Fidelity National Financial Inc (FNF) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the FNF 2012 fourth-quarter earnings call. At this time, all participants are in a listen-only mode. Later there will be an opportunity for questions.

(Operator Instructions)

As a reminder, this conference is being recorded. And I'd now like to turn the conference over to your host Mr. Dan Murphy. Please go ahead.

Thanks and good morning everyone and thanks for joining us for our fourth-quarter 2012 earnings conference call. Joining me today are George Scanlon, our CEO; Randy Quirk, President; and Tony Park, our CFO. We will begin with a brief strategic and business overview from George. And Tony will finish with a review of the financial highlights. We will then open the call for your questions and finish with some concluding remarks from George.

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 facts, 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 be available through phone replay beginning at 1 pm Eastern time today through next Wednesday, February 27. The replay number is 800-475-6701 and the access code is 278625. Let me now turn the call over to our CEO, George Scanlon.

Thank you, Dan, and good morning, everybody. 2012 was a successful year for our Company on a number of fronts. Our title business performed extremely well, generating a 14.1% pre-tax margin for the full-year 2012 and we are particularly proud of the 16% pre-tax margin our title business generated this quarter. That margin is nearly equal to the peak title margin we earned in 2003, a year that saw total mortgage originations of $3.8 trillion, more than double the projection of total mortgage originations for 2012.

Our employees have worked hard to position the Company for this level of success in what remains an improving but sluggish market. And I congratulate them all for this achievement. Refinance transactions remained strong and we also saw acceleration in the level of purchase transactions, as we experienced an 11% increase in open resale orders during the fourth quarter versus the prior-year quarter. For the full year, resale orders grew more than 7% versus 2011, giving us a sense of optimism as we look to 2013.

Our commercial title business had a record-setting fourth quarter, generating nearly $143 million in revenue, by far the strongest commercial quarter in the history of our Company. Open orders of 18,300 increased 5% and closed orders of 13,500 improved by 8% over the prior-year quarter. The revenue growth was driven by a combination of the 8% increase in closed orders and a particularly strong 28% increase in the commercial fee per file. For the full-year 2012, commercial title revenue was nearly $412 million, an increase of 13% versus 2011. We expect the commercial business to continue to perform well for us throughout 2013.

Open order accounts were strong during the quarter, growing 25% over the prior-year quarter. Overall, open orders averaged more than 10,800 per day for the fourth quarter with October averaging 11,700; November, 10,800; and December, 9,700. First two weeks of December actually showed an increase from November, averaging 11,600 open orders per day. The two weeks around Christmas and New Year's showed a normal seasonal slowdown, averaging 8,100 open orders for those two weeks. As expected, open orders bounced back in January, averaging 10,400 open orders per day with the last two weeks of the month averaging 11,100 open orders per day. Not surprisingly, the mix of fourth-quarter business continued to be weighted toward refinance orders, as 68% of open orders and 67% of closed orders were refinance related. But as I mentioned earlier, we continue to see steady improvement in the purchase market as evidenced by the 11% increase in purchase orders open in the fourth quarter versus the prior year, which is an accelerating trend that we saw throughout 2012.

2012 was also year of milestones for our two major non-title businesses. Our restaurant group expanded significantly with the acquisitions of O'Charley's and J. Alexander's, growing from a revenue base of approximately $400 million entering 2012 to more than $1.4 billion entering 2013. We began consolidating the restaurant group's results in May 2012 and as we enter 2013, we remain focused on improving the financial performance of the O'Charley's concept and growing our restaurant group to provide significant value for FNF shareholders. In the fourth quarter, the restaurant group produced operating revenue of $359 million and adjusted EBITDA of $18.2 million for an adjusted EBITDA margin of 5.1%. While we are still in the early stages of the O'Charley's integration, we have made significant progress on the $20 million synergy target and expect to fully realize those savings by the end of 2013.

We have also begun the reimage and remodel program and are encouraged by the improvement in sales and traffic coming from those remodeled locations. We expect to make significant progress in improving the financial performance of the O'Charley's concept during 2013. Overall, after transaction and integration costs of $4.4 million, the restaurant group contributed a pre-tax loss of $4.7 million for the quarter.

