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 March 31, 2019
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 every Interactive Data File required to be submitted 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 files).YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth 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 | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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 April 15, 2019 were:
FNF Common Stock 274,856,177
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 2019
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) |
| | | | | | | |
| March 31, 2019 |
| December 31, 2018 |
| (Unaudited) | | |
ASSETS |
Investments: | | | |
Fixed maturity securities available for sale, at fair value, at March 31, 2019 and December 31, 2018 includes pledged fixed maturity securities of $423 and $418, respectively, related to secured trust deposits | $ | 2,089 |
| | $ | 1,998 |
|
Preferred securities, at fair value | 288 |
| | 301 |
|
Equity securities, at fair value | 635 |
| | 498 |
|
Investments in unconsolidated affiliates | 128 |
| | 137 |
|
Other long-term investments | 140 |
| | 135 |
|
Short-term investments, at March 31, 2019 and December 31, 2018 includes short-term investments of $2 and $8, respectively, related to secured trust deposits | 213 |
| | 480 |
|
Total investments | 3,493 |
| | 3,549 |
|
Cash and cash equivalents, at March 31, 2019 and December 31, 2018 includes $300 and $412, respectively, of pledged cash related to secured trust deposits | 1,123 |
| | 1,257 |
|
Trade and notes receivables, net of allowance of $19 at March 31, 2019 and December 31, 2018 | 296 |
| | 306 |
|
Note receivable from Cannae Holdings, Inc., see Note A | 100 |
| | — |
|
Goodwill | 2,727 |
| | 2,726 |
|
Prepaid expenses and other assets | 446 |
| | 377 |
|
Lease assets, see Note K | 399 |
| | — |
|
Other intangible assets, net | 494 |
| | 513 |
|
Title plants | 405 |
| | 405 |
|
Property and equipment, net | 164 |
| | 164 |
|
Income taxes receivable | — |
| | 4 |
|
Total assets | $ | 9,647 |
| | $ | 9,301 |
|
LIABILITIES AND EQUITY |
Liabilities: | | | |
Accounts payable and accrued liabilities | $ | 799 |
| | $ | 956 |
|
Notes payable | 837 |
| | 836 |
|
Reserve for title claim losses | 1,483 |
| | 1,488 |
|
Secured trust deposits | 709 |
| | 822 |
|
Lease liabilities, see Note K | 419 |
| | — |
|
Income taxes payable | 55 |
| | — |
|
Deferred tax liability | 236 |
| | 227 |
|
Total liabilities | 4,538 |
| | 4,329 |
|
Commitments and Contingencies: |
| |
|
Redeemable non-controlling interest by 21% minority holder of ServiceLink Holdings, LLC | 344 |
| | 344 |
|
Equity: | | | |
FNF common stock, $0.0001 par value; authorized 487,000,000 shares as of March 31, 2019 and December 31, 2018; outstanding of 274,908,676 and 275,373,834 as of March 31, 2019 and December 31, 2018, respectively, and issued of 289,647,896 and 289,601,523 as of March 31, 2019 and December 31, 2018, respectively | — |
| | — |
|
Preferred stock, $0.0001 par value; authorized 50,000,000 shares; issued and outstanding, none | — |
| | — |
|
Additional paid-in capital | 4,510 |
| | 4,500 |
|
Retained earnings | 762 |
| | 641 |
|
Accumulated other comprehensive earnings (loss) | 14 |
| | (13 | ) |
Less: Treasury stock, 14,739,220 shares and 14,227,689 shares as of March 31, 2019 and December 31, 2018, respectively, at cost | (516 | ) | | (498 | ) |
Total Fidelity National Financial, Inc. shareholders’ equity | 4,770 |
| | 4,630 |
|
Non-controlling interests | (5 | ) | | (2 | ) |
Total equity | 4,765 |
| | 4,628 |
|
Total liabilities, redeemable non-controlling interest and equity | $ | 9,647 |
| | $ | 9,301 |
|
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 March 31, |
| 2019 | | 2018 |
| (Unaudited) |
Revenues: | | | |
Direct title insurance premiums | $ | 440 |
| | $ | 472 |
|
Agency title insurance premiums | 552 |
| | 564 |
|
Escrow, title-related and other fees | 534 |
| | 618 |
|
Interest and investment income | 54 |
| | 38 |
|
Realized gains and losses, net | 142 |
| | 1 |
|
Total revenues | 1,722 |
| | 1,693 |
|
Expenses: | | | |
Personnel costs | 592 |
| | 607 |
|
Agent commissions | 421 |
| | 431 |
|
Other operating expenses | 344 |
| | 423 |
|
Depreciation and amortization | 44 |
| | 47 |
|
Provision for title claim losses | 45 |
| | 47 |
|
Interest expense | 12 |
| | 11 |
|
Total expenses | 1,458 |
| | 1,566 |
|
Earnings from continuing operations before income taxes and equity in earnings of unconsolidated affiliates | 264 |
| | 127 |
|
Income tax expense | 65 |
| | 31 |
|
Earnings before equity in earnings of unconsolidated affiliates | 199 |
| | 96 |
|
Equity in earnings of unconsolidated affiliates | 7 |
| | 2 |
|
Net earnings | 206 |
| | 98 |
|
Less: Net earnings attributable to non-controlling interests | — |
| | 1 |
|
Net earnings attributable to Fidelity National Financial, Inc. common shareholders | $ | 206 |
| | $ | 97 |
|
Earnings per share | | | |
Net earnings per share attributable to FNF common shareholders, basic | $ | 0.75 |
| | $ | 0.36 |
|
Net earnings per share attributable to FNF common shareholders, diluted | $ | 0.74 |
| | $ | 0.35 |
|
| | | |
Weighted average shares outstanding FNF common stock, basic basis | 273 |
| | 273 |
|
