significant value for FNF shareholders.

I'll now turn the call over to our CEO, Al Stinson.

Thank you, Bill. Despite a very difficult operating environment resulting from the credit crunch that began almost literally overnight this summer, we did generate a 7.1% pre-tax margin in the title business for the third quarter before the reserve charge, and almost a 9% pre-tax margin year-to-date. There have been two recent events that are both very positive for our title insurance business.

First, we completed the redomestication of both Chicago Title and Ticor Title of Florida to Nebraska on October 1. This redomestication was particularly important for Chicago Title, as the move to Nebraska will also allow us to more efficiently take dividends out of Chicago Title in the future under Nebraska regulations. The redomestication of Chicago Title also provides the opportunity to access approximately 200 million in capital that was trapped under Missouri regulations.

The second very positive event was an early October letter sent from California Insurance Commissioner Steve Poizner to the California Land Title Association concerning the Department's regulatory reform efforts regarding title insurance. In the letter, the Commissioner states that he will propose substantial changes to the data call and stat plan regulations to simplify them and minimize compliance costs. Many of the data elements required by the current regulations will be eliminated from the stat plan. He will also delay the implementation dates by one year, meaning data collection will begin in 2010, with recording of this data commencing in 2011.

In addition to these changes, he made two commitments. First, he agreed to eliminate the interim rate reduction if the industry helps to obtain an alternative method to enforce the data call. Second, he agreed to eliminate the maximum rate formula if the industry works to enact substantive alternative reforms. The first reform went into effect in early October with the introduction of the CLTA sponsored titlewizard.com Web site that allows California consumers to enter a ZIP code and other information and compare title insurance rates among various title companies in California. We believe our diligent efforts to date in working with the Commissioner's office have effectively removed the risk of rate reduction in the State of California, and anticipate that continued cooperative efforts will pave the way for future reforms that will benefit both the California consumer and the title insurance industry.

Revenue growth in the specialty insurance segment was about 3%, as 8% growth in personal lines and 5% growth in flood were offset somewhat by a decline in home warranty revenue due to the significant slowdown in resale transactions, particularly on the West Coast. From an earnings standpoint, the homeowners business suffered from higher fire losses in July and August, leading to a 73% loss ratio in the quarter. As fire losses declined in September, the loss ratio came back down to 55%. Additionally, the home warranty market declined 20% to about 15%, resulting from the decline in resale transactions, particularly on the West Coast. Finally, earnings were up slightly in the flood business despite a small decline in flood claim processing revenue due to the quiet hurricane season in 2007.

FNRES continues to make progress in the ongoing evolution of Cyberhomes. The site currently has 800,000 live listings, with another 700,000 that will be live in the very near future, for a total of more than 1.5 million real estate listings. The AOL relationship we mentioned on the last earnings call went live on October 1st, and Cyberhomes is now the sole content provider for AOL Real Estate.

As Bill mentioned, Cascade is actively engaged in seeking entitlements for resort and residential development on two parcels of its land, which would potentially allow for their sale at prices much higher than their original purchase prices. In addition, Cascade is currently in negotiation to sell a number of parcels at prices in excess of both timber value and cost basis. Sedgwick continues to perform consistently. In the third quarter it generated 166 million in revenue with an EBITDA margin of just over 15%.

Let me turn the call to Randy Quirk to comment on the title insurance business.

Thank you, Al. Total open order volumes declined significantly during the third quarter. For the entire quarter we opened just over 523,000 total orders, for a quarterly average of 8300 open orders per business day. On a monthly basis we opened 9000 orders per day in July, 8100 orders per day in August, and 7800 orders per day in September. Total open order volume declined by 21% from the prior year third quarter and 16% sequentially from the second quarter of this year.

Refinance orders as a percentage of total orders remained consistent, comprising 59% of open order volumes for the third quarter versus 58% in both the third quarter of 2006 and the second quarter of this year.

Finally, October order counts have declined to average approximately 7600 open orders per day for the first three weeks of the month. Order counts for the first week of October actually showed improvement over the last week of September, the second week of the month saw a large decline from the first week, and the third week showed another increase over the second week of the month to an open order level roughly equal to the last week of September.