We have also made the strategic decisions to separate our restaurant group into two companies. American Blue Ribbon Holdings will be our casual and family dining company consisting of the O'Charley's, Ninety Nine Restaurant, Max & Erma's, Village Inn, and Bakers Square concepts. J. Alexander's will be our upscale dining company consisting of the J. Alexander's and Stoney River Legendary Steaks concepts. We believe our restaurant operations can be optimally managed through a distinct upscale dining-focused company and a separate casual and family dining-focused company, allowing each to be better-positioned to take advantage of opportunities in their different market segments. Additionally, we continue to expect to augment organic growth with potential future acquisitions.

Remy International also had several significant events occur in 2012. In August, we acquired 1.5 million additional shares of Remy common stock and became the majority owner of the company, triggering the consolidation of Remy's financials into FNF. Additionally, in December, Remy successfully became listed on the NASDAQ stock market under the trading symbol our REMY, creating additional liquidity for its common stock. In January 2013, Remy announced that CEO John Weber had stepped down from that role but would continue to remain as a member of the Board of Directors. The same time, Jay Pittas, previously Remy's Chief Commercial Officer, was named the new President and CEO of Remy. We are excited about the future for Remy and look forward to continued future operational and financial success that will benefit all Remy shareholders.

In the fourth quarter, Remy generated operating revenue of $275 million and adjusted EBITDA of $40.1 million for an adjusted EBITDA margin of 14.6%. Remy continues to perform well against a challenging global macroeconomic backdrop and remains focused on improving productivity during the difficult economic environment. Overall, Remy produced pre-tax earnings of $9 million for the fourth quarter.

Our minority-owned investment Ceridian generated fourth-quarter revenue of $384 million, a 3.5% decline from the prior-year quarter. But despite the revenue softness, EBITDA of $101 million increased 42%. The EBITDA margin was 26% and our 33% share of Ceridian's quarterly loss was $5 million.

In late December, we announced the acquisition of Digital Insurance, the nation's leading employee benefits company specializing in health insurance distribution and benefits management for small and mid-size businesses. Digital manages more than 20,000 employer clients, 250 broker partnerships, and more than $1 billion in annual premiums. Digital's largest division, Digital Benefit Advisors is a rapidly-growing health benefits brokerage agency that utilizes Digital's highly scalable benefits technology platform to successfully target the SMB marketplace on a direct basis. Digital generated approximately $50 million in revenue in 2012 and is expected to achieve approximately $70 million in revenue in 2013. Digital insurance serves a fragmented market with significant organic growth and consolidation potential. And the Company has a demonstrated record of success in efficiently distributing health benefit plans to the SMB marketplace. The Company has a unique business model and provides FNF with a growth opportunity in an industry undergoing major change.

Finally, we continued to repurchase shares throughout 2012, as we had the available cash and felt the repurchase program provided a good return for our shareholders. In the fourth quarter, we repurchased 680,000 shares for total proceeds of $15.9 million, an average price of $23.42. For 2012, we repurchased a total of 1.8 million shares for total proceeds of $37.6 million, an average price of $20.55. We will continue to consider stock repurchase as part of our capital allocation strategy in 2013.

Now let me turn the call over to Tony Park to review the financial highlights. Tony?

Thank you, George. FNF generated more than $2.2 billion in revenue in the fourth quarter compared to $1.3 billion in the fourth quarter of 2011, as title revenue grew by $328 million or 26%. The consolidations of the restaurant group added $357 million in revenue and Remy added $275 million in revenue. Net earnings were $152 million or $0.66 per diluted share, while full-year net earnings were $607 million or $2.68 per diluted share. Decreased title claims paid resulted in improved cash flow as cash flow from operations was $243 million for the fourth quarter and $620 million for the full-year 2012. Book value per share grew to $20.78 at December 31, a 25% increase from book value per share of $16.57 at the beginning of the year.

The title segment generated nearly $1.6 billion in operating revenue for the fourth quarter, a 26% increase from the fourth quarter of 2011. Direct title premiums grew by more than 37%, driven by a 25% increase in closed orders and a 6% increase in the fee per file. Agency premiums grew by 21% over the prior year, trailing the direct premium increase as more refinance and commercial business is done through the direct channels of the Company. Agency profitability grew as the fourth-quarter agent split improved by 20 basis points to 76%. Title segment personnel costs increased by $81 million or 20% versus the fourth quarter of 2011 and other operating expenses grew by $42 million or 16%, significantly lower than the 37% increase in direct title premiums and the 26% increase in total title operating revenue. This quarter highlights the operating leverage to improved order counts and the future mix shift toward a more purchase-driven market. The net effect was a 16% pre-tax title margin, an improvement of 430 basis points versus the fourth quarter of 2011.