Weighted average shares outstanding FNF common stock, diluted basis | 277 |
| | 280 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
|
| | | | | | | |
| Three months ended March 31, |
|
| 2019 | | 2018 |
| (Unaudited) |
Net earnings | $ | 206 |
| | $ | 98 |
|
Other comprehensive earnings (loss): | | | |
Unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) (1) | 23 |
| | (9 | ) |
Unrealized gain on investments in unconsolidated affiliates (2) | 6 |
| | 3 |
|
Unrealized gain (loss) on foreign currency translation (3) | 2 |
| | (1 | ) |
Reclassification adjustments for change in unrealized gains and losses included in net earnings (4) | (4 | ) | | (2 | ) |
Other comprehensive earnings (loss) | 27 |
| | (9 | ) |
Comprehensive earnings | 233 |
| | 89 |
|
Less: Comprehensive earnings attributable to non-controlling interests | — |
| | 1 |
|
Comprehensive earnings attributable to Fidelity National Financial, Inc. common shareholders | $ | 233 |
| | $ | 88 |
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_______________________________________
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(1) | Net of income tax expense (benefit) of $7 million and $(3) million for the three-month periods ended March 31, 2019 and 2018, respectively. |
| |
(2) | Net of income tax expense of $2 million and $1 million for the three-month periods ended March 31, 2019 and 2018, respectively. |
| |
(3) | Net of income tax expense (benefit) of $1 million and less than $(1) million for the three-month periods ended March 31, 2019 and 2018, respectively. |
| |
(4) | Net of income tax expense of $1 million and less than $1 million for the three-month periods ended March 31, 2019 and 2018. |
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In millions, except per share data)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fidelity National Financial, Inc. Common Shareholders | | | | | | |
| | | | | | | | Accumulated | | | | | | | | |
| | FNF | | | | | | Other | | | | | | | | Redeemable |
| | Common | | Additional | | | | Comprehensive | | Treasury | | Non- | | | | Non- |
| | Stock | | Paid-in | | Retained | | Earnings | | Stock | | controlling | | Total | | controlling |
| | Shares | | $ | | Capital | | Earnings | | (Loss) | | Shares | | $ | | Interests | | Equity | | Interests |
Balance, December 31, 2017 | | 288 |
| | $ | — |
| | $ | 4,587 |
| | $ | 217 |
| | $ | 111 |
| | 13 |
| | $ | (468 | ) | | $ | 20 |
| | $ | 4,467 |
| | $ | 344 |
|
Exercise of stock options | | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
Adjustment for cumulative effect for adoption of ASU 2016-01 | | — |
| | — |
| | — |
| | 128 |
| | (109 | ) | | — |
| | — |
| | — |
| | 19 |
| | — |
|
Other comprehensive earnings — unrealized loss on investments and other financial instruments | | — |
| | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| | — |
| | (9 | ) | | — |
|
Other comprehensive earnings — unrealized gain on investments in unconsolidated affiliates | | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
|
Other comprehensive earnings — unrealized loss on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | | — |
|
Reclassification adjustments for change in unrealized gains and losses included in net earnings | | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | | — |
|
Equity portion of debt conversions settled in cash | | — |
| | — |
| | (24 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (24 | ) | | — |
|
Stock-based compensation | | — |
| | — |
| | 7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7 |
| | — |
|
Dividends declared, $0.30 per common share | | — |
| | — |
| | — |
| | (82 | ) | | — |
| | — |
| | — |
| | — |
| | (82 | ) | | — |
|
Acquisitions of non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | — |
|
Subsidiary dividends declared to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
|
Net earnings | | — |
| | — |
| | — |
| | 97 |
| | — |
| | — |
| | — |
| | 1 |
| | 98 |
| | — |
|
Balance, March 31, 2018 | | 288 |
| | $ | — |
| | $ | 4,573 |
| | $ | 360 |
| | $ | (7 | ) | | 13 |
| | $ | (468 | ) | | $ | 21 |
| | $ | 4,479 |
| | $ | 344 |
|
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2018 | | 290 |
| | $ | — |
| | $ | 4,500 |
| | $ | 641 |
| | $ | (13 | ) | | 14 |
| | $ | (498 | ) | | $ | (2 | ) | | $ | 4,628 |
| | $ | 344 |
|
Exercise of stock options | | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Treasury stock repurchased | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | (18 | ) | | — |
| | (18 | ) | | — |
|
Other comprehensive earnings — unrealized gain on investments and other financial instruments | | — |
| | — |
| | — |
| | — |
| | 23 |
| | — |
| | — |
| | — |
| | 23 |
| | — |
|
Other comprehensive earnings — unrealized gain on investments in unconsolidated affiliates | | — |
| | — |
| | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | 6 |
| | — |
|
Other comprehensive earnings — unrealized gain on foreign currency translation | | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
|
Reclassification adjustments for change in unrealized gains and losses included in net earnings | | — |
| | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) | | — |
|
Stock-based compensation | | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
|
Dividends declared, $0.31 per common share | | — |
| | — |
| | — |
| | (85 | ) | | — |
