Mar 4, 2008
Executives
Jo Etta Bandy - Sr. VP, Corporate Communications Parker S.
Kennedy - Chairman and CEO Curt G. Johnson - President, First American Title Insurance Company Dennis J.
Gilmore - COO Frank V. McMahon - Vice Chairman and CFO
Analysts
Darrin Peller - Lehman brothers Nathaniel Otis - Keefe, Bruyette & Woods Nikolai Fisken - Stephens Inc.
Operator
Good morning, and welcome to the First American Fourth Quarter and Year-End Financial Results Conference Call. All participants are in a listen-only mode.
[Operator Instructions]. A copy of the today's press release and the accompanying presentation are also available at the company's website at www.firstam.com/investor.
Also, the recording will be available for replay from the company's Investor Website for a short time. You may call area code 203-369-1094.
We will now turn the call over to your conference host, Ms. Jo Etta Bandy, Senior Vice President of Corporate Communications.
Ms. Bandy, you may begin.
Jo Etta Bandy - Senior Vice President, Corporate Communications
Thank you, and good morning, everyone. At this time, we would like to remind listeners that management's commentary and responses to your questions may contain forward-looking statements such as those described on page two of the accompanying slides and other statements that do not relate strictly to historical or current facts.
The forward-looking statements speak only as of the date they are made and the company does not undertake to update forward-looking statements through reflect circumstances or events that occur after the date the forward-looking statements are made. Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward-looking statements.
Factors that could cause the anticipated results to differ from those described on the forward-looking statements are described on slide two. As indicated on slide three, management's commentary and responses to your questions also contained certain financial measures that are not presented in accordance with Generally Accepted Accounting Principle.
The company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In the slide presentation, these non-GAAP financial measures have been presented with and reconciled to the most directly comparable GAAP financial measures.
Investors should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Joining us today the call will be Chairman and Chief Executive Officer, Parker Kennedy; Frank McMahon, Vice Chairman and Chief Financial Officer; Dennis Gilmore, First American's Chief Operating Officer; and Curt Johnson, President of our First American Title Insurance Company.
During the call, we will be referring a slide presentation, which is currently available on First American's website at firstfam.com/investor. At this time, it is my pleasure to turn the call over to Park Kennedy.
Parker S. Kennedy - Chairman and Chief Executive Officer
Thank you, Jo, and thank you to everyone on the call. Directing your attention to slide five of our presentation, included among First American's recent highlights was the January 15 announcement of the division of First American into a financial services company and an information solutions company.
This process is well underway and we continue to anticipate completion in the third quarter of this year. The company's cash flow from operations for the quarter was strong at $202.1 million, 5% ahead of the same quarter last year.
First Advantage announced very strong earnings with 07' EBITDA 13.7% ahead of 06'. We saw excellent growth in our international title operations and revenues exceeded $435 million in 07'.
Our title order volumes rose sharply in January of ‘08, up 33% in December. Directing your attention to page six, our consolidated revenues for the quarter were down 14.3% when compared to the same period of 2006.
Our financial services revenue dropped 18.6% when compared to Q4 of ‘06. Revenues in the information technology businesses dropped only 2.4% compared in Q4 of ‘06.
Our consolidated Q4 after-tax loss was $67.5 million. This amount reflects an unusually high effective tax rate, and where our normal rate applied our unadjusted after tax earnings would have been $49.3 million.
In our January 15 spin-off announcement, we stated that the company after excluding extraordinary gains and losses expected to be marginally profitable for this quarter. As shown on page seven, our adjusted after-tax earnings were $22 million for the quarter or $0.24 per share.
At this time, I would like to introduce Curt Johnson, our Title Insurance Company President to discuss our title segment.
Curt G. Johnson - President, First American Title Insurance Company
Thank you, Park. 2007 was a very challenging year for the title insurance industry.
It was also a year of significant changes for our company. The changes include a newly structured operating platform, consolidation of our various operating brands, establishing the new centralized title and escrow production division, a change in approach towards our agency relationships, and a basic transformation of the title insurance company.
All of these and other changes were initiated against the backdrop of a rapidly declining real estate market in an unprecedented claims environment. We were very disappointed with the results for the year, but we remain very optimistic about our future opportunities given the changes and improvements, which we completed in 2007.