Debt outstanding, excluding ABRH and Remy, was $980 million with no maturities until May 2017. Additionally, there were no borrowings under our credit facility as of December 31. The consolidation of Remy and the restaurant group added debt of $364 million, with $271 million from Remy and $93 million from the restaurant group. FNF does not provide any corporate guarantee on the debt of either Remy or the restaurant group. Our debt-to-total capital ratio was 22% at December 31, including the Remy and restaurant group debt.

Total title claims paid were $131 million during the fourth quarter and $433 million for the full-year 2012, a full-year decline of $87 million. We will continue to provide for future claims at a 7% provision level as we enter 2013 and we expect claims paid to continue to decline in 2013. We also continue to see encouraging results from the 2009 through 2012 policy years. Finally, our investment portfolio totaled nearly $5.2 billion at December 31, an increase of approximately $470 million from the prior year-end.

From a regulated standpoint, we have more than $1.8 billion in statutory reserves, $1.9 billion in regulated cash and investments, and $530 million in secured trust deposits, for a total of more than $4.2 billion in regulated cash and investments. From an unregulated perspective, we have $390 million in our minority equity investment in Ceridian and approximately $400 million in unregulated cash and investments for a total of approximately $800 million in unregulated cash and investments. There is also $150 million in consolidated cash at Remy and the restaurant group that is necessary for their operations.

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

(Operator Instructions)

Bose George, KBW.

Actually, first just had a question on the increase in the commercial fee per file. Just curious what was driving that in terms of were there large transactions? And also just how we should think about that number going forward?

Bose, this is George. I would say that we had a very positive mix in the fourth quarter with several larger deals getting closed. There was a flurry of activity through the uncertainty over tax policy and so we were able to get some larger deals done that otherwise might have slipped into the first quarter but I would view that increase in fee per file as aberrational.

Okay. Okay, great. That makes sense. And then actually just in terms of the commercial volume that comes through your agent channel, just curious how meaningful that was, just size commercial as a percentage of the agent premiums?

We don't have great visibility into that but given the size of our agents, I would say it's relatively modest. The bulk of the transactions come through our national offices that are focused on the commercial market who have the sophistication to handle more complicated transactions. And so I don't think you see that much come through agency. There's obviously some component but it's relatively minor.

Okay, great and then just one last thing. The book value was up a little less than increase in GAAP earnings so I was just wondering what was the difference?

Tony -- we obviously had a buy-back during the quarter as well as dividend.

Right. Those are the two components that impact equity and that's probably it. I don't remember anything aberrational in the equity roll forward from a negative perspective other than those two pieces. I'll look at it to see if there's anything other than the dividend and the buy-back in Q4.

Okay great. Thanks a lot.

Mark DeVries, Barclays.

Thanks for the update on January of motor trends. Do you have any read yet on the first couple weeks of February at this point?

Yes, we're running about 7% ahead of last year. It's tough in isolation to look at a week or two at a moment in time, particularly with the weather patterns being different in the north year-over-year. But again I'd say the same positive momentum we saw in the fourth quarter continuing into the first quarter of this year.

Got it. And are you still seeing that same 67%, 68% of those being refi that you saw in the fourth quarter?

Randy?

Yes, actually it's a little higher than that. We ran through January and the first couple of weeks of February with refis at about 65% so the refis are still holding. We think that they will have some pretty good legs through the first half of the year. And of course, the purchases come up already in January from the back end of 2012.

Okay, great. Can you talk about what caused the increase in the corporate personnel expense in the quarter and what should we think about the run rate moving forward?

Yes, Mark, this is Tony. The Company adopted an LTIP program, or long-term incentive plan, designed to compensate certain key individuals for the performance of our strategic investments such as Remy, Ceridian, and ABRH. That was adopted during the end of the third quarter and was filed with our third-quarter 10-Q. We did have a catch-up accrual in the fourth quarter in that line item so that's what you are seeing so we have about $10 million of incentive compensation recorded in that line item in Q4. There's no payment due in 2013. The first payment at the earliest would be in 2014. The expected run rate for that accrual amount during 2013 would be $5 million per quarter. That's at this point. That's subject to change depending on the performance of those investments. So I would use somewhere around $30 million to $32 million as a run rate for the corporate and other segment in terms of a loss on a quarterly basis.

