Fidelity National Financial Q4 2007 Earnings Call Transcript

Jan.31.08 | About: Fidelity National (FNF)

Fidelity National Financial (NYSE:FNF)

Q4 2007 Earnings Call

January 31, 2008 11:00 am ET

Executives

Daniel Murphy, Senior Vice President Finance and Investor Relations

William P. Foley, II, Chairman of the Board of Directors

Alan L. Stinson, Chief Executive Officer

Raymond R. Quirk, Co-President

Anthony J. Park, Chief Financial Officer

Analysts

Nick Fisken - Stephens Inc.

Rob Maitland - Snyder Capital

Analyst for Bob Napoli - Piper Jaffray

Analyst for Geoffrey Dunn - KBW

Rajeev Patel - SuNOVA Capital

Darrin Peller - Lehman Brothers

Operator

Welcome to the Fidelity National Financial fourth quarter earnings call. (Operator Instructions) I would now like to turn the conference over to Mr. Dan Murphy. Please go ahead, sir.

Daniel Murphy

Thanks and good morning, everyone and thank you for joining us for our fourth quarter 2007 earnings conference call. Joining me today are Bill Foley, Chairman of the Board; Al Stinson, our Chief Executive Officer; Randy Quirk, Co-President; and Tony Park, our CFO.

We will follow our normal format, starting with a brief strategic overview from Bill Foley; Al Stinson will provide an update on our operating companies. Randy Quirk will then provide a more in-depth analysis of the title insurance business; and Tony Park 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 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, changes in general economic and business and political conditions, including changes in the financial markets; 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 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 operating subsidiaries as a source of cash flow; significant competition that our operating subsidiaries face; compliance with extensive government regulations of our operating subsidiaries; and other risks detailed in the statement regarding the 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 7. The replay number is 800-475-6701 with an access code of 906388.

I will now turn the call over to our Chairman Bill Foley.

William P. Foley

Thanks, Dan. 2007 turned out to be a very challenging year for some of our businesses and a yet a positive year for others. On the challenging side, our title insurance business clearly faced the most adversity. The first half of the year presented slowing, but manageable mortgage and real estate markets. The late summer brought on the sub-prime and liquidity crisis and a near shut down of the mortgage and residential real estate markets. However we remain true to our operating strategy and continue to focus on operating metrics and our efforts to maximize the profitability of our title insurance operations.

Before the impact of the two reserve strengthening charges in the third and fourth quarters, we generated 7.1% and 6.0% pre-tax margins respectively in third and fourth quarters of 2007. While we aspire to produce higher pre-tax margins than we did in the second half of the year, those results were admirable, given the extremely challenging macroeconomic environment, and we are confident that FNF is still the clear leader in profitability in the title insurance industry.

While 2007 was a difficult environment for the title business, 2008 has started out very positively. Last week’s 75 basis points Fed rate cut opens up the real possibility of a significant increase in refinance transactions. Yesterday’s additional 50 basis points rate cut should provide even more momentum for increased refinance orders.

Additionally, the potential increase to the confirming mortgage loan limit in certain market to nearly $730,000 could have a very positive impact on order count. In a short period of time, the outlook for the title market has improved dramatically.

Our specialty insurance business has achieved solid results in 2007. The flood insurance operation continued to provide a consistent stream of revenue and earnings due to the recurring nature of this business and the lack of underwriting risk for FNF as the federal government underwrites all flood insurance in the United States. The homeowners business had some difficult loss situations overcome, most notably the Southern California wildfires. Despite those loss difficulties the homeowners operation remained profitable throughout 2007.

Home warranty revenue suffered from the severe slowdown in the residential real estate market but still generated nearly 20% pre-tax margins for 2007. The entire specialty insurance operation generated greater than a 13% pre-tax margin for the full year of 2007.