In 2007, mortgage originations declined by more than 14%. We are proud of the fact that our operating revenues fell by only 9%.
Direct revenues fell by 5%, while agency revenues fell by 13%. The relatively low decline in our direct revenues shows the strength of our national commercial services division, our default in the international segments.
We had intense focus on reducing our labor force in line with declining revenue and order counts in 2007. In 2007, our open orders were 5.7% lower than in 2006 and closed orders were 9.1% lower.
We reduced our personnel by 2996 net employees during 2007, including nearly 1100 in the fourth quarter. We did experience significant cost associated with the separation of these employees.
In 2007, we terminated 19% of all of our employees who had a base compensation of $100,000 or more. In spite of the declining real estate market, the most challenging part of 2007 was the unprecedented claims environment and higher than expected operating expenses.
As you can see on page nine of the presentation, our operating expenses had increases in both quarter-over-quarter and year-over-year measures. Dennis Gilmore will describe our aggressive strategies related to improvement in both of these areas for 2008 in just a moment.
The fourth quarter shows an unprecedented in both orders and revenue. In the fourth quarter of 2007, mortgage originations were 34% lower than the fourth quarter of 2006.
Our open orders were down 26% and closed orders were down 29%. Direct revenue was down 18% and agency revenue was down 21%.
As you can see on page ten of the slide presentation, we took a significant adjustment to our claims reserves in the fourth quarter. Paid and known claims in the fourth quarter were even higher than expected.
The majority of the losses of continued to come from policy years 2004 to 2006. I'm happy to advise you that our claims experience in January and February of this year is improving compared to both fourth quarter and to 2007 overall.
Page 11 shows the summary of our fourth-quarter reserve strengthening moves as well as other information related to specific policy year losses. On page 12 you will feel we’ve provided an in-depth claims review by cause, severity, sales channel, and policy type for 2007.
Our National Commercial Services division had another outstanding year in terms of net profitability and [inaudible] performance. The liquidity and credit issues last year created challenges for many of our commercial customers.
However, our National Commercial Services division is still positioned for market leadership in the Commercial segment. Page 14 reviews Commercial revenues and order activity for the quarter and the year.
And I am happy to report that we have experienced positive commercial order volumes as we have moved into 2008. Page 15 shows the very clear declining trend for order counts for 2007.
The fourth quarter levels were over 20% lower than the first quarter levels of 2007. Volumes for January and February have improved significantly as Park mentioned, but at the same time we do continue to reduce our personnel levels.
Finally, on page 16 you'll see a comparison of First American with our primary competitor for the past two years. We’ve been consistently improving our performance compared to this competitive prior to the fourth quarter.
Our expenses related to separation and other one-time expenses produced very unfavorable gap during the fourth quarter. This is absolutely an acceptable to us and we know that it is very disappointing to you.
Our management team is very excited about the opportunity to work directly with Dennis Gilmore as our CEO in these challenging and exciting times. Dennis is well prepared to support our initiatives and he will now explain our strategies for improvement in 2008.
Dennis J. Gilmore - Chief Operating Officer
Thank you, Curt. As Park mentioned, on January 15 we announced that First American will be divided into two separately traded public entities.
One of those, the Financial Services Company, is comprised of the title insurance segment, specialty insurance segment, and the trust and banking businesses. I’m excited about the opportunity the Board has given me to lead the Financial Services Company.
It's no secret that 2007 was a challenging year for our title company. 2007 saw the accelerated down cycle of the realistic markets, magnified during the second-half by the unprecedented disruption in the credit markets.
Even though we’ve seen a material increase in order counts through January, we believe the operating environment will remain challenging in 2008. Curt Johnson and his leadership team have been very focused on confronting these challenging… and I look forward to working closely with them to achieve our improved operating results.
The increased focus we'll drive from the spin-off combined with the additional cost savings initiatives we have implemented will position to title company to accept 2008 as a stronger company. Going forward, our title company must change its business model to one with lower overhead expenses and greater operating efficiencies.
We are keenly focused on profitability. In our title operations, we have instituted a performance improvement plan focused on personnel cost, operating cost, and agency profitability.
In 2007, we made significant progress towards lowering our personnel costs, but we have still much work to do. We have instituted several major steps to rationalize our cost structure.