Obviously, with declining order counts during the quarter, we were focused on continuing to appropriately manage the ongoing reduction in our headcount. We began the quarter with approximately 12,500 employees in the field, and ended the quarter with a little less than 10,800 employees, excluding the ATM acquisition, a reduction of more than 1700 positions, or 14%, during the third quarter.

ATM added approximately 200 employees, so we actually ended the quarter with approximately 11,000 employees. More than 870, or half of the quarter's reductions, came in the month of September alone, and more than 400 of those actually came in in the last week of September. So we did not actually see the benefit from those personnel cuts during the quarter, but should begin to see that benefit in the fourth quarter and into next year.

As a reference point, we had 14,800 employees at the beginning of 2006. So we have eliminated 4000 positions, or almost 30% of the field workforce, since the beginning of 2006. At the peak in 2003, we had approximately 18,500 employees in the field, so we are down more than 40% from our peak staffing levels. We have continued our aggressive headcount reduction early in the fourth quarter, as we have eliminated another -- an additional 600 positions in the first three weeks of October.

To summarize the current environment, on a sequential basis from the second quarter of this year, open orders and direct title premiums were down 16% and 13%, respectively, while headcount and personnel costs declined by 14% and 6%, respectively. Other operating expenses declined by 7%.

As I mentioned earlier, half of our headcount reduction for the quarter took place in September, so we would not have seen any real benefit from those personnel cuts during the quarter. The speed of the slowdown makes it difficult for us to reduce expenses as quickly as the order count falls, but we are continuing to reduce our costs as quickly as possible.

With the significant decline in order counts, we are seeking out additional means of cost cutting beyond simple headcount reduction in the field operations. We cannot go into significant detail on these measures for competitive reasons, but we wanted to at least give you some flavor for the additional ongoing cost cut initiatives.

As we mentioned last quarter, we have made meaningful reductions in our corporate and administrative staff. We have also consolidated our six divisions down to five, and have also eliminated a number of regional manager positions. We have closed a significant number of branches, consolidating branches in close geographic proximity to each other, consolidated brands in certain markets and consolidated county management over several brands in some marketplaces. We have restructured bonus and incentive programs to include overall profitability of an operation in the bonus and incentive compensation calculation, and we are implementing temporary pay cuts at senior levels. The severity of the decline in the pace of orders has dictated that we seek out every cost-saving opportunity that we can throughout the organization.

The commercial title business continues to perform better than the residential business. We opened nearly 13,700 commercial orders in our national commercial divisions, and closed approximately 8200 commercial orders, generating more than $80 million in revenue. This was 21% over the third quarter of 2006, and commercial revenue accounted for more than 20% of the total direct title premiums in the third quarter.

Now let me turn the call over to Tony Park to review the financial highlights.

Thank you, Randy. FNF generated $1.4 billion in revenue for the third quarter, with pre-tax earnings of $2.7 million, net earnings of $6.5 million, and cash flow from operations of $75 million. These results include an $81.5 million pre-tax charge to strengthen our reserve for title claim losses. Before the charge we generated net earnings of $62 million, or $0.28 per diluted share.

The title segment generated $1.2 billion in total revenue for the third quarter, a decline of 19% from the third quarter of 2006 and a 10% sequential decline from the second quarter of this year. Before the reserve charge, the pre-tax margin for the title segment was 7.1%. Personnel costs of $400 million were down $36 million, or 8% versus the third quarter of 2006, and declined by $26 million, or 6% sequentially from the second quarter of this year. Other operating expenses declined by $6 million, or 3%, from the third quarter of 2006, and declined by $16 million, or 7%, sequentially from the second quarter of this year.

Specialty insurance revenue was $107 million for the third quarter, including $4 million in investment income. Flood insurance generated $43 million in revenue, a 5% improvement over the third quarter of 2006. Personal lines insurance contributed $39 million in revenue, growing by 8% over the third quarter 2006, with the homeowners business producing a loss ratio of 73% for the quarter, which was attributable to the fire losses in July and August. Home warranty produced $18 million in revenue during the third quarter and generated a pre-tax margin of 15%, which was a decline from its 20% level due to the significant slowdown in real estate activity in the Western United States. The total specialty insurance loss provision was $38 million in the third quarter.

While we do not consolidate the results of Sedgwick, as Al mentioned, they produced revenue of $166 million and EBITDA of more than $25 million for the third quarter. Our share of Sedgwick's net income was just under $2.5 million.

