Fidelity National Financial Inc (FNF) 2008 Q4 法說會逐字稿

Welcome to the FNF fourth quarter earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host, Mr. Dan Murphy. Please go ahead.

Thank you, Rachel and good morning, everyone. Thanks for joining us our our fourth quarter 2008 earnings conference call. Joining me today are Bill Foley, Chairman of the Board, Al Stinson, Chief Executive Officer, Randy Quirk, President and Tony Park, CFO.

We will follow our normal format this morning starting with a brief strategic overview from Bill Foley. Al Stinson will provide an update on our operating Companies. Randy will provide a more in-depth analysis of the title business and Tony will finish with a review of the financial highlights. We will then open it up for your questions and finish with some concluding remarks from Bill Foley.

This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by, and information currently available to, management. Because such statements are based on expectations as to future economic performance and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The risks and uncertainties which forward-looking statements are subject to include, but are not limited, to the risks and other factors detailed in our press release dated today 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 1:00 pm Eastern Time today, through February the 11th. That replay number is 800-475-6701 with an access code of 983329.

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

Thanks, Dan.

2008 will go down as one of the most difficult economic environments for the United States in the last several generations. On top of terrible macro-economic back drop, the significant declines in mortgage and real estate markets throughout the country severely impacted the title insurance industry.

We spent much of 2008, as we did in 2007, reducing expenses throughout our entire insurance operations, both in the form of reducing personnel expenses, as well as through the closure of a number of title and escrow offices. However, there were two positive events that occurred during the month of December that provided momentum and renewed optimism as we entered 2009.

First we closed on the acquisition of Commonwealth Land Title, Lawyers Title and United Capital Title on December 22nd. The acquisition of these underwriters makes FNF the largest title insurer by market share in the country. We now have reserves for claim losses of more than $2.6 billion which is approximately twice that of any other title company, reserves plus stockholders equity of approximately $5.4 billion and a cash investment portfolio of more than $4.7 billion.

The second positive event was the significant increase in open order counts in the months of December and January. Absolute total order counts more than doubled in December versus their November level with per day open orders increasing by approximately 65%. January open order counts improved further from the significant December increase. The significantly strong order count levels and the acquisition of Commonwealth Land Title, Lawyers Title and United Capital both provided significant opportunities for our title business as we move into 2009. I will let Randy Quirk cover some of the integration progress we have made in the first month of the acquisition.

Our last -- on our last earnings conference call we mentioned that we were seeking price increases in many states in which we do business and in the last three months we have made significant progress on that project. We have instituted revised rates that are now effective in approximately 21 states. The revisions include simplified rate structures in some states as well as pricing increases anywhere from 0% to 20%.

As an example, a 10% increase went into effect in the State of California in late January. Texas and Florida are two large states where the rates are promulgated so we will not be seeking independent price increases in those states. The last of the big four states, New York, has rates set by a rating bureau of which the title insurers are members. We are working through our membership in New York, in the New York rate bureau, to ensure rates are properly set based upon industry performance and market expectations.

Additional rate revisions are pending in a number of other states and we are also analyzing the filed rates of our newly acquired underwriters to make them consistent with the rest of our underwriters. Over the course of 2008, our Company engaged in an exhaustive analysis of our claims management and payment procedures.

The outcome of that analysis and the implementation of centralized payment practices began to show results in the fourth quarter with claim payments of $50 million versus $85 million in the third quarter. The trend continued in the month of January with approximately $10 million of net claims being recorded, net paid claims being recorded during the month.

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

Thank you, Bill.

Specialty insurance revenue was $97 million for the fourth quarter, an increase of approximately $4.5 million from the fourth quarter of 2007. Flood insurance generated $41 million in revenue and personal lines insurance contributed $34 million in revenue. Pre-tax earnings of $18 million were positively impacted by the increased flood claim processing revenue during the fourth quarter, driven by late summer hurricane-related floods. The homeowners business produced a loss ratio of 63% for the quarter.

While we do not consolidated the results of Sedgwick, they produced revenue of $175 million and EBITDA of $30 million for an EBITDA margin of more than 17% for the fourth quarter. Pre-tax earnings of $7.5 million include interest expense of $7 million and depreciation and amortization of $11 million. We continue to own 32% of Sedgwick.