Our two minority-owned investments benefited from the long-term contractual nature of the revenue streams from outside of the mortgage and real estate industries. First our minority-owned operating subsidiaries Sedgwick grew to more than $660 million in annual revenue business. The largest third-party administrator in the country, with revenue growth of 34% and organic revenue growth of 8% and EBITDA margins of approximately 15% and client retention rates greater than 98%. Additionally, Sedgwick added several new features to its business offerings, including an in-house national medical bill review facility for workers compensation medical claims; the launch of a national professional liability claims services capability for healthcare organizations with medical malpractice exposure; significant updates to proprietary claims services software; and the signing of an agreement with United Health Group to develop an unprecedented program for the integrated servicing of employer sponsored workers compensation, disability, group medical and other employee absence programs.

Sedgwick’s future looks promising and we are excited about the significant value that this asset can deliver for FNF shareholders in the future.

Our other minority-owned investment is Ceridian, a leading information services company in the human resource, retail and transportation markets. Ceridian is probably most well-known as one of the largest payroll processing firms in the United States. We closed our minority investment in Ceridian in November and we are excited about the implementation of a 4 point cost reduction plan. The cost reductions include workforce reductions, SG&A rationalizations, technology savings and spending improvements and business process improvements. The successful execution of this cost reduction plan will lead to material margin improvement and we are looking forward to Ceridian capitalizing on that opportunity during 2008.

We also completed a minority investment in the common equity of Remy International through our Special Opportunities Group. Remy is primarily an auto part supplier with annual revenue of approximately $1.2 billion. Our Special Opportunities Group originally held fixed income such as securities of Remy but after its successful emergence from a prepackaged protection procedure we now have a $60 million investment which is a 47% ownership stake in the common equity of Remy.

We also hold 20 million preferred stocks for a total investment of $80 million. Like our other investments, we will ultimately seek the most efficient means of creating value from these assets for FNF shareholders.

We continue to repurchase shares of our common stock during the fourth quarter and in total we repurchase 3 million shares during November and December at a total cost of about $45 million. Since instituting this buy back in the spring of 2007, we have repurchased a total of 9.7 million shares of the available 25 million share authorization for a total cost of approximately $183 million. We are not currently buying any stock as we continue to analyze our cash needs and other potential sources of cash from the sale of various FNF assets.

Finally, we continue to pay our $0.30 quarterly dividend most recently on December 28th 2007 we announced our March $0.30 quarterly dividend yesterday. We have said publicly that we have the ability to pay that dividend through 2009 and we expect to maintain that $0.30 per share quarterly dividend for the foreseeable future.

Let me now turn the call over to Al Stinson.

Alan L. Stinson

Thank you, Bill. Our title business continues to focus on maximizing margins, despite a difficult operating environment. Before the loss reserves strengthening we generated a 6% pre-tax for the fourth quarter and an 8.1% pre-tax margin for all of 2007. If you also add back the $14.4 million in lease acceleration expenses we incurred during the fourth quarter, due to the closing of offices under existing leases, we actually produced a 7.2% pre-tax margin over the fourth quarter. Despite a challenging environment, our title insurance employees continued to show themselves to be the best operators in the business

Specialty insurance revenue was $93 million for the fourth quarter, including $4 million in investment income, a decline of $2 million from the fourth quarter of 2006. Flood insurance generated $32 million in revenue, a 7% growth rate from the fourth quarter of 2006.

Personal lines insurance contributed $43 million in revenue, a slight decline from the fourth quarter of 2006 as we remained focus on profitable growth versus absolute revenue growth. The homeowners business produced an increase loss ratio of 80% for the quarter, primarily due to $7.5 million in losses from the southern California wildfires.

Home warranty produced $17 million in revenue during the fourth quarter. It generated a pre-tax margin of 20%, which was an increase back to its more normal profit margins, despite the significant slowdown in real estate activity in the Western United States.

While we do not consolidate results of Sedgwick, they produced revenue of $170 million and EBITDA margin above 15% for the fourth quarter. For the full year Sedgwick produced $660 million of revenue, 8% organic growth and EBITDA margin improvement of nearly 200 basis points.