Okay. Great. And any updates you can provide us on thoughts on either monetizing or IPO-ing your ABRH holdings?

Mark, this is George. At this point, the focus is really on getting the O'Charley's business, which represents about 40% of the total revenue, up to a better margin performance. We were encouraged in the quarter by a positive trend in year-over-year sales, on a same-store sales basis at O'Charley's. So it was the first time since 2006 that happened. We've introduced a number of changes to the menu. Value pricing meals at $9.99. And we completed our first refurbishment, both interior and exterior, and produced 20% improvement in sales. And so we are aggressively focused on a renovation program that will actually hit almost 50% of the O'Charley's restaurants in 2013. It will be split between exterior-only and full refurbish but our experience in the past with those refurbishment's is that they generate strong rates of return and steady and improving same-store sales that are sticky. So with regard to any IPO, maybe toward the end of the year if we see the trends come along favorably, we might have the flexibility to do that and of course there could always be an opportunity in a transaction with another company to possibly do that. But those are opportunistic and I'd say the focus right now is on the blocking and tackling.

Okay and that full refurbishment you mentioned, were the benefits from that in line with or better than what you were hoping for?

I'd say better than expected. So we were very encouraged. And to put it in context, the full refurbishment costs about $225,000 to $250,000, a exterior package is in the $75,000 to $100,000 range, and we're going to hit, like I said, about 110 restaurants this year. So that, along with the changes we've made in the menu, we think will give us a better chance at that margin improvement we are seeking.

Okay, great. Thanks.

(Operator Instructions)

Brett Huff, Stephens.

Nice quarter. Commercial just incredibly good. Congrats on that. A few follow-up questions, a little bit longer-term. Can you guys just remind us -- you had said high-teens normalized pre-tax title margins. Based on what you saw in the 4Q, does that increase, decrease, keep that outlook about the same, or any commentary on that?

Brett, I would say that is still a reasonable target for us to achieve. We did benefit from the mix of commercial in the fourth quarter. But I would also point out that we are still operating in an almost no-growth economy and so better days are ahead for commercial as the economy strengthens. We are just obviously very happy about our margin performance overall; to do 14.1% for the year in this market is really outstanding. And so as the mix changes and none of us know what normal will be a couple years down the road, but the one thing we do know is we will have more of a bias toward resale transactions then refi. And as you know, we get twice as much for every resale transaction. We still think that mid to higher teens target is realistic and achievable. And we will be getting that in a market that is less than -- go back to '03 and '04. So we've got the Company's cost position in a great position to take advantage of incremental revenue. In fact, if you look at the performance of the Business over a couple years ago, almost every dollar increase in revenue from 2010 came to the bottom line in 2012. So we're really -- we've done a lot of good things over the last couple of years.

That's helpful. And can you talk about hiring -- the refi orders continue to be really pretty good, at least stable, which is a good thing for now. Where are you on hiring folks to fulfill that demand or are we just -- folks working more over time and are there breakpoints where we need to hire more or at what point do we need to start trimming? Can you give us your thoughts on that as you see things change?

Sure. Randy?

Yes. You are correct. We had to obviously add to staff through 2012 even into the back end of the year -- in the fourth quarter, we added about 250 additional employees. A lot of closings as we go in now into the 2013 into the first quarter, if the orders stay where they are, we will be able to hold the headcount as the refis start to fall off at some point in the year. We will make the adjustments. We still manage to our metrics, still watch our productivity numbers. We manage to open order accounts on a weekly basis. So we don't see really any additional surge in additional hiring. But we'll stay very close to it as this market starts to shift, at whatever point in time it does shift, and we will stay close to it as it goes to the resale side. A lot of the people that we hired through the back half of 2012 understood that these were temporary positions based on refinance volume.

And then on the private equity investments, George, you had talked a little bit about Ceridian. What is the -- what is the thought now that you guys have termed out that debt? Is that still something that is thought to be salable all of once or is there a chance to split it or is there any further thinking on that asset?