We also do not consolidate the results of Ceridian, but they produced revenue of $390 million and EBITDA of $89 million and EBITDA margin of 23%. The pre-tax loss of approximately $31 million includes interest expense of $72 million and depreciation and amortization of $47 million. We continue to own 33% of Ceridian, overall our loss from equity investments was $6 million for the fourth quarter.

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

Thank you, Al.

Overall total open order volumes were weak during October and most of November and then increased significantly in December. We opened 5300 orders per day in October, [5006] orders per day in November, and nearly 9300 orders per day in December, a sequential monthly increase of 65% in December.

Refinance orders drove the sharp increase in December as refis were approximately 73% of total December open orders. January open order counts have increased from December's level as we opened approximately 14,200 orders per day in January, a 50% increase over the month of December.

The newly acquired Lawyers Commonwealth and United Underwriters contributed to those increases, but January open orders on just the historic Fidelity underwriters increased significantly from December. We also believe that the majority of those open orders are closing, as we saw an increased in closed orders in the last week of January, although we do think that it will probably take longer to close those orders due to significant increases in volume.

We continue to reduce headcount through much of the fourth quarter, eliminating approximately 600 additional positions before the addition of the new underwriters. In the first month since the acquisition of Commonwealth Lawyers and United Title, we have been very aggressive on reducing costs in those underwriters. Through the end of January we have eliminated approximately 1500 of the 5500 employees that we inherited at the closing on December 22nd. A reduction of approximately 27% of the existing workforce. We have also closed about 125 offices in the first month of ownership.

In total, we have eliminated annual run rate expenses of approximately $180 million. We will continue to evaluate the cost structure of the acquired underwriters in the first quarter, but we believe the largest costs have been taken out in the first month of ownership.

We are also focused on implementing the Fidelity metrics based system throughout these operations and bringing their operating efficiencies up to the level of our other underwriters during 2009. We have been very impressed with the experience and expertise and professionalism of the employees of all of the acquired underwriters and look forward to their significant future contribution to the success of the Fidelity family of title insurance underwriters. The commercial time of business had a mixed quarter, as order counts declined moderately but the fee per file declined significantly.

We opened approximately 13,800 commercial orders in our national commercial divisions and closed approximately 8000 commercial orders, generating $39 million in revenue on a nearly 50% decline in the fee per file versus the fourth quarter of 2007. We believe that many large deals are experiencing delays in closing due to financing issues. Commercial revenue accounted for approximately 17% of total direct title premiums in the fourth quarter.

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

Thank you, Randy.

FNF generated $1 billion in the fourth quarter with a net loss of $1.7 million. The fourth quarter results include the impact of Commonwealth, Lawyers and United Title from their acquisition date of December 22nd. Those acquired underwriters contributed a net loss of $2.8 million for the fourth quarter. Without those underwriters, FNF, on a stand alone basis, produced earnings of approximately $1.2 million or $0.01 per share.

The title segment generated $899 million in total revenue for the fourth quarter, a decline of 23% from the fourth quarter of 2007. Again, those results include the impact of Commonwealth, Lawyers and United Capital Title from their acquisition date of December 22nd. Direct title premiums declined by 34% versus the fourth quarter of 2007, while agency premiums declined by 26%. Escrow and other fees were down by only 2% as the $55 million in default revenue in our asset linked business offset the decline in escrow fees. Of this $55 million, $34 million was passed through revenue that also shows up as an expense in other operating expenses, offsetting some of the benefit seen in the revenue line item.

Personnel costs of $267 million were down $91 million or 26% versus the fourth quarter of 2007 and decreased by $45 million or 14% sequentially from the third quarter. Head count was reduced by approximately 600 positions during the fourth quarter ending the year with about 8000 field employees before the impact of the Commonwealth and Lawyers acquisitions.

Other operating expenses of $238 million showed a 2% decline versus the fourth quarter of 2007 and the third quarter of 2008. Two major items negatively impacted the actual, very significant operational decline in operating expenses.

First, earnings credits from off balance sheet escrow deposits continued to decline, tracking the significant decline in order volumes and escrow balances, as well as short-term interest rates that are effectively at zero. This situation caused a $24 million decline in earnings credits in the fourth quarter versus the fourth quarter of 2007.

Additionally, the previously mentioned gross-up business at Asset Link contributed $34 million in additional operating expenses. If you segregate facilities, supplies, travel and entertainment, marketing and title plant expenses, costs that we manage aggressively during the quarter, there was a $45 million or 32% decline in those categories of expenses versus the fourth quarter of 2007. The provision for title claims was $52 million for the fourth quarter.

