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Edited Transcript of FNF earnings conference call or presentation 30-Oct-19 4:00pm GMT

Q3 2019 Fidelity National Financial Inc Earnings Call

JACKSONVILLE Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Fidelity National Financial Inc earnings conference call or presentation Wednesday, October 30, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony John Park

Fidelity National Financial, Inc. - Executive VP & CFO

* Michael Joseph Nolan

Fidelity National Financial, Inc. - President

* Raymond Randall Quirk

Fidelity National Financial, Inc. - CEO & Director

* William Patrick Foley

Fidelity National Financial, Inc. - Non-Executive Chairman

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Conference Call Participants

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* Bose Thomas George

Keefe, Bruyette, & Woods, Inc., Research Division - MD

* Edward Christopher Gamaitoni

Compass Point Research & Trading, LLC, Research Division - MD & Head of Research

* Geoffrey Murray Dunn

Dowling & Partners Securities, LLC - Partner

* Jason Scott Deleeuw

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* John Gregory Micenko

Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research

* John Robert Campbell

Stephens Inc., Research Division - MD

* Mackenzie Jean Aron

Zelman & Associates LLC - VP

* Mark C. DeVries

Barclays Bank PLC, Research Division - Director & Senior Research Analyst

* Jamie Lillis

SOLEBURY TROUT LLC - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Fidelity National Financial 2019 Third Quarter Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded.

I would like to turn the conference over to your host, Jamie Lillis. Please go ahead.

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Jamie Lillis, SOLEBURY TROUT LLC - MD [2]

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Thank you, operator, and good morning, everyone. Thank you for joining us for our third quarter 2019 earnings conference call.

Joining me today are our Chairman, Bill Foley; CEO, Randy Quirk; President, Mike Nolan; and CFO, Tony Park. We'll begin with a brief strategic overview from Bill. Randy will review the title business. And Tony will finish with a review of the financial highlights. We'll then open the call for your questions and finish with concluding remarks from Bill.

Before we begin, I would like to remind you that 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 expectations, hopes, intentions or strategies regarding the future, 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 financial and operating results 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 risks and other factors detailed in our press release dated yesterday and 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 2:00 p.m. Eastern Time today through November 6. The replay number is (800) 475-6701 and the access code is 472566.

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

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [3]

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Thank you, Jamie. The third quarter was another strong quarter for our title business, as we generated adjusted pretax title earnings of $407 million and an 18.6% adjusted pretax title margin, both of which represent record quarterly performances since the third quarter of 2003. I'll let Randy go into more detail on the title business.

Turning to Stewart Information Services, as we announced in September, we made the decision to terminate our proposed merger agreement with Stewart, given the insurmountable regulatory hurdles that we faced. Looking forward, we remain committed to creating meaningful long-term value for our shareholders and are in the process of reviewing our capital allocation strategy with our Board.

Our priorities for capital continue to be focused on share repurchases, consistent dividend growth over time and strategic M&A that enhances the growth profile and diversification of the company.

As we announced yesterday afternoon, we increased our dividend 6% to $0.33 per share from our previous dividend of $0.31 per share as a result of the very strong cash flow generation of our title business. In July, our Board declared a $0.31 per share dividend in the third quarter of 2019, which used $85 million in available cash from the holding company in September. We also repurchased 810,000 shares of our common stock during the third quarter for approximately $35 million.

Cash inflows were $294 million, primarily from the $277 million in underwriter and non-underwriter dividends that were paid up to FNF holding company in the third quarter, $16 million in principal and interest on the intercompany ServiceLink note and $1 million in interest of the Cannae line of credit. The net result was we ended the third quarter with approximately $984 million in available holding company cash.

I'll now turn the call over to Randy to discuss the title business.

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [4]

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Thank you, Bill. We generated adjusted pretax title earnings of $407 million, a $108 million or 36% increase over the strong third quarter of 2018. Our adjusted pretax title margin was 18.6%, a 290 basis point or 18% increase over the prior year. We had a 21% increase in direct orders closed, comprised of a 2% increase in daily purchase orders closed, a 17% increase in total commercial orders closed and a 114% increase in daily refinance orders closed.

Purchase order opened increased by 1% versus the third quarter of 2018, a sequential improvement from the 2% decrease in the second quarter of 2019 versus the prior year. Refinance orders opened increased by 114% versus the third quarter of 2018, as decline in mortgage rates continues to drive strong refinance volumes.