As Bill mentioned, we completed our investments in Ceridian in November. Our equity investment of approximately $500 million represents a 33% ownership stake in Ceridian. As is the case with Sedgwick, we will account for this investment under the equity method of accounting and Ceridian will not be consolidated for financial statement purposes.

Finally on our last earnings call, we discussed a potential hybrid debt offering whose proceeds would be utilized to repurchase stock. Unfortunately, the liquidity situation of the capital markets has not allowed us to pursue that option to this point in time. We would still consider such insurance, but are not optimistic about getting a hybrid issuance completed in the foreseeable future.

Let me turn the call over to Randy Quirk to comment on the Title Insurance business.

Raymond R. Quirk

Thank you, Al. Total open order volumes continued to decline in the fourth quarter. For the entire quarter, we opened 462,000 total orders for a quarterly average of 7,300 open orders per business day, a sequential decline of approximately 12% from the third quarter of this year and a 26% decline from the fourth quarter of 2006.

While the year-over-year decline was larger than in the third quarter, the sequential decline of 12% from the third quarter to the fourth quarter was less than the 16% sequential decline from the second quarter to the third quarter of 2007.

Looking at it monthly, we opened 7,500 orders per day in October, 7,800 per day in November and 6,700 orders per day in December. The increase in November orders certainly was a positive development as we saw flat open order volumes from October to November in 2006.

Additionally, while December orders declined significantly, the 14% sequential decline was not much different than the 12% sequential decline we experienced from November to December of 2006.

Refinance orders as a percentage of total orders increased in the fourth quarter, comprising approximately 63% of open order volume and 61% of closed orders for the fourth quarter, versus 59% and 55% in the third quarter. The refinance mix was relatively flat with the fourth quarter of 2006.

Finally, January open order counts have increased significantly, particularly in the last two weeks. After averaging 7,300 open orders today in the fourth quarter, we averaged approximately 12,000 open orders per day, last week. For the first four weeks of January, we are averaging 9,300 open orders per day, although much of the recent January increase appears to be coming from lower refinance transactions. Obviously, with the decline in open order counts during the quarter, we remained focus on continuing to appropriately manage the ongoing reduction in our headcount. We began the quarter with approximately 11,000 employees in the field and ended the year with approximately 9,950 a reduction of about 1,050 positions or 10% during the fourth quarter. As a reference point, we had approximately 15,000 employees at the beginning of 2006 so we have eliminated 5,500 positions or more than 33% of the field work force, since the beginning of 2006. At the peak in 2003, we had approximately 18,500 employees in the field so we are down nearly 50% from our peak staffing levels.

To summarize our fourth quarter expense reductions on a sequential basis from the third quarter of 2007, open orders and direct title premiums were both down 12%. Our headcount and personnel cost declined by 10% and 11% respectively. We remain committed to maximizing our profitability in all market environments.

The commercial title of business remains in bright spot. We opened approximately 12,900 commercial orders in our national commercial divisions and closed approximately 8,300 commercial orders generated more than $98 million in revenue. This was actually more than a 9% increase over the fourth quarter of 2006, and commercial revenue accounted for more than 28% of total direct title premiums in the fourth quarter.

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

Anthony J. Park

Thank you, Randy. FNF generated $1.3 billion in revenue for the fourth quarter with a pre-tax loss of $79 million and net loss of $45 million and cash flow from operations $37 million. These results include a $135.7 million pre-tax charge to strengthen our reserve for title claim losses, which I will discuss in a minute.

Before the increased loss provision, we generated net earnings of $59 million or $0.28 per diluted share. We also recorded a $14.4 million abandoned lease expense in the fourth quarter, resulting from the acceleration of the present value of remaining lease obligations and the write-off of the net book value of leasehold improvements from those offices we chose to close. This had a negative impact on earnings in the fourth quarter, but it will be a benefit to future quarters.