As Bill mentioned, actual title claims paid in the quarter declined significantly to $50 million, down sequentially from $85 million in the third quarter and $95 million in the fourth quarter of 2007. As we always do, we will continue to evaluate the size of our balance sheet reserves and our provision level each quarter.

New open claims declined in the fourth quarter as we opened approximately 7100 new claims, versus 8500 in the fourth quarter of 2007 and 7500 in the third quarter of 2008. Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013, the $585 million drawn under our credit facility, the $50 million subordinated note issued to Land America and debt at Fidelity National Capital, the vast majority of which is nonrecourse. The debt to total capital ratio was 32% at December 31st, 2008 and 29% without the nonrecourse debt. Also, we repaid $50 million under our revolving credit facility on January 22nd, leaving us with $535 million outstanding today.

Finally, our investment portfolio totaled $4.7 billion at December 31st. There are approximately $3.6 billion of legal, regulatory and other restrictions on some of those investments including secured trust deposits of approximately $500 million and statutory premium reserves for underwriters at approximately $2.4 billion. There are also some other restrictions, including less liquid investments like our ownership stakes in Sedgwick, Ceridian and [Remi], cash held as collateral and our security lendings program, and some working capital needs at some underwritten title companies. All of which total approximately $700 million. So of the gross $4.7 billion, approximately $1.1 billion was theoretically available for use with about $900 million held at regulated underwriters, and approximately $200 million in non-regulated entities.

Let me now turn the call back to our Operator, Rachel, to allow for any questions.

Thank you. (Operator instructions). The first question is from the line of Bob Napoli. Please go ahead.

Thank you, good morning, everybody.

Good morning.

A little different world than it was last conference call for you guys. The question on the title claims -- i'm sorry -- the title trends in the month of january in Land America, trying to understand-- to get a handle on what the earnings power of the Company with the acquisition. Closing -- or opening 14,000 orders in the month of January, which, as you said, includes the Land America business, if I looked at Land America's direct claims prior to the transaction, relative to your claims, it would suggest that they were about 40% the size of the direct revenue versus FNF.

That would suggest that Land America closed orders, assuming you kept, let's call it 85% of the business, that they would be opening about 4900 orders a day if they kept the same, relative to FNF. Now, is that -- I mean, I don't think from hearing you that it sounded like Land America was that much. Is it fully integrated or all of the orders that are being originated by those underwriters coming through to FNF? How much market share have you lost?

Well, thanks, Bob.

That's a terrific question and I'm going to attempt to respond to a part of it and then turn it over to Randy. Obviously, the Land America employees have been fully integrated.

We did not assume responsibility or assume direct control over all of Land America's offices. We really assumed control over those Lawyers, Title and Commonwealth offices in various parts of the country and that assumption of that business was very effective and Randy could give you some specifics with regard to the number of employees retained in those various locations. We did, however, take a very aggressive approach relative to making decisions to reduce staff and close offices where we thought there was any question at all.

So we probably -- or easily could have over-achieved in terms of being conservative in order to integrate Land America or the Land America offices and operations just as quickly as possible with the least risk possible. Now, Randy, perhaps you can address the order levels coming out of Lawyers Title, Commonwealth Title and also the -- whether we are completely capturing all of those orders. Bob, I would say one other thing, though, with regard to Lawyers and Commonwealth, we have implemented the claims management procedures for those Companies, effective December 22nd, and we are seeing significant progress relative to the manner in which and the way those claims had been processed versus how they will be processed under our system. So we do anticipate significant improvement in claims payments coming out of the Land America acquired Companies.

Okay.

Randy, could you --

Sure.

Comment on the other piece?

Sure, Bill.

Yes, as you had mentioned, in January we were opening up 14,100 orders per day. Of that, about 2100 of those orders opened per day in January were from the Commonwealth, Lawyers Title underwriters. Now, on the closing side, they were closing about 1000 to 1200 orders per day. That accompanied the addition of these employees in the field. We brought in about 2100 in the field and about 600 or 700 in the production center, so we figured the productivity, at this point in time, on the open orders per day, runs at about 20 open orders per employee.