First, we intend to eliminate an additional 700 positions during the first quarter of 2008. In January, we reduced our headcounts by 300 and we will monitor our progress on a weekly basis.
Despite a sharp increase in January title orders, we remain committed to reducing headcount. Second, we’ve instituted a 2008 bonus plan to better align our incentives with our operating management goals of the corporation.
Next, we intend to implement a salary reduction program for our highly compensated employees beginning in the second quarter and continuing to the end of the year. In addition to personnel expense reductions, there are significant cost savings opportunities in other areas of the business.
By the third quarter of 2008, we intend to close an additional 200 offices and we've also implemented a program to gradually sell most of the 120 company-owned properties. Most of these properties are small offices and will not have a material impact on our capital position, but we believe the capital could be better deployed elsewhere.
In 2007, we began rolling out a program to consolidate our treasury management activities. As of December 31, 44% of our title offices use our centralized treasury services.
We expect by the third quarter of 2008 all the First American branded retail offices will be on this program, which will result in a dramatic reduction in our banking and wiring fees and improved yield on our assets. First America's technology and offshore capacities are strategic competitive advantages and they have not been fully utilized.
Today, the title company has approximately 2,300 employees offshore as well as key vendor relationships. We will act aggressively to take advantage of our offshore efficiencies within our centralized production operations.
We’ve installed new senior executives to lead the title company's overall offshore efforts. Leveraging our technology and offshore capacity is one of our most important strategic initiatives.
The last major objective is to improve the profitability of our agency business. We have installed a new senior executive to lead the company's overall agency strategy.
We are currently performing a profitability analysis on all agents, which will examine the agent’s split, claims experience, profitability, and other factors. If the agent does not meet our required thresholds, we will either renegotiate the agency split, cancel the agreement, or take other appropriate actions.
Many agency relationships have already been terminated, and we are especially focused on our agency business in the western states, which have a relatively unfavorable agency split. To summarize, we are changing the way we do business.
We will be a leaner, more efficient company moving forward, and in this challenging environment we are acutely focused on cost reductions. We have a senior leadership team that will be held accountable for accomplishing our specific objectives.
We have metrics in place to monitor our progress and we have aligned our incentive structure with the goals of the company. We have an outstanding management team in place and I'm confident that we will achieve our objectives.
I'd now like to turn… introduce Frank McMahon who will comment on the Information Solutions Company.
Frank V. McMahon - Vice Chairman and Chief Financial Officer
Thank you, Dennis. I would now like to talk about our key strategies for the new Information Solutions Company.
We only have two key strategies, one will be to accelerate the product development activities and the second will be to improve operational efficiencies. Product development will allow us to enhance the value of our products and more importantly extend our client base.
When we emerge as a standalone public company, we will do so with a one-firm mentality and culture. This mindset will allow us to, number one, better identify the needs of our clients and offer solutions-based products; number two, provide for greater opportunity for our employees; and number three, allow us to improve margins and earnings by realizing cost savings from the consolidation of administrative functions.
We will be presenting a comprehensive review of the Information Solutions Company later this year. And I'd now like to discuss the fourth quarter results beginning on page 18.
Our Information Technology segment, which will comprise the Information Solutions Company, reported pre-tax income of $181.5 million in the fourth quarter of 2007. However, included in that pretax amount are several gains and losses on investments.
Excluding those gains would result in pretax income for the Information segment up $81.7 million, a 14% decline from the third quarter and a 21% decline from the fourth quarter of '06. Page 19 reflects the pro forma adjusted results for the Information Solutions Group, factoring in additional corporate expenses that we anticipate as a separate public standalone company.
EBITDA for 2007 was $482 million, a 1.5 increase from 2006. Overall, our Information business has experienced difficult market conditions during the second half of '07.
However, I believe management responded well to changing conditions and will continue to implement the necessary changes to maintain acceptable margins while investing in the business to stimulate topline growth. Let me discuss each segment in a little more detail.
Our mortgage information segment, which consists of our flood determination tax and default related businesses had a difficult quarter due to meaningful declines in volumes. Our tax and flood business experienced an $11 million reduction of revenues or 12% relative to the third quarter.
$6.3 million of this was due to volume declines and $5.4 million was due to lengthening of the deferred tax service revenue. Volume has recovered thus far in 2008 however, with our flood orders up 23% in January from December levels.
