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FIDELITY NATIONAL FINANCIAL : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/01/2017 | 10:55pm CEST

The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could vary materially from those forward-looking statements contained herein due to many factors, including, but not limited to: changes in general economic, business and political conditions, including changes in the financial markets; continued weakness or adverse changes in the level of real estate activity, which may be caused by, among other things, high or increasing interest rates, a limited supply of mortgage



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funding or a weak U.S. economy; our potential inability to find suitable
acquisition candidates, acquisitions in lines of business that will not
necessarily be limited to our traditional areas of focus, or difficulties in
integrating acquisitions; our dependence on distributions from our title
insurance underwriters as our main source of cash flow; significant competition
that our operating subsidiaries face; compliance with extensive government
regulation of our operating subsidiaries and adverse changes in applicable laws
or regulations or in their application by regulators; our ability to
successfully execute the proposed plan to distribute shares of Black Knight and
redeem all FNFV tracking stock; and other risks detailed in the "Statement
Regarding Forward-Looking Information," "Risk Factors" and other sections of our
Annual Report on Form 10-K (our "Annual Report") for the year ended December 31,
2016 and other filings with the SEC.
The following discussion should be read in conjunction with our Annual Report
for the year ended December 31, 2016.
For a description of our business, including descriptions of segments and recent
business developments, see the discussion under Basis of Financial Statements in
Note A to the Condensed Consolidated Financial Statements included in Item 1 of
Part I of this Report, which is incorporated by reference into this Part I, Item

Business Trends and Conditions
Our Title segment revenue is closely related to the level of real estate
activity which includes sales, mortgage financing and mortgage refinancing.
Declines in the level of real estate activity or the average price of real
estate sales will adversely affect our title insurance revenues.
We have found that residential real estate activity is generally dependent on
the following factors:
• mortgage interest rates;

• mortgage funding supply; and

• strength of the United States economy, including employment levels.

As of July 20, 2017 the Mortgage Bankers Association ("MBA") estimated the size of the U.S. mortgage originations market as shown in the following table for 2016 - 2019 in its "Mortgage Finance Forecast" (in trillions):

                                             2019     2018     2017     2016
Purchase transactions                       $ 1.2$ 1.2$ 1.1$ 1.0
Refinance transactions                        0.4      0.4      0.5      0.9

Total U.S. mortgage originations forecast $ 1.6$ 1.6$ 1.6$ 1.9

In 2016, total originations were reflective of a generally improving residential
real estate market driven by increasing home prices and historically low
mortgage interest rates. Over the same period, existing home sales increased and
there was a decline in total housing inventory. In 2017 and beyond, increased
mortgage interest rates driven by gradual increases in the target federal funds
rate are expected to adversely impact mortgage originations. In a rising
interest rate environment, refinance transactions are expected to decline. The
MBA predicts overall mortgage originations in 2017 through 2019 will decrease
compared to the 2016 period due to a decrease in refinance transactions, offset
by a slight increase in purchase transactions. Purchase transactions involve the
issuance of both a lender's policy and an owner's policy, resulting in higher
fees, whereas refinance transactions only require a lender's policy, resulting
in lower fees.
While projected increases in mortgage interest rates present a potential
headwind for mortgage originations, other economic indicators used to measure
the health of the United States economy, including the unemployment rate and
consumer confidence, have improved in recent years. According to the United
States Department of Labor'sBureau of Labor, the unemployment rate has dropped
from 7.4% in 2013 to 4.4% in 2017. Additionally, the Conference Board's monthly
Consumer Confidence Index has risen sharply at the end of 2016 and into 2017. We
believe that improvements in both of these economic indicators, among other
indicators which support a generally improving United States economy, present
potential tailwinds for mortgage originations and support recent home price
We cannot be certain how, if at all, the positive effects of a change in mix of
purchase to refinance transactions and of a generally improving United States
economy and the negative effects of projected decreases in overall originations
will impact our future results of operations. We continually monitor origination
trends and believe that, based on our ability to produce industry leading
operating margins through all economic cycles, we are well positioned to adjust
our operations for adverse changes in real estate activity.
Because commercial real estate transactions tend to be driven by supply and
demand for commercial space and occupancy rates in a particular area rather than
by interest rate fluctuations, we believe that our commercial real estate title
insurance business