The title segment generated nearly $1.2 billion in total revenue for the fourth quarter, a decline of 19% from the fourth quarter of 2006 and a 4% sequential decline from the third quarter. As Al mentioned, the pre-tax margin before the reserve charge was 6%.

Personnel costs of $358 million were down $77 million or 18% versus the fourth quarter of 2006 and $42 million or 11% sequentially, from the third quarter. Other operating expenses of $242 million actually showed an increase of $18 million or 8% from the fourth quarter of 2006 and a sequential increase of $25 million or 11% from the third quarter.

Three major items caused this increase: first, we recognized the $14 million in abandoned lease expenses in the fourth quarter. Again, we will see a future benefit from lower lease expense due to these office closures.

Second, we recorded a $20 million gross-up to both revenue and expense due to passthrough default business in our service link title operation. This accounting gross-up causes expenses to look higher than they really are when viewed in isolation. When analyzed with the $20 million increase in revenue, there is no bottom line impact.

Finally, earnings credits from off balance sheet escrow deposits continue to decline, tracking a significant decline in order volumes and thus escrow balances.

We experienced a sequential $7 million decline in earnings credit in the fourth quarter. These three items accounted for $41 million increase in other operating expenses in the fourth quarter versus the third quarter.

We did find it necessary to record an additional $135.7 million provision to again strengthen our reserve for title claim losses in the fourth quarter. We experienced meaningful deterioration in the ultimate estimated expected loss for policy years 2005 through 2007 during the fourth quarter -- roughly 50 basis points for each of those three years -- those three policy years account for approximately $65 million of the increased reserve according to our actuarial model.

Policy years 2005 through 2007 are now projected to produce ultimate loss ratios of between 7.3% and 7.5%. Policy years 1999 through 2004 also experienced some adverse development during the fourth quarter, but at much lower levels than policy years 2005 through 2007. Policy years 1999, 2000, 2003 and 2004 all experienced approximately 20 basis points in deterioration in the ultimate estimated expected loss. Those four policy years account for approximately $30 million of the $135.7 million increased reserve taken during the fourth quarter. Policy years 1999 through 2004 are now projected to produce an average ultimate loss ratio of approximately 7.4%.

Claims continue to come from three main categories: title search and exam errors, fraud and forgery and closing our escrow errors. Additionally, the split between direct and agency claims has remained relatively consistent at 50-50.

In 2007, nearly 65% of paid claims have fallen into those three major categories and the number of paid claims in those three categories has increased over the last several years. The $135.7 million addition to reserves increased the reserve for claim losses on the balance sheet to more than $1.3 billion. This is approximately 3% or $39 million above our actuarial reserve point estimate as of December 31 2007.

We determined that moving a reasonable amount above the point estimate was a prudent and conservative thing to do, particularly given the adverse development experience in the last two quarters.

With the last nine years now showing expected ultimate loss ratios of between 7.3% and 7.5%, we intend to leave our provisional level at 7.5% of gross title premiums for new business written in 2008. If we continue to experience further material adverse development on those prior years during 2008, we would have to further strengthen our reserves. We will continue to assess our balance sheet reserve adequacy on a quarterly basis.

Debt on our balance sheet primarily consists of the $490 million in senior notes due in 2011 and 2013; the $535 million drawn under our credit facility to primarily fund our Ceridian investment in November 2007; and debt at Fidelity National Capital, the vast majority of which is non-recourse. The debt to total capital ratio was 26% at December 31, 2007.

Finally, our investment portfolio totaled $4.7 billion at December 31. There are approximately $3.2 billion of legal, regulatory and other restrictions on some of those investments, including secured trust deposits of approximately $700 million and statutory premium reserves for underwriters of approximately $1.7 billion. There are also some other restrictions including less liquid investment like our ownership stake in Sedgwick, Ceridian and Remy; cash held as collateral in our securities lending program and working capital needs some underwritten title companies, all of which total approximately $800 million.

