Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-Q
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| | |
þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
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| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-32630
FIDELITY NATIONAL FINANCIAL, INC.
______________________________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
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| | |
Delaware | | 16-1725106 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
601 Riverside Avenue, Jacksonville, Florida | | 32204 |
(Address of principal executive offices) | | (Zip Code) |
(904) 854-8100
___________________________________________________________________
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | |
Large accelerated filer þ | | Accelerated filer o | | Non-accelerated filer o | | Smaller reporting company o |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
The number of shares outstanding of the Registrant's common stock as of October 31, 2016 were:
FNF Group Common Stock 271,950,614
FNFV Group Common Stock 66,606,822
FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2016
TABLE OF CONTENTS
Part I: FINANCIAL INFORMATION
| |
Item 1. | Condensed Consolidated Financial Statements |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data) |
| | | | | | | |
| September 30, 2016 |
| December 31, 2015 |
| (Unaudited) | | |
ASSETS |
Investments: | | | |
Fixed maturity securities available for sale, at fair value, at September 30, 2016 and December 31, 2015 includes pledged fixed maturity securities of $332 and $342, respectively, related to secured trust deposits | $ | 2,476 |
| | $ | 2,558 |
|
Preferred stock available for sale, at fair value | 321 |
| | 289 |
|
Equity securities available for sale, at fair value | 432 |
| | 345 |
|
Investments in unconsolidated affiliates | 620 |
| | 521 |
|
Other long-term investments | 103 |
| | 106 |
|
Short-term investments, at September 30, 2016 and December 31, 2015 includes short-term investments of $193 and $266, respectively, related to secured trust deposits | 523 |
| | 1,034 |
|
Total investments | 4,475 |
| | 4,853 |
|
Cash and cash equivalents, at September 30, 2016 and December 31, 2015 includes $412 and $108, respectively, of pledged cash related to secured trust deposits | 1,061 |
| | 780 |
|
Trade and notes receivables, net of allowance of $42 and $32, at September 30, 2016 and December 31, 2015, respectively | 547 |
| | 496 |
|
Goodwill | 5,047 |
| | 4,760 |
|
Prepaid expenses and other assets | 649 |
| | 615 |
|
Capitalized software, net | 582 |
| | 553 |
|
Other intangible assets, net | 1,020 |
| | 969 |
|
Title plants | 395 |
| | 395 |
|
Property and equipment, net | 610 |
| | 510 |
|
Total assets | $ | 14,386 |
| | $ | 13,931 |
|
LIABILITIES AND EQUITY |
Liabilities: | | | |
Accounts payable and accrued liabilities | $ | 1,306 |
| | $ | 1,283 |
|
Notes payable | 2,754 |
| | 2,793 |
|
Reserve for title claim losses | 1,602 |
| | 1,583 |
|
Secured trust deposits | 922 |
| | 701 |
|
Income taxes payable | 73 |
| | 45 |
|
Deferred tax liability | 621 |
| | 594 |
|
Total liabilities | 7,278 |
| | 6,999 |
|
Commitments and Contingencies: | | | |
Redeemable non-controlling interest by 21% minority holder of ServiceLink Holdings, LLC | 344 |
| | 344 |
|
Equity: | | | |
FNF Group common stock, $0.0001 par value; authorized 487,000,000 shares as of September 30, 2016 and December 31, 2015; outstanding of 271,896,091 and 275,781,160 as of September 30, 2016 and December 31, 2015, respectively, and issued of 283,973,901 and 282,394,970 as of September 30, 2016 and December 31, 2015, respectively | — |
| | — |
|
FNFV Group common stock, $0.0001 par value; authorized 113,000,000 shares as of September 30, 2016 and December 31, 2015; outstanding of 66,636,822 and 72,217,882 as of September 30, 2016 and December 31, 2015, respectively, and issued of 80,581,675 and 80,581,466 as of September 30, 2016 and December 31, 2015, respectively | — |
| | — |
|
Preferred stock, $0.0001 par value; authorized 50,000,000 shares; issued and outstanding, none | — |
| | — |
|
Additional paid-in capital | 4,839 |
| | 4,795 |
|
Retained earnings | 1,629 |
| | 1,374 |
|
Accumulated other comprehensive earnings (loss) | 2 |
| | (69 | ) |
Less: treasury stock, 26,022,663 shares as of September 30, 2016 and 14,977,394 shares as of December 31, 2015, at cost | (595 | ) | | (346 | ) |
Total Fidelity National Financial, Inc. shareholders’ equity | 5,875 |
| | 5,754 |
|
Non-controlling interests | 889 |
| | 834 |
|
Total equity | 6,764 |
| | 6,588 |
|
Total liabilities, redeemable non-controlling interest and equity | $ | 14,386 |
| | $ | 13,931 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per share data) |
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Unaudited) | | (Unaudited) |
Revenues: | | | | | | | |
Direct title insurance premiums | $ | 556 |
| | $ | 524 |
| | $ | 1,518 |
| | $ | 1,488 |
|
Agency title insurance premiums | 713 |
| | 647 |
| | 1,934 |
| | 1,685 |
|
Escrow, title-related and other fees | 950 |
| | 852 |
| | 2,636 |
| | 2,517 |
|
Restaurant revenue | 273 |
| | 349 |
| | 858 |
| | 1,084 |
|
Interest and investment income | 29 |
| | 30 |
| | 96 |
| | 93 |
|
Realized gains and losses, net | (4 | ) | | (10 | ) | | 5 |
| | (19 | ) |
Total revenues | 2,517 |
| | 2,392 |
| | 7,047 |
| | 6,848 |
|
Expenses: | | | | | | | |
Personnel costs | 732 |
| | 680 |
| | 2,091 |
| | 1,993 |
|
Agent commissions | 545 |
| | 495 |
| | 1,473 |
| | 1,279 |
|
Other operating expenses | 514 |
| | 476 |
| | 1,439 |
| | 1,424 |
|
Cost of restaurant revenue | 237 |
| | 302 |
| | 727 |
| | 921 |
|
Depreciation and amortization | 113 |
| | 102 |
| | 315 |
| | 306 |
|
Provision for title claim losses | 70 |
| | 65 |
| | 190 |
| | 185 |
|
Interest expense | 35 |
| | 34 |
| | 102 |
| | 97 |
|
Total expenses | 2,246 |
| | 2,154 |
| | 6,337 |
| | 6,205 |
|
Earnings from continuing operations before income taxes and equity in losses of unconsolidated affiliates | 271 |
| | 238 |
| | 710 |
| | 643 |
|
Income tax expense | 95 |
| | 81 |
| | 245 |
| | 219 |
|
Earnings from continuing operations before equity in losses of unconsolidated affiliates | 176 |
| | 157 |
| | 465 |
| | 424 |
|
Equity in losses of unconsolidated affiliates | (7 | ) | | (19 | ) | | (6 | ) | | (16 | ) |
Net earnings from continuing operations | 169 |