Both tax and flood volume levels in February continue to increase over January levels. Our default revenue increased 8% sequentially and continues to be strong in the first quarter.
Our expense base increased in the quarter $4.4 million on a sequential quarter basis with 60% of that increase coming from higher cost in default and 40% of the increase due to the Proxix acquisition. Actions taken in the second half of last year by Barry Sando and his team are expected to resolve in an additional savings of $2 million in 2008, and there are additional actions this year that are expected to result in another $8 million of savings.
These initiatives include office consolidations and the elimination of all temporary help. Based on the recovery in volumes thus far in the first quarter and the cost-cutting initiatives underway, we believe that margins for these businesses will improve to the 15% to 20% range in the first quarter of 2008.
Our property segment, which includes our data and analytics group, collateral valuation businesses, and First [inaudible] operations had a reasonably good quarter given the environment. Most of the businesses in this segment experienced volume declines, with CoreLogic; Data Trace, our title plan business; Data Tree, our document imaging business down 10%, 11% and 12% respectively on a sequential quarter basis.
Like many of our other businesses however, volume trends thus far this year are encouraging. January volumes increased over 20% from December and continue to increase in February.
New client wins are also resulting in higher volumes. We had two large clients hired to help them analyze their loan portfolios for risk management and marketing purposes.
We are also experiencing market share gains due to ongoing improvements in our ADM products. In fact, three large customers recently moved us into the leading positions in their automated valuation cascades, which will result in increased revenues.
Offsetting these positive trends is the ongoing lack of activity in our securitization business. The good news for us is that we dominate this business.
The bad news for us is that non-agency issuance are at seven-year lows and are off nearly 90% from the second quarter of '07. A real bright spot in the quarter was the job that George Livermore and his team did managing expenses.
Expenses declined $21 million on a sequential quarter basis or 14%. Our team was quick to respond to changing market conditions, reducing headcount by 260 people, which will result in annualized savings of $25 million.
We expect to see $10 million of this $25 million in 2008. As previously announced, First Advantage had a very successful quarter both operationally and financially.
Anand Nallathambi and his team are doing a fine job executing on their plans. From a financial standpoint, some well executed and well timed asset sales resulted in pretax gains of a $117.8 million.
From an operational perspective, the company posted good results given the challenging market conditions that impacted their lender segment. The employer segment, multifamily and investigative and litigation support segments posted good revenue growth fueled in part by a very strong international operations.
First Advantage overall had strong cash flow in the quarter, and cash provided by operating activities increased 43% relative to the fourth quarter of '06. I would now like to briefly discussed capital management.
Free cash flow in the quarter with $120.6 million, a decrease of 6% from the last year. For the full year of '07, free cash flow was $351 million, a 6% increase over 2006 levels.
Our debt-to-total capital decreased in the quarter to 21.6%, primarily due to debt repayment at First Advantage. At this point, we do not plan on repurchasing shares until we see a meaningful improvement in the margins of our financial services businesses or generate cash from sale of non-core assets.
With that, we'd now like to open it up for questions. Question and Answer
Operator
[Operator Instructions]. Our first question comes from Darrin Peller, Lehman brothers.
Darrin Peller - Lehman brothers
Thank you. The higher reserves level, the higher plan… your provision number being up I think it was about $122 million that you classified as an excess reserve or reserve build.
I think you commented it was associated with more of the '02 through '04 years. I guess can you… I am sorry, '04 through '06 years.
Can you comment on now where you think your reserve is both for those years? I mean are you actually now reserved at around 7.5% for those years?
And then, also on the prior years, it looks like you laid out the claims between 4% to 5%… or maybe 4% to 6%. Do you think those might need some sort of reserve build in the future?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
Darrin, it's Frank McMahon. I don't know if you've seen our slide presentation, but we had given the ultimate loss ratios by policy year.
Darrin Peller - Lehman brothers
Yes, I’m looking at that.
Frank V. McMahon - Vice Chairman and Chief Financial Officer
I had indicated that a very significant amount of that strengthening, close to 90% related to '04, '05 and '06 with a big... large component of that 90% being '05 and '06.
So we’ve provided the ultimate and I would just caution you though, when you do those comparisons understand that the denominator is different for different companies. So you can't compare our ultimates to Fidelity unless you add…
Darrin Peller - Lehman brothers
That's correct.
