FNF

Fidelity National Title Group, Inc. - 10-Q Summary (Q2 2006)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2006. Fidelity National Title Group, Inc. ("FNT") is one of the largest title insurance companies in the United States, operating through a single segment (title and escrow) with approximately 29% national market share. FNT operates as a subsidiary of Fidelity National Financial, Inc. ("FNF"), which retains 82.1% of FNT's outstanding stock. The company is currently pursuing "Proposed Transactions" to eliminate its holding company structure, merge FNF with Fidelity National Information Services (FIS), and rename FNT as the new FNF.

Key Financial Metrics

Note: 2005 EPS figures are presented on a pro forma basis due to the October 2005 distribution of FNT stock by FNF.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 7.6% in Q2 2006 compared to Q2 2005. Title insurance premiums fell 9.0% due to a 10.1% drop in direct premiums and an 8.2% drop in agency premiums. This reflects a slowing real estate market, specifically a decline in refinance activity and closed order volumes (down 15.5% in Q2).
• Profitability Pressure: Net earnings decreased 27.5% in Q2 2006. While personnel costs decreased slightly, the provision for claim losses increased to 7.5% of premiums (up from 6.5% in 2005), and interest expense rose significantly to $12.4 million from $0.4 million due to new debt issuances.
• Debt Structure: The company issued $490 million in public bonds (7.3% due 2011 and 5.25% due 2013) in early 2006 to exchange for intercompany "Mirror Notes" owed to FNF. This resulted in a substantial increase in interest expense compared to the prior year.
• Investment Income: Interest and investment income increased 69.7% in Q2 2006, driven by higher interest rates and increased investment balances, partially offsetting the decline in title premiums.

Guidance, Outlook, and Risks

• Corporate Restructuring: The company expects the "Proposed Transactions" (merger of FNF into FIS and renaming of FNT) to close in late Q3 or early Q4 2006. Upon completion, the company will become a holding company with diversified business lines beyond title insurance.
• Regulatory Risks: Significant regulatory scrutiny is ongoing. The California Insurance Commissioner proposed regulations that could significantly reduce title insurance rates. Similar inquiries are active in Florida, New York, and other states. The company settled a New York State Attorney General investigation with a $2 million fine and a 15% rate reduction on certain policies.
• Market Risks: Revenue is highly correlated with real estate activity. Rising mortgage interest rates and limited funding supply are projected to reduce mortgage production by 18.3% in 2006, posing a risk to future premiums.
• Legal Proceedings: The company faces multiple class actions regarding premium discounts, recording fees, and alleged price-fixing. Management believes none of these will have a material adverse effect on overall financial condition, though outcomes are uncertain.

Key Facts for Investor Verification

• Transaction Completion: Verify the status and closing date of the proposed merger between FNF and FIS and the subsequent renaming of FNT.
• Regulatory Rate Actions: Monitor the outcome of the California Insurance Commissioner's proposed rate regulations and the Florida Office of Insurance Regulation's rate review, as these could materially impact revenue.
• Debt Servicing: Confirm the company's ability to service its increased debt load ($573.2 million) amidst declining operating cash flows and rising interest rates.
• Claim Loss Reserves: Review the adequacy of the $1.13 billion reserve for claim losses, given the increase in the provision for claim losses to 7.5% of premiums.
• Service Link Contingency: Note the potential $60 million contingent consideration payment due in Q3 2006 related to the 2005 acquisition of Service Link.