| | — |
| | — |
| | — |
| | (85 | ) | | — |
|
Subsidiary dividends declared to non-controlling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) | | — |
|
Net earnings | | — |
| | — |
| | — |
| | 206 |
| | — |
| | — |
| | — |
| | — |
| | 206 |
| | — |
|
Balance, March 31, 2019 | | 290 |
| | $ | — |
|
| $ | 4,510 |
| | $ | 762 |
| | $ | 14 |
| | 15 |
| | $ | (516 | ) | | $ | (5 | ) | | $ | 4,765 |
| | $ | 344 |
|
See Notes to Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | |
| For the three months ended March 31, |
|
| 2019 |
| 2018 |
| (Unaudited) |
Cash flows from operating activities: | | | |
|
Net earnings | $ | 206 |
| | $ | 98 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | |
Depreciation and amortization | 44 |
| | 47 |
|
Equity in earnings of unconsolidated affiliates | (7 | ) | | (2 | ) |
Gain on sales of investments and other assets, net | — |
| | (8 | ) |
Non-cash lease costs | 37 |
| | — |
|
Operating lease payments | (37 | ) | | — |
|
Distributions from unconsolidated affiliates, return on investment | 3 |
| | 1 |
|
Stock-based compensation cost | 9 |
| | 7 |
|
Change in valuation of equity and preferred securities, net | (142 | ) | | 7 |
|
Changes in assets and liabilities, net of effects from acquisitions: | | | |
Net decrease in trade receivables | 12 |
| | 6 |
|
Net increase in prepaid expenses and other assets | (76 | ) | | (14 | ) |
Net decrease in accounts payable, accrued liabilities, deferred revenue and other | (106 | ) | | (150 | ) |
Net decrease in reserve for title claim losses | (5 | ) | | (5 | ) |
Net change in income taxes | 58 |
| | 31 |
|
Net cash (used in) provided by operating activities | (4 | ) | | 18 |
|
Cash flows from investing activities: | | | |
Proceeds from sales of investment securities | 194 |
| | 189 |
|
Proceeds from calls and maturities of investment securities | 62 |
| | 120 |
|
Proceeds from sales of property and equipment | — |
| | 21 |
|
Funding of Cannae Holdings Inc. note receivable | (100 | ) | | — |
|
Additions to property and equipment and capitalized software | (22 | ) | | (20 | ) |
Purchases of investment securities | (322 | ) | | (283 | ) |
Net proceeds from sales and maturities of (purchases of) short-term investment securities | 268 |
| | (51 | ) |
Additional investments in unconsolidated affiliates | (1 | ) | | (21 | ) |
Distributions from unconsolidated affiliates, return of investment | 17 |
| | 19 |
|
Net other investing activities | (2 | ) | | (1 | ) |
Other acquisitions/disposals of businesses, net of cash acquired/disposed | — |
| | (5 | ) |
Net cash provided by (used in) investing activities | 94 |
| | (32 | ) |
Cash flows from financing activities: | | | |
Debt service payments | — |
| | (15 | ) |
Equity portion of debt conversions paid in cash
| — |
| | (31 | ) |
Dividends paid | (85 | ) | | (82 | ) |
Subsidiary dividends paid to non-controlling interest shareholders | (3 | ) | | (2 | ) |
Exercise of stock options | 1 |
| | 3 |
|
Net change in secured trust deposits | (113 | ) | | (5 | ) |
Payment of contingent consideration for prior period acquisitions | (6 | ) | | (4 | ) |
Purchases of treasury stock | (18 | ) | | — |
|
Net cash used in financing activities | (224 | ) | | (136 | ) |
Net decrease in cash and cash equivalents | (134 | ) | | (150 | ) |
Cash and cash equivalents at beginning of period | 1,257 |
| | 1,110 |
|
Cash and cash equivalents at end of period | $ | 1,123 |
| | $ | 960 |
|
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 financial information in this report presented for interim periods is unaudited and 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. In the opinion of management, 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, 2018.
Description of the Business
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 products and (ii) technology and transaction services to the real estate and mortgage industries. FNF is one of the nation’s largest title insurance companies operating through its title insurance underwriters - Fidelity National Title Insurance Company ("FNTIC"), Chicago Title Insurance Company ("Chicago Title"), Commonwealth Land Title Insurance Company ("Commonwealth Title"), 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.
For information about our reportable segments refer to Note H Segment Information.
Recent Developments
Pending Acquisition of Stewart
On March 18, 2018, we signed a merger agreement (the "Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"). The material terms of the Merger Agreement and progress on the Stewart Merger through February 2019 are set forth in our Annual Report.
We continue to respond to the Federal Trade Commission's ("FTC") request for additional information and documentary material (referred to as a 'Second Request'). We have also filed a new Form A application with the New York State Department of Financial Services, which disapproved a prior application, to acquire control of Stewart Title Insurance Company. We will continue to respond to the FTC's Second Request and maintain discussions with all other relevant regulatory bodies to seek approval of the Stewart Merger.
The closing of the Stewart Merger is subject to certain closing conditions, including federal and state regulatory approvals and the satisfaction of other customary closing conditions.