The -- but we just closed this transaction at the back end of December, so as we came out of the shoot on January 1st, counting the open orders, the closed orders and the employees, it took probably one week to get all of our adjustments in there, so in February the numbers should report a little bit higher in terms of what their contribution is to the overall order count.

What it sounds like is that group of Companies as it relates to Land America, that their market share is down by about half. Is that on the direct basis and I'm not sure about the agent side, their agent business was bigger.

Yes, Bob, one of the things to keep in mind is that Land America was roughly 65% agency driven and 35% direct driven.

Right.

And Fidelity and Chicago are 50/50, plus or minus and so the result is you can't quite extrapolate the number of orders that would be coming out of Fidelity system on certain amount of revenue to Land America because their revenue is about 33% less from the direct side. We really haven't -- there has been a diminution in business to Land America because during the time or the pendency of the transaction while Land America had filed their Chapter 11 proceeding, a number of lenders redirected their orders, a lot of them redirected them to our Companies.

After we closed the transaction beginning in January, those order levels, those order flows have now reopened and so you should be seeing improvement as we go forward relative to Land, to Lawyers -- I keep on calling it Land America, but it's really Lawyers and Commonwealth sales representatives and escrow officers garnering the business they used to have. We had almost no fallout of individuals in the sales and marketing and in the escrow area of individuals that we wanted to hire that we didn't hire. It was -- it's about a 95%, 96% retention rate.

So, we are anticipating order flows on the Lawyers, Commonwealth side moving up, and they are moving up, as we speak today, because the lenders have now redirected those orders that were going to First American or to Fidelity or to Chicago, they are coming back to Land America. So that's a long way -- or Lawyers and Commonwealth. So that's a long winded answer. I hope we got it for you.

Very helpful. I think we will learn a lot more over the next 60 to 90 days.

In this environment, can you give some color on what kind of margins you think you can generate in the title business and what -- how large do you think the mortgage industry is going to be in 2009?

Al?

Obviously --

I'm going to take the latter one first. The answer is, I don't know. But there's a lot of guesses that the refinance business will drive mortgage originations considerably higher. I think, if that is the case, we can return to very attractive profit margins as we have talked about in the past. So I think it's all positive.

You expect to be double-digit margins comfortably in '09?

I'm not sure I'm going to go to quite that much detail, but we will be in line with our margins that we have earned in similar market conditions. And I know that's sort of evasive but it also depends on how much refi business actually flows through the system.

And the margin --

Bob, if everyone could just write their congressman and ask them to allow refis without the need of a new appraisal, if the individual is current on their mortgages and the Fannie and Freddie would acquire those mortgages, we would solve the -- we would solve a good piece of the housing problem and stabilize prices and we would have a gigantic market.

That may happen. At a 4% mortgage rate, I guess.

Even 4.5%; we don't want to be greedy.

Just last question on claims seems to have improved pretty substantially and what have you done in the towns process oriented because, marketwise certainly, foreclosures remain high, maybe a little bit delayed on some of these programs, but why would you -- is it purely process improvement or market environment? I can't believe it's market environment improvement.

Well, it does appear that we have turned the corner in the number of new claims being generated because each successive month we are opening less claims than we opened in the same month the year before so that's -- that's running at about a 12%, 15% improvement rate. So that's encouraging.

The other thing we have done, we are making sure we are paying every claim that should be paid but we are examining the payment of claims in great detail to ensure that when a claim is submitted to our Company, that there's proper documentation that demonstrates that it's a legitimate claim. I'd rather not go into it in more detail than that, but we have significantly changed our operating procedures beginning October 23rd of this year and we have seen massive improvement in the way claims are being paid. We were paying claims in the past exactly in accordance with the procedures we had in place. Those were -- those procedures were not appropriate for the current claims environment. And we now believe that we have policies, procedures and analytics in place that allow us to more -- to more appropriately evaluate claims as they are presented.

The other thing we have done, we counted as claims very minor items that would be a deed reformation, a document that hadn't been recorded, mis-recording of documents in improper order. Those in the past have become claims and now we have returned those items, those claims or those incidences back to the county operations to fix so a lawyer no longer touches them. We still count them as a reported claim, but they are not processed by claims centers, and of the 7000 claims that were opened, 7100 claims that were opened in the third quarter, about 2000 claims -- 2000 items were kicked back to the counties and about 50% of those have already been solved because they are fairly simple, non-monetary issues. So, that's one example of the way we have re formed our policies and procedures that we are going to be much more effective in terms of costs incurred relative to handling claims.