Frank V. McMahon - Vice Chairman and Chief Financial Officer
You have to take their escrow revenue and add it to their denominator. So...
but what we have shown is ultimate loss ratios for 2006 is 7%, for 2005 is 7.8% and for 2004 is 6.2% and we believe those compare favorably to other industry participants.
Darrin Peller - Lehman brothers
Right. Thanks, I saw that.
But the data that shows the '03, '02, ’01 years still shows losses at about 4.6%, 4.8%, 5.4%. I guess the question is, so far that's 4.6 and 5.4, etcetera, but… I mean as we have seen in the past the '04 through '06 years came up I think for Fidelity National about two quarters ago or one quarter, they had a reserve build because of those years...
those earlier years. And so are you being prudent about those now with your reserves or should we expect to see something down the road with those… with regards to bringing higher provisions for those years?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
Well, we… our experience would show that in the first five years of a policy year you do have a very strong ability to analyze what the ultimate would be and you don't get... you don't tend to get much variation after you have those years developed four or five years in.
We did not see material adverse developments in those years in 2007 and both our outside and in our in-house actuary we are very comfortable with the numbers based on the historical development in patterns.
Darrin Peller - Lehman brothers
Okay. So I mean should we be using around 6.5% to 7.5% sort of provision range for the next quarter or two?
Dennis J. Gilmore - Chief Operating Officer
Yes, Darrin. This is Dennis Gilmore, yes, use 7%.
Darrin Peller - Lehman brothers
Okay. Thank you.
And then just real quickly, can you just explain the average speed for order flows, it increased pretty significantly, I think it was 16% to 1911? And it seems like the commercial revenue is down to some extent or at least the orders were down.
What was the driver? Was it default management business or what was the driver of the actual increase?
Curt G. Johnson - President, First American Title Insurance Company
Yes, Darren, this is Curt Johnson. It was the commercial mix and the declining residential mix and the even though the commercial mix was off it was still good.
So it was just the commercial mix of business relative to the universe.
Darrin Peller - Lehman brothers
Okay. Thanks guys.
Curt G. Johnson - President, First American Title Insurance Company
Thank you.
Operator
Our next question comes from Nate Otis, KBW.
Nathaniel Otis - Keefe, Bruyette & Woods
Good morning, gentlemen.
Parker S. Kennedy - Chairman and Chief Executive Officer
Hi, Nat.
Nathaniel Otis - Keefe, Bruyette & Woods
Couple of quick things. First, can you give a little bit more color, in your press release you talked about $7.8 million due to new acquisitions in personnel cost line in the title business.
Just a little more color on that.
Curt G. Johnson - President, First American Title Insurance Company
Yes, these are... these would be very small acquisitions that were completed in the last 12 months or in some places they were buy-ins of minority positions.
So it's not material at all. Probably, the most significant of that would have been actually an escrow company, not a title company in Southern California that we owned 50% of and did not consolidate and now we own a 100% of that.
Dennis J. Gilmore - Chief Operating Officer
This is Dennis. I will add on to that.
In 2007, we set out a strategy to de-emphasize acquisition activity in the title company. We are going to continue with that strategy moving forward.
We are focused on the structure now and so we think we have got the necessary geographic coverage.
Nathaniel Otis - Keefe, Bruyette & Woods
Okay. Great.
Then just following on for kind of expense run rate, in the mortgage insurance business… excuse me the mortgage information business, you talked about 8 million in annualized savings in '08. Any run rate going forward?
Any color on how we could see that coming in through the year from a quarterly standpoint?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
I would say it's going to be relatively balanced. We've taken some actions already this year.
We consolidated one of our businesses that was on the East Coast, moved them into our Dallas facility. So we are going to...
we already have... we've already initiated some actions, but we have others that will be over the balance of the year.
So I think probably the safest assumption is assumed that that happens throughout the year on kind of a continuous basis.
Nathaniel Otis - Keefe, Bruyette & Woods
Okay. And just last question, more on net realized gains.
On slide 28, you kind of gave a little bit of color with title property and First Advantage. Certainly, first advantage I think that's probably the dealer track holdings.
If you add the segments up there it comes out to be about 35 million and you refer in your press release about 26.2 in realized gains… net realized gains. Any idea where the differential is there?
