Fidelity National Financial Inc (FNF) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the FNF second quarter earnings conference call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. If you should require assistance at any time, please press the star followed by the zero on your touchtone phone and an operator will assist you. As a reminder, this conference is being recorded today, July 24th, 2008.

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

Thanks, and good morning, everyone, and welcome to our second quarter earnings conference call. Joining me today are Bill Foley, our Chairman, Al Stinson, our CEO, Randy Quirk, President, Tony Park, CFO. We'll follow our usual format. Bill Foley will begin with a brief strategic overview; Al Stinson will review our non-title businesses; Randy Quirk will provide an update on the title business; Tony Park will walk through the financials.

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 may be caused by, among other things, higher increasing interest rates, a limited supply of mortgage funding or a weak U.S. economy, a 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, clients 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 10K and other filings with the SEC.

The conference call is being recorded. You may access the replay on our website at FNF.com or via the telephone beginning at noon Eastern today through next Thursday, July the 31st. The replay number is 800-475-6701 with an access code of 953610.

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

Thanks, Dan. We continue to navigate our way through an extremely challenging market during the second quarter. (Inaudible) order accounts continuing to weaken, focused on reducing our personnel costs, downsizing our operations (inaudible) the size of the title operations. I'll let Randy Quirk address our cost-cutting efforts.

To our other businesses, we continue to make progress on monetizing the value of some of those assets. In early June, we announced the sale of 20% of our 40% ownership stake in Sedgwick to United Health Group, receiving approximately 54 million in proceeds. Our investment related to this 20% stake was approximately $29 million which includes our share of income since our original investment of $26 million in January of 2006. This sale resulted in more than a double on our original investment and we recorded a $25 million pretax gain in the quarter. We believe the sale of this portion of our Sedgwick ownership stake provides another example of our ability to accrue significant value for our shareholders. Our ownership percentage at Sedgwick is now 32%.

We also continue to move to the process on specialty insurance as multiple parties have expressed interest and we expect to be in a position to announce the signing of a definitive agreement in the upcoming months.

At Cascade, we are still working on several projects related to the remaining Bull Springs, Gilchrist and [Mezama] parcels, including filing resort applications, taking entitlements for development and the potential sale of the land. We remain confident that we will be able to create some meaningful value from this asset for our shareholders.

Both Ceridian and Remy continue to make progress on their efforts to improve their operations and ultimately, their financial performance. These are the most likely medium-term versus short-term value creation opportunities.

We continue to repurchased shares of our common stock during the second quarter. In total, we repurchased 2.2 million shares from late April through June at a total cost of about $33 million. Since initiating this buyback in the spring of '07, we have repurchased a total of nearly 12 million shares of the available 25 million share authorizations for a total cost of approximately $216 million.

Finally, our Board declared a third quarter dividend yesterday and we anticipate maintaining our dividend at $0.30 per share per quarter through 2008. However, we do continually assess our capital allocation strategy and weigh the benefit of continuing to pay the dividend at its current level versus reducing debt, repurchasing our stock or conserving cash. At this point, we've been able to maintain the dividend and also repurchase the shares. We will continue to assess our capital allocation strategy as we plan for 2009 and we remain dedicated to the most efficiently returning capital and maximizing value for our shareholders.

I will now turn the call over to Al Stinson.

While the environment in the title business is very difficult, some of our other businesses are enjoying strong operating performance. Specialty Insurance revenue was 97 million for the second quarter, a decline of 7 million from the second quarter of 2007. Flood Insurance generated 40 million in revenue, a 5% growth rate from the second quarter of 2007. Personal Lines Insurance contributed 35 million in revenue, a $5.6 million decline from the second quarter of 2007, as we remain focused on strong underwriting standards and profitable growth versus absolute revenue growth.

The Homeowners' business produced a loss ratio of 57% for the quarter. Home Warranty produced 16 million in revenue during the second quarter and generated a pretax margin of 20%, consistent with its recent performance, despite the significant slowdown in real estate activity in the western United States. The entire segment, pretax profit was 13.2 million and the pretax margin was 13.6%, an increase over the prior year pretax margin of 13.4%.