Great. Thank you.

And the next question comes from the line of Mark Dwelle. Please go ahead, sir.

Yes, thanks. A lot of moving parts with the integration of the Land America businesses and with the cost saves you've already taken out. Can you give us any guidance on what the new run rate will be on your personnel costs and other operating expenses?

Again, that's a pretty tough one, but I can tell you this. Let me try it this way. I think everybody is trying to figure out what our profit margins might end up being. With the kind of cost reductions that Randy and his group have done, we are very well positioned to take advantage of higher mortgage origination levels and I think all you've got to do go back in history to some of those years when we had high mortgage origination levels and take a look at what our profit margins were.

But we are running at very, very attractive personnel costs at this time. We are very well positioned. We will do everything possible to prevent that personnel cost from creeping up as these higher margins -- higher volumes kick in. Does that -- is that helpful?

Yes. Thanks. The next question, it looks like based on our calculation, the average fee per order closed fell pretty significantly Q over Q. I'm assuming that was attributable to the trends in the commercial business. Could you give some color on that and also where you see it headed with refi presumably making up the larger share of the business going forward?

Well, you've hit a very important point and that -- our commercial average fee per file is down about 40%, so that's a piece of it. And the other piece of it is that back in the third quarter we were running 50% resale and new home sales and 50% refis and now as we have kicked into the end of the fourth quarter, we were running 80% refis and our average -- so our average fee per file on a basic transaction went from about $1400 down to about $1100.

So, while it's easier, it's more efficient to handle a refi, the money garnered from those -- from that refi business obviously is a good deal less, so you need to make it up in volume, which we now -- we now are. Right now, refis are running about 75% of total transactions according to the EMBA and so you just have to -- it's a moving target and that would mean our average fee per file is now up around $1200 instead of $1100.

Okay. And then finally, it looks like the premium shifted a little bit back towards agency during the quarter. Is that more of a product of the mix of business that came in during the quarter?

It's actually a result of the fact that agents tend not to pay their underwriters as quickly as they should. Although we are very aggressive about collecting our accounts receivable.

But, normally in the fourth quarter, the agents clean up any past due obligations back to the -- back to their underwriters. That's been our historical situation and if there were -- if there were going to be any kind of incentive programs to qualify, they need to get their money in in the fourth quarter. So that's why you see the little shift in the fourth quarter, so it's more of a -- it's more of a business aberration as opposed to a -- as opposed to anything else as a business shift.

Okay. And as the LFG business come online, would you expect it to shift a little bit more towards the agency going forward, or are you doing a disproportionate amount of kind of cutting back in that channel?

Well, we have actually reduced the total number of agents at Fidelity from about 12,000 three years ago down to 4600. However, we have only removed about 10% of our volume. So, we were doing a lot of business with small agents that weren't generating much revenue for us. We also intend to, of course, reduce the Lawyers Title and the Commonwealth agency base and that should come down by about 40% over the next 12 months. However, the large agents that are really generating the revenue will be retained. We are just trying to get rid of the agents that are high claims oriented or just don't generate enough revenue for us to be able to properly service them.

Okay. Thank you.

All right. Thank you. And next I'll go to the line of Doug Mewhirter. Please go ahead.

Excuse me. Good morning. The first question I had is the relationship between the close and open orders. If you just look at the trends on your press release, the trend has been down, although, am I correct in saying that you're just reporting December orders opened and December orders closed; for example, the orders closed actually weren't from orders opened in December, they were from October and November, so there could be a lagging issue there.

And, although given that the -- The commentary from the press saying everybody is -- no one is getting approved for a loan or the -- there's too many operational bottlenecks and closings aren't happening, you're pretty comfortable with saying that, say just above 50% of orders seem to be closing?

Let me answer this. This is Al.

What happens every time you have an increase in order volumes, temporarily, the closing ratio looks to be lower because you're adding them faster than they are being closed. So you always have that trend.

Secondly, I'm not so sure it's a hangup with the banks on not approving refis. They are just swamped and so you've got a bit of a slowdown from that and I think Randy's view is the banks are going to take a little bit longer this time around to process transactions but we are very confident that our closings are going to be in line with historical trends.