Yes, Brett, when you look at Ceridian, there is really two businesses there. There is a payments business -- I'm going to round the numbers here -- that's about $500 million, extremely profitable, has a Comdata is inside of that business, which targets the transportation industry. And then there's a prepaid card business, as well. And we're looking at other channels where payments can be used and we're excited about some growth prospects for '13 that we think are very legitimate. On the HR side, it's about $1 billion business and we acquired a company last year called Dayforce that we closed literally about a year ago. And we've been focused on integrating their technology into the Ceridian payroll technology and really going from a mainframe-based solution for customers to a cloud-based solution.

And we are very encouraged with where we are after that first year. We've had a number of successful customer implementations. We are seeing momentum on the sales side. And we think it's a transformative opportunity for the HR side of the business. So there's two businesses there and there's more likely to be a two-step transaction sequence in monetizing those investments. They don't really have any direct relationship to one another. They are separately managed and they serve different markets. So we see an opportunity to monetize one ahead of the other and which one it is, is difficult to say at this point. But the operating trends are moving in the right direction and we will have that flexibility down the road.

That's helpful. And then last question, I don't know if you have talked about this before but do you all have an equivalent in a normalized EPS that you think about when you think about that high-teens title pre-tax margin making whatever reasonable assumptions you want to make about the two newly consolidated businesses?

The short answer is no. We look at those high margins as you get up to 18%, 19% range in combination with what we would expect to be lower cash outflow for claims as we get through the cycle that we're hopefully on a downtrend now. But there is not much below the line once you get there. You've got the corporate overhead and that has not historically moved that much. So if you model it out, Brett, from using those high-teens margins, you can get to an EPS number. Now we are in the market buying shares back but there are a lot of shares out there and I don't know that we make that meaningful of a dent in it for purposes of affecting the denominator.

And as you -- on that buy-back, the stock is at it almost $26 now and you typically buy around book value. Are you -- do you consider buying above book value meaningfully or is that still the more comfortable range?

We have bought above book value, as you can see in what we did in the fourth quarter and our expectation is to continue to be in the market. And the stock is trading about 20% above book. Still relatively cheap on an earnings multiple basis. And so we think there's good value there.

That's what I needed. Thanks for your time, guys.

(Operator Instructions)

Alan Danzig, Lord Abbett.

Hello. Very impressive title margin this quarter at 16%. I was wondering, given the high commercial fee per file, how much of an impact did that have on the margin and what would be a more of a run rate given that -- I would think that this higher quarter to the tax rules is an unusual quarter. I don't know if you think of a more normalized margin for it for the quarter?

Boy, that's a mathematical question that--

Well, I can certainly try to plug in numbers but I don't want to assume what a commercial margin would be?

Well, you know what I would do. I would just take the average commercial fee per file for the year and just use that as a proxy for the fourth quarter and then take the delta. Fourth quarter, seasonally, is always our strongest quarter. So -- and the first quarter is our slowest. So there is always going to be that seasonality but if you take the average for the year you will get maybe something directional. Tony, is that reasonable, do you think?

Yes, I'm just looking at some numbers here that show that actually our commercial pre-tax margin in 2011 was identical to our commercial pre-tax margin in 2012 at 31%. So just because we had a really strong Q4 in commercial when you smooth it out over the course of the year versus the prior year, they are almost the same. Now we did jump up in Q4 with a margin above 35% in that business. But overall -- relative to the 16% overall, it probably didn't have a huge impact on the entire title business because it's $143 million of revenue versus numbers that are a lot bigger than that overall.

Thank you.

DeForest Hinman, Walthausen & Company.

Hello, everyone, I'll apologize in advance if this has already been asked. I've been on and off the call. But on the restaurant business, it looks like the operating profit is trending in the right direction. Is there any thought about increasing the level of disclosure around the number of locations and the same-store sales trends among the different brands and you did speak about separating the companies, at least internally, from a reporting perspective but when can we expect some increased transparency in that segment?

DeForest, I would say, we will reevaluate that during this year. And maybe towards the end of the year that will make sense but if we look at our concepts, five of the six had improved same-store sales in the fourth quarter. So we are monitoring all the metrics that you need to monitor in the restaurant industry and over time you'll see us expand our disclosure. But right now we just began consolidating them this year. If you look at our financials, there are no year-over-year comparisons because we started that mid-year. And we need to get a good year under our belt and then we can evaluate the appropriateness of that.