Is that in the mortgage information or just any other color there to get re-consolidated?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
The difference would really be at corporate.
Nathaniel Otis - Keefe, Bruyette & Woods
Okay.
Frank V. McMahon - Vice Chairman and Chief Financial Officer
We didn't break our corporate separately.
Nathaniel Otis - Keefe, Bruyette & Woods
Okay. All right.
Thank you.
Operator
[Operator Instructions]. Our next question is coming from Nik Fisken of Stephens.
Nikolai Fisken - Stephens Inc.
Hey. Good morning, everybody.
Parker S. Kennedy - Chairman and Chief Executive Officer
Good morning, Nik.
Nikolai Fisken - Stephens Inc.
What was the current book value for title?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
We will be filing… the 10-K will show a book value of just over $32 for the company. We are not going to disclose book value.
There is not... I think that probably the best way to get there, Nik, is just to take the number that we gave on the January 15 presentation, and we did disclose obviously about the fourth-quarter results and you can kind of do a roll-forward.
And I can help you do that offline, but that's how you get there.
Nikolai Fisken - Stephens Inc.
Okay. And can you walk us through the closing ratios on orders received in Q4?
How much... we've heard from other industry participants that closing ratios have come off quite a bit here as of late?
Dennis J. Gilmore - Chief Operating Officer
This is Dennis. Closing ratios at the end of '04 were 72%, it was strong, but going into the first quarter we are looking at a lower closing ratio.
I think the closing ratio will be closer to the 60% range because of the make-up of the orders. We are clearly getting an uptick in our order counts right now and they are continuing to January and February, but just to make up the orders highly concentrated in refinances I think the closing ratios will be low.
Nikolai Fisken - Stephens Inc.
[inaudible] below 60?
Dennis J. Gilmore - Chief Operating Officer
It's a speculation at this point. I think in the 60… low 60s that would probably be the best answer.
Nikolai Fisken - Stephens Inc.
Okay. And on the 482 of '07 EBITDA for Info Solutions, given the fourth quarter performance can you just give us or maybe just talk around it why that 482 would increase in '08?
Parker S. Kennedy - Chairman and Chief Executive Officer
Well, we actually are off to a good start to the year, but one-and-half months doesn't make a year. So I want to caution you there.
But as I mentioned, most of our businesses are seeing order increases. We think we can be more efficient operationally.
So we'll be providing more details as the year goes forward, but our hope is to show growth in EBIDTA year-over-year.
Nikolai Fisken - Stephens Inc.
And are you guys going to give guidance on Info Solutions at some point?
Parker S. Kennedy - Chairman and Chief Executive Officer
As we get closer to being a separate company we will.
Nikolai Fisken - Stephens Inc.
Yes, I think you guys had talked about doing an analyst day. Is that still planned for the next couple of months or so?
Parker S. Kennedy - Chairman and Chief Executive Officer
We will be having in analyst day at some point. We have not set the date at this point.
Nikolai Fisken - Stephens Inc.
Okay. And last question I've got is, post the split can you give us a range of options that are being considered on what you're going to do with First Advantage?
Parker S. Kennedy - Chairman and Chief Executive Officer
Really, I think you and the investors probably understand what the options are and we really are not going to comment beyond what we said previously.
Nikolai Fisken - Stephens Inc.
Okay. Thanks.
Operator
Your next question is coming from Jason Deluke [ph], Piper Jaffrey.
Unidentified Analyst - Piper Jaffray
Good morning. Thanks for taking my question.
I was just wondering on the title claims, are you noticing any major difference between the claims you've seen in the agency channel versus the direct channel?
Curt G. Johnson - President, First American Title Insurance Company
We are in... approximately 60% of our agents… came from agents in 2007.
That's well aside of the historic norms what we're used to. And of particular concern, we had some geographic concentrations of agents in California and Florida, Ohio, Michigan, Pennsylvania and New York.
So the policy years, '04 to '06, which continued to be troublesome also continued to be much more heavily loaded with agent claims and direct claims from what we've seen historically.
Dennis J. Gilmore - Chief Operating Officer
And I'll.... this is Dennis, I've a comment.
We're not satisfied with our claims distribution right now, it's 60, 40; 60 being agent right now. It doesn't match our book of revenue for the business right now.