| | 138 |
| | 459 |
| | 408 |
|
Less: Net earnings attributable to non-controlling interests | 13 |
| | 6 |
| | 32 |
| | 20 |
|
Net earnings attributable to Fidelity National Financial, Inc. common shareholders | $ | 156 |
| | $ | 132 |
| | $ | 427 |
| | $ | 388 |
|
| | | | | | | |
Amounts attributable to Fidelity National Financial, Inc. common shareholders | | | | | | | |
Net earnings attributable to FNF Group common shareholders | $ | 163 |
| | $ | 150 |
| | $ | 423 |
| | $ | 396 |
|
| | | | | | | |
Net (loss) earnings attributable to FNFV Group common shareholders | $ | (7 | ) | | $ | (18 | ) | | $ | 4 |
| | $ | (8 | ) |
| | | | | | | |
Earnings per share | | | | | | | |
Basic | | | | | | | |
Net earnings per share attributable to FNF Group common shareholders | $ | 0.60 |
| | $ | 0.54 |
| | $ | 1.56 |
| | $ | 1.42 |
|
| | | | | | | |
Net (loss) earnings per share attributable to FNFV Group common shareholders | $ | (0.11 | ) | | $ | (0.24 | ) | | $ | 0.06 |
| | $ | (0.10 | ) |
Diluted | | | | | | | |
Net earnings per share attributable to FNF Group common shareholders | $ | 0.58 |
| | $ | 0.53 |
| | $ | 1.51 |
| | $ | 1.38 |
|
| | | | | | | |
Net (loss) earnings per share attributable to FNFV Group common shareholders | $ | (0.11 | ) | | $ | (0.24 | ) | | $ | 0.06 |
| | $ | (0.10 | ) |
| | | | | | | |
Weighted average shares outstanding FNF Group common stock, basic basis | 271 |
| | 277 |
| | 272 |
| | 278 |
|
| | | | | | | |
Weighted average shares outstanding FNF Group common stock, diluted basis | 279 |
| | 285 |
| | 280 |
| | 286 |
|
| | | | | | | |
Cash dividends paid per share FNF Group common stock | $ | 0.21 |
| | $ | 0.21 |
| | $ | 0.63 |
| | $ | 0.59 |
|
| | | | | | | |
Weighted average shares outstanding FNFV Group common stock, basic basis | 66 |
| | 76 |
| | 68 |
| | 81 |
|
| | | | | | | |
Weighted average shares outstanding FNFV Group common stock, diluted basis | 69 |
| | 78 |
| | 70 |
| | 84 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| |
| 2016 | | 2015 | | 2016 | | 2015 |
| (Unaudited) | | (Unaudited) |
Net earnings | $ | 169 |
| | $ | 138 |
| | $ | 459 |
| | $ | 408 |
|
Other comprehensive earnings (loss): | | | | | | | |
Unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) (1) | 6 |
| | (19 | ) | | 52 |
| | (30 | ) |
Unrealized (loss) gain on investments in unconsolidated affiliates (2) | (2 | ) | | (19 | ) | | 13 |
| | (24 | ) |
Unrealized gain (loss) on foreign currency translation (3) | 1 |
| | (2 | ) | | 6 |
| | (9 | ) |
Reclassification adjustments for change in unrealized gains and losses included in net earnings (4) | (2 | ) | | — |
| | — |
| | — |
|
Minimum pension liability adjustment (5) | — |
| | (4 | ) | | — |
| | (4 | ) |
Other comprehensive earnings (loss) | 3 |
| | (44 | ) | | 71 |
| | (67 | ) |
Comprehensive earnings | 172 |
| | 94 |
| | 530 |
| | 341 |
|
Less: Comprehensive earnings attributable to non-controlling interests | 13 |
| | 6 |
| | 32 |
| | 20 |
|
Comprehensive earnings attributable to Fidelity National Financial, Inc. common shareholders | $ | 159 |
| | $ | 88 |
| | $ | 498 |
| | $ | 321 |
|
| | | | | | | |
Comprehensive earnings attributable to FNF Group common shareholders | $ | 169 |
| | $ | 125 |
| | $ | 487 |
| | $ | 357 |
|
| | | | | | | |
Comprehensive (loss) earnings attributable to FNFV Group common shareholders | $ | (10 | ) | | $ | (37 | ) | | $ | 11 |
| | $ | (32 | ) |
_______________________________________
| |
(1) | Net of income tax expense (benefit) of $4 million and $(12) million for the three-month periods ended September 30, 2016 and 2015, respectively, and $33 million and $(18) million for the nine-month periods ended September 30, 2016 and 2015, respectively. |
| |
(2) | Net of income tax (benefit) expense of $(1) million and $(12) million for the three-month periods ended September 30, 2016 and 2015, respectively, and $8 million and $(15) million for the nine-month periods ended September 30, 2016 and 2015, respectively. |
| |
(3) | Net of income tax expense (benefit) of less than $1 million and $(1) million for the three-month periods ended September 30, 2016 and 2015, respectively, and $3 million and $(6) million for the nine-month periods ended September 30, 2016 and 2015, respectively. |
| |
(4) | Net of income tax benefit of $1 million for the three-month period ended September 30, 2016. |
| |
(5) | Net of income tax benefit of $2 million for the three and nine-month periods ended September 30, 2015. |
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fidelity National Financial, Inc. Common Shareholders | | | | | | |
| | FNF | | FNFV | | | | | | Accumulated | | | | | | | | |
| | Group | | Group | | | | | | Other | | | | | | | | Redeemable |
| | Common | | Common | | Additional | | | | Comprehensive | | Treasury | | Non- | | | | Non- |
| | Stock | | Stock | | Paid-in | | Retained | | Earnings | | Stock | | controlling | | Total | | controlling |
| | Shares | | $ | | Shares | | $ | | Capital | | Earnings | | (Loss) | | Shares | | $ | | Interests | | Equity | | Interests |
Balance, December 31, 2015 | | 282 |
| | $ | — |
| | 81 |
| | $ | — |
| | $ | 4,795 |
| | $ | 1,374 |
| | $ | (69 | ) | | 15 |
| | $ | (346 | ) | | $ | 834 |
| | $ | 6,588 |
| | $ | 344 |
|
Exercise of stock options | | 2 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16 |
| | — |
|
Treasury stock repurchased | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 11 |
| | (247 | ) | | — |
| | (247 | ) | | — |
|
Other comprehensive earnings — unrealized gain (loss) on investments and other financial instruments | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 52 |
| | — |
| | — |
| | (1 | ) | | 51 |
| | — |
|
Other comprehensive earnings — unrealized gain on investments in unconsolidated affiliates | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| | — |
| | 13 |
| | — |
|
Other comprehensive earnings — unrealized gain on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
|
Stock-based compensation | | — |
| | — |
| | — |
| | — |
| | 28 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
| | 44 |
| | — |
|
Shares withheld for taxes and in treasury | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) | | — |
|
Dividends declared | | — |
| | — |
| | — |
| | — |
| | — |
| | (172 | ) | | — |
| | — |
| | — |
| | — |
| | (172 | ) | | — |
|
Acquisitions of non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 14 |
| | 14 |
| | — |