Lastly, total commercial orders opened increased by more than 15% over the third quarter of 2018. This quarter produced improving trends in purchase orders opened, a strong continued quarter of refinance orders opened and a well -- as well as ongoing strength in commercial orders opened. Due to the strength of our third quarter, we are well positioned to continue producing strong title business results through the remainder of 2019.

For the third quarter, total opened orders averaged 9,250 per day, with July at 8,700, August at 9,700 and September at 9,300. Purchase orders opened were up 1% and closed were down 2% on a daily basis in the third quarter. Purchase orders opened in July were down by 2.4% versus the prior year period, while August and September were up 1% and 4%, respectively, versus the prior period. Refinance orders opened and closed increased by 114% and 93%, respectively, on a daily basis versus the third quarter of '18.

The best month of the quarter was August when refinance orders opened increased by 142% over August of 2018. For the first 4 weeks of October, total orders opened were approximately 8,600 per day. Daily purchase orders opened increased by 2% versus the prior year, and daily refinance orders opened increased by 123% over the prior year period.

Total commercial revenue of $301 million was a 9% increase over the third quarter of 2018, driven primarily by a 17% increase in closed orders, somewhat offset by a 6% decrease in the fee per file. Commercial orders opened increased 15% in the third quarter versus the prior year, positioning us well for the remainder of 2019. The first 9 months of 2019, total commercial revenue of $818 million was the largest 9-month revenue performance since we began tracking total commercial revenue in 2015.

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

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [5]

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Thank you, Randy. We generated more than $2.2 billion in total revenue in the third quarter, with the title segment generating all but the $47 million of revenue we generated in our corporate segment.

Net earnings were $250 million, which included $4 million in realized gains. Adjusted net earnings were $304 million or $1.10 per diluted share. Excluding realized gains of $3 million, the title segment generated over $2 billion in total revenue for the third quarter, a 13% increase from the third quarter of 2018.

Direct premiums increased by 15% versus the third quarter of 2018. Agency premiums also grew nearly 15%. And escrow title related and other fees increased by 15% versus the prior year. Personnel costs increased by 9%, and other operating expenses grew by only 8%. All in, the title business generated an 18.6% adjusted pretax title margin, a 290 basis point increase versus the third quarter of 2018.

Interest income of $57 million was a $13 million increase over the prior year, as we continue to see the positive impact of higher short-term interest rates on the interest we earn on the client exchange funds we hold in our 1031 exchange business, the reinvestment of proceeds from maturing fixed income securities and from cash and short-term investments.

FNF debt outstanding was $838 million on September 30 for a debt-to-total capital ratio of 13.3%. Our claims paid of $52 million were $15 million lower than our provision of $67 million for the third quarter. The carried reserve for claim losses is currently $28 million or 2% above the actuary central estimate. We continue to provide for claims at 4.5% of total title premiums.

Finally, our investment portfolio totaled more than $5.4 billion at September 30. Included in the $5.4 billion are fixed maturity and preferred securities of $2.5 billion with an average duration of 3.5 years and an average rating of 8.2, equity securities of $700 million, short-term and other investments of $700 million and cash of $1.5 billion. Of the $1.5 billion in cash, nearly $1 billion currently sits at the holding company level.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of John Campbell from Stephens.

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John Robert Campbell, Stephens Inc., Research Division - MD [2]

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Congrats on a great quarter. I just want to touch on commercial for a second. Obviously, you've seen continued good strength there. If you can maybe just kind of unpack where the strength is coming from on a, I guess, on a region-by-region basis or maybe asset class? Or are you just kind of seeing it across the board? Any kind of color there?

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Michael Joseph Nolan, Fidelity National Financial, Inc. - President [3]

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Sure, John. It's Mike. And it's really broad-based. I mean we're seeing most asset classes doing very well. And depending on the quarter, some are stronger than the others, but energy, office, multifamily and industrial is very strong. Gaming kind of comes in and out, but very strong there. And then in terms of geography, as I look at our 21 national offices, our California and Washington, NCSs are doing very, very well. Texas, D.C., Virginia, Pittsburgh, Philly, Minnesota, just a lot of markets around the country. And in New York in particular in the third quarter, we saw some really strong deals exported out of New York and into our field operations throughout the country.

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John Robert Campbell, Stephens Inc., Research Division - MD [4]

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That's good to hear. And then on the 15% open order growth out of commercial, that's probably the strongest result I've seen in a while. It looks like it puts you guys on a pretty good path maybe through 4Q and maybe in 1Q. But any sense for the size of the deals and the mix now and then maybe the type of orders we have purchased or refied? And how that -- how those 2 might influence the commercial fee per file for 4Q?