So we're... again I made a comment earlier.
We're very focused on our agency business right now from an overall perspective. We're looking at our total book of agency business from a profitability standpoint, a split standpoint, the claims experience standpoint, and we're going to take the necessary actions to correct it.
Unidentified Analyst - Piper Jaffray
Okay. That actually was my next question.
I was just wondering, the actions you are taking in the agent channel right now, and how that's.... the stuff is already baked in the cake for the policies you've already put out there.
But maybe going forward is there going to be... can you get back to the...
like a normal split between agent and direct in terms of the claims?
Dennis J. Gilmore - Chief Operating Officer
Yes. Let me answer that.
This is again Dennis. It's difficult to project exactly what the splits will be as we move forward through this process.
But the agency is a very important channel to us. It is a very key channel to us, but we have to make sure it's the right distribution for us, the right profitability mix.
So again, we're going to be very focused on our agents, the profitability, the splits, the claims, the overall experience of that agent. We are highly focused on our western agents right now, and also our large national lender agents that have a concentration doing lender business.
We've recently cancelled one of our largest lender agents in January. And again just overall, we're going to take a very hard strong look at this book of business.
Curt G. Johnson - President, First American Title Insurance Company
Yes. Jason's this is Curt.
Just to add to that, as Dennis says we're laser focused on it now, but we really started toward… from the second quarter on of last year delving into this and as you say, what we're seeing from '04 to '06 is baked in the cake. But we started aggressively with this procedure last year.
We've met with a number of agents that have been problematic and we continue to do so as we move into 2008.
Unidentified Analyst - Piper Jaffray
Okay. I appreciate that color.
And then just on the closing ratio for... we saw the big jump in the open orders for January.
It looks like February was... is going to be down from… somewhat from there, but you kind of touched on this, you think that is going to be close to a 60% closing ratio for the first quarter.
But are you seeing a part of that because… you have a lot of refis and the closing ratio tend to be lower in that, but are you seeing anything… maybe it's too early, but have you seen anything in terms of maybe underwriting standards have tightened up so much that fewer of these things are… of these mortgages are finally getting approved and that's impacting the closing ratio or is it still more of just the fact that it's just a lot of refi activity and these open orders take a couple of months to close?
Dennis J. Gilmore - Chief Operating Officer
Let me comment on that. This is Dennis.
Let's go back into first quarter of '07, our closing ratios were approximately 67%, and going into the first quarter of '08 we think the closing ratios… again I think low-60s is probably guidance I would give you and it is directly attributed to the quarter mix, high concentration of refinance. If we look at the book and how it's built over the last two months, first two weeks of January are very slow, kind of a very slow period after the holiday period and then started building.
A lot of that had to do obviously with the rate cuts and stimulus package that have been put in place. Now we've been building all the way through mid-January into February, but I think we have to be cautious.
We have to be cautious because I think they tightened down underwriting standards, no question. And we don't have the experience yet on how these loans will ultimately close.
So I think the book of business will be a very high quality book of business from a claims perspective, we’ve just got to get some time under our belt to see actually how it closes right now.
Curt G. Johnson - President, First American Title Insurance Company
And we would also have add that… this is Curt, the appraisals are tending to have a different timeline than they were a year ago today and it tends to be affecting the closing ratios also.
Unidentified Analyst - Piper Jaffray
I believe like one to two months lag was typical, I mean could you... what are you expecting now?
Dennis J. Gilmore - Chief Operating Officer
I think we shouldn't really say at this point that we think that the time to close will be much different than it has been historically. It will be typically in that one to three months depending on the order.
So I haven't really seen anything that's going to drive the timing on the closing materially different. But the underwriters have… I mean the mortgage companies have clearly tightened down their underwriting perspectives.
Unidentified Analyst - Piper Jaffray
All right. Thank you very much.
Operator
Next question comes from Darrin Peller of Lehman Brothers.
Darrin Peller - Lehman brothers
Thanks, just a quick follow-up on the claims. If you back out $122 million that you are classifying as a reserve strengthening for prior years, you’re let with a current quarter of provision that's under 5%.
But it seems like you're still guiding towards that 7% for future quarters. How can we be comfortable that’s not too low?