And your comment was absolutely correct, in December we were really closing October's orders. In January we were closing November and early December's orders. And so we will start seeing these closings from the openings we are now -- we are now achieving will kick in in March. We are starting to see it in late January a little bit but it's going to be mid-February to the end of March that we really start closing the early January orders.

Okay. My second question is, I guess either to Bill or Tony, or whoever, the Ceridian, they seem to be still getting by with positive operating margins. It's a very economically leveraged company and it seems to be -- EBITDA seems to be uncomfortably close to the interest expense. Do you believe that the banks are still comfortable with where it's at, given the economy and the worsening trends?

This is Al. I'll answer that.

We are in compliance with all of our debt covenants, our loans are at very attractive rates. We are, you know applying excess cash to reduce debt levels, so we are in very good shape with the banks.

The economy, of course, does impact Ceridian and we have been fairly aggressive in cost cuts and the profit margins actually keep going up and have improved year over year, and we are planning for that again in '09 as we get our profit plans, our business plans in place.

Okay. That's helpful. Any update on the -- your European sea business, your specialty business? I know you've been negotiating with various potential buyers.

We have been, and, really the update is that we continue to negotiate with one particular buyer, the distance between a purchase sale -- a purchaser and the seller are fairly close. The sale price -- at the sale price we are talking about, we are a little -- we are almost ambivalent about whether to proceed with it or not and so we are currently evaluating whether we should sell that business at the proposed sales price and or should we keep the business and continue to reevaluate the areas of the country where we do business as a PNC carrier, which we have removed ourselves from about 16 higher claim states. So, i would say there's probably -- there's more to come and we don't have a good answer for you right now.

Okay. Thanks. That's very helpful. My last question, I guess, for Tony is were there any lease termination or severance charges in this quarter and given that you've done a lot of cutting already, do you anticipate booking -- do you have an estimate for any kind of charges you might be booking in the first quarter for lease termination or severance charges?

Well, we had just $3.5 million dollars in lease termination charges in the fourth quarter. That's come down from about $12.5 million dollars in the third quarter and $13 million in the prior year. With -- in terms of the Land America or the Lawyers Commonwealth operations, all of those terminations, to the extent we are closing offices, and there are many offices we are or have closed, those would all be put up in purchase accounting, so you won't see further lease terminations on those offices.

And I would also say that, given the volumes and the number of offices closed over the last couple years, which is well over 400 at this point, I believe we are just about to the end of any kind of further consolidation in terms of lease terminations. From a severance standpoint we don't pay -- we don't have severance costs, so that really doesn't come into play.

Okay. Thanks. That's all my questions.

All right. Thank you. Next we will go to the line of Nik Fisken. Please go ahead.

Hey, good morning, everybody.

Good morning.

Can you give us the close ratio for January?

Do you have that, Al or does Tony.

Tony or Randy, can you give a little color on that one?

Yeah. Our closing ratio with the influence of the refinances was approximately 65%. You're typically closing six out of ten refis when you have this type of volume starting to kick in as it did on the closing side at the back end of January starts to skew the closing ratio a bit. So 65 -- 65% would be the number.

And if you're seeing no evidence that closing rates are going to fall below 60?

Well, we don't know, as we discussed earlier. What this wave of refis and the extension of that closing period, you might see some impact in that regard, but -- below 60, but we are confident that these refis will close, but as Bill or Al had mentioned earlier, it's going to take 45, 60 days, maybe 75 days, which prior to this was typically maybe a 30 day cycle.

The answer, Nik to your question is we don't expect a closing ratio dropping below 60%.

Thanks and if I'm -- I'm trying to gauge the Land expense base that you're cutting, that you've cut the $180 million out of. Can you kind of give us a start run rate of personnel and other expenses?

I guess, Nik to give you a sense, we have only recorded 10 days of December's results from the Commonwealth, Lawyers expenses but just to give you rough numbers on that, from a personnel-related level, they -- their December results showed about $37 million in expenses and from a sort of G&A and other, their expenses in December were about $28 million, depreciation is about $2 million. Of course they have a loss provision which, you know, which is probably fairly consistent with ours. So that should give you a sense of a starting point.

Those numbers are down. We have -- we worked with them pretty closely in November as well. Those numbers are down from what they had seen in the third quarter but clearly with the expense reductions that we have made in the last 30 to 45 days, you'll see a considerable impact on those numbers.

That $37 million, $28million and $2 million was for the 10 days of December?

No. That was for the full month of December of which we booked 10 days of that in our results.