Note Receivable from Cannae
In November 2017, in conjunction with the split-off of our former portfolio company investments into a separate company, Cannae Holdings, Inc. ("Cannae"), we issued to Cannae a revolver note (the "Cannae Revolver") in the aggregate principal amount of up to $100 million. Cannae is considered a related party to FNF.
The Cannae Revolver accrues interest quarterly at LIBOR plus 450 basis points and matures on the five-year anniversary from the date of issuance. The maturity date is automatically extended for additional five-year terms unless notice of non-renewal is otherwise provided by either FNF or Cannae, in their sole discretion.
On February 7, 2019, Cannae borrowed $100 million from FNF under the Cannae Revolver.
We account for the Cannae Revolver as a financing receivable. Interest income is recorded ratably in periods in which principal is outstanding. Uncollectible financing receivables are written off or impaired when, based on all available information, it is probable that a loss has occurred. As of March 31, 2019, there are no indications that a future loss is probable.
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
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
positive earnings have been reported.
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 no antidilutive instruments outstanding during the three-month periods ended March 31, 2019 or March 31, 2018.
Recent Accounting Pronouncements
Adopted Pronouncements
In February 2016, the FASB issued Accounting Standards Update ("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 resulting from applying the fair value measurement, to be reflected on the lessee's balance sheet; and expanding and adding to the required disclosures for lessees. In July 2018, the FASB issued ASU 2018-11 Leases (Topic 842): Targeted Improvements which allows entities the option to adopt this standard using a modified retrospective approach with a cumulative-effect adjustment to opening equity at the adoption date and include required disclosures for prior periods.
We adopted Topic 842 on January 1, 2019 using a modified retrospective approach and recorded lease right-of-use assets ("Lease assets") of $421 million and liabilities for future discounted lease payment obligations ("Lease liabilities") of $437 million at the date of adoption. The adoption also resulted in a decrease of $9 million and $25 million to our Prepaid expenses and other assets and Accounts payable and accrued liabilities, respectively. We elected to apply the following package of practical expedients on a consistent basis permitting entities not to reassess: (i) whether any expired or existing contracts are or contain a lease; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance.
See Note K. Leases for further discussion of our leasing arrangements and related accounting.
Pronouncements Not Yet Adopted
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 fixed maturity 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 still evaluating the effect this new guidance will have on our consolidated financial statements and related disclosures and have not yet concluded on its effects. We do not plan to early adopt the standard.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note B — Summary of Reserve for Claim Losses
A summary of the reserve for claim losses follows:
|
| | | | | | | |
| Three months ended March 31, |
| 2019 | | 2018 |
| (Dollars in millions) |
Beginning balance | $ | 1,488 |
| | $ | 1,490 |
|
Change in reinsurance recoverable | (1 | ) | | — |
|
Claim loss provision related to: | | | |
|
Current year | 45 |
| | 47 |
|
Prior years | — |
| | — |
|
Total title claim loss provision | 45 |
| | 47 |
|
Claims paid, net of recoupments related to: | |
| | |
|
Current year | (1 | ) | | (1 | ) |
Prior years | (48 | ) | | (50 | ) |
Total title claims paid, net of recoupments | (49 | ) | | (51 | ) |
Ending balance of claim loss reserve for title insurance | $ | 1,483 |
| | $ | 1,486 |
|
Provision for title insurance claim losses as a percentage of title insurance premiums | 4.5 | % | | 4.5 | % |
We continually update loss reserve estimates as new information becomes known, new loss patterns emerge, or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors.
Due to the uncertainty inherent in the process and to the judgment used by management, the ultimate liability may be greater or less than our current reserves. If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that additional reserve adjustments may be required in future periods in order to maintain our recorded reserve within a reasonable range of our actuary's central estimate.
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 March 31, 2019 and December 31, 2018, respectively:
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | 269 |
| | $ | — |
| | $ | 269 |
|
State and political subdivisions | — |
| | 98 |
| | — |
| | 98 |
|
Corporate debt securities | — |
| | 1,571 |
| | 18 |
| | 1,589 |
|
Mortgage-backed/asset-backed securities | — |
| | 75 |
| | — |
| | 75 |
|
Foreign government bonds | — |
| | 58 |
| | — |
| | 58 |
|
Preferred securities | 18 |
| | 270 |
| | — |
| | 288 |
|
Equity securities | 635 |
| | — |
| | — |
| | 635 |
|
Other long-term investment | — |
| | — |
| | 107 |
| | 107 |
|
Total assets | $ | 653 |
| | $ | 2,341 |
| | $ | 125 |
| | $ | 3,119 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and agencies | $ | — |
| | $ | 225 |
| | $ | — |
| | $ | 225 |
|
State and political subdivisions | — |
| | 148 |
| | — |
| | 148 |
|
Corporate debt securities | — |
| | 1,486 |
| | 17 |
| | 1,503 |
|
Mortgage-backed/asset-backed securities | — |
| | 60 |
| | — |
| | 60 |
|
Foreign government bonds | — |
| | 62 |
| | — |
| | 62 |
|
Preferred securities | 16 |
| | 285 |
| | — |
| | 301 |
|
Equity securities | 498 |
| | — |
| | — |
| | 498 |
|
Other long-term investments | — |
| | — |
| | 101 |
| | 101 |
|
Total assets | $ | 514 |
| | $ | 2,266 |
| | $ | 118 |
| | $ | 2,898 |
|
Our Level 2 fair value measures for preferred securities and fixed maturity securities available for sale are provided by a third-party pricing service. We utilize one firm for our preferred stock and our bond portfolios. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. 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, or any other feature which may influence its risk and thus marketability, as well as relative credit information and relevant sector news. |
| |
• | 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. |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
| |
• | Mortgage-backed/asset-backed securities: These securities are comprised of commercial mortgage-backed securities, 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. |
| |
• | Preferred securities: Preferred securities are valued by calculating the appropriate spread over a comparable U.S. Treasury security. Inputs include benchmark quotes and other relevant market data. |
Our Level 3 fair value measures for our other long term investment are provided by a third-party pricing service. We utilize one firm to value our Level 3 other long-term investment. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. We utilize the income approach and a discounted cash flow analysis in determining the fair value of our Level 3 other long-term investment. The primary unobservable input utilized in this pricing methodology is the discount rate used which is determined based on underwriting yield, credit spreads, yields on benchmark indices, and comparable public company debt. The discount rate used in our determination of the fair value of our Level 3 other long-term investment as of March 31, 2019 was a range of 7.8% - 8.2% and a weighted-average of 8.0%. Based on the total fair value of our Level 3 other long-term investment as of March 31, 2019, changes in the discount rate utilized will not result in a fair value significantly different than the amount recorded.