So of the gross $4.7 billion, approximately $1.5 billion was theoretically available for use with about $1.3 billion held at regulated underwriters and approximately $170 million in non-regulated entities. In addition to $170 million available we also have approximately $290 million of dividend capacity from our underwriters during 2008 for a total of $460 million in available cash during 2008.

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

Question-and-Answer Session

Operator

Your first question comes from Nick Fisken - Stephens Inc.

Nick Fisken - Stephens Inc.

What’s your sense on where closing ratios will go?

Anthony J. Park

Nick, our typical closing ratio for the last few years has been in the range of 65% to 70%. On the loan side, it typically runs closer to 60%. So we expect with this influx of refinance orders that we hit in the month of January which has been very, very good for us that the closing ratio will move down to about the low 60’s. But we came through last year, mid-year about 62% or 63% through 2007.

Nick Fisken - Stephens Inc.

Any type of comfort you can give us on claims on a go-forward basis.

Raymond Quirk

No. We were frankly a little surprised over the last quarter’s development and now by having an actuary on staff and he’s been on staff for about a year-and-a-half. The data we’re developing gives us a lot more comfort and confidence in our loss reserving on a go-forward basis.

The only thing that bothers us is that there appears to be about a three-year lag between the time the policy is issued and the time a claim is actually paid; its about 29 – it’s about 32 months or 33 months and that would indicate that as of the end of ‘07, we are into ‘05 in terms of policy processing and these have been very consistent numbers over the last number of years. Again, this is data that is a little bit new to us but its very, very strong data.

So we are concerned about 2008, because we are going to be seeing the balance of ‘05 and getting into ‘06.

We are very confident that ‘09 is going to have positive developments for us in claims development. So we are watching ‘08 very carefully. The other thing that we have determined is that while our claims are 50-50 agency to direct operations, the problem we are having is that our agency revenue is represented by about 22-cent dollars as opposed to 100-cent dollars that we can underwrite to operations. So when you look at it that way, the agency claim volume is disproportionate to our revenue generation. As you know, over the last several years we’ve been very aggressive about canceling agents and attempting to upgrade our agency base and we are continuing to do that.

We are now in a even more aggressive mode and we are actually looking at various states that may have a propensity to produce higher claims and we will have more to report on that analysis at the end of the first quarter but we are well into it.

Nick Fisken - Stephens Inc.

How much of that is coming directly from California would you guess?

Raymond Quirk

California is not the problem. California is really equal to or less than our historic claims paid rate of developing. It’s states in the Midwest that are the most troublesome and we are going to see where it goes, but we did another analysis that showed that of the agents that we have cancelled over the last three years, had they never been an agent or been cancelled more than three years ago, the claims paid on those agents were about $240 million out of $413 million of agency claims paid.

You can see why we are concerned about that agency business; I mean we have our arms around it and we are aggressive in terms of auditing and analyzing our agents, but we are probably going to be more aggressive in terms of agency cancellations and pulling back from certain markets that just don’t makes sense for us.

So we know how to continue to improve our loss development. It just unfortunately takes a couple of years to work it’s way though the system, so that’s about the best answer I can give and that is a little bit long and I apologize.

Nick Fisken - Stephens Inc.

Last question, just so I have got my numbers right, you have got $80 million in Remy, $00 million in Ceridian and what’s the Sedgwick number and the Timber number?

Raymond Quirk

Sedgwick is about $133 million, and Timber is $95 million, although we are doing a couple of Timber sales that are developing and we anticipate reducing that investments based on the distribution out of Cascade which we were at 70% or 71% on.

Operator

Your next question comes from Rob Maitland - Snyder Capital.

Rob Maitland - Snyder Capital

You indicated that most of the recovery that you saw in January is coming from the refi side. Are you seeing any improvement in the purchase side as a result of better interest rates?