I got it. Okay. And then, can you give us an outlook on the $180 million? What could that go to?

I'm sorry.

The $180 million of expense savings out of Land.

Our target is $225 million.

Great.

I believe we will achieve that in short order.

And so talk to us about headcount reductions. Since you've had this big spike in orders.

Randy?

Well, our reduction as we have mentioned earlier, we pulled out another 600 positions in the fourth quarter. Currently, we are holding the line on our staffing levels. The one exception to that would be in our centralized lending centers, a ServiceLink up in Pittsburgh that we have had to bring on another 200 or 300 employees, but in the field operations we are working hard to hold the line, so we don't anticipate a spike in the staffing in the first quarter.

And then on the price increases, if I was just to say apples to apples, since you're getting these price increases, what do you think the effective impact is on fee per file for 2009, holding everything else equal?

Boy, Tony, I don't know if we can -- I don't know if we can answer that one, Nik. We would rather defer that to the end of the first quarter until we start seeing the results of these prices increases. Obviously we got a 10% increase in California. It's our largest and most deeply penetrated state in terms of volume and that went into effect on January 31st so that was the big one.

In Texas and Florida, as they are promulgated states, each state goes through a review and we believe they will be if not price increases, differences in the amount of agency versus underwriter split in both states and Texas has continually squeezed the underwriter relative to the percentage they receive relative to the agent. It probably moves the other direction or there is a price increase instituted and the same in Florida because all the regulators and all the regulators understand very clearly that this needs to be a healthy industry and there haven't been price increases taken in really any significant way in 10 years.

Last one for Al on [Remi], any debt covenant cash call issues?

No, Nik, we are okay with [Remi] and actually, in spite of the headwinds that [Remi] has had, they have performed admirably on EBITDA they have exceeded for 2008 and they are planning -- they have taken so much headcount out as they planned for these GM plant reductions or shutdowns, they continue to perform quite well. We don't have any debt -- debt issues at this point.

Great. Thanks so much.

(Operator Instructions) The next question comes from the line of Nate Otis. Please go ahead.

Good morning, gentlemen.

Good morning.

Most of the questions have been answered. Just have one follow-up. Any thoughts on whether the lower paid claim activity has anything to do with more foreclosure moratoriums going into effect over maybe the third and fourth quarter of last year?

No. Actually wouldn't have any impact because those claims keep on being submitted and being processed because, of course, a title claim relates to the condition of the title of the property and because there's a foreclosure moratorium. It just means something that's popped up that month potentially may be a claim so that has no impact.

Even going forward. So if there are less foreclosures going on the pipeline that's not going to impact your paid claims in any way?

The only thing that might happen is if there are less foreclosures going forward because the foreclosure is an event in which the title of the property has to be -- you have to ensure the title of the property is good in the name of the foreclosurer, will be good in the name of the foreclosuring intent, if there are less foreclosures then I guess it would be the situation that we might not get notice of a claim on a piece of property because no one would know about it. But that would be -- but that's the typical experience that we have with a whole claims profile.

And then in that event, it could -- it could hypothetically be pushed off a little bit into the future?

For very, very small percentage hypothetically, this really wouldn't be significant.

All right. Thank you.

And the next question comes from the line of David West. Please go ahead.

Good morning. You had cash flow of operations in the quarter of $60 million. I wondered if you would comment about your outlook for cash flow in '09 and maybe more importantly or as importantly what your top priorities would be regarding dividend and debt repayment.

Well, we have done our internal cash flow analyses and the dividend we feel is secure at least through 2010 taking -- through mid 2010 taking a very, very conservative approach, looking at our cash flows as they have been, not as how we anticipate they will be. We also are focused on repaying debt. We have reduced our line of credit down to $535 million. We do have some sources of cash that we see on the horizon, so we work toward reducing that line of credit lower this year. Our internal target is to reduce it by another $100 million. And cash flow wise, we are anticipating a pretty good cash flow year versus last year. Historically, this company has fairly easily achieved $500 million to $700 million of cash flow and I don't know if we can get quite to $500 million this year, in a turnaround year, but we would certainly focus on that.

Thanks very much.

And the next question comes from the line of [Ethan Sandberg]. Please go ahead.

Hi, guys. I want to understand a little bit better on the price increases. You said California went through the end of January. Can you give us a sense of how big California is as a percentage of business and then maybe just an -- if you look across the 21 states that you did make progress on, in general, what is the average price change versus what it was?