Debt primarily consists of the $490 million face value in senior notes due in 2011 and 2013, and $150 million debt at Fidelity National Capital, the vast majority of which is nonrecourse. The debt to total capital ratio was 15.6% at September 30th. We did record an $81.5 million pre-tax charge to strengthen our reserve for title claim losses in the third quarter.

For policy years 2000 through 2004, our losses continued to develop at higher-than-expected levels, with loss ratios exceeding initial provision rates. These higher losses reflect increases in both the number of claims and increased severity. The strength of the real estate markets drove increased order volumes from 2001 through 2006, which would partly explain the upward trend in loss incidents, while rapid home price appreciation, inflation and increasing legal costs would logically drive higher dollar severity of claims.

Policy years 2005 through 2007 have also experienced some recent adverse development, but those actual loss ratios remain below or in line with our estimates and the actual loss provision recorded for each of those policy years. For both time periods, claims continued to come from three main categories -- title search and exam errors, fraud and forgery, and closing or escrow errors. Additionally, the split between direct and agency claims has remained relatively consistent at about 50/50. In 2007, nearly 65% of paid claims have fallen into those three major categories, and the number of paid claims and those three major categories has increased over the last several years. In particular, we have seen an increase in fraud and forgery and, to a lesser degree, search and exam related claims over the last two years. The $81.5 million charge brings our reserve for title claims to more than $1.2 billion, equal to the actuarial reserve point estimate as of September 30th. We expect to maintain our provision for current claims at 7.5% of gross title premiums. However, we will continue to monitor the balance sheet reserves, provision level and paid claims development against the actuarial model each quarter.

Finally, our investment portfolio totaled $4.3 billion at September 30th. There are approximately $2.9 billion of legal, regulatory and other restrictions on some of those investments, including secure trust deposit of approximately $700 million, and statutory premium reserves for underwriters of approximately $1.7 billion. There are also some other restrictions, including less liquid investments, like our ownership stake in Sedgwick, cash held as collateral in our securities lending program, and working capital needs at some underwritten title companies, all of which total approximately $500 million. We backed this out as another category of restrictions. So, of the gross $4.3 billion, approximately $1.4 billion was theoretically available for use, with about $1.3 billion held at regulated underwriters and approximately $100 million in non-regulated entities.

In addition to the $100 million available, we also have approximately $130 million of dividend capacity from our underwriters during the fourth quarter, as well as the potential $200 million that could be available through the redomestication of Chicago Title. We will have to analyze the surplus situation at Chicago Title to determine if it is prudent to dividend out the entire $200 million in the fourth quarter.

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

(OPERATOR INSTRUCTIONS). Geoff Dunn, KBW.

First question. Do you have enough feel, given your statutory income performance to date, to have a rough estimate of what you think the statutory upflows might be available in '08 from your underwriting companies?

We don't have an exact number on that. We did -- as Bill mentioned, when we did a dividend test, we looked at we looked at 2007 and our run rate in 2007, stressed that by about 30% in '08, and then again used that same level for '09 activity. We feel it's a very conservative estimate. And based on that, we were still very comfortable to be able to pay our dividends. I believe our upstream in '07 from statutory income was about $265 million. Certainly we would expect a lower level for '08. But, I would believe that would exceed $200 million, so somewhere between the 200 and the 265 is my best estimate right now.

When you did your stress test, are you assuming drawing down on any line of credit, like in excess of the line that you might use for Ceridian?

There was some small amount of borrowing required in 2009.

Last question. Obviously, you're doing a lot of things to reduce expenses. I was wondering if you could maybe give us a little bit more color on your personnel and operating costs within title specifically? Can you break down maybe the salary and variable benefit commission components and bonuses, and, on the operating side, the big-ticket items there, so we can see what is fixed and what might be variable?

Sure. In the Title Group, clearly, the larger segment, personnel costs, primarily just two main categories. Our salaries, which includes some non-cash stock comp, is about 60% of the total cost in personnel costs, and bonus and commissions, mostly variable costs, make up about 25%. So that's 85% of the total in those two major categories.