While we do not consolidate the results of Sedgwick, they produced revenue of 171 million and EBITDA of 26 million for a greater than 15% EBITDA margin for the second quarter. The EBITDA margin was a 15% increase over the second quarter of 2007 margin.

Sedgwick continues to perform well and it's an attractive asset, as evidenced by our successful sale of 20% of our ownership stake in June. We currently own 32% of Sedgwick. We also do not consolidate the results of Ceridian, but they produced revenue of 407 million and EBITDA of 93 million and an EBITDA margin of 23%. We are pleased with the efforts that Ceridian has made in the first six months of our investment in the face of a difficult operating environment and the Company will continue to seek further progress on improving the operations and financial performance through the remainder of 2008 and into 2009. We own 33% of Ceridian. Our actual loss recorded at FNF was 5 million -- approximately 5 million as Ceridian had interest expense of 78 million and purchase price amortization of about 40 million.

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

Thank you, Al. Our total open-order volumes continued to weaken throughout the second quarter despite the fact that we were operating in the normally seasonally strong spring and summer months. For the entire quarter, we opened 462,600 total orders for a quarterly average of 7,200 open orders for business day, a sequential decline of approximately 19% the first quarter of this year and a 26% decline from the second quarter of 2007.

Looking at it monthly, we opened 7,700 orders per day in April, 7,500 orders per day in May and 6,500 orders per day in June. Refinance orders as a percentage of total orders decreased in the second quarter, comprising approximately 53% of open-order volumes and 57% of closed orders in the second quarter, versus approximately 66% and 67% respectively in the first quarter.

Finally, June open-order counts have been roughly flat -- finally, July open-order counts have been roughly flat, with a June open-order level of approximately 6,500 open orders per day.

Obviously, with declining order counts during the quarter, we remain focused on continuing to appropriately manage the ongoing reduction in our headcount. We began the quarter with approximately 10,000 employees in the direct field operations and ended the quarter with approximately 8,800, a reduction of about 1,200 positions or 12% during the second quarter. We also eliminated approximately 400 positions in other areas of the Company, including agency operations, administrative areas and corporate department. However, the majority of these reductions came in the month of June, particularly in the last two weeks of the month. While our reporting results did not see any real benefit from these late-quarter staff reductions, we do expect to see lower personnel costs in the third and fourth quarter as a result of these significant staffing reductions.

We also continue to close title and escrow branches that no longer make economic sense to operate given the order volumes that we are currently experiencing. We closed approximately 90 branches during the second quarter, incurring accelerated lease termination costs of approximately $10 million. We will continue to monitor our order counts very closely and we are prepared to continue to shrink the size of our workforce if order counts dictate the need to do so. We remain committed to maximizing our profitability in all market environments.

The Commercial Title business remains relatively solid, although it did show a sequential decline in revenue. We opened approximately 16,200 commercial orders in our National Commercial Divisions, closed approximately 9,400 commercial orders, generating nearly $61 million in revenue. This was consistent with the 16,200 open orders and the 9,600 closed orders in the first quarter. The revenue was down from $73 million, as the commercial paper (inaudible) declined to $6,400 versus $7,500 in the first quarter.

Commercial order counts were down approximately 20% from the second quarter of 2007. Commercial revenue accounted for approximately 19% of total direct title premiums in the second quarter.

Let me now turn the call over to Tony Park who will review our financial highlights.

Thank you, Randy. FNF generated $1.2 billion in revenue for the second quarter with pretax earnings of $14 million, net earnings of $7 million and cash flow from operations of $13 million. Those reported results include three material events. First, we recorded a $25 million pretax gain from the sale of 20% of our Sedgwick investment. Second, we recorded a $10 million abandoned lease expense in the second quarter, resulting from the acceleration of the present value of remaining lease obligations and the writeoff of a net book value of leasehold improvements from those branches we decided to close in the second quarter. This had a negative impact on the earnings in the second quarter, but it will be a benefit for future quarters.