Our Level 3 fair value measures for our corporate debt securities relate to multiple investments which are considered immaterial individually and in the aggregate.
The following table presents a summary of the changes in the fair values of Level 3 assets, measured on a recurring basis, for the three months ended March 31, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 | | Three months ended March 31, 2018 |
| Other long-term | | Corporate debt | | | | Other long-term | | Corporate debt | | |
| investments | | securities | | Total | | investments | | securities | | Total |
| (In millions) | | (In millions) |
Fair value, beginning balance | $ | 101 |
| | $ | 17 |
| | $ | 118 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Fair value of assets associated with the adoption of ASU 2016-01 | — |
| | — |
| | — |
| | 100 |
| | — |
| | 100 |
|
Transfers from Level 2 | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Transfers to Level 2 | — |
| | (4 | ) | | (4 | ) | | — |
| | — |
| | — |
|
Paid-in-kind dividends (1) | 1 |
| | 1 |
| | 2 |
| | 1 |
| | — |
| | 1 |
|
Purchases | — |
| | 5 |
| | 5 |
| | — |
| | — |
| | — |
|
Sales and maturities | — |
| | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
|
Net valuation gain included in earnings (2) | 5 |
| | — |
| | 5 |
| | — |
| | — |
| | — |
|
Fair value, ending balance | $ | 107 |
| | $ | 18 |
| | $ | 125 |
| | $ | 101 |
| | $ | 13 |
| | $ | 114 |
|
_____________________________________
(1) Included in Interest and investment income on the Condensed Consolidated Statements of Earnings
(2) Included in Realized gains and losses, net on the Condensed Consolidated Statements of Earnings
Transfers into or out of the Level 3 fair value category occur when unobservable inputs become more or less significant to the fair value measurement or upon a change in valuation technique. For the three months ended March 31, 2019, transfers between Level 2 and Level 3 were based on changes in significance of unobservable inputs used associated with a change in the valuation technique used for certain of the Company’s corporate debt securities and are not considered material to the Company's financial position or results of operations. Transfers between Level 2 and Level 3 in the three months ended March 31, 2019 are not material.
Substantially all of the unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) on our Condensed Consolidated Statements of Comprehensive Income relate to fixed maturity securities which are considered Level 2 fair value measures.
The carrying amounts of short-term investments, accounts receivable and notes receivable approximate fair value due to their short-term nature and/or short time period since consummation. Additional information regarding the fair value of our investment portfolio is included in Note D. Investments.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note D — Investments
The carrying amounts and fair values of our available for sale securities at March 31, 2019 and December 31, 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Carrying | | Cost | | Unrealized | | Unrealized | | Fair |
| Value | | Basis | | Gains | | Losses | | Value |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | | | |
U.S. government and agencies | $ | 269 |
| | $ | 268 |
| | $ | 2 |
| | $ | (1 | ) | | $ | 269 |
|
State and political subdivisions | 98 |
| | 96 |
| | 2 |
| | — |
| | 98 |
|
Corporate debt securities | 1,589 |
| | 1,569 |
| | 25 |
| | (5 | ) | | 1,589 |
|
Mortgage-backed/asset-backed securities | 75 |
| | 74 |
| | 1 |
| | — |
| | 75 |
|
Foreign government bonds | 58 |
| | 61 |
| | — |
| | (3 | ) | | 58 |
|
Total | $ | 2,089 |
| | $ | 2,068 |
| | $ | 30 |
| | $ | (9 | ) | | $ | 2,089 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Carrying | | Cost | | Unrealized | | Unrealized | | Fair |
| Value | | Basis | | Gains | | Losses | | Value |
| (In millions) |
Fixed maturity securities available for sale: | | | | | | | | | |
U.S. government and agencies | $ | 225 |
| | $ | 226 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 225 |
|
State and political subdivisions | 148 |
| | 147 |
| | 1 |
| | — |
| | 148 |
|
Corporate debt securities | 1,503 |
| | 1,510 |
| | 6 |
| | (13 | ) | | 1,503 |
|
Mortgage-backed/asset-backed securities | 60 |
| | 59 |
| | 1 |
| | — |
| | 60 |
|
Foreign government bonds | 62 |
| | 67 |
| | — |
| | (5 | ) | | 62 |
|
Total | $ | 1,998 |
| | $ | 2,009 |
| | $ | 9 |
| | $ | (20 | ) | | $ | 1,998 |
|
The cost basis of fixed maturity securities available for sale includes an adjustment for amortized premium or accreted discount since the date of purchase.