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Michael Joseph Nolan, Fidelity National Financial, Inc. - President [5]

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Yes. So we had some pretty big transactions in the third quarter, John, but we also closed a tremendous amount of volume. And remember, our closings were up 17%, and 60% of those closings are local deals, and that fee per file was off a bit more than in other quarters. So that did pull it down for the quarter. We have some large transactions in the pipeline. I would anticipate the commercial fee per file to come back up in the fourth quarter. It's typically our highest for the year. And I don't think we've had a commercial fourth quarter in a while where the national fee per file was below 13,000. So I think it's looking very good for the pipeline.

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John Robert Campbell, Stephens Inc., Research Division - MD [6]

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That's good to hear. And then lastly, Bill, I mean obviously you guys kind of have a high-class problem now with the cash at the holding company. You mentioned, at the Board level, you guys were kind of discussing your options. But just at a high level, any sense for kind of what you -- where your head is at on the M&A side? And if you guys do have a pipeline, if there's anything kind of larger transformational outside of title that you might be looking at?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [7]

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Well, it'd all be -- it would be complementary to what we're presently doing or countercyclical to what we're personally engaged in. As you know, title business is transactional in nature. And when the rates are low, we reap the rewards. And when the rates are higher, the transactions slow down. And if we could find something that would balance that trend, that would be very interesting to us. Then there are other businesses that are really ServiceLink-related in ways, but in areas of business that we presently don't have coverage. Obviously, there's not going to be another large title deal. And we're also -- we increased the dividend, it doesn't seem like a lot, but it was up 6%, $0.02 a share. We want to make sure we never get in trouble in terms of our revenue will go backward on our dividend increases, and this is the time of the year when we normally review and increase our dividend. And then we're taking a good look at increasing our share buyback, but it would be on a kind of daily, consistent basis, just as we've been doing. And so that's the process we're going through. So it was a great quarter, generated a lot of cash. Fourth quarter is going to be a terrific quarter. We're already seeing that in -- from the month of October. And so there should be more to be revealed in the next several months.

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John Robert Campbell, Stephens Inc., Research Division - MD [8]

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Okay. And then I want to touch back maybe on the M&A commentary around the countercyclical angle. What are your thoughts on the -- on First American and their approach with having an internal bank? Is that anything that could be of interest to you guys from just the countercyclical angle with rates?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [9]

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We are actually pursuing that -- we're pursuing a bank that would be depository for some of our escrow funds. And it's a long and steady process, and we've been on it for about 1.5 years. And we're close to filing, but we're just not quite there yet.

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Operator [10]

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Our next question will come from the line of Mark DeVries from Barclays.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [11]

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Yes. Obviously, a very strong margin on the quarter. Wanted to get your thoughts on how we should think about your need to add expense here to fulfill the pretty robust pipeline of new opportunities on the refi side and kind of implications for the margin?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [12]

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Yes. This is Randy. You're correct. I mean strong second quarter and third quarter with openings. I believe our third quarter openings were up 30% year-over-year, closing is up 20%. We added a couple of hundred employees in the third quarter, but still we're running a little over 200 less employees than a year ago. So as we go forward, the only real expense swing would revolve around labor cost. And we don't anticipate adding to staff in the fourth quarter. We're up about 50 employees so far into October. We'll have a lot of closings, but we expect that, that will level off as we go through the back end of the year. So expense-wise, I don't see anything dramatically changing outside of the labor cost.

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Mark C. DeVries, Barclays Bank PLC, Research Division - Director & Senior Research Analyst [13]

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Okay. So the implication is we should expect another pretty strong margin in 4Q, particularly as we think about an even bigger contribution from commercial, is that fair?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [14]

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Well, we -- as Bill had said, it's going to be another very strong quarter. 18.6%, of course, was a record quarter for us. And you always have some seasonality impact as you get through into the back end of November and into December. But commercial is going to be very strong. And we actually, on the refinance side, could end up with more refis closings in the fourth quarter than we had in the third quarter. So it will be -- it should be a very good fourth quarter.

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Operator [15]

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Our next question then will come from the line of Mackenzie Aron from Zelman & Associates.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [16]

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Just following up on the strong margins this quarter, is there anything from a technology or automation standpoint that is helping to drive the really strong result that you can maybe point to?