William P. Foley

It is too early to tell because the purchase transactions would just be starting to pick up. Traditionally, the resale transaction will start really strengthening late February, March, April, May for closings in summer. So I would say by the end of the first quarter we will be able to give you much more accurate numbers with regard to resales.

What we are seeing now are just a really significant upsurge in refinance orders. We feel somewhat vindicated by the fact that a couple of our competitors have really pulled back or gone out of businesses, especially in the western market over the last 60 or 90 days.

We are pretty aggressive about hiring revenue producers in those western markets and so we have actually hired from various competitors that were shutting down. Around 70 escrow officers and sales representative, all of which are revenue producers and no admin help, and those people actually are bringing orders in. It looks good now; we just have to close them.

Operator

Your next question comes from Bob Napoli - Piper Jaffray.

Analyst for Bob Napoli - Piper Jaffray

Given the strong trend you are seeing in January with open orders, how has your 2008 volume outlook changed at all? You had previously stated that a 10% pre-tax margin was a goal. Is it still the goal and how close do you think you can to that goal if your volume outlook has changed for 2008?

William P. Foley

10% is our minimum goal. Our minimum goal. That’s much more achievable today than it was 30 days ago.

Analyst for Bob Napoli - Piper Jaffray

Do you have any outlook on how long you think the increased refi activity can continue here, given with where rates sitting there right now?

William P. Foley

It’s going to go on for a long time. It’s very, very positive.

Raymond Quirk

We came into January expecting a much lower order tempo than what we are seeing now, obviously, and we think this first quarter will be back at the levels of what we were for the better part or the high point of the first half of 2007. So we are changing our outlook a bit in terms of our volume of open orders and as Bill said now, we need to get them over to the closing side.

Analyst for Bob Napoli - Piper Jaffray

On the specialty insurance side, the quarter-over-quarter revenue was little weaker than I thought and I thought maybe that was because of the reduced home warranty revenue. Was there anything going on in there quarter over quarter that we should be aware of?

William P. Foley

There actually was, because last year in the fourth quarter we some saw Hurricane Katrina related flood revenue, that was about $22 million or $23 million and that was very, very profitable revenue for us. That just didn’t exist this year. So specialty insurance had the California wildfires, but that’s part of property and casualty. Actually would have been very profitable for the fourth quarter and we basically through the homeowners and auto programs, we almost offset the decline in the flood business. So it’s a little stronger than it looks because last year was skewed by the Katrina flood processing volume.

Operator

Your next question comes from Geoffrey Dunn - KBW.

Analyst for Geoffrey Dunn - KBW

A couple of quick questions on the loss ratio. First you said between ‘04 and ‘07, reserves were in a 7.3 to 7.5 range, is there any way to break that out by specific year?

Raymond Quirk

It’s really pretty consistent. ‘04 is in the low sevens, about 7.2 and ‘05 is about 7.4,’06 is about 7.3 and ‘07 looks now like it’s about 7.5. But again. these are expected ultimate loss ratios; it’s pretty hard to have a lot of visibility into the 2007 claim year with just really one year of claims reported. So a lot of this is driven off of the last three to five years and sometimes five to seven years of experience. So these numbers can move a little bit plus or minus.

Analyst for Geoffrey Dunn - KBW

Okay that was very helpful actually. Second, you were talking about the higher claims coming from the agency side of things. Is there anyway you could give a little more colors? Is that more fraud, is that more error? Is there any way to splice that a little more?

Raymond Quirk

The losses are fairly consistent at various categories either between agency and direct operations. The one thing on fraud that we have seen because we started focusing on it more than three years ago. Paid fraud claims in ‘05 were $49 million and ‘06 were $42 million or $43 million and in ‘07 were $30 million, $31 million. So we have seen some real improvement in fraud. A lot of the fraud is agency-based or agency-driven. We have improved that from an intense audit [inaudible] including canceling agents that have created problems for us. So if you look at our revenue it’s 50:50 agency versus direct, but our net revenue of course is 100% on the direct side and every dollar we get into the book is ours, 100%. On the agency side, it’s 22-cent dollars.