And can you talk about how things have progressed thus far on some of your initiatives? I know you had talked about doing some remodels and I know you had talked about some menu changes. Can you characterize the customer response either from the new remodels or the new menus or both?

Well I would say, as evidenced by that one full remodel that we completed in mid-November, a 20% pick-up that's held is very encouraging. We rolled out the nine for $9.99 menu at a handful of locations and rolled it out at all the locations in mid-January. And the customer reception to that has been extremely favorable. We introduced pies at a handful of restaurants and found that the demand greatly exceeded our expectations so we see another channel for pies through O'Charley's that we currently enjoy at Bakers Square and Village Inn. We are tracking to get the $20 million in synergies. We relocated the ABRH management team to Nashville. We are pacing according to schedule and are encouraged by everything we've seen so far. I'd say the economy remains a challenge.

So the casual dining segment is very competitive and there's commodity price pressure that everybody experiences. But we feel like we're doing the right things to position margin expansion, which is what we really want to get. And then separately by combining J. Alexander's and Stoney River, we really now have a segment with about $200 million of revenue that can focus on the upscale side of the market, which is very different from the casual and family side. So I'd say another year of transition. Opportunistic M&A when it makes sense. And if we get the margin expansion going with O'Charley's this year, that will really give us some more financial flexibility.

Okay great. Thank you.

Karan Ahooja, Eminence Capital.

Hello, guys. Great quarter. So, first question just to follow-up a little bit on the point you made on the February orders up 7% year-over-year and I respect the fact that we are only a few weeks into the month, but if I look at that versus last year that implies something that looks better on a daily basis than anything we saw last year. Am I looking at that right or is there some math that I might be missing?

You mean relative to first quarter of last year?

No if I look at the daily orders for the full year, 7% over February, which actually looked like it ended up being a pretty good month last year. It suggests that what you currently are doing in February is the best you would have done even last year?

Well, here's the way I would think about it and the other guys can chime in here. The first quarter is seasonally slower until we get into the spring season. And so you'll see the summertime activity order levels generally on a daily basis higher than you will in the winter and this time of year. So it's better year-over-year. But on a per day basis below what it was probably in the late summer through late fall period. Is that fair, guys? They are nodding at me here, yes, so. But yes, so, but the point is, Karan, that the momentum we saw in the fourth quarter is continuing into the first quarter, which is encouraging.

Got you. And just in terms of the 11% increase in purchase, which is obviously terrific to see. Is that showing any signs of being beyond 11% in Q1 or is that stable with that or even down?

I'd say not at this point but we've all read the data, which says that there is not very much inventory out there. The homebuilders are benefiting from that. And really we get into the time of year when people are deciding to move and so it will be interesting to watch the inventories over the next 60 to 90 days to see if more supply is coming on the market. And obviously that would be good because it would promote more transactions. The lack of supply has benefited pricing in many markets and so you are seeing multiple bids in many situations but we do need more inventory out there and that's probably the key variable for growth in the resale market in 2013.

Got you. And then just shifting to housing prices, which obviously I respect that it's not a one-to-one relationship but clearly you have buckets in terms of how you price your product. How should I think about the benefit, obviously if you look at the orders now, up say 7% or whatever it might be over last year and then housing prices seeming like they are up mid to high single digits, maybe even more if you exclude some things here and there. Should I think about that as actually being a pretty good -- you should assume that incremental lever? Or how do you build it up in your minds?

Well it clearly is embedded revenue growth as housing prices increase. It is not one-for-one so that a 4% increase in the price of the house does not yield a 4% increase in the title premium. Tony, do we have a ratio? Is that--?

Oh, probably roughly I would say maybe 60% is what you would get out of that. It is a sliding scale. It does increase, but to your point it isn't dollar for dollar.

But -- and in terms of how you compensate employees on that amount that is coming from a housing price appreciation, would that all flow through to the bottom line or is that going to your employees? I'm getting at the incremental margins of that?

Generally, the employee compensation is driven by pre-tax profitability. So as title premiums increase, whether -- or title revenue increases, whether it's because of more volume or a change in mix or the benefit from higher real estate prices, all those things contribute to better profitability and our managers are incentified to maximize that profitability. So their compensation is driven by their own success.