Finally, we decided to increase our provision for losses to 8.5% for the full year 2008, resulting in a 9.5% provision for the second quarter. This increase provision was a $15 million drag on earnings in the second quarter.

The Title Segment generated $1 billion in total revenue for the second quarter, a decline of 24% from the second quarter of 2007 and a 3% sequential decline from the first quarter.

Personnel costs of $341 million were down $85 million or 20% versus the second quarter of 2007, an increase by $6 million or 2% sequentially from the first quarter. As Randy mentioned, we did reduce total headcount by approximately 1,600 positions primarily in the second half of the month of June. We expect to see the benefit of those reductions in the third and fourth quarters.

Other operating expenses of $261 million actually showed an increase of $27 million or 12% from the second quarter of 2007 and a sequential increase of $53 million or 25% from the first quarter. Three major items caused these increases. As I mentioned earlier, we recognized $10 million in abandoned lease expenses in the second quarter. Neither the first quarter of 2008 nor the second quarter of 2007 had these costs. Again, we will see a future benefit from the lower lease expense due to these branch closures.

Second, we recorded a $23 million gross-up to both revenue and expense due to pass-through default business in our service-linked title operation. This accounting gross-up causes expenses to look higher than they really are when viewed in isolation. When analyzed with a similar $23 million increase in revenue, there's no bottom line impact. The first quarter of this year had $12 million in default gross-up, while the second quarter of 2007 had none.

Third, earnings credits from off-balance sheet escrow deposits continued to decline, tracking the significant decline in order volumes and not escrow balances, as well as declining short-term interest rates. We experienced a $23 million decline in earnings credits in the second quarter versus the second quarter of 2007, and a $10 million sequential decline from the first quarter. These three items accounted for a $56 million increase in other operating expenses in the second quarter versus the second quarter of 2007, and a $31 million sequential increase from the first quarter.

The provision for title claims was $71 million or 9.5% for the second quarter. During the second quarter, we made this decision to increase the provision for losses for the full year 2008 to 8.5%. We saw some minor adverse development of 10 basis points in policy years 2003, 2006 and 2007 and the ultimate expected loss experience according to our actuarial model, and 20 basis points in policy year 2005. Policy years 2003 through 2007 are projected to produce ultimate loss ratios of between 6.8% and 7.7%, which is slightly higher than the projected ultimate loss ratio of 6.7% to 7.6%, the model predicted in March. Given the slight increase in ultimate expected losses, we decided the prudent treatment was to increase our provision to 8.5% for full-year 2008. Actual title claims paid in the second quarter were $67 million, resulting in an increase of $3 million to the title reserves.

Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013, the $535 million drawn under our credit facility to primarily fund our Ceridian investment and debt at Fidelity National Capital, the vast majority of which is non-recourse. The debt-to-total capital ratio was 27.5% at June 30th.

Finally, our investment portfolio totaled $4.3 billion at June 30th. There are approximately $2.9 billion of legal regulatory and other restrictions on some of those investments, including secure trust deposits of approximately $650 million and statutory premium reserves for underwriters of approximately $1.5 billion. There are also some other restrictions, including less liquid investments like our ownership stakes in Sedgwick, Ceridian and Remy, cash held as collateral in our securities lending program and working capital needs at some underwritten title companies, all of which total approximately $750 million. 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 $175 million of dividend capacity from our underwriters for the remainder of 2008, for a total of $275 million in available cash for the rest of the year. We also have $565 million in available capacity under our revolving credit facility.

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

Yes, sir, thank you. (OPERATOR INSTRUCTIONS). We have our first question from Robert Napoli from Piper Jaffray. Please go ahead.

Good morning.

Good morning.

Good morning.

Good morning.