Other operating costs we have a lot more categories, the primary one of which is facilities and telephone costs, and that runs about 25% on a quarterly basis. Then we have several categories in the roughly 10% range. Title plant costs, technology costs, professional fees, supplies and postage, travel, all of those categories are roughly 10%. Certainly there's some variable components within those categories. Premium taxes runs us maybe about 5%. That's purely variable on gross premiums, and then other various categories make up the remaining 20%.

When we look at these, obviously, bonus commissions is directly adjustable. Are you taking -- and it sounds like you're closing offices. So, are we going to see meaningful moves on, like, facility costs, and maybe even title plant usage moving forward?

Geoff, it all comes down proportionally. And the only problem with facilities costs are usually when we're closing a facility, it's in a market that has got a heavy -- a large vacancy rate. So we've got to try and roll those off and sublease those properties as expeditiously as possible.

The one thing we've always done, though, is maintain short-term leases. So generally speaking, our leases are less than three -- three years or less. So these small escrow branches were -- a third would roll off in '08, and a third would roll off in '09, and some are rolling off right now.

We've done a couple of other things. The top 40 managers have all taken a 10% pay cut, effective November 1st through February 28. And we've also eliminated all discretionary bonuses this year. So all the people who got bonuses last year that were discretionary based upon some kind of administrative job have been completely eliminated. So we're all feeling the pain. And myself, I'm waving my salary for the four months November, December, January, February. So we're taking this very seriously.

[Darrin Peller], Lehman Brothers.

Just wanted to ask you a little more about the specialty insurance division. The claims were up a little bit because of some fires in California. Clearly, with the current events in California, it seems like it's probably more severe now than it was over the summer. Can you help us understand how that may translate during the fourth quarter or first quarter of '08 in [the way of] claims?

We can, actually. The claims in July and August were primarily in the Midwest. And one of the things that occurs when an economy starts being stressed and people begin defaulting on their mortgages is sometimes their houses burn down. Not arson, but accidental, so we pay those claims. In California we have a pretty good handle on where we stand today, and we have six losses in California. Five are total losses, one is a partial loss, and the total loss to date is about $2.4 million. They are letting people back into the Poway-Ramona region of San Diego County and Escondido. So we should have a really very good handle in the next week or so on just what the total level of claims are. But we're pretty pleased with the fact that the way the underwriting was conducted by Mark Davey and his group, and making sure that we stayed in populated areas, that we stayed away from hillsides and high brush, high instances of brush, that we've only had six losses. And we're on it. We know pretty accurately what's going on.

That's great. Real quickly, on the 2004 to -- 2001 to 2004 policy years, which I think you mentioned you're reserving at a bit of a higher -- or you didn't reserve as high initially. Maybe it was 5.5% at the time. Where are the claims coming in on that versus where you reserved? Also, where are the claims coming in on the more recent years, policy years, versus where -- I think you've reserved now, what, 7.5%?

We've reserved at 7.5% since 2005. And as I mentioned, those developments right now, loss ratios are below or in line. In fact, those three years, currently, the ultimates are projected to be below that 7.5 provision level. We were providing years 2000 through 2004 at levels that were 5, 5.5, 6% levels, and those have exceeded those expectations.

Now, we have taken that into consideration as to the current levels, which is more in the 6.5 to 8% area in terms of those five years. So that's what we're seeing in loss ratios now. The charge we took in the quarter would reflect that. So we are currently at our actuarial point estimate at this point, which would reflect those newer levels. So provided there's no further adverse development in these policy years, then we feel comfortable where we are today.

One thing we have seen that has happened is that the -- while new claims have continued to increase on a year-to-year basis, earlier in the year they were increasing at the rate of about 13%. And as we've moved through the year, we're now moving -- our new claims are up about 10%. So it's really the first positive sign we have seen in several years relative to claims. And as the rate of change decreases, then the claims will eventually go down. But again, it's too early to draw a conclusion from that. So what Tony and our internal actuaries were doing was just trying to be conservative and trying to be realistic about what our loss reserves should be and what our level of reserving should be.

On the 7.5% reserve level, when you say it's not exceeding it or it's below it, can you give us a number?

(inaudible) about 6.9 (multiple speakers)

We're just below 7% on each of those three years currently.

Ron Bobman, Capital Returns.