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is less dependent on the industry cycles discussed above than our residential
real estate title business. Commercial real estate transaction volume is also
often linked to the availability of financing. For several years through 2015,
we experienced continual year-over-year increases in the fee per file of
commercial transactions. In 2016, we experienced a slight decrease in the volume
and fee per file of commercial transactions as compared to 2015. Through 2017,
we have seen that trend reverse as commercial revenue has increased as compared
to 2016 due to increased fee per file.
Historically, real estate transactions have produced seasonal revenue
fluctuations in the real estate industry. The first calendar quarter is
typically the weakest quarter in terms of revenue due to the generally low
volume of home sales during January and February. The third calendar quarter is
typically the strongest quarter in terms of revenue, primarily due to a higher
volume of home sales in the summer months. The fourth quarter is typically also
strong due to the desire of commercial entities to complete transactions by
year-end. We have noted short-term fluctuations through recent years in resale
and refinance transactions as a result of changes in interest rates.
Black Knight
Underlying the mortgage loan life cycle is the technology and data and analytics
support behind each process, which has become increasingly critical to industry
participants due to the complexity of regulatory requirements. As the industry
has grown in complexity, participants have responded by outsourcing to large
scale specialty providers, automating manual processes and seeking end-to-end
solutions that support the processes required to manage the entire mortgage loan
life cycle.
Black Knight's various businesses are affected differently by the level of
mortgage originations, including refinancing transactions. Black Knight's
mortgage servicing platform is minimally affected by varying levels of mortgage
originations because it earns revenues based on the total number of mortgage
loans it processes, which tend to stay more constant than the market for
originations. Black Knight's origination technology and some of its data
businesses may be affected by the volume of real estate transactions and
mortgage originations, but many of its client contracts for origination
technology contain minimum charges.
Black Knight's various businesses may also be affected by general economic
conditions. For example, in the event that a difficult economy or other factors
lead to a significant decline in levels of home ownership and a significant
reduction in the number of mortgage loans outstanding and Black Knight is not
able to counter the impact of those events with increased market share or higher
fees, it could have a material adverse effect on its mortgage processing
revenues. In contrast, we believe that a weaker economy tends to increase the
volume of consumer mortgage defaults, which may increase the revenues in Black
Knight's specialty servicing technology business that is used to service
residential mortgage loans in default. Moreover, interest rates tend to decline
in a weaker economy driving higher than normal refinance transactions that
provide potential volume increases to Black Knight's origination technology
Restaurant Group
The restaurant industry is highly competitive and is often affected by changes
in consumer tastes and discretionary spending patterns; changes in general
economic conditions; public safety conditions or concerns; demographic trends;
weather conditions; the cost of food products, labor, energy and other operating
costs; and governmental regulations. The restaurant industry is also
characterized by high capital investments for new restaurants and relatively
high fixed or semi-variable restaurant operating expenses. Because of the high
fixed and semi-variable expenses, changes in sales in existing restaurants are
generally expected to significantly affect restaurant profitability because many
restaurant costs and expenses are not expected to change at the same rate as
sales. Restaurant profitability can also be negatively affected by inflationary
and regulatory increases in operating costs and other factors. The most
significant commodities that may affect our cost of food and beverage are beef,
seafood, poultry, and dairy, which accounted for approximately half of our
overall cost of food and beverage in the past. Generally, temporary increases in
these costs are not passed on to guests; however, in the past, we have adjusted
menu prices to compensate for increased costs of a more permanent nature.
Average weekly sales per restaurant are typically higher in the first and fourth
quarters than in other quarters, and we typically generate a disproportionate
share of our earnings from operations in the first and fourth quarters.
Holidays, severe weather and other disruptive conditions may impact sales
volumes seasonally in some operating regions.
Our revenues in future periods will continue to be subject to these and other
factors that are beyond our control and, as a result, are likely to fluctuate.



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