The following table presents certain information regarding contractual maturities of our fixed maturity securities at March 31, 2019:
|
| | | | | | | | | | | | | | |
| | March 31, 2019 |
| | Amortized | | % of | | Fair | | % of |
Maturity | | Cost | | Total | | Value | | Total |
| | (Dollars in millions) |
One year or less | | $ | 301 |
| | 15 | % | | $ | 300 |
| | 14 | % |
After one year through five years | | 1,306 |
| | 62 |
| | 1,314 |
| | 63 |
|
After five years through ten years | | 261 |
| | 13 |
| | 271 |
| | 13 |
|
After ten years | | 126 |
| | 6 |
| | 129 |
| | 6 |
|
Mortgage-backed/asset-backed securities | | 74 |
| | 4 |
| | 75 |
| | 4 |
|
Total | | $ | 2,068 |
| | 100 | % | | $ | 2,089 |
| | 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.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
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 March 31, 2019 and December 31, 2018, were as follows (in millions):
|
| | | | | | | | | | | | | | | | | | | | | | | |
March 31, 2019 | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
U.S. government and agencies | $ | — |
| | $ | — |
| | $ | 126 |
| | $ | (1 | ) | | $ | 126 |
| | $ | (1 | ) |
Corporate debt securities | 170 |
| | (3 | ) | | 371 |
| | (2 | ) | | 541 |
| | (5 | ) |
Foreign government bonds | 48 |
| | (2 | ) | | 10 |
| | (1 | ) | | 58 |
| | (3 | ) |
Total temporarily impaired securities | $ | 218 |
| | $ | (5 | ) | | $ | 507 |
| | $ | (4 | ) | | $ | 725 |
| | $ | (9 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | |
| Less than 12 Months | | 12 Months or Longer | | Total |
| Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized |
| Value | | Losses | | Value | | Losses | | Value | | Losses |
U.S. government and agencies | $ | 71 |
| | $ | (1 | ) | | $ | 117 |
| | $ | (1 | ) | | $ | 188 |
| | $ | (2 | ) |
Corporate debt securities | 661 |
| | (8 | ) | | 301 |
| | (5 | ) | | 962 |
| | (13 | ) |
Foreign government bonds | 52 |
| | (3 | ) | | 10 |
| | (2 | ) | | 62 |
| | (5 | ) |
Total temporarily impaired securities | $ | 784 |
| | $ | (12 | ) | | $ | 428 |
| | $ | (8 | ) | | $ | 1,212 |
| | $ | (20 | ) |
We recorded no impairment charges relating to investments during the three-month periods ended March 31, 2019 or 2018.
As of March 31, 2019 and December 31, 2018, we held no investment securities for which an other-than-temporary impairment had been previously recognized. It is possible that future events may 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 tables present realized gains and losses on investments and other assets and proceeds from the sale or maturity of investments and other assets for the three-month periods ended March 31, 2019 and 2018, respectively:
|
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2019 |
| | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity |
| | (In millions) |
Sales and maturities of fixed maturity securities available for sale | | $ | 1 |
| | $ | (1 | ) | | $ | — |
| | $ | 235 |
|
Sales and maturities of preferred securities | | — |
| | — |
| | — |
| | 24 |
|
Sales of equity securities | | 4 |
| | — |
| | 4 |
| | 41 |
|
Valuation of equity securities | | | | | | 126 |
| | — |
|
Valuation of preferred securities | | | | | | 11 |
| | — |
|
Valuation of other long term investments | | | | | | 5 |
| | — |
|
Impairment of lease assets | | | | | | (4 | ) | | — |
|
Total | | | | | | $ | 142 |
| | $ | 300 |
|
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
|
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2018 |
| | Gross Realized Gains | | Gross Realized Losses | | Net Realized Gains (Losses) | | Gross Proceeds from Sale/Maturity |
| | (In millions) |
Sales and maturities of fixed maturity securities available for sale | | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | 298 |
|
Valuation of equity securities | | | | | | (4 | ) | | — |
|
Valuation of preferred securities | | | | | | (3 | ) | | — |
|
Property and equipment | | | | | | 5 |
| | 21 |
|
Total | | | | | | $ | 1 |
| | $ | 319 |
|
Investment with Related Party
Included in equity securities as of March 31, 2019 and December 31, 2018 are 5,706,134 shares of Cannae common stock (NYSE: CNNE) which were purchased during the fourth quarter of 2017 in connection with the split-off of our former portfolio company investments to Cannae. The fair value of our related party investment is $138 million and $98 million as of March 31, 2019 and December 31, 2018, respectively.