I had a couple questions. First, on the stress test that you mentioned, when you incorporate the expense saves from the payroll reductions and the headcount reductions, what does that 30% correlate to with respect to title apps? Would it be sort of a daily average, a quarterly average, a monthly average? Is there any sort of corresponding title count that you could provide us with?

We really did more a top level. We looked at our earnings, our earnings per share, and expected earnings for 2007. And based on that, we discounted that by 30%. We didn't do a bottoms-up approach where we analyzed the incoming title orders or analyzed the personal and so forth. So it was a top level, but, we feel, a conservative calculation, especially pushing the 2008 reduced levels all the way into 2009.

Flat, like '09 over '08, is basically the assumption as far as cash flow?

Yes. '09 was flat with '08.

A slightly different question, but somewhat related. There was some mention about the Cascade deals, and sort of the opportunity for realized gains there above cost basis subject to certain events happening. What sort of order of magnitude are we talking about? Is this a few million dollars, or $50 million, or a couple hundred million dollars? I'm not that familiar with the Company, so if you could sort of ballpark that I'd appreciate it.

If everything came together as we're planning over the next couple years, it's in excess of $100 million.

And the near-term realizations in the next 12 months would be --

Much less than that, smaller parcels, and it's mainly negotiating the sale of some of these large timber tracks, and all at good gains, but not that kind of magnitude.

So I shouldn't assume that these are meaningful drivers to your dividend confidence statements. Those aren't meaningful contingent events that are going to increase the confidence or lower the confidence in the security at the dividend?

We didn't even include them. They were irrelevant.

Thanks a lot, and good luck in these tough times.

Nik Fisken, Stephens, Inc.

Should 7% pre-tax be the low, given what you know going into Q4?

As we go into the next two quarters, obviously, they're going to be somewhat challenging based on the closings coming off of declining inventory that was gathered in the third quarter. We're going to also hit the traditional slowdown in the marketplace with the short November. We do have a 23-day month in October, but a short November, and the seasonal issues in December. That could be offset partially by what still looks like a strong commercial market for us. So you're going to have to hit that in the fourth quarter. The first quarter, obviously, January, February, a slow start to the year every year. February's got other 19-day month involved in it.

So we think both quarters are going to be challenging. We're going to continue to monitor our metrics as we do, our open orders or productivity. We have some parts of the country that haven't been hit with this slowdown yet to the -- with the severity that it's been hit in the West. So we will probably still be looking at our headcount and consolidating operations. So I don't know that I could give you an actual number, but I do know that they're going to be challenging. But we're going to be reducing the expenses aggressively. As Bill said, we're renegotiating compensation packages, and taking some of (inaudible) reduced packages around the country. So, it will be challenging for the next two quarters, but we'll be on the game relative to our expense reduction.

And how do you guys feel going into your annual provision review on the claims side, where you stand today?

I think we're very comfortable where we are today. Each quarter we look at it very closely, probably not much differently at year-end than we do each quarter. We have an actuary on staff who spends most of his time looking at trends and losses coming in, and we're comfortable now that we're sitting at the midpoint estimate, and we're comfortable where we are today, and expect to provide at 7.5% in the fourth quarter. But obviously, we'll take a close look at year end and see where we stand at that point.

And then, Bill, in light of the $16 share price, roughly, how has that affected your use of cash outlook and the idea of keeping all these different pieces of FNF in part of the same entity?

I think you should refer your investment banking colleagues to us. Everything is under review, Nik. Everything we have is under review. And it's going to be -- as Randy said, it's going to be a challenging November, December, January, February. It's going to be interesting to see how the market reacts in March, and traditionally the uptick that starts happening in terms of closings. And we'll really know a lot more as we see what happens with orders in January and February, and we start seeing those closings in March. And we don't see how it can get much worse than what it is right now, but Randy is reducing staff as fast as he can. And we don't have -- we also don't have a lot of -- a lot of separate assets that are readily saleable, although I will say that we investigate all alternatives relative to Sedgwick, and we take a look at specialty insurance. So we're looking at everything. Everything is on the table. But it always has been with us, as you know.

What about the use of cash outlook?