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Michael Joseph Nolan, Fidelity National Financial, Inc. - President [17]

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Sure, Mackenzie, it's Mike. Particularly in the third quarter, I'd point to 2 things. First is just the great commercial performance. That tends to be higher-margin business for us. But on the automation side, with all the refis that we're processing, we're really able to take advantage of our NextDays title automation and also our ability to do work in India. We're -- in our centralized refi environments like ServiceLink, roughly 70% of our refi orders require a little or no touch. So they come in and we can process them and get the commitment out with little to no human touch. And in our distribute footprint, it's about 40%. So we're seeing a nice lift from the automation, and that just matures over time and will get better and better.

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Mackenzie Jean Aron, Zelman & Associates LLC - VP [18]

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Excellent. And then another question on agent, the agent revenue strength, I know we don't have the full market share picture yet, but seems like you all have been gaining share in that channel. And just curious what you're hearing from the field, if those gains are going to be fully sustainable now that the Stewart deal is off the table? And how much of the strength was driven by agent reallocating during the merger process?

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Michael Joseph Nolan, Fidelity National Financial, Inc. - President [19]

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We feel like we're taking same share in agency. We've seen good growth in a number of markets, particularly Florida, which is a great agency market, and other markets in the Southeast and in the East. As you know, we don't do a lot in the West relative to agency, but we've seen nice growth there. And I wouldn't say it's market share we've necessarily taken away from Stewart. I don't know that it came from any dislocation, and I think we're just more broadly taking share from the overall marketplace.

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Operator [20]

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Our next question then is going to come from the line of Jack Micenko from SIG.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [21]

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I wanted to ask about the fee per file on the resi side. It sounds like with the pipeline on refi where it's at, we should see another -- maybe another year-to-year decline in resi fee per file. And I think you said earlier, just to confirm, maybe a rebound in commercial in the fourth quarter. Am I thinking about that the correct way?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [22]

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Yes. I think that's right. I mean we -- in the third quarter, 50% or 45% of our closings were refinanced versus 30% in the third quarter last year. And I would anticipate in the fourth quarter that, that could be 50% -- move to 50% or maybe low 50%. So that's certainly a headwind on the fee per file. And it's just how much it gets offset by a lift on commercial.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [23]

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Okay. Okay. Makes sense. And then on the buyback, going back to an earlier question. I guess maybe to ask in a different way, what are you waiting to see to announce or to think about something more substantial on the buyback side? Obviously, it sounds like you've got some things in the hopper on M&A, but is it sustainability of volumes? Is it 4Q? Help us sort of think about what some of the different deciding factors will be.

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [24]

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I mean really our first allocation to capital has been to keep on maintaining and increasing our dividends. So we're very proud of what we've done with our dividend over the last 7 or 8 years. The buyback, we have a steady buyback program that we -- I mean we're not blacked out. We buy a certain number of shares per day, and that's where the number that we would look to increase that share purchase per day. We wouldn't do a Dutch auction. We wouldn't do a special buyback. We'd rather just be really kind of steady and consistent. And so we don't announce the number of shares we buy per day. We just say that we're in the market, and we're going to be looking to increase the number of shares purchase per day when we're not blacked out. That's kind of as specific as I can get. Is that fair enough, Tony?

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [25]

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Yes. Makes sense. We did buy 810,000 shares in the quarter, spent $35 million.

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John Gregory Micenko, Susquehanna Financial Group, LLLP, Research Division - Deputy Director of Research [26]

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And that automatic approach, I guess, that would suggest that you're pretty comfortable with the intrinsic value and current valuation?

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [27]

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We are.

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [28]

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Yes. Absolutely.

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Operator [29]

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Our next question then will come from the line of Jason Deleeuw from Piper Jaffray.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [30]

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What's a good go-forward tax rate?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [31]

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Jason, I think you can model 24%. We did have an unusual tax rate in the third quarter at 18.8%. That was up against actually a 17.8% in the prior year third quarter, which also had some, I'll call them, discrete items. We did have a $5 million Florida state tax refund that showed up in Q3 that lowered our rate. And we also had some increased stock option exercise activity, following the -- really the prolonged blackout we had for Stewart, where we were blacked out for a long period of time. And when that lifted, we did have some expirations that were quickly approaching. And so that exercise activity does generate a tax benefit to us. And so that's why we're kind of sub-20% at this point, but I think you can model 24% going forward.