|
Subsidiary dividends declared to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) | | — |
|
Net earnings | | — |
| | — |
| | — |
| | — |
| | — |
| | 427 |
| | — |
| | — |
| | — |
| | 32 |
| | 459 |
| | — |
|
Balance, September 30, 2016 | | 284 |
| | $ | — |
|
| 81 |
|
| $ | — |
| | $ | 4,839 |
| | $ | 1,629 |
| | $ | 2 |
| | 26 |
| | $ | (595 | ) | | $ | 889 |
| | $ | 6,764 |
| | $ | 344 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | |
| For the nine months ended September 30, |
|
| 2016 |
| 2015 |
| (Unaudited) |
Cash flows from operating activities: | | | |
|
Net earnings | $ | 459 |
| | $ | 408 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 315 |
| | 306 |
|
Equity in losses of unconsolidated affiliates | 6 |
| | 16 |
|
(Gain) loss on sales of investments and other assets, net | (10 | ) | | 9 |
|
Gain on sale of Cascade Timberlands | — |
| | (12 | ) |
Impairment of assets | 5 |
| | 10 |
|
Stock-based compensation cost | 44 |
| | 44 |
|
Changes in assets and liabilities, net of effects from acquisitions: | | | |
Net change in pledged cash, pledged investments, and secured trust deposits | — |
| | (1 | ) |
Net increase in trade receivables | (43 | ) | | (57 | ) |
Net increase in prepaid expenses and other assets | (23 | ) | | (67 | ) |
Net decrease in accounts payable, accrued liabilities, deferred revenue and other | (33 | ) | | (34 | ) |
Net increase (decrease) in reserve for title claim losses | 19 |
| | (16 | ) |
Net change in income taxes | 6 |
| | 67 |
|
Net cash provided by operating activities | 745 |
| | 673 |
|
Cash flows from investing activities: | | | |
Proceeds from sales of investment securities available for sale | 188 |
| | 712 |
|
Proceeds from calls and maturities of investment securities available for sale | 340 |
| | 245 |
|
Proceeds from sales of other assets | — |
| | 14 |
|
Proceeds from the sale of cost method and other investments | 36 |
| | — |
|
Additions to property and equipment and capitalized software | (230 | ) | | (172 | ) |
Purchases of investment securities available for sale | (496 | ) | | (936 | ) |
Net proceeds from (purchases of) short-term investment securities | 438 |
| | (309 | ) |
Purchases of other long-term investments | — |
| | (22 | ) |
Contributions to investments in unconsolidated affiliates | (155 | ) | | (78 | ) |
Distributions from unconsolidated affiliates | 75 |
| | 175 |
|
Net other investing activities | 2 |
| | (9 | ) |
Acquisition of Commissions, Inc., net of cash acquired | (229 | ) | | — |
|
Acquisition of eLynx Holdings, Inc., net of cash acquired | (115 | ) | | — |
|
Acquisition of BPG Holdings, LLC, net of cash acquired | — |
| | (43 | ) |
Proceeds from sale of Cascade Timberlands | — |
| | 56 |
|
Other acquisitions/disposals of businesses, net of cash acquired | (146 | ) | | (55 | ) |
Net cash used in investing activities | (292 | ) | | (422 | ) |
Cash flows from financing activities: | | | |
Borrowings | 100 |
| | 1,352 |
|
Debt service payments | (158 | ) | | (1,325 | ) |
Additional investment in non-controlling interest | — |
| | (6 | ) |
Proceeds from Black Knight IPO | — |
| | 475 |
|
Dividends paid | (171 | ) | | (164 | ) |
Subsidiary dividends paid to non-controlling interest shareholders | (6 | ) | | (4 | ) |
Exercise of stock options | 16 |
| | 19 |
|
Equity and debt issuance costs | — |
| | (1 | ) |
Distributions by Black Knight to member | — |
| | (17 | ) |
Payment of contingent consideration for prior period acquisitions | (4 | ) | | — |
|
Payment for withholding taxes on stock-based compensation for shares withheld from participants and in treasury | (2 | ) | | — |
|
Purchases of treasury stock | (251 | ) | | (374 | ) |
Net cash used in financing activities | (476 | ) | | (45 | ) |
Net (decrease) increase in cash and cash equivalents, excluding pledged cash related to secured trust deposits | (23 | ) | | 206 |
|
Cash and cash equivalents, excluding pledged cash related to secured trust deposits at beginning of period | 672 |
| | 564 |
|
Cash and cash equivalents, excluding pledged cash related to secured trust deposits at end of period | $ | 649 |
| | $ | 770 |
|
Supplemental cash flow information: | | | |
Income taxes paid, net | $ | 236 |
| | $ | 148 |
|
Interest paid | $ | 92 |
| | $ | 92 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A — Basis of Financial Statements
The unaudited financial information in this report includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, “we,” “us,” “our,” or “FNF”) prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have been included. All adjustments made were of a normal, recurring nature. This report should be read in conjunction with our Annual Report on Form 10-K (our "Annual Report") for the year ended December 31, 2015.
Certain reclassifications have been made in the 2015 Condensed Consolidated Financial Statements to conform to classifications used in 2016.
Description of the Business
We have organized our business into two groups, FNF Group and FNF Ventures ("FNFV").
Through FNF Group, we are a leading provider of (i) title insurance, escrow and other title-related services, including trust activities, trustee sales guarantees, recordings and reconveyances and home warranty insurance and (ii) technology and transaction services to the real estate and mortgage industries. FNF is the nation’s largest title insurance company operating through its title insurance underwriters - Fidelity National Title Insurance Company, Chicago Title Insurance Company, Commonwealth Land Title Insurance Company, Alamo Title Insurance and National Title Insurance of New York Inc. - which collectively issue more title insurance policies than any other title company in the United States. Through our subsidiary ServiceLink Holdings, LLC ("ServiceLink"), we provide mortgage transaction services including title-related services and facilitation of production and management of mortgage loans. FNF also provides industry-leading mortgage technology solutions, including MSP®, the leading residential mortgage servicing technology platform in the U.S., through its majority-owned subsidiary, Black Knight Financial Services, Inc. ("Black Knight").
Through our FNFV group, we own majority and minority equity investment stakes in a number of entities, including American Blue Ribbon Holdings, LLC ("ABRH"), Ceridian HCM, Inc. ("Ceridian"), and Digital Insurance, Inc. ("Digital Insurance").