The number one goal that we have established is to maintain the dividend. That's why we backed off the stock repurchase program that we had been engaged in. We would like to reinstitute that program based upon cash availability. We're trying to get a good handle on the amount of cash necessary to close the Ceridian transaction. Originally we had committed to $900 million. That has now been reduced to about $550 million based upon limited partners participation in the transaction. And we do receive a significant banking -- investment banking fee as part of that transaction. So our total outlay on Ceridian is somewhere around 510 to $525 million. That improves where we were just a couple of months ago relative to what our prospects were with Ceridian. So all these things are going into the mix. We just thought that it would be better for this period of time to slow down on the stock repurchase and basically suspend it, despite the fact that we believe the stock price is very, very attractive at these levels. So I hope that's a pretty good summation for you.

That was. Thank you.

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

A couple questions still on the sheet here, I guess. Sedgwick -- I'm sorry -- the Ceridian deal, 510 to 525 million of capital, what ownership interest will you have with that level of capital investment?

It's going to be -- basically the total capital requirements are about 1.6, so we're going to be just right around 30%

And what would be the plan, is just to hold that 30% over time, and just realize -- treat it as an investment?

Treat it as an investment, attempt to continue to help them improve their operating performance and grow their businesses, and at some point, just as a financial sponsor would do, you look for liquidity in that, whether it's an IPO or a sale of the company. And that's normally in that three to five-year time horizon.

Now, on the claims side, maybe a follow-up there. The claims for -- it would seem to me that the claims for '05 and '06 years in particular would probably be higher, and maybe the early part of '07, would be kind of peak claim years, because that seems to be the years when there was the most fraud and other things going on in the mortgage market. So isn't there a risk that those years are going to go beyond the 7.5, if the 2000 to 2004 are trending towards 7.5?

There is that risk, Bob. One thing we did about three years ago was start implementing fairly stringent claims management programs. We started reducing agents aggressively. We looked at agents that were high claims agents and we canceled them. And that was a process that we probably led the pack on, and began doing that [really] three years ago. And our competitors have just started doing that. So we're hopeful that the indication that Tony is relating to you is a trend that is based upon better claims management practices on our part, and also float over into our direct operations and training sessions, ensuring that people that did things like wrote over broken priorities and so on were disciplined or let go. So we've been pretty aggressive. And one of the reasons over the last several years we've lost market share to competitors is because we have declined business, as opposed to just taking all business from all agents and from all sources. So that's about the best, I think, we can do to give you some comfort. But we don't know either.

That makes sense. The market share you lost, if that's the case, the reason for losing share would be a good reason.

We felt it was a good reason.

If you look at margins, obviously, the fourth quarter and the first quarter are going to be dreadful for your industry and for the mortgage industry from a business perspective. As you look at '08 as a full year, given where mortgage originations have gone, can you give a feel or a goal for title margins for full year '08? It seems like things probably can't get a lot worse than they will be in the fourth quarter and the first quarter.

Our goal is a 10% margin. That's our goal.

Is that realistic at all for 2008?

How many people have been laid off this year, Randy, to try to achieve that goal?

As I said earlier, we continue to be aggressive in our expense reduction. These are not easy decisions. It's actually quite difficult. We are in a position where we're needing to deal with people that are longer-term employees, so it's not been easy. But we will continue to press on that. As Bill said, our goal is 10%, always has been 10%. We've got to clear off the first quarter of the year, get that behind us, and move on from there.

(inaudible) cost-cutting as always, I guess. On Sedgwick, can you give an organic revenue growth number there? Have there been any little acquisitions lately?

No. There have been no acquisitions this year. The last acquisition was CMI about a year ago. Al, do you have that number?

What we've got -- if you look at year-to-date revenues for Sedgwick, our growth in revenues is 34% relative to the prior year. Now, that includes new business and acquisitions. Our organic growth is running in excess of 10% out of that. Interestingly, EBITDA growth is 45%. So we've got some very nice trends working in that company.

On the capital side, you guys ran through some things pretty quickly. After the Ceridian investment, what would be -- how would you look at your excess capital at that point? You guys ran through some numbers pretty quickly.

I think, in running through the cash at the parent company level, we have about $100 million today, expect dividends from subsidiaries in the fourth quarter of 130 million, plus another 200 million from the Nebraska redomestication from Chicago Title. Uses of that would be our dividend, our quarterly dividend of $65 million. That gets you to $365 million at year-end, not counting the Ceridian investment. So, clearly, we would have some borrowing on our line of credit facility to fund Ceridian. But depending on what that amount is, that could be maybe a couple hundred million.