A question on liquidity. I know you went over that in detail enough to go back through the notes, but debt-to-capital, 27.5% today, and some of the other metrics -- what are the -- what is the 275 million of cash available the best thing to look at? In this credit crunch, the access the capital, obviously, is a little bit different than maybe it was six months ago, certainly a year ago. What can -- what is -- what can you take your -- what are you comfortable with on debt-to-capital and is it that 275 of cash available that we should look at when we're thinking about dividends and buybacks and --

Well, Bob, the ratios need to stay probably below about 30 to 35% for us to continue to maintain [an A] financial straight grading, which is viable to the industry. So we're not going to be doing anything that would take that debt to total cap much above 30, to be on the safe side. So, yes, you can look at the cash available as sort of a metric to see how much margin (inaudible) we have. In addition, we will generate substantial proceeds when we sell Specialty Insurance, which will raise a considerable amount of additional cash.

Do you have -- can you give a range on what you think -- how that Specialty Insurance will --

No, Bob, I really can't. I would hate to do that at this point. It's a little premature.

Okay. And with the expense cuts you guys made in June, the office closings, how much does that, on a run-rate basis, take down your expenses as we go into the third quarter?

Well, the personnel reductions would bring down the overall labor expense on an annual run-rate of about 110 million, so north of $100 million. We will not see the full benefit of that in the third quarter because of some of the commissions and salaries that rolled over in the first week of July, but we'll get the full benefit in August and September and certainly in the fourth quarter.

Is there much more you can do at this point?

Yes, I believe we can. We're going to continue -- it's a continual process. We're still actively involved in reductions and in fact, we're going to still be -- we're going to be very aggressive in the third quarter and year-end. In some parts of the country, that may even require taking it down another 10 or 15%. So it's a continual process. We're going to stay on our metrics and our labor ratios, and we still have more that we can do. We can also accomplish more in terms of the merging of our operations around the country.

Okay. I guess the good news is the California regulators can't say you make too much money anymore. Just a last question, a big picture. You guys have the highest margins -- have had the highest margins in the industry for a long time and if you guys are struggling in this market, a very tough market, your competitors, many of them, have to be struggling more. Is there -- are there opportunities in this environment or would you even have any interest in mergers where you could cut out substantial costs that -- is there M&A opportunities out there?

Bob, as far as the -- shortly after that, there's always been most active in adverse market conditions, and that's when we acquired most of our significant assets in terms of underwriters have been in more or less (inaudible) situation. That's one reason why, in my opening comments, I made the reference to capital allocation and possible preservation of cash because we've been very aggressive about repurchasing shares and the ongoing payment of the dividend. However, as the market has deteriorated, we believe that there will be some opportunities and with other underwriters or other large operations across the country, to perhaps consolidate for really the benefit of the shareholders of those companies as well as our own shareholders. So that's really why we -- why Al and myself and Tony and Randy were (inaudible) our remarks in a very conservative light to be in a position to preserve cash.

Thanks, Bill. I think that makes sense. Thank you.

Thank you. And our next question is from Darren [Pieler] from Lehman Brothers. Please go ahead.

Thanks. Just to touch on the provision increase, can you comment on the underlying claim increases you've been seeing and really compare that to the provision increase? I mean, it seems like the provision increased 100 basis points. I mean, the claims probably were not -- I don't think they were up that much, but maybe you can just comment on how conservative you're really being there.

I think if you look at the 8.5% relative to years we've had historically, that is very conservative. I think we did have two years in the very early part of this decade, this ultimate loss ratio has reached that point, but since then, we haven't seen anything go higher than 7.7%. So part of that 8.5% is to address some pretty minor adverse development in the last couple of years, and the rest really is more to be conservative, given the volatility that we've seen in our claims. We are watching that closely and each quarter, each month, we analyze the claims experience and expect to provide at 8.5% for the remainder of the year.

Okay. So basically, it's fair to say that you're seeing kind of at the most around a 7.7% claim loss scenario on prior policy years, but you're providing, I guess, about 80 basis points higher than that in provisions?

That's correct, Darren.

Okay. And then -- you might have mentioned this before, but on the investment income, what was the dropoff related to? And if you already said it, I apologize for that, but if you would repeat it.