As of September 30, 2016, we had the following reporting segments:
FNF Group
| |
• | Title. This segment consists of the operations of our title insurance underwriters and related businesses. This segment provides core title insurance and escrow and other title-related services including trust activities, trustee sales guarantees, recordings and reconveyances, and home warranty insurance. This segment also includes our transaction services business, which includes other title-related services used in the production and management of mortgage loans, including mortgage loans that experience default. |
| |
• | Black Knight. This segment consists of the operations of Black Knight, which, through leading software systems and information solutions, provides mission critical technology and data and analytics services that facilitate and automate many of the business processes across the life cycle of a mortgage. |
| |
• | FNF Group Corporate and Other. This segment consists of the operations of the parent holding company, certain other unallocated corporate overhead expenses, and other real estate and insurance-related operations. |
FNFV
| |
• | Restaurant Group. This segment consists of the operations of ABRH, in which we hold a 55% ownership interest. ABRH and its affiliates are the owners and operators of the O'Charley's, Ninety Nine Restaurants, Village Inn, Bakers Square, and Legendary Baking restaurant and food service concepts. This segment also included the results of operations of J. Alexander's, Inc. ("J. Alexander's") through the date it was distributed to FNFV shareholders, September 28, 2015, and the Max & Erma's concept, which was sold pursuant to an Asset Purchase Agreement on January 25, 2016. |
| |
• | FNFV Corporate and Other. This segment primarily consists of our share in the operations of certain equity investments, including Ceridian, as well as consolidated investments, including Digital Insurance, in which we own 96%, and other smaller operations which are not title-related. |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Recent Developments
On August 23, 2016, FNF Group completed its acquisition of Commissions, Inc. ("CINC"), a leading provider of web-based real estate marketing and customer relationship management software for elite Realtors® and agent teams across North America, for $229 million. CINC’s product offerings include software, marketing and services designed to enhance the productivity and sales results of elite Realtors® and agent teams through lead generation and proactive lead management. See Note B for further discussion.
During the second quarter of 2016 we invested $30 million in CF Corporation (“CF Corp”, NYSE: CFCOU), a blank check company co-founded by William P. Foley, the Chairman of our Board of Directors. Mr. Foley also serves as the Co-Executive Chairman of CF Corp. As of September 30, 2016, our investment in CF Corp has a fair value of $31 million and is included in Equity securities available for sale on the corresponding Condensed Consolidated Balance Sheet.
On May 16, 2016, Black Knight completed its acquisition of eLynx Holdings, Inc. ("eLynx"), a leading lending document and data delivery platform, for $115 million. eLynx helps clients in the financial services and real estate industries electronically capture and manage documents and associated data throughout the document lifecycle. This acquisition positions Black Knight to electronically support the full mortgage origination process. See Note B for further discussion.
On May 2, 2016, we purchased certain shares of common and preferred stock of Ceridian Holding, LLC, the ultimate parent of Ceridian, from third-party minority interest holders for $17 million. As a result of this purchase, our ownership of Ceridian increased from 32% to 33%.
On April 29, 2016, pursuant to the terms of a certain “synthetic lease” agreement, dated as of June 29, 2004, as amended on June 27, 2011, and further described under Off-Balance Sheet Arrangements in Item 2 of Part I of this Quarterly Report, we exercised our option to purchase the land and various real property improvements associated with our corporate campus and headquarters in Jacksonville, Florida from SunTrust Bank for $71 million.
On March 30, 2016, Ceridian HCM Holding, Inc., a wholly-owned subsidiary of Ceridian, completed its offering (the "Offering") of senior convertible preferred shares for aggregate proceeds of $150 million. As part of the Offering, FNF purchased a number of shares equal to its pro-rata ownership in Ceridian for $47 million. FNF's ownership percentage in Ceridian did not change as a result of the transaction.
On February 18, 2016 our Board of Directors approved a new FNFV Group three-year stock repurchase program, effective March 1, 2016, under which we may repurchase up to 15 million shares of FNFV Group common stock. Purchases may be made from time to time by us in the open market at prevailing market prices or in privately negotiated transactions through February 28, 2019.
Earnings Per Share
Basic earnings per share, as presented on the Condensed Consolidated Statement of Earnings, is computed by dividing net earnings available to common shareholders in a given period by the weighted average number of common shares outstanding during such period. In periods when earnings are positive, diluted earnings per share is calculated by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding plus the impact of assumed conversions of potentially dilutive securities. For periods when we recognize a net loss, diluted earnings per share is equal to basic earnings per share as the impact of assumed conversions of potentially dilutive securities is considered to be antidilutive. We have granted certain stock options, shares of restricted stock, convertible debt instruments and certain other convertible share based payments which have been treated as common share equivalents for purposes of calculating diluted earnings per share for periods in which positive earnings have been reported.
The net earnings of Black Knight in our calculation of diluted earnings per share is adjusted for dilution related to certain Black Knight restricted stock granted to employees in accordance with ASC 260-10-55-20. We calculate the ratio of the Class B shares we hold to the total weighted average diluted shares of Black Knight outstanding and multiply such ratio by Black Knight's net earnings. The result is used as a substitution for Black Knight's net earnings attributable to FNF included in our consolidated net earnings in the numerator for our diluted earnings per share calculation. As the result had no effect for the three or nine-months ended September 30, 2016, there were no adjustments made to net earnings attributable to FNF in our calculation of diluted earnings per share. There are no adjustments to earnings attributable to FNF in our calculation of basic earnings per share. There are no adjustments made to net earnings attributable to FNFV in our calculation of basic or diluted earnings per share.
Options or other instruments which provide the ability to purchase shares of our common stock that are antidilutive are excluded from the computation of diluted earnings per share. There were 2 million antidilutive options outstanding during both the three
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
and nine-months ended September 30, 2016. There were no antidilutive options outstanding during the three or nine-month periods ended September 30, 2015.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU provides a new comprehensive revenue recognition model that requires companies to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This update also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. This update permits the use of either the retrospective or cumulative effect transition method. ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations was issued by FASB in March 2016 to clarify the principal versus agent considerations within ASU 2014-09. ASU 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing was issued by the FASB in April 2016 to clarify how to determine whether goods and services are separately identifiable and thus accounted for as separate performance obligations. ASU 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients was issued by the FASB in May 2016 to clarify certain terms from the aforementioned updates and to add practical expedients for contracts at various stages of completion. We are evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting. Upon issuance of ASU 2015-14, the effective date of ASU 2014-09 was deferred to annual and interim periods beginning on or after December 15, 2017.
In February 2015, the FASB issued ASU No. 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis. This ASU changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The ASU eliminates the ASU 2010-10 deferral of the ASU 2009-17 VIE consolidation requirements for certain investment companies and similar entities. In addition, the ASU excludes money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940, as amended, or that operate under requirements similar to those in Rule 2a-7 from the GAAP consolidation requirements. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed though a contractual arrangement. The update allows for the application of the amendments using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or retrospective application for prior periods. This update is effective for annual and interim periods beginning on or after December 15, 2015. We adopted the update as of March 31, 2016. The update did not have a material effect on our financial position or results of operations. In October 2016, the FASB issued ASU No. 2016-17 Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which clarified certain aspects of assessing a VIE for consolidation as a decision maker when related party interests exist. This update is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. As we have already adopted ASU 2015-02, the ASU requires that adjustments resulting from adoption, if any, be applied retrospectively to all relevant prior periods presented beginning with the fiscal year in which the amendments in ASU 2015-02 initially were applied. The update will not have a material effect on our financial position or results of operations and no adjustments were made to prior periods.