Got you. Sorry, I know I've got a bunch year, but on the provision that I know you've kept it 7% for a while now. Any thoughts on bringing that down as we get farther away from the poor integers?

Yes I think so. And that something we will probably be talking about in a year. We will hold it at 7% this year, maintaining some conservatism. As you saw, our claims paid for the year came down dramatically from last year. We expect that trend to continue. We are all still dealing with those years where the loss ratios approached 9%. The last three or four years it has been closer to 5.5% or 6% so we are encouraged by the recent trends. And actuarially, we'll get more credit a year from now than we're getting for that. So we won't aggressively drop it but if you get a 50 basis point move, it goes straight to margin and that may be appropriate a year from now.

Got you. And then the last question I have is just in terms of the use of cash to better understand what the options are, with the dividend is probably about $150 million. DOIs, you are doing little tuck-ins, which seem hopefully, obviously over time, you've done a terrific job with those. What should we think about as being the rest of it? Should it be a one-time dividend? Would a buy-back be more likely than that? And how much actually can you realistically dividend out of the -- out of your insurance subsidiary?

Well, as you know, the insurance companies are regulated. So that cash flow has to go through a formula before it can be up-streamed into the parent company. Clearly our balance sheet is very conservative. Our leverage ratios are relatively low. The cash dividend is a priority for us. We raised it 15% coming into this year and 17% last year. We've been active in the market and we will continue to be active in buying shares back. And again remaining opportunistic for acquisitions but being selective in that. If you look at our track record, we've been good buyers of businesses and then we've invested incremental capital to grow them and create a disproportionate value. And also made it clear that on any given day everything is for sale. So right now I'd say we're in a growth mode with our restaurant businesses, a transitional mode with our Ceridian business, and Remy, as they reported earnings yesterday, they have got a solid foundation for growth. So I'm not sure there's going to be any significant exit events that would generating incremental cash this year but the cash flow operations should strengthen and that just gives us flexibility. We've done a one-time dividend in the past. I wouldn't rule that out but I wouldn't pencil that in at this point in time.

And within that formula that you mentioned, part of the reason I ask is my understanding of the formula is that it's based on your prior 12-months earnings obviously, where this year it was quite a lot better than it obviously was in 2011. Is that a fair characterization?

Well you have to take into account some of the gains we recognized in consolidating the restaurant and Remy operations where we basically stepped up their value from what we paid for it to what it was currently valued at. So that helped enhance both the book value and the earnings per share for the year. We had talked a couple years ago about a payout ratio and because the market is transitional and if you look at the projections from MBA they are still projecting a 20% decline in originations this year. So it's hard to be formulaic about your capital allocation policy when we're still in a real estate market that's in transition. But we're comfortable as I said with growing the cash dividend, being active in the market for our stock, and then being good allocator's of that capital to M&A when it's appropriate.

Got you. And I'll just squeeze one last one in there on Remy because we don't have a lot of history with that one. If you make the adjustment for what it was highlighted as a one-time thing in the press release, you had about $12 million of pre-tax earnings this quarter in that segment. Is that a good run rate or is Q4 seasonally high or low?

They don't give guidance and I would refer you to their call yesterday, which they had, so you can get the transcript for that or listen to the call. Their business can be very much affected by the weather. The after-market business for starters, for example, can dramatically increase in a cold winter because starters tend to burn out in the winter time just as in a hot summer, alternators tend to burn out. So there is some seasonality to that side of the business, which represents about 40% of their revenue base. The OE market is more tied to overall vehicle production and as you know that can stop or start or be suspended based on sales volumes. So there's a lot of movement. But they are generally fairly calendared evenly over the year but I would refer you to their website and investor relations for more specifics.

Okay, thanks a lot. I appreciate all the answers to all these questions.

Okay. Thank you. And there are no further questions in queue. Back to Mr. Scanlon for closing remarks.

Thank you, operator. The fourth quarter was a great finish to a very strong year for our Company. We are proud of the 16% pre-tax margin our title business generated this quarter, a margin rivaling the highest title margin in the history of our Company. As we enter 2013, we remain focused on our overriding goal of creating value for our shareholders. Thank you for joining us today.

Okay. Thank you. And that concludes our conference for today. Thank you for your participation and for using AT&T Executive TeleConference Service. You may now disconnect.