The interest in investment income decrease relates really to some declining balances, declining short-term rates, and then our securities lending program grosses out both interest income and interest expense. And that declined, I think, close to $4 million in both interest income and interest expense. So the net didn't change in that program, but it did show the impact to the top line.

So looking forward, I mean, are we -- can you give us a sense for what we should be expecting?

The current year -- or I'm sorry -- the current quarter was at about 30 million. I think 35 is probably a better run-rate.

Okay. Thanks, guys.

Thank you. And our next question is from Gary Gordon with [Vertellus] Partners. Please go ahead.

Okay, thank you. Two questions, one on Ceridian. You said there was a 5 million loss in the second quarter. Was there anything unusual in the quarter? You described a tough environment, but anything unusual beyond that? And are there any sort of changes in operations planned for the second half that would change that number materially?

Really, nothing unusual at all. As a matter of fact, the performance was very good. EBITDA was 93 million, well above the prior year, a nice growth rate, EBITDA margin of 23%, but of course, it's a highly levered transaction and we have a lot of interest cost and we have purchase price amortization, which of course, is non-cash. So when you put that all together, you end up with a loss, but because of those two factors, and then our share of the loss that we recorded is 5 million, but nothing unusual at all. As a matter of fact, we're quite pleased with the investment.

Okay, thanks. Second question, putting aside the dividend for the moment and looking at your potential use of cash, buying back your own stock versus deal opportunities (inaudible) in the LBO market which could suggest very good opportunities versus buying your own stock. How do you think about that tradeoff?

Again, that really goes back to the answer that I gave Bob earlier, and that is we really want to be prepared to be flexible relative to having cash on hand, but if an opportunity develops, we can execute against it. I mean, we have over $500 million of undrawn capacity under our credit facility and so we're really trying to balance now just how much -- what our dividend rate should be and what the stock buyback rate should be and preservation of cash for potential -- for acquisition opportunities. And frankly, every time we buy back a share of stock, we reduce our equity capitalization and therefore, we start putting upward pressure on our debt-to-cap ratio and if we still earn our dividend, the same thing is true with regard to our dividend. That's kind of the best answer I can give you, but we do think there's going to be some opportunities within our industry for consolidation as we go forward during the next year.

Okay, thank you.

Thank you. Our next question is from Nick Fisken with Stephens, Inc. Please go ahead.

Good morning, everybody.

Good morning.

Good morning.

Good morning.

What's our tax basis on Specialty?

Nick, I believe that's approximately 180 million.

Yes.

We can firm that up and then get back to you, but I think that is close.

And you guys expect to have more lease termination charges in the second half of this year?

Yes, I think we -- Randy, do you know (inaudible) --

Yes, we're scheduled to have 35 to 40 more branch closures in the third quarter. We don't know about the fourth quarter yet.

And last question, how much do we have invested in Remy?

$80 million.

8-0?

Yes.

Right. Thanks so much.

Okay. Our next question is from Nate Otis with KBW. Please go ahead.

Good morning, gentlemen. First question, it looks like you might have restated your last year's commercial numbers. I just wanted to get a little bit of color on what went on there.

Yes, the first and second quarter were roughly the same in terms of open-order volume and closed-order volume. On the go-forward, we still have seen a little softening in the second half, but still a pretty solid and pretty consistent market. We're seeing properties take longer to close deals, longer to closing, but [we have tracking] of the fed situation. The market seems to be moving more towards the single site and the small office and retail sectors, so overall, we see a consistent second half, maybe a bit softer than the first half.

Okay, thank you. I was actually looking at -- from an order count standpoint, it looked like your order counts for '07 were redone a little and I just wanted to get an idea if there was anything specifically behind that, any change in the way you viewed commercial order -- open orders or anything like that.

No, I don't believe so.

All right. Any color also on the tax rate? Was it low this quarter given all the realized gains?

Yes, it's really lowered. If you look at the components of our earnings and project that through the end of the year, a large portion of our earnings are based on tax-free earnings. So it's 29.5%. It's a little confusing because we have the investment -- equity investment earning that's below the line. You really have to combine that with the pretax earnings and you get to a 29.5% year-to-date tax provision.