Well, California, Al, represents, what, about 25% of our total business?

Right.

So that's major. And those are all direct operations so that's a price increase that certainly benefits our Company better than -- or more directly than almost any other -- any other state.

The balance I'd really like to defer until the end of the first quarter when we get a few more price increases in place and we will be able to -- we will be able to give you a very good synopsis of what we have achieved over the last six months in terms of increasing prices and increasing margin. And it's all good, it's all dollar for dollar to our pretax line, but California, of course, is significant and getting that price increase through, we were very pleased with.

And if that went in at the end of January, when should that start to show up in revenues?

February -- closings on February 1st forward.

Okay. So stuff that was in the pipeline?

Sure, yep.

And I guess, was that -- when you guys looked at the Land America deal and then had been tinkering with what the profitability could be, were you guys assuming any progress on these price increases?

The transaction became such a bargain purchase at such a low percentage of their book value that it really did not -- it did not really figure into our analysis. We were more concerned about insuring that their investment portfolio was in good position, that we were buying -- getting what we thought we were buying and also looking at their operations and their systems to ensure that we can get the adequate level of synergies that we are achieving. So that was the focus on our -- of our due diligence.

Okay. And just two more questions, I think. And you -- referring back to a normal or this kind of environment we should look at the types of margins you had historically, given the price increases going on now, that doesn't lead to upside to what the historical margins would be in a similar environment?

We just don't want to guide you to a double-digit margin level at this point because we have just gone through two very difficult years and we had a little spike in refis a year ago and we started feeling pretty good and of course then the refis evaporated, so we really just don't want to guide. We don't want to anticipate too many good things right now. We feel -- we finally feel like we may be at the end of the tunnel because we can see the light but we just want to make sure it's not a train.

No. That's prudent. And as far as the trend accelerating in January, can you give us a little better sense of what the organic trend was if you -- because you had the new business in there and did it accelerate or decelerate as you got through the end of January and into early February?

The levels of orders as we move through January actually peaked about the second week of January at 16,000 orders a day and have reduced down to somewhere between 12,000 and 13,000 orders a day. We believe that's directly related to the little kickup in long-term rates and also the fact that the lenders have raised rates because they are being inundated with refi transactions and they are trying to slow it down to ensure that their procedures and practices are in good shape and no one wants to experience what we went through in '05 to -- through '07.

And so we are not -- again, 12,000 to 13,000 orders a day is 140% of where we were in October, so we -- and we haven't added the staff to -- we haven't really added staff so we are feeling really good. If we can maintain 12,000 orders a day this year, it will be -- we will all have a good investment experience.

Okay. And organically, how much of the increase from January and December were -- how much of that was organic?

Oh, I see. Well, basically if you're referring to Commonwealth, Lawyers Title, they are running about 2000 orders a day, and so organic growth is from 5,000 to 10,000. As we sit at the end of January.

Got it. Okay. Thanks, guys.

Sure.

And the next question comes from the line of Lisa Walker. Please go ahead.

I just had a question on the cramdown legislation that's going through or potentially going through. What's the effect on the title business for that?

We are so naive, we don't probably know what it is. (laughter).

Give us a little more color on what you're referring to, the cramdown.

What Citi agreed to as far as that -- instead of actually going through a foreclosure, they are trying -- it's a cramdown -- or foreclosure, mitigation that you're actually going to take the mortgage into the bankruptcy process and the judge can take down the value of the mortgage.

Well, that would be good for us because that means our policy would be reduced, our policy exposure would be reduced on those particular loans.

Okay.

We haven't really seen -- we basically issue a new policy when there's a foreclosure, it's called a trustee sale guarantee or when there's a refinance transaction, which is a -- which is obviously a refi transaction or a new or existing home sale to the owner. So we are pretty simple in the piece of paper that we issue and normally when government gets involved, it usually serves to our benefit because someone wants to get a policy of title insurance on their house in some fashion.

Okay. Thanks.

You bet.

And Mr. Murphy, there are no additional questions at this time. Please continue.

Well, 2008 was a challenging year, we entered 2009 with optimism and momentum as both the increased order counts and the acquisition of Commonwealth, Lawyers and united Title provide significant opportunities for our title business. Thank you for joining us this morning.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for AT&T executive teleconference. You may now disconnect.