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Jason Scott Deleeuw, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [32]

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All right. And then market share going forward, I mean, traditionally in title insurance, it's been M&A that drives big changes in the needle in terms of market share. And so that looks like that's all off the table, but is there anything -- I know you said you're taking share in the agent channel. But is there anything in terms of ramping up agent acquisitions that is interesting at this point? Or is there anything on the direct side that you could also do from a market share standpoint?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [33]

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Yes, this is Randy. Now that Stewart is behind us, we're going to get back to where we were a couple of years ago, looking at agents, small, midsize agents and infilling our footprint. We have a very distributed and pretty solid footprint, but there is areas where we can complement our existing brands through acquisitions. So we'll be back on that track. And then there is recruiting. We're always in the game to hire good, new revenue-producing people. So it's a bit of an organic approach at this point, but we will be looking at, and are currently looking at, acquisitions.

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Operator [34]

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Our next question then will come from the line of Geoffrey Dunn from Dowling & Partners.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [35]

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I have a few. In the past, Fidelity had $1 billion at the holdco at mid-teens with debt leverage, it would just be a matter of time before a big deal is coming at us. Can you talk about how you think about, I guess, the possibility of a large, somewhat transformational transaction coming in the door versus more of a tack-on strategy?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [36]

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Well, it's very intuitive, Geoff.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [37]

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I know you don't like sitting on money, so.

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [38]

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Yes. We -- the things that we are looking at are somehow related. They're in the insurance space or related to the insurance space. And we're trying to stay away from ideas that are presented to us that are transactional in nature. We'd rather have -- move to the recurring revenue model. And if we can move toward acquisitions or investments in the company and that we can grow that company that are countercyclical to the title insurance, transactional, low-interest rate-driven business, that's really where we're most interested in, and that's what we're working on. We're running a lot of screens right now, and we're really trying to focus on what would make the most sense for the company. But you're not going to see anything that's out of line. There's not going to be any restaurants. There's not going to be any extraneous-type investments. These will be investments or an acquisition or acquisitions that will really protect our fortress balance sheet. That's kind of my last goal here and my stance in this company.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [39]

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But you wouldn't rule out a sizable deal?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [40]

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No. No, I would not rule out a sizable deal.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [41]

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Okay. And then as you planned for the Stewart deal, I think the buyback anticipation was to repurchase at least the amount of shares issued in the Stewart transaction, both because the valuation deemed -- was deemed attractive and to get rid of the dilution. What changes that appetite? And it seems to me like, now, you just have even more cash to go after buyback?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [42]

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Yes. And we're going to increase the buyback. We are going to. But we have 280-somewhat-million shares outstanding.

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [43]

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Yes. 275 million.

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [44]

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And so if we buy back 10 million shares, it doesn't really move the needle. It's a big chunk of money. So we'd like to be consistent. If we could buy back in the 5 million to 10 million share range per annum, I'd be pretty happy with that. And I think we're being consistent, we're being steady, we're not getting ahead of the market, we're not investing all of our funds at a higher stock price. It's going to be dollar cost average. So that's really -- that's what we're seeing around talking about. And as Tony mentioned, we bought about 800,000 shares in the third quarter. You can expect to see that move up as we move forward during this year and into next year.

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [45]

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We have 22 million shares available under our authorization, so plenty of room.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [46]

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Right. And then just a couple of title specific. I think it was Randy indicated we could see higher closings in fourth quarter for refi. Is the October closed order per day pace exceeding September?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [47]

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The -- it's pretty steady on the purchase side, a little softening in the last 2 weeks on the refinance side. But we're seeing steady on a week-by-week basis in October versus September on the purchase side.

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [48]

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Just one thing to add there, Geoff. On the close side, the last week of the month is always our heaviest closing months, so it really influenced those numbers and we're just going through that this week.

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Geoffrey Murray Dunn, Dowling & Partners Securities, LLC - Partner [49]

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Sure. And then last question. I did see recently, you announced the launching of a Digital Closing Hub. Could you talk a little bit about that and how that incrementally benefits your business, both, I guess, from -- I think it's more focused on the agency side, but also expenses?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [50]

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It's really early stage with all these digital closing initiatives. The technology is there, as we've talked about before. We've announced our initiative with Black Knight called Expedite. We're fully digital closing capable. We've got partnerships and things we can do with remote online notarization. But what you really need for this to become more of a reality is clients and customers that want to use it. And so we have a number of pilots underway in various states with customers, but it's all very early stage. And I think the Digital Hub is really just to kind of reach out to the agent community to let them know they can take advantage of some of these technologies that we have in play.