Okay, that's helpful. Thank you. And then just a last question, in general in the past, you've given maybe a little bit of color on what you thought the Specialty assets could be worth. Any color right now, just a general range right now?

I don't think we want to give that. We're very close -- within the next month or so, we'll be announcing something and you'll hear the number then.

Okay, fair enough. Thank you.

Thank you. Our next question is from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks, good morning.

Good morning.

More of a high-level question on the industry -- given the difficulty of the environment we're in and could proceed into further, I think you did a good job laying out your capital resources, but do you think we're entering a stage of the market where actually capitalization could be threatened at certain players in the industry?

I'm going to let Al answer that.

I'm going to answer it this way. There's plenty of people that do -- that are pointing to that. The recent Fitch Report on the RAC, risk-adjusted capital ratios, would certainly indicate that the industry in total has suffered a decline in liquidity. So, yes, I -- and how serious it gets to be, I can't tell you, but there's certainly been a change over the last couple of years. There's no question about it. We remain very solid, however, on all those ratios that you see both in [Demitech] -- the [Demitech] Service and Fitch.

Okay. I asked the question based on your indication that there might be consolidation opportunities. How do you weight a potential consolidation opportunity versus maybe just simply taking customers away from a competitor?

Geoff, our goal is to take every customer away from every competitor and we're balancing that right now because the market is so difficult and Randy is doing an excellent job in reducing staff and consolidating operations, but we do actually -- we are actually hiring sales representatives and escrow officers and people to control customers from a number of our competitors as they now start accelerating their own consolidation efforts and start reducing the size of their staff and reducing the open reach of their operation. So we're doing that and I just believe we need to have cash available so that we can be opportunistic if the right situation develops.

Okay, thanks.

Thank you. Our next question is from Brian Roman with [Robeco] Investment Management. Please go ahead.

Hi, thanks for taking my question. I don't believe I have the same expertise as the group of people that asked questions previously, but I'll give it a try. Anyway, I've got several questions here. First of all -- let's see, looking at the release, I'm just trying to understand the business here. June was slower than May; May was slower than April. Is that a normal seasonal pattern?

No, actually, that is not a normal seasonal pattern. Typically, the second quarter in the springtime, you do get a little bit of a lift from the resale market. We did see additional resale transactions closing in the second quarter, but the refis came down significantly. So a little bit of a departure from prior years.

Okay, okay.

Some of those type questions, Dan Murphy can give you a great deal of color if you call him offline. He's our Director of Investment. It relates to --

I know, I appreciate that, but --

(Inaudible) get into it --

I mean, it's sort of an interesting issue to open up that the seasonality of the business isn't quite evolving the way you thought. Next question, reserving, you did take the higher reserve. Could you just explain again why you upped it to 8.8%?

8.5%

I'm sorry.

We've seen some minor adverse development in the last few years and in fact, we've seen that recur over the course of really the last, I want to say, four quarters.

And now, does that relate to the increase in foreclosures and the decline in housing demand? I mean, is it all sort of tied in together?

Not directly. I mean, there is a theory that there's some correlation in terms of maybe some acceleration of claims that you wouldn't otherwise see that are being accelerated and showing up in our numbers that might not ultimately produce higher loss ratios.

Right.

But because we're seeing a large number of foreclosures and that generates a transaction and a title search, that some of these claims may be coming in, that we see. And at this point in the early stages, you can't tell if it's acceleration or truly just poor performance. So to be conservative, we've increased our loss provision.

So you can't put your thumb on it yet and say -- or your finger on it and say, this is related to the increase in foreclosures and you're just seeing adverse development?

That's right.

Okay. Next question, the dividend. Well, it's $0.30 a quarter. I know you got a lot of cash; I know you sold the Sedgwick piece, but you're not earning it and you certainly haven't earned it year-to-date. With the cost cuts that you have implemented, and I think you said it was close to $100 million annualized cost cut in June, all other things being equal -- and that's sort of a [tough] way to look at things -- do you envision yourself earning the dividend on an operating basis by the fourth quarter?