Frank V. McMahon - Vice Chairman and Chief Financial Officer
The provision for the entire year is for the policy as of 2007 is 6.4, so we're providing at a higher level than 6.4 for the first three quarters. And so, the balance there is really to get you to that 6.4 for the year 2007 just for that year.
The other thing we should mention is that we did see a very noticeable difference in our incurred claims and paid claim patterns related to policy year 2007 through 2007. The first half of the year… that policy year did not develop well and it showed meaningful improvement in the third and fourth quarter.
I think it's a clear indication that you were seeing a change in underwriting standards and the quality of loans that were being made in the quality of the loan closing process.
Darrin Peller - Lehman brothers
Okay. Real quickly, can you just provide us with any update on any regulatory issues?
I know that there were some headlines in the Journal recently regarding some lawsuits. There was some… I guess maybe anything on the AG’s investigation of your appraisal unit, anything else?
Parker S. Kennedy - Chairman and Chief Executive Officer
The Attorney General in New York, Andrew Cuomo, has brought a lawsuit against our company and it involves appraisal process… the appraisal process and the product that we are offer. We don't comment on currently pending litigations.
So it is probably best to just leave it at that except to say that we don't see that that action has any foundation in fact or in law. With regard to the antitrust case that involves the rating structure in the State of New York, there again our policy is not to comment on pending litigations.
But I can say that while our lawyers are continuing to evaluate the case, we believe at this time that this attack on our industry is without merit, and we and the other underwriters who operate in New York intend to vigorously oppose that lawsuit.
Darrin Peller - Lehman brothers
All right. Thanks, guys.
Parker S. Kennedy - Chairman and Chief Executive Officer
Thank you.
Curt G. Johnson - President, First American Title Insurance Company
Thank you.
Operator
Our next question is coming from Nate Otis, KBW.
Nathaniel Otis - Keefe, Bruyette & Woods
Two quick follow-up questions. One, just on that agent profitability assessment, any idea how long that's going to be until it actually completes?
Dennis J. Gilmore - Chief Operating Officer
This is Dennis. I think it's an ongoing process first of all.
It's how we are going to manage the business going forward. So there is no really start and stop to it.
We're coming out very aggressively on the process right now, the program. We’ve assigned a new senior director in our company… a senior executive to lead the effort for our overall [agency strategy across-the-board and we will see impact you on the first, second and third quarters I'm sure due to these efforts.
Nathaniel Otis - Keefe, Bruyette & Woods
And then also a question… on page 17 you gave a good detailed assessment of where your margin initiatives are… basically what the expenses are coming out. The implication is that for headcount it looks like in the past it's been about 50,000 per head reduced maybe in '07 and maybe for every office somewhere in the 80,000 to 100,000 removed.
Is that something we can expect going forward since… given that headcount reductions in the first quarter and future office closings?
Dennis J. Gilmore - Chief Operating Officer
Yes, let me comment on that again. When we started aggressively lowering our headcounts early '07, we had a lower average salary as we were going to the lower paid people.
As we ended the year, our staff average reduction was very close to the numbers you gave. As we move into '08, I think it will be at that number or even potentially higher as we continue to delayer the management levels of the company.
Curt mentioned earlier that we’d reduced through '07 19% of our higher comp people over 100,000. We're going to continue to just look at our overall cost structure from personnel aspects.
On the office, that is the experience for '07 and that has a little volatility depending on what we're focusing on and what we’re concentrating on. So that'll change a little bit per quarter… quarter-over-quarter depending on what we consolidate over the next three quarters.
That’s a good working rule to go forward with right now.
Nathaniel Otis - Keefe, Bruyette & Woods
Okay. Great.
Thank you.
Operator
That's all the time that we have for questions today. At this time, I will now turn the call back to Mr.
Kennedy for closing remarks.
Parker S. Kennedy - Chairman and Chief Executive Officer
I want to thank everybody who was kind enough to join us on the call. We will talk to you soon.
Dennis J. Gilmore - Chief Operating Officer
Thank you.
Operator
Thank you, Mr. Kennedy.
This concludes this morning's conference call. We would like to remind our listeners that today's conference call is available for replay.
Please dial area code 203-369-1094. Copy of the press release announcing First American's fourth quarter results and the slide presentation are available on First American's website at www.firstam.com/investor.
The company would like to thank you for your participation. This concludes today's conference.
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