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Operator [51]

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Our next question will come from the line of Bose George from KBW.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [52]

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Just going back to capital, and I don't mean to beat a dead horse here, but just given the cadence of the buybacks that you suggested, does that really suggest that you'll be basically holding a fair amount of dry powder for M&A as opposed to returning more capital in the near term?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [53]

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I'd say that's an accurate statement. We really want to kind of look at a couple of transactions that have come before us that we're thinking about. And if they don't come to fruition, we're going to be very cost conscious and value-oriented. Then we would probably relook at our capital allocation strategy. I mean I like our fortress balance sheet, I like our low debt position and I love the cash on the balance sheet. It just gives us a lot of flexibility to do a lot of different things.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [54]

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Okay. That helps. And then just actually switching to the margin, can I get the margin on your -- from the centralized refi channel? And then the premiums in the channel, how do they vary versus just the regular refi premium?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [55]

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Well, first on the margins, so in our centralized refi in the third quarter, we had a 33% margin, which is a phenomenal margin, and that was probably up against about an 18% margin in the year before. I mean 33% is kind of running what you see in some of our national commercial operations, for example. So it just shows you what you can do with volume and taking advantage of automation, as I talked about before. On the premium side, it's probably pretty consistent with the average fee per file in our distributed model. I think it's around 1,000 an order, Tony?

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [56]

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Yes.

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [57]

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So I think it's pretty consistent, Bose.

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Bose Thomas George, Keefe, Bruyette, & Woods, Inc., Research Division - MD [58]

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Okay. And then, actually, with the changes in the taxes premiums, I guess, that went into effect this quarter, do you see that as being material at all to fee per file going forward?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [59]

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I think it's pretty immaterial. Overall, it was about a 4.9% or 5% decrease. It's not -- I do not see it as impacting fee per file a lot.

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [60]

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The annual revenue impact was something like $17 million. It was pretty negligible.

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [61]

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Yes. We could -- a couple of commercial deals could take care of that.

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Operator [62]

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(Operator Instructions) We have a question from the line of Chris Gamaitoni from Compass Point.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [63]

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I wanted to follow-up, one thing on the margin is clearly amazing right now. In an environment where refinances go back down, how fast will you be able to reduce employees in that type of environment?

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [64]

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How fast will we reduce employees? Yes, it's Randy. Well, we move very quickly, as we have in the past. It'll probably push into the first quarter versus what traditionally takes place in the fourth quarter. But as we lose that volume, we will stay with our metrics and make the appropriate adjustments in the field. We never allow ourselves to get too far behind the open order count. So it'll happen in a real-time fashion. And maybe we touch on it a bit at the back of the fourth quarter, but I think it'll probably be more of a first quarter event.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [65]

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Okay. And going to your bank commentary, assuming the approvals go well, do you have any idea of the size of the deposit balances on average that could move into that bank?

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [66]

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We did some studies on it. I mean we have to be kind of slow and steady.

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Raymond Randall Quirk, Fidelity National Financial, Inc. - CEO & Director [67]

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Yes. Of course, we're still looking at that, a little bit of a moving target, but it could be potentially a couple billion dollars and potentially more over time, but it's probably a little too early to fix a number there.

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Edward Christopher Gamaitoni, Compass Point Research & Trading, LLC, Research Division - MD & Head of Research [68]

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Okay. And just assuming that all went through (inaudible) capitalized, will the holdco cash be the source of capital to capitalize in a bank with $1 billion-plus in deposits?

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Anthony John Park, Fidelity National Financial, Inc. - Executive VP & CFO [69]

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Yes. I think it would. It has to come from somewhere. I mean it probably needs something like an 8% capital or some -- 8%, 9%, 10% capital to start it out. So that would probably come from holdco.

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Operator [70]

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And at this time, I would like to turn the conference back over to management for any sort of closing remarks. Please go ahead.

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William Patrick Foley, Fidelity National Financial, Inc. - Non-Executive Chairman [71]

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Thank you. We're very pleased with our third quarter results, the best performance on a quarterly basis for our title business in 16 years. We're well positioned for the remainder of the year to capitalize on the strong third quarter with significant refinance orders opened, a continued upward trend in purchase orders opened and the strength in commercial orders opened. Additionally, we remain focused on deploying our growing capital base to maximize value for our shareholders. Thanks for joining us today, and we look forward to updating everyone on our fourth quarter call.

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Operator [72]

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Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. You may now disconnect.