Note E —Notes Payable
Notes payable consists of the following:
|
| | | | | | | | |
| | March 31, 2019 | | December 31, 2018 |
| | (In millions) |
Unsecured notes, net of discount, interest payable semi-annually at 4.50%, due August 2028 | | $ | 443 |
| | $ | 442 |
|
Unsecured notes, net of discount, interest payable semi-annually at 5.50%, due September 2022 | | 398 |
| | 398 |
|
Revolving Credit Facility, unsecured, unused portion of $800 | | (4 | ) | | (4 | ) |
| | $ | 837 |
| | $ | 836 |
|
At March 31, 2019, the estimated fair value of our unsecured notes payable was approximately $879 million, which was $29 million higher than its carrying value, excluding $13 million of net unamortized debt issuance costs and discount. The fair values of our unsecured notes payable are based on established market prices for the securities on March 31, 2019 and are considered Level 2 financial liabilities.
On August 13, 2018, we completed an offering of $450 million in aggregate principal amount of 4.50% notes due August 2028 (the "4.50% Notes"), pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The 4.50% Notes were priced at 99.252% of par to yield 4.594% annual interest. We pay interest on the 4.50% Notes semi-annually on the 15th of February and August, beginning February 15, 2019. The 4.50% Notes contain customary covenants and events of default for investment grade public debt, which primarily relate to failure to make principal or interest payments.
On June 25, 2013, FNF entered into an agreement to amend and restate our existing $800 million Second Amended and Restated Credit Agreement (the “Existing Credit Agreement”), dated as of April 16, 2012 with Bank of America, N.A., as administrative agent (in such capacity, the “Administrative Agent”) and the other agents party thereto (the “Revolving Credit Facility”). On April 27, 2017, the Existing Credit Agreement was amended (the "Restated Credit Agreement").The material terms of the Restated Credit Agreement are set forth in our Annual Report for the year ended December 31, 2018. As of March 31, 2019, there was no principal outstanding, $4 million of unamortized debt issuance costs, and $800 million of available borrowing capacity under the Revolving Credit Facility.
On August 28, 2012, FNF completed an offering of $400 million in aggregate principal amount of 5.50% notes due September 2022 (the "5.50% Notes"), pursuant to an effective registration statement previously filed with the SEC. The material terms of the 5.50% Notes are set forth in our Annual Report for the year ended December 31, 2018.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
|
| | | |
Gross principal maturities of notes payable at March 31, 2019 are as follows (in millions): | |
2019 (remaining) | $ | — |
|
2020 | — |
|
2021 | — |
|
2022 | 400 |
|
2023 | — |
|
Thereafter | 450 |
|
| $ | 850 |
|
Note F — Commitments and Contingencies
Legal and Regulatory Contingencies
In the ordinary course of business, we are involved in various pending and threatened litigation matters related to our operations, some of which include claims for punitive or exemplary damages. With respect to our title insurance operations, this customary litigation includes but is not limited to a wide variety of cases arising out of or related to title and escrow claims, for which we make provisions through our loss reserves. Additionally, like other companies, our ordinary course litigation includes a number of class action and purported class action lawsuits, which make allegations related to aspects of our operations. We believe that no actions, other than the matters discussed below, if any, depart from customary litigation incidental to our business.
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings in which it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and which represents our best estimate has been recorded. Our accrual for legal and regulatory matters was $10 million and $11 million as of March 31, 2019 and December 31, 2018, respectively. None of the amounts we have currently recorded are considered to be material to our financial condition individually or in the aggregate. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending legal proceedings is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
In a class action captioned Patterson, et al. v. Fidelity National Title Insurance Company, et al., Case No. GD 03-021176, originally filed on October 27, 2003 and pending in the Court of Common Pleas of Allegheny County, Pennsylvania, plaintiffs allege the named Company underwriters violated Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) by failing to provide premium discounts in accordance with filed rates in refinancing transactions. Contrary to rulings in similar federal court cases that considered the rate rule and agreed with the Company’s position, the court held that the rate rule should be interpreted such that an institutional mortgage in the public record is a “proxy” for prior title insurance entitling a consumer to a discount rate when refinancing when there is a mortgage of record within the number of years required by the rate rule. The rate rule requires sufficient evidence of a prior policy, and because not all institutional mortgages were insured, the Company’s position is that a recorded first mortgage alone does not constitute sufficient evidence of an earlier policy entitling consumers to a discounted rate. The court certified the class refusing to follow prior Pennsylvania Supreme Court and appellate court decisions holding that the UTPCPL requires proof of reliance, an individual issue which precludes certification. After notice to the class, plaintiffs moved for partial summary judgment on liability, and defendants moved for summary judgment. On June 27, 2018, the court entered an order granting plaintiffs’ motion for partial summary judgment on liability, and denying the Company’s motion finding that the Company failed to advise its agents on how to interpret the rate rule so that it would be uniformly applied, thereby having engaged in “deceptive conduct.” The Company plans to seek an interlocutory appeal of the summary judgment order. The court approved the parties’ stipulation in which they agreed that before interlocutory review is appropriate, the court will first determine which party should bear the burden of ascertaining the class and calculating damages, and determine whether the damages should be trebled. Following briefing and oral argument on these issues, the court held that a multiplier of 1.5, not treble, should be applied to the amount of damages, if any, proven by class members at trial. The court also held that plaintiffs should bear the responsibility of identifying class members and calculating damages. The interlocutory appeal of the summary judgment order will now proceed. There has been no determination as to the size of the class. It is unknown whether plaintiffs will seek statutory or actual damages, whether the judge will exercise discretion to award treble damages or award prejudgment interest, or what plaintiffs’ counsel will seek as reasonable attorneys’ fees. Accordingly, damages are not reasonably estimable at
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
this time. We will continue to vigorously defend this matter, and we do not believe the result will have a material adverse effect on our financial condition.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. Also, regulators and courts have been dealing with issues arising from foreclosures and related processes and documentation. Various governmental entities are studying the title insurance product, market, pricing, and business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities which may require us to pay fines or claims or take other actions. We do not anticipate such fines and settlements, either individually or in the aggregate, will have a material adverse effect on our financial condition.