No.

No, okay.

I'd say there's no chance --

No chance.

-- of a $0.30 dividend in the fourth quarter.

Okay. So a snowflake's chance in Jacksonville, huh?

That's correct.

Okay. The last question and I'm sorry to ask so many. The investment portfolio, I did see gains -- or actually you took some -- an FNT piece, some realized gains and losses. You may have explained it already, but could you just tell what they are? And also, do you own any Fannie or Freddie preferreds or bank trust preferreds?

No to the second question. The first question, if you look at the consolidated results, we had the $25 million gain on the sale of Sedgwick, which we've discussed.

Got that.

But we also had some impairments. The accounting rules are pretty stringent in terms of how you analyze your investments and you don't have a long time to look at them, so any investment that goes into a loss position needs to be analyzed. And if it sits in a loss position for longer than six months, often you have to book an impairment even if you don't feel like that security is ultimately going to be realized as a loss. So we had roughly $10 million in other than temporary impairments recorded in the quarter.

Yes, but Wall Street, we've come up with this term OTTI and people just buzz it around, but you're saying that there's about $10 million of that in the quarter?

That's correct.

Okay, great. Thank you very much.

Let me get back to --

Sure.

-- your questions on could we conceivably earn the $0.30 dividend in the fourth quarter and I was probably a little flippant in saying not a chance because frankly, we don't give projections. We don't give guidance. We don't know, but if we did -- you saw what we earned in the second quarter. You've heard what we're doing on cost savings and so on, but we just can't make that kind of projection.

Thank you very much. Appreciate the -- taking my questions.

Yes.

Thank you. Our question is from [Louis Sykes] with Tennant Capital. Please go ahead.

Hi, good morning, and I'd like to follow-up on that. I'm trying to get a forward-looking comment out of you. Can you give us a sense for what you think is a reasonable title margin target in this difficult environment in the second half assuming that you don't have a volume pickup in -- that the volume picture plays out at the current extent?

Well, our goal for titles or margin on our title business has been to try to maintain a minimum 12% margin, and we aren't able to do that in this environment. The margin in the second quarter was impacted by several non-recurring items including the lease charge. There will be another smaller lease charge in the second quarter -- in the third quarter and probably another one in the fourth quarter, but they'll be more modest in nature. So our goal would be to certainly improve our margin going forward in title operations. It's unlikely we're going to hit our kind of minimum goal of 9 to 10% operating margin at our Title Group in this environment.

And how -- I mean, the lease charge was, I guess, 10 million or about a percent or so and then the catchup in the claim loss reserve, I guess, was another percent extra roughly.

That's right.

So at adjusted, we would be at 3% or so, but volumes obviously are going down. The closed orders are going to be lower in the third quarter and --

The third quarter will be comparable to the second quarter, although orders have been on the -- have been declining and then we'll get to -- start getting the benefit of our run-rate reductions on our personnel savings that were incorporated in the second quarter, which were significant and ended up being about 16% of our overall employee base. And then again, the lease charges that we're taking in the second quarter, we'll get the benefit of those going forward in the third quarter, but it would be very difficult for us to achieve the 9 or 10% margin.

Right, I don't think anyone is dreaming of 9 or 10% at this point. And if -- I mean, it's -- obviously, the worst kind of environment for you is when volumes are declining and you're sort of constantly running behind in terms of getting to optimum size for the current amount of business. I mean, if we just had volumes stabilize at this low level and you can finally catch up with the cost cuts, do you have a sense for what margins would be at that point, I mean, even before we get a volume recovery, just if we stabilize at low level?

I believe we'd get back to this 9, 10 -- 8, 9, 10% operating margin.

Even at these low levels?

Even at these low levels.

Okay. Thanks, guys.

Thank you. And our next question is from Andrew [Vindigan] with General American. Please go ahead.