How much can you borrow off of that facility?

We have a $1.1 billion facility at LIBOR plus 45.

That's currently unused?

Yes.

And this last question on the -- in your investment portfolio, I guess, and I don't know if you took any -- are there any residential mortgage holdings, [yield] holdings (inaudible) sub-prime mortgage holdings? What is there -- what is in that investment portfolio that is -- I know most of it, the vast majority of it is very highly rated. But there's a lot of highly rated assets that aren't worth what they're rated these days.

Actually, about $100 million in equities, in which there's unrealized gain of about $15 million. And the balance of the portfolio really is A, AA, AAA bonds. And we have been pretty judicious about not doubling down the real estate business. So we don't -- we haven't bought CMOs and we haven't bought Fannie Mae instruments and so on. We have been buying munis and treasuries.

I'm sorry -- last question; I lied. Commercial business. Have you seen any slowdown? You had nice trends in that business, but are you sensing a slowdown in the commercial business?

Actually, for the third quarter, open orders have been down slightly from the second quarter, but were 15% ahead of what we were third quarter of last year. And actually, any slight slowdown was really just in the month of September. So, we're still expecting good, strong fourth-quarter closings, and then moving to that first quarter. But it's just really been relatively flat, just with a little bit of a downtick in September.

We're very happy the TXU transaction is going down, because we're the underwriter on that.

[Patricia Coronado], [Mountain Lake Group].

This is [Mitch Cantor] at Mountain Lake. Two questions related to your margin. The first one is, if you go out three or four years, and the current level of business is about where it is today -- by today I mean the September/October level, or 5 million existing home sales environment -- today it's a struggle to get the margins up to your trough target of 10%. But if it turns out that that is a normal level of activity for the homebuying industry, will it be possible, do you think, to move towards your longer-term average margins of about 15%? That's my first question.

I think with -- I would say yes; we could move towards that. One of the benefits of our multiple branch strategy is that we're able to consolidate some of our facilities as we see these markets hitting. So we can still do some work bringing down our expenses even in this type of a market. And we do believe that this will move upwards back towards that 15%

The second question is, is there a level of business in the short run, as the market continues to unfold, where we go to 3 million new home sales, just as one indicator for example, which is a trough in the last 30 years? Is there a level at which it becomes simply unattainable to achieve a 9 or 10% margin regardless -- just because of the fixed nature of some of your expenses?

It's not unattainable; it just means we're going to have about 4000 employees instead of 9500.

But you can still -- you could still get there?

We could still get the margins -- the margins will be there. The issue is going to be the revenue will not be there, so we'll be making less money. But we'll make the money.

(inaudible)

Yes.

Geoff Dunn, KBW.

I just wanted to follow up on capital management. Tony, is the hybrid market still closed to most real estate companies, or is it loosening up for you?

We're looking at it. It bounces around from week to week, really. I think it was closed for a while. Two weeks ago it opened up, I think, very strongly, and then you had some of the large banks, Bank of America Wachovia, with some surprises that, I think, closed it down. But certainly there's more optimism in that market now than there has been for some time.

I guess where I'm going with this is that it's a shame not to be able to retire the stock down here at book value. You said definitively that you feel comfortable with your dividend, and it does seem like you have a lot of resources above and beyond the cash flow needed for that. So, would you be looking to take advantage of a hybrid situation, or levering above 30% debt to cap on straight debt, to take advantage of the current valuations after you get past fourth quarter?

We like the hybrid idea. We really are all over that if we can get the market open. We'd have to really sit down with our board and decide that we want -- and determine whether or not it made sense to borrow down against the line of credit to buy stock back. And that would be a decision, if we were to do that, it would probably be made in the spring of next year once we get through these next four or five months.

Thank you. At this time we have no further questions. Mr. Foley, I'll return the call to you for concluding remarks, sir.

Thank you. While there's, clearly, a tough operating environment for our title business, we remain excited about the longer-term prospects of that core business, as well as those of our other businesses. We look forward to updating you on our achievements and evolution of all of our companies on our next earnings call. Thank you for joining us this morning.

Thank you. Ladies and gentlemen, that does then conclude our conference for today.