Note G — Dividends
On April 24, 2019, our Board of Directors declared cash dividends of [$0.31] per share, payable on June 28, 2019, to FNF common shareholders of record as of June 14, 2019.
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note H — Segment Information
Summarized financial information concerning our reportable segments is shown in the following tables.
As of and for the three months ended March 31, 2019:
|
| | | | | | | | | | | |
| Title | | Corporate and Other | | Total |
| (In millions) |
Title premiums | $ | 992 |
| | $ | — |
| | $ | 992 |
|
Other revenues | 481 |
| | 53 |
| | 534 |
|
Revenues from external customers | 1,473 |
| | 53 |
| | 1,526 |
|
Interest and investment income, including realized gains and losses | 190 |
| | 6 |
| | 196 |
|
Total revenues | 1,663 |
| | 59 |
| | 1,722 |
|
Depreciation and amortization | 39 |
| | 5 |
| | 44 |
|
Interest expense | — |
| | 12 |
| | 12 |
|
Earnings (loss) before income taxes and equity in earnings of unconsolidated affiliates | 292 |
| | (28 | ) | | 264 |
|
Income tax expense (benefit) | 71 |
| | (6 | ) | | 65 |
|
Earnings (loss) before equity in earnings of unconsolidated affiliates | 221 |
| | (22 | ) | | 199 |
|
Equity in earnings of unconsolidated affiliates | 7 |
| | — |
| | 7 |
|
Net earnings (loss) | $ | 228 |
| | $ | (22 | ) | | $ | 206 |
|
Assets | $ | 8,567 |
| | $ | 1,080 |
| | $ | 9,647 |
|
Goodwill | 2,463 |
| | 264 |
| | 2,727 |
|
As of and for the three months ended March 31, 2018:
|
| | | | | | | | | | | |
| Title | | Corporate and Other | | Total |
| (In millions) |
Title premiums | $ | 1,036 |
| | $ | — |
| | $ | 1,036 |
|
Other revenues | 516 |
| | 102 |
| | 618 |
|
Revenues from external customers | 1,552 |
| | 102 |
| | 1,654 |
|
Interest and investment income, including realized gains and losses | 38 |
| | 1 |
| | 39 |
|
Total revenues | 1,590 |
| | 103 |
| | 1,693 |
|
Depreciation and amortization | 40 |
| | 7 |
| | 47 |
|
Interest expense | — |
| | 11 |
| | 11 |
|
Earnings (loss) before income taxes and equity in earnings of unconsolidated affiliates | 163 |
| | (36 | ) | | 127 |
|
Income tax expense (benefit) | 40 |
| | (9 | ) | | 31 |
|
Earnings (loss) before equity in earnings of unconsolidated affiliates | 123 |
| | (27 | ) | | 96 |
|
Equity in earnings of unconsolidated affiliates | 1 |
| | 1 |
| | 2 |
|
Net earnings (loss) | $ | 124 |
| | $ | (26 | ) | | $ | 98 |
|
Assets | $ | 8,276 |
| | $ | 742 |
| | $ | 9,018 |
|
Goodwill | 2,434 |
| | 313 |
| | 2,747 |
|
The activities in our segments include the following:
| |
• | 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, and home warranty products. 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. |
| |
• | Corporate and Other. This segment consists of the operations of the parent holding company, our real estate technology subsidiaries and our remaining real estate brokerage businesses. This segment includes the results of operations of Pacific Union International, Inc. ("Pacific Union") through September 24, 2018, the date we closed on the sale of all of our equity interest in, and notes outstanding from, Pacific Union. This segment also includes certain other unallocated corporate overhead expenses and eliminations of revenues and expenses between it and our Title segment. |
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Note I — Supplemental Cash Flow Information
The following supplemental cash flow information is provided with respect to certain cash payment and non-cash investing and financing activities.
|
| | | | | | | | |
| | Three months ended March 31, |
| | 2019 | | 2018 |
Cash paid for: | | | | |
|
Interest | | $ | 22 |
| | $ | 15 |
|
Income taxes | | 6 |
| | 2 |
|
Non-cash investing and financing activities: | | | | |
Change in proceeds of sales of investments available for sale receivable in period | | $ | (44 | ) | | $ | 11 |
|
Change in purchases of investments available for sale payable in period | | 20 |
| | (4 | ) |
Lease liabilities recognized in exchange for lease right-of-use assets | | 6 |
| | — |
|
Remeasurement of lease liabilities | | 9 |
| | — |
|
Note J — Revenue Recognition
On January 1, 2018, we adopted Accounting Standard Codification ("ASC") Topic 606 by applying