That is what has really troubled us about the whole agency program is that we are basically paying the same amount of claims on the same revenue but we are only receiving $0.22 of every dollar. So if you look at it that way, agency really hasn’t been very profitable for several years and it’s disappointing to us because we started reducing agents more than three years ago and we have been very aggressive whereas other underwriters have been signing a lot of those agents that we have cut and it looks like we are going to have be more aggressive on the agency side to get these claims reduced.

It may be that we have to go to our agents and change splits and be more aggressive about that and there may be that there are certain areas of the country that are more claim prone and we may just not do business in those areas of the country. We have a lot of good data now which is very, very helpful.

Analyst for Geoffrey Dunn - KBW

Any color on commercial volumes to start off ‘08 in January?

William P. Foley

Commercial volume has been consistent over the last couple of years, commercial volume in ‘07 versus ‘06 was about flat, and ‘07 in terms of land acquisition in ‘08 land acquisition does not look particularly strong in terms of residential property development. But the other commercial business refi, refi of office buildings, hotels and other commercial property was very strong and will probably get stronger based upon these low rates.

Operator

Your next question comes from the line of Rajeev Patel - SuNOVA Capital.

Rajeev Patel - SuNOVA Capital

When you were talking about the first quarter, the direct orders opened, did you say that it could be similar to the first half of ‘07 in terms of the opening volumes?

William P. Foley

We expect it might be higher than that. We should be heading up towards a range higher than 10,000 orders during the first quarter on an opening per day basis. So it will be higher than the first quarter.

Rajeev Patel - SuNOVA Capital

On the comment about the operating margin, the pre-tax margin hopefully of 10% or greater; is that for on the average of the full year or when do you hope to hit that by?

William P. Foley

I am sorry, you said the operating margins for the full year?

Rajeev Patel - SuNOVA Capital

The previous question about your target for 10% margins and you guys commented that, that’s at a minimum and the prospects of hitting that have greatly improved over the last 30 days. Is that targeted for the end of the year or is that something which you think you could get kind of by mid-year?

William P. Foley

The first quarter is going to be difficult because of lack of openings in the last quarter of last year. But beginning in the second and third quarter that we maintain these lower rates and the refinanced volumes are maintained then a 10% operating margins should get made.

Operator

Your next question comes from Bob Napoli - Piper Jaffray.

Analyst for Bob Napoli - Piper Jaffray

You reduced the employee count pretty significantly here again just in the fourth quarter and just with the volume uptick that you’re seeing right now, what are your employee needs going forward? Do you think there was more cost cutting or do you need to hire more or are you pretty much comfortable with the current levels?

William P. Foley

If the orders keep up at the present pace, we are going to be short employees. One thing we don’t want to do is get in a position where we have too few employees and we create a claims problem for ourselves three years from now by not properly processing our orders.

However, at this time we are holding the line. We are really just resisting hiring anybody other than revenue attached people from couple of companies that went out of business.

Analyst for Bob Napoli - Piper Jaffray

Just to come back to the closing ratio, just given the underwriting environment how it has tightened up significantly; and then just with falling home prices in many markets and reduce home equities that’s available for refinancing, how do you think that’s going to impact the closing ratio now relative to the historical high refi period that you guys have seen and those closing ratios? Do you think there is going to be a significant difference in this tougher environment to get approved from mortgage even on a refinance?

William P. Foley

I think you have expressed our concerned about the influx of orders we are presently seeing with the falling home prices and fewer lenders and a difficulty in terms of secondary marketing moving into secondary markets with regards to home loans. That is the one concerning thing relative to the influx of orders we are seeing, what will that closing ratio be? We will have a lot better feels for it as we move through the month of March because that is when these closings will start hitting and in March traditionally is the month where we are very, very profitable and make up for what happens in January and February.

So I think it is news to come and we will have numbers for you at the end of first quarter.