Hi, could you give a book value on your insurance business and give some sort of metric on your flood business in terms of EBITDA margins or cost basis or something to give an idea as to how we should value it?

The book value is $230 million.

Is that for the whole thing or --

That's for the entire piece except the Home Warranty business, which is not for sale.

But conceptually, the flood business probably shouldn't be valued on book value because it's fee based. What metric should we use on that in order to get a rough idea in terms of what it's worth or what it should sell for without giving the price, obviously?

The flood business is part of the insurance company, so you can't break -- you couldn't break out the book value separate because it is an underwriter even though it's reinsured by the federal government. I don't know how to answer the question on the kind of valuation you've put on that separately.

All right, thanks.

Thank you. And our next question is from [Raheed] Patel with [Synova]. Please go ahead.

Hey, guys, thanks for taking the questions. Bill, just a couple of quick questions for you. You had mentioned a few times that you want to keep some powder dry for potential acquisitions. Are you looking more to do kind of distressed acquisitions or is anything -- or are you looking to kind of grow title in the current environment from a pricing standpoint?

I believe our next acquisition opportunities will be somewhere related to the title industry and the title business, and that's why we've -- we had our Board meeting yesterday and we really had a long -- the discussions that were being primarily focused on, uses of cash, preservation of cash and looking at various potential opportunities within the title insurance industry. So if we were to do something over the next year or so, you should then be thinking about title insurance as opposed to a distressed acquisition in an unrelated industry.

And do you think that you'll have the opportunity to buy other title businesses at more distressed pricing than you would today?

Don't want to say.

Okay. And is your focus -- do you still have a preference of direct into a more direct channel versus agency?

Well, actually, neither one is doing very well right now. We continue to reduce our agency count pretty aggressively and take high-claims agents and remove them from our agency portfolio group. On the other hand, where claims are more controlled on the direct operations side, the overhead is much more significant because we obviously have the people and we have the facilities. So I guess we just would be flexible in terms of what we're -- in terms of the opportunity that was presented to us. It would -- any acquisition we would make would be primarily done on a synergistic basis in terms of consolidating operations and becoming more efficient with whatever the -- whoever the acquiree is.

Okay, great. Thanks a lot.

(OPERATOR INSTRUCTIONS). And we have a question from Tim Ryan with Oppenheimer Funds. Please go ahead.

Yes, hi, good morning. I just wanted to follow-up on a question from two or three people ago with respect to what you think a steady-state margin in the title business could get to once you've sort of wrung all the costs out, even if we stay at this level. And I think you said 9 and 10% and that does sort of correlate with, if memory serves, two or three years ago when people were worried about the mortgage market falling apart as much as it did.

You guys used to have an analysis that said in a trillion-eight market, we think we can do 10%. It sounds like you're still there. I guess I'm just wondering we're in the trillion-eight market. How -- I mean, is just the steps that you've talked about to this point, i.e., the cuts you made at the end of June and the cuts you plan to make between now and year end, is that all it takes to get there, or is there something else in the environment or with reserving or something else that has to take place?

No, I believe we would get there if we had stabilized order flows for the next -- if our order rates maintained at the current level and we continued our expense cuts and our cost saves for the next few months, and we were set at the end of the third quarter, then I believe we would get there. Our problem has been over the last two and a half years is catching a falling knife and we just -- we're getting cut every time we try to catch it.

Understood, and appreciate the fact that you can only keep up so far and the rate of decline has been extremely fast, but just wanted to make sure that I understood where we stood now if we stay at these counts. And who knows whether that happens, but thanks very much.

Sure.

(OPERATOR INTRUCTIONS). And at this time, there are no questions in the queue and I will turn it back to Mr. Foley. Please go ahead.

Thank you. We continue to navigate our way through an extremely challenging market during the second quarter. As we move to the second half of 2008, we remain focused on maximizing the profitability of our title business through continued cost reductions throughout our operations, as well as monetizing the values from some of our other assets, most notably the completions of sales of our specialty insurance business. Thank you for taking the time and joining us this morning.

Ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Teleconferencing. You may now disconnect.