In May 2015, the FASB issued ASU No. 2015-09 Financial Services - Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this ASU require insurance entities to disclose for annual reporting periods additional information about the liability for unpaid claims and claim adjustment expenses related to short-duration contracts. The amendments also require insurance entities to disclose information about significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses. This update is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, with early application permitted. This update will not have a significant effect on our ongoing financial reporting as our primary insurance products are not short-duration contracts. Except for certain disclosure requirements, the Company does not expect the adoption of this guidance to impact its condensed consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer will be required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. Entities will also be required to present separately on the face of the income statement
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The ASU requires the prospective application of the amendments for adjustments to provisional amounts that occur after its effective date. We adopted the update as of March 31, 2016. The update did not have a material effect on our financial position or results of operations.
In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The primary amendments required by the ASU include: requiring equity investments with readily determinable fair values to be measured at fair value through net income rather than through other comprehensive income; allowing entities with equity investments without readily determinable fair values to report the investments at cost, adjusted for changes in observable prices, less impairment; requiring entities that elect the fair value option for financial liabilities to report the change in fair value attributable to instrument-specific credit risk in other comprehensive income; and clarifying that entities should assess the need for a valuation allowance on a deferred tax asset related to available-for-sale debt securities in combination with other deferred tax assets. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The ASU requires a cumulative-effect adjustment of the balance sheet as of the beginning of the year of adoption. Early adoption of the ASU is not permitted, except for the provision related to financial liabilities for which the fair value option has been elected. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures and have not yet concluded on its effects.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The amendments in this ASU introduce broad changes to the accounting and reporting for leases by lessees. The main provisions of the new standard include: clarifications to the definitions of a lease, components of leases, and criteria for determining lease classification; requiring virtually all leased assets, including operating leases and related liabilities, to be reflected on the lessee's balance sheet; and expanding and adding to the required disclosures for lessees. This update is effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the standard is permitted. The ASU requires a modified retrospective approach to transitioning which allows for the use of practical expedients to effectively account for leases commenced prior to the effective date in accordance with previous GAAP, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures and have not yet concluded on its effects.
In March 2016, the FASB issued ASU No. 2016-04 Liabilities - Extinguishment of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. The primary amendment in this ASU will provide guidance for derecognition of prepaid stored-value product liabilities that meet certain criteria and was designed to alleviate diversity in practice under current GAAP. This update is effective for annual and interim periods beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect this update to have a significant effect on our ongoing financial reporting as we do not have a significant liability for prepaid stored-value products. However, we are still evaluating the totality of the effects the update will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-07 Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The primary amendment in this ASU is to eliminate the requirement to retroactively adopt the equity method of accounting. This update is effective for annual and interim periods beginning after December 15, 2016, including interim periods within those fiscal years. We adopted the update as of March 31, 2016. The update did not have a material effect on our financial position or results of operations.
In March 2016, the FASB issued ASU No. 2016-09 Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to ASC Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. We adopted this ASU as of March 31, 2016. For the three and nine-month periods ended September 30, 2016 we have recorded $3 million and $13 million, respectively, in income tax benefit related to the tax effects associated with the exercise of stock options within Income tax expense on the Condensed Consolidated Statement of Earnings. There was no impact to opening equity for the nine-month period ended September 30, 2016. There was no impact to net earnings for the three or nine-month periods ended September 30, 2015. The Condensed Consolidated Statement of Cash Flows for the nine-month period ended September 30, 2015 has been restated to conform with the current period, which resulted in an increase to both cash flows provided by operations and cash flows used in financing activities of $13 million for the period. We did not change our accounting policy
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
for estimating expected forfeitures of stock compensation.
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this ASU introduce broad changes to accounting for credit impairment of financial instruments. The primary updates include the introduction of a new current expected credit loss ("CECL") model that is based on expected rather than incurred losses and amendments to the accounting for impairment of debt securities available for sale. This update is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures and have not yet concluded on its effects.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU introduce clarifications to the presentation of certain cash receipts and cash payments in the statement of cash flows. The primary updates include additions and clarifications of the classification of cash flows related to certain debt repayment activities, contingent consideration payments related to business combinations, proceeds from insurance policies, distributions from equity method investees, and cash flows related to securitized receivables. This update is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption of this ASU is permitted, including in interim periods. The ASU requires retrospective application to all prior periods presented upon adoption. We are currently evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures and have not yet concluded on its effects.
Note B — Acquisitions
FNF Group Corporate and Other
On August 23, 2016, FNF Group completed its acquisition of Commissions, Inc. ("CINC"), a leading provider of web-based real estate marketing and customer relationship management software for elite Realtors® and agent teams across North America, for $229 million. CINC’s product offerings include software, marketing and services designed to enhance the productivity and sales results of elite Realtors® and agent teams through lead generation and proactive lead management. CINC's financial position and results of operations from the acquisition date are included in our Core Corporate and Other segment. The acquisition does not meet the definition of "significant" pursuant to Article 3 of Regulation S-X (§210.3-05). Further, the results of operations are not material to our financial statements. Further details on the acquisition are discussed below.
FNF Group paid total consideration, net of cash received, of $229 million in exchange for 95% of the equity interests of CINC. The total consideration paid was as follows (in millions):
|
| | | |
Cash paid | $ | 240 |
|
Less: Cash Acquired | (11 | ) |
Total net consideration paid | $ | 229 |
|
The purchase price has been initially allocated to CINC's assets acquired and liabilities assumed based on our best estimates of their fair values as of the acquisition date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. These estimates are preliminary and subject to adjustments as we complete our valuation process with respect to computer software, other intangible assets, accounts payable and accrued liabilities, taxes and goodwill.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
The following table summarizes the total purchase price consideration and the preliminary fair value amounts recognized for the assets acquired and liabilities assumed as of the acquisition date (in millions):
|
| | | |
| Fair Value |
Computer software | $ | 25 |
|
Other intangible assets | 45 |
|
Goodwill | 181 |
|
Total assets acquired | 251 |
|
| |
Accounts payable and accrued liabilities | 8 |
|
Deferred tax liability | 3 |
|
Total liabilities assumed | 11 |
|
| |
Non-controlling interests | 11 |
|
Total liabilities and equity assumed | 22 |
|
| |
Net assets acquired | $ | 229 |
|
The gross carrying value and weighted average estimated useful lives of Computer software and Other intangible assets acquired in the CINC acquisition consist of the following (dollars in millions):
|
| | | | | |
| Gross Carrying Value | | Weighted Average Estimated Useful Life (in years) |
Computer software | $ | 25 |
| | 3 |
Other intangible assets: | | | |
Customer relationships | 35 |
| | 10 |
Trade name | 8 |
| | 10 |
Non-compete agreements | 2 |
| | 4 |
Total Other intangible assets | 45 |
| | |
Total | $ | 70 |
| | |
For comparative purposes, selected unaudited pro-forma consolidated results of operations of FNF for the three and nine months ended September 30, 2016 and 2015 are presented below. Pro-forma results presented assume the consolidation of CINC occurred as of the beginning of the 2015 period. Amounts reflect our 95% ownership interest in CINC and are adjusted to exclude costs directly attributable to the acquisition of CINC, including transaction costs.