Operator

Your next question comes from Darrin Peller - Lehman Brothers.

Darrin Peller - Lehman Brothers

Can you guys remind us again of the actual profitability of refi versus purchase? Maybe if you can quantify it as maybe in basis points of more of the value of the underlying transaction?

William P. Foley

Well refis are easier to process and they take less time; however, the closing ratio on refis is lower so you can really look at it as kind of wash out because by the time the efficiencies are utilized with regard to refinance transaction versus a retail transaction over the lower closing ratio I don’t really think you would see much difference.

Darrin Peller - Lehman Brothers

In regard to your capital levels, you said 26% was your debt to capital ratio right now, and first of all, I guess you are not buying back stock probably because you don’t want to bring that too much higher. What is your target on that ratio?

William P. Foley

Actually our target is under 30% and we felt like we are a little under leveraged and of course we made a commitment to investments in Ceridian back in May and June of last year which was well before we had full visibility relative to the credit crisis, although and now it looks like that loan we have on Ceridian is pretty good because it is down about 150 basis points; it is LIBOR based.

Our target is under 30% and we are evaluating right now a number of the assets that we have on the books and how to get some liquidity with regard to some of those minority investments that we presently own because one of the things that we have mentioned in the past, our first goal is of course to protect our shareholders and our second goal is to maintain the dividend and our third goal at this time is repurchase shares.

So we were repurchasing shares in the fourth quarter and we stopped around December 15th or so -- December 10th or 15th -- because we just didn’t know what the future was going to bring relative to the credit markets.

Now we have a little more visibility and a little more confidence and I think I would like to get through the first quarter before we probably re-engage in the share repurchase program, closing ratios, see how our cash flow looks and see if we can gain some liquidity and a couple of other ideas we are working on.

So we are still committed to repurchasing shares. We have too many shares outstanding, I would like to see us repurchase a lot of shares. We just can’t get the leverage any more and we do certainly get a lot of money with the number of shares we have on the books. But we have got to be patient.

Darrin Peller - Lehman Brothers

On the dividend, on the other side, maybe you can quantify for us exactly how much, I mean what kind of earnings power do you need to have to maintain the dividend throughout? I know a lot of it is based on prior years earnings. Could you help us quantify and understand how that works?

William P. Foley

Well, what we have done is we have done a cash flow analysis and based upon the dividends that can come up from the underwriters and we have budgeted earnings at a 70% rate, basic cash flow at a 70% rate in 2008 to 2009 versus what we achieved in 2007 and at that rate at the end of 2009 we would have to borrow about $90 million to maintain the dividend through 2009. We would have paid back about $40 million of debt in addition to that and that’s with no asset sales and that’s at a 70% earnings rate for 2008 and 2009.

We were trying to be very conservative, that’s why whenever Al’s gone on the road he said we will stress test our dividend and we feel we are confident, at least the first half through the first half of ‘09.

Darrin Peller - Lehman Brothers

Lastly touch on the scalability of your business model. Maybe you can help us understand what type of capacity do you think each of your direct employees with regard to title can actually close on a monthly basis and where are we right now? In other words, how much are they closing now, what capacity do you need before you have to really start hiring people?

William P. Foley

If we can get into March we will start hiring people. If the quarter stays at the present rate because they are refinance orders, they are easier to process.

Darrin Peller - Lehman Brothers

So like ten per month, on average?

William P. Foley

No, our people can close 15 a month, between 15 and 20 a month.

Darrin Peller - Lehman Brothers

What was it in fourth quarter around?

William P. Foley

Not much. We had a lot of capacity.

Operator

There are no further questions; I will like to turn the conference back over to Mr. Foley.

William P. Foley

Thank you. 2007 was a challenging year for our company, particularly in the title of business. But it looks like things may be improving. We remain excited about the long-term prospects of all our business and remain committed to our underlying goal of continuing to maximize the value of the assets at FNF for the ultimate benefit of our shareholders.

Thank you for joining us this morning.

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