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2016 | | 2015 | | 2016 | | 2015 |
Total revenues | | $ | 2,524 |
| | $ | 2,400 |
| | $ | 7,075 |
| | $ | 6,870 |
|
Net earnings attributable to Fidelity National Financial, Inc. common shareholders | | 159 |
| | 133 |
| | 432 |
| | 390 |
|
Black Knight
On May 16, 2016, Black Knight completed its acquisition of eLynx, a leading lending document and data delivery platform. eLynx helps clients in the financial services and real estate industries electronically capture and manage documents and associated data throughout the document lifecycle. Black Knight purchased eLynx to augment its origination technologies. This acquisition positions Black Knight to electronically support the full mortgage origination process. The acquisition does not meet the definition of "significant" pursuant to Article 3 of Regulation S-X (§210.3-05). Further, the results of operations are not material to our financial statements. Further details on the acquisition are discussed below.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Black Knight paid total consideration, net of cash received, of $115 million for 100% of the equity interests of eLynx. The total consideration paid was as follows (in millions):
|
| | | |
Cash paid | $ | 96 |
|
Borrowings under revolving line of credit | 25 |
|
Total cash paid | 121 |
|
Less: Cash Acquired | (6 | ) |
Total net consideration paid | $ | 115 |
|
The fair value of eLynx’s acquired Computer software and Other intangible assets was determined using a preliminary third-party valuation based on significant estimates and assumptions, including Level 3 inputs, which are judgmental in nature. These estimates and assumptions include the projected timing and amount of future cash flows, discount rates reflecting the risk inherent in the future cash flows and future market prices. These estimates are preliminary and subject to adjustments as we complete our valuation process with respect to computer software, other intangible assets, and goodwill. The fair value of the remaining assets acquired and liabilities assumed approximate their carrying values, and therefore, no fair value adjustments are reflected in these amounts.
The following table summarizes the total purchase price consideration and the preliminary fair value amounts recognized for the assets acquired and liabilities assumed as of the acquisition date (in millions):
|
| | | |
| Fair Value |
Trade and notes receivable | $ | 4 |
|
Property and equipment | 1 |
|
Computer software | 14 |
|
Other intangible assets | 39 |
|
Goodwill | 61 |
|
Total assets acquired | 119 |
|
| |
Accounts payable and other accrued liabilities | 4 |
|
Total liabilities assumed | 4 |
|
| |
Net assets acquired | $ | 115 |
|
The gross carrying value and weighted average estimated useful lives of Computer software, Property and equipment and Other intangible assets acquired in the eLynx acquisition consist of the following (dollars in millions):
|
| | | | | |
| Gross Carrying Value | | Weighted Average Estimated Useful Life (in years) |
Computer software | $ | 14 |
| | 5 |
Property and equipment | 1 |
| | 3 |
Other intangible assets: | | | |
Customer relationships | 35 |
| | 10 |
Trade name | 4 |
| | 10 |
Total Other intangible assets | 39 |
| | |
Total | $ | 54 |
| | |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note C — Fair Value Measurements
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015, respectively:
|
| | | | | | | | | | | | | | | |
| September 30, 2016 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | 110 |
| | $ | — |
| | $ | 110 |
|
State and political subdivisions | — |
| | 617 |
| | — |
| | 617 |
|
Corporate debt securities | — |
| | 1,571 |
| | — |
| | 1,571 |
|
Mortgage-backed/asset-backed securities | — |
| | 63 |
| | — |
| | 63 |
|
Foreign government bonds | — |
| | 115 |
| | — |
| | 115 |
|
Preferred stock available for sale | 35 |
| | 286 |
| | — |
| | 321 |
|
Equity securities available for sale | 432 |
| | — |
| | — |
| | 432 |
|
Total assets | $ | 467 |
| | $ | 2,762 |
| | $ | — |
| | $ | 3,229 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | 117 |
| | $ | — |
| | $ | 117 |
|
State and political subdivisions | — |
| | 768 |
| | — |
| | 768 |
|
Corporate debt securities | — |
| | 1,495 |
| | — |
| | 1,495 |
|
Mortgage-backed/asset-backed securities | — |
| | 71 |
| | — |
| | 71 |
|
Foreign government bonds | — |
| | 107 |
| | — |
| | 107 |
|
Preferred stock available for sale | 42 |
| | 247 |
| | — |
| | 289 |
|
Equity securities available for sale | 334 |
| | 11 |
| | — |
| | 345 |
|
Total assets | $ | 376 |
| | $ | 2,816 |
| | $ | — |
| | $ | 3,192 |
|
Our Level 2 fair value measures for fixed-maturities available for sale are provided by third-party pricing services. We utilize one firm for our taxable bond and preferred stock portfolio and another for our tax-exempt bond portfolio. These pricing services are leading global providers of financial market data, analytics and related services to financial institutions. We rely on one price for each instrument to determine the carrying amount of the assets on our balance sheet. The inputs utilized in these pricing methodologies include observable measures such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. We review the pricing methodologies for all of our Level 2 securities by obtaining an understanding of the valuation models and assumptions used by the third-party as well as independently comparing the resulting prices to other publicly available measures of fair value and internally developed models. The pricing methodologies used by the relevant third-party pricing services are as follows:
| |
• | U.S. government and agencies: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers. |
| |
• | State and political subdivisions: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers. Factors considered include relevant trade information, dealer quotes and other relevant market data. |
| |
• | Corporate debt securities: These securities are valued based on dealer quotes and related market trading activity. Factors considered include the bond's yield, its terms and conditions, and any other feature which may influence its risk and thus marketability, as well as relative credit information and relevant sector news. |
| |
• | Mortgage-backed/asset-backed securities: These securities are comprised of agency mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities. They are valued based on available trade information, dealer quotes, cash flows, relevant indices and market data for similar assets in active markets. |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
| |
• | Foreign government bonds: These securities are valued based on a discounted cash flow model incorporating observable market inputs such as available broker quotes and yields of comparable securities. |
| |
• | Preferred stocks: Preferred stocks are valued by calculating the appropriate spread over a comparable U.S. Treasury security. Inputs include benchmark quotes and other relevant market data. |
| |
• | Equity securities available for sale: This security is valued using a blending of two models, a discounted cash flow model and a comparable company model utilizing earnings and multiples of similar publicly-traded companies. |
As of September 30, 2016 and December 31, 2015 we held no assets or liabilities measured at fair value using Level 3 inputs.
The carrying amounts of short-term investments, accounts receivable and notes receivable approximate fair value due to their short-term nature. Additional information regarding the fair value of our investment portfolio is included in Note D.
Note D — Investments
The carrying amounts and fair values of our available for sale securities at September 30, 2016 and December 31, 2015 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2016 |
| Carrying | | Cost | | Unrealized | | Unrealized | | Fair |
| Value | | Basis | | Gains | | Losses | | Value |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | | | |
U.S. government and agencies | $ | 110 |
| | $ | 109 |
| | $ | 1 |
| | $ | — |
| | $ | 110 |
|
State and political subdivisions | 617 |
| | 601 |
| | 16 |
| | — |
| | 617 |
|
Corporate debt securities | 1,571 |
| | 1,550 |
| | 31 |
| | (10 | ) | | 1,571 |
|
Mortgage-backed/asset-backed securities | 63 |
| | 60 |
| | 3 |
| | — |
| | 63 |
|
Foreign government bonds | 115 |
| | 118 |
| | 1 |
| | (4 | ) | | 115 |
|
Preferred stock available for sale | 321 |
| | 312 |
| | 10 |
| | (1 | ) | | 321 |
|
Equity securities available for sale | 432 |
| | 323 |
| | 115 |
| | (6 | ) | | 432 |
|
Total | $ | 3,229 |
| | $ | 3,073 |
| | $ | 177 |
| | $ | (21 | ) | | $ | 3,229 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 |
| Carrying | | Cost | | Unrealized | | Unrealized | | Fair |
| Value | | Basis | | Gains | | Losses | | Value |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | | | |
U.S. government and agencies | $ | 117 |
| | $ | 115 |
| | $ | 2 |
| | $ | — |
| | $ | 117 |
|
State and political subdivisions | 768 |
| | 748 |
| | 20 |
| | — |
| | 768 |
|
Corporate debt securities | 1,495 |
| | 1,509 |
| | 14 |
| | (28 | ) | | 1,495 |
|
Mortgage-backed/asset-backed securities | 71 |
| | 68 |
| | 3 |
| | — |
| | 71 |
|
Foreign government bonds | 107 |
| | 120 |
| | — |
| | (13 | ) | | 107 |
|
Preferred stock available for sale | 289 |
| | 290 |
| | 5 |
| | (6 | ) | | 289 |
|
Equity securities available for sale | 345 |
| | 276 |
| | 81 |
| | (12 | ) | | 345 |
|
Total | $ | 3,192 |
| | $ | 3,126 |
| | $ | 125 |
| | $ | (59 | ) | | $ | 3,192 |
|
The cost basis of fixed maturity securities available for sale includes an adjustment for amortized premium or accreted discount since the date of purchase.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
The following table presents certain information regarding contractual maturities of our fixed maturity securities at September 30, 2016:
|
| | | | | | | | | | | | | | |
| | September 30, 2016 |
| | Amortized | | % of | | Fair | | % of |
Maturity | | Cost | | Total | | Value | | Total |
| | (Dollars in millions) |
One year or less | | $ | 489 |
| | 20 | % | | $ | 490 |
| | 20 | % |
After one year through five years | | 1,706 |
| | 70 |
| | 1,733 |
| | 70 |
|
After five years through ten years | | 161 |
| | 7 |
| | 167 |
| | 7 |
|
After ten years | | 22 |
| | 1 |
| | 23 |
| | 1 |
|
Mortgage-backed/asset-backed securities | | 60 |
| | 2 |
| | 63 |
| | 2 |
|
Total | | $ | 2,438 |
| | 100 | % | | $ | 2,476 |
| | 100 | % |
Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Because of the potential for prepayment on mortgage-backed and asset-backed securities, they are not categorized by contractual maturity.
Net unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015, were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2016 | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
Corporate debt securities | $ | 172 |
| | $ | (1 | ) | | $ | 20 |
| | $ | (9 | ) | | $ | 192 |
| | $ | (10 | ) |
Foreign government bonds | 47 |
| | (1 | ) | | 20 |
| | (3 | ) | | 67 |
| | (4 | ) |
Preferred stock available for sale | — |
| | — |
| | 47 |
| | (1 | ) | | 47 |
| | (1 | ) |
Equity securities available for sale | 65 |
| | (5 | ) | | 17 |
| | (1 | ) | | 82 |
| | (6 | ) |
Total temporarily impaired securities | $ | 284 |
| | $ | (7 | ) | | $ | 104 |
| | $ | (14 | ) | | $ | 388 |
| | $ | (21 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2015 | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
Corporate debt securities | 747 |
| | (24 | ) | | 20 |
| | (4 | ) | | 767 |
| | (28 | ) |
Foreign government bonds | 106 |
| | (13 | ) | | — |
| | — |
| | 106 |
| | (13 | ) |
Preferred stock available for sale | 140 |
| | (4 | ) | | 24 |
| | (2 | ) | | 164 |
| | (6 | ) |
Equity securities available for sale | 92 |
| | (12 | ) | | — |
| | — |
| | 92 |
| | (12 | ) |
Total temporarily impaired securities | $ | 1,085 |
| | $ | (53 | ) | | $ | 44 |
| | $ | (6 | ) | | $ | 1,129 |
| | $ | (59 | ) |
We recorded $5 million in impairment charges relating to investments during the nine-month period ended September 30, 2016. The impairment charges related to a fixed maturity security and an investment in an unconsolidated affiliate in which we determined the ability to recover our investment was unlikely. We recorded $2 million in impairment charges relating to investments during the three-month period ended September 30, 2016 related to the aforementioned fixed maturity security. We recorded $9 million in impairment charges on fixed maturity securities during the three and nine-month periods ended September 30, 2015 relating to investments that were determined to be other-than-temporarily impaired. The impairment charges were for fixed maturity securities that we determined the credit risk of the holdings was high and the ability of the issuer to pay the full amount of the principal was unlikely. As of September 30, 2016 we held $1 million in fixed maturity securities for which an other-than-temporary impairment had been previously recognized. As of December 31, 2015, we held $2 million in fixed maturity and equity securities for which an other-than-temporary impairment had been previously recognized. It is possible that future events may
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
lead us to recognize impairment losses related to our investment portfolio and that unanticipated future events may lead us to dispose of certain investment holdings and recognize the effects of any market movements in our condensed consolidated financial statements.
The following table presents realized gains and losses on investments and other assets and proceeds from the sale or maturity of investments and other assets for the three and nine-month periods ended September 30, 2016 and 2015, respectively:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity | | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity |
| | (In millions) | | (In millions) |
Fixed maturity securities available for sale | | $ | — |
| | $ | (2 | ) | | $ | (2 | ) | | $ | 156 |
| | $ | 3 |
| | $ | (4 | ) | | $ | (1 | ) | | $ | 505 |
|
Preferred stock available for sale | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | 9 |
|
Equity securities available for sale | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) | | 1 |
|
Investments in unconsolidated affiliates | | | | | | — |
| | — |
| | | | | | (3 | ) | | — |
|
Other long-term investments | | | | | | — |
| | — |
| | | | | | 15 |
| | 36 |
|
Other assets | | | | | | (2 | ) | | — |
| | | | | | (6 | ) | | — |
|
Total | | | | | | $ | (4 | ) | | $ | 156 |
| | | | | | $ | 5 |
| | $ | 551 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2015 | | Nine months ended September 30, 2015 |
| | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity | | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity |
| | (In millions) | | (In millions) |
Fixed maturity securities available for sale | | $ | 9 |
| | $ | (12 | ) | | $ | (3 | ) | | $ | 375 |
| | $ | 13 |
| | $ | (15 | ) | | $ | (2 | ) | | $ | 899 |
|
Preferred stock available for sale | | — |
| | — |
| | — |
| | 5 |
| | — |
| — |
| — |
| | — |
| | 43 |
|
Equity securities available for sale | | 9 |
| | (6 | ) | | 3 |
| | 20 |
| | 10 |
| — |
| (8 | ) | | 2 |
| | 26 |
|
Other long-term investments | | | | | | — |
| | — |
| | | | | | — |
| | 14 |
|
Debt extinguishment costs | | | | | | — |
| | — |
| | | | | | (9 | ) | | — |
|
Other assets | | | | | | (10 | ) | | — |
| | | | | | (10 | ) | | — |
|
Total | | | | | | $ | (10 | ) | | $ | 400 |
| | | | | | $ | (19 | ) | | $ | 982 |
|
Investments in unconsolidated affiliates are recorded using the equity method of accounting. As of September 30, 2016 and December 31, 2015, investments in unconsolidated affiliates consisted of the following (dollars in millions):
|
| | | | | | | | | | |
| Current Ownership | | September 30, 2016 | | December 31, 2015 |
Ceridian | 33 | % | | $ | 423 |
| | $ | 358 |
|
Other | Various |
| | 197 |
| | 163 |
|
Total | | | $ | 620 |
| | $ | 521 |
|
In addition to our equity investment in Ceridian, we own certain of their outstanding bonds. Our investment in Ceridian bonds is included in Fixed maturity securities available for sale on the Condensed Consolidated Balance Sheets and had a fair value of $31 million and $23 million as of September 30, 2016 and December 31, 2015, respectively. We did not purchase or dispose of any Ceridian bonds in the nine-month period ended September 30, 2016.
During the three-month periods ended September 30, 2016 and 2015, we recorded $10 million and $21 million, in equity in losses of Ceridian, respectively, and $3 million and $2 million in equity in earnings of other unconsolidated affiliates, respectively. During the nine-month periods ended September 30, 2016 and 2015, we recorded $15 million and $21 million, in equity in losses of Ceridian, respectively, and $9 million and $5 million in equity in earnings of other unconsolidated affiliates, respectively.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Summarized financial information for Ceridian for the relevant dates and time periods included in Investments in unconsolidated affiliates and Equity in losses of unconsolidated affiliates in our Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Earnings, respectively, is presented below.
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
| (In millions) |
Total current assets before customer funds | $ | 441 |
| | $ | 489 |
|
Customer funds | 3,434 |
| | 4,333 |
|
Goodwill and other intangible assets, net | 2,307 |
| | 2,272 |
|
Other assets | 90 |
| | 92 |
|
Total assets | $ | 6,272 |
| | $ | 7,186 |
|
Current liabilities before customer obligations | $ | 178 |
| | $ | 267 |
|
Customer obligations | 3,404 |
| | 4,312 |
|
Long-term obligations, less current portion | 1,141 |
| | 1,143 |
|
Other long-term liabilities | 285 |
| | 322 |
|
Total liabilities | 5,008 |
| | 6,044 |
|
Equity | 1,264 |
| | 1,142 |
|
Total liabilities and equity | $ | 6,272 |
| | $ | 7,186 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30, 2016 | | Three months ended September 30, 2015 | | Nine months ended September 30, 2016 | | Nine months ended September 30, 2015 |
| (In millions) | | (In millions) |
Total revenues | $ | 170 |
| | $ | 166 |
| | $ | 515 |
| | $ | 509 |
|
Loss before income taxes | (31 | ) | | (38 | ) | | (71 | ) | | (47 | ) |
Net loss | (35 | ) | | (70 | ) | | (59 | ) | | (77 | ) |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note E —Notes Payable
Notes payable consists of the following:
|
| | | | | | | | |
| | September 30, 2016 | | December 31, 2015 |
| | (In millions) |
Unsecured notes, net of discount, interest payable semi-annually at 5.50%, due September 2022 | | $ | 397 |
| | $ | 397 |
|
Unsecured convertible notes, net of discount, interest payable semi-annually at 4.25%, due August 2018 | | 291 |
| | 288 |
|
Unsecured notes, net of discount, interest payable semi-annually at 6.60%, due May 2017 | | 300 |
| | 300 |
|
Revolving Credit Facility, unsecured, unused portion of $800, due July 2018 with interest payable monthly at LIBOR + 1.45% | | (4 | ) | | (5 | ) |
Unsecured Black Knight InfoServ notes, including premium, interest payable semi-annually at 5.75%, due April 2023 | | 401 |
| | 402 |
|
Black Knight Term A Facility, due May 2020 with interest currently payable monthly at LIBOR + 2.00% (2.56% at September 30, 2016) | | 743 |
| | 771 |
|
Black Knight Term B Facility, due May 2022 with interest currently payable quarterly at LIBOR + 3.00% (3.75% at September 30, 2016) | | 342 |
| | 343 |
|
Black Knight Revolving Credit Facility, unused portion of $350, due May 2020 with interest currently payable monthly at LIBOR + 2.00% (2.56% at September 30, 2016) | | 46 |
| | 95 |
|
ABRH Term Loan, interest payable monthly at LIBOR + 2.50% (3.02% at September 30, 2016), due August 2019 | | 94 |
| | 100 |
|
Digital Insurance Revolving Credit Facility, unused portion of $48, due March 2020 with interest payable monthly at LIBOR + 2.50% - 3.50% (3.70% at September 30, 2016) | | 110 |
| | 99 |
|
ABRH Revolving Credit Facility, unused portion of $76, due August 2019 with interest payable monthly at Base Rate + 1.50% (5.00% at September 30, 2016) | | 8 |
| | — |
|
Other | | 26 |
| | 3 |
|
| | $ | 2,754 |
| | $ | 2,793 |
|
At September 30, 2016, the estimated fair value of our long-term debt was approximately $3,163 million, which was $386 million higher than its carrying value, excluding $23 million of net unamortized debt issuance costs and premium/discount. The carrying values of our ABRH term loan, ABRH revolving credit facility and Digital Insurance revolving credit facility approximate the fair values at September 30, 2016 as they are variable rate instruments with short reset periods which reflect current market rates. The fair value of our unsecured notes payable was $1,775 million as of September 30, 2016. The fair values of our unsecured notes payable are based on established market prices for the securities on September 30, 2016 and are considered Level 2 financial liabilities. The carrying value of the Black Knight Term A, Term B, and revolving facilities approximate fair value at September 30, 2016. The revolving credit facilities are considered Level 2 financial liabilities.
On May 27, 2015, Black Knight InfoServ, LLC ("BKIS") entered into a credit and guaranty agreement (the “BKIS Credit Agreement”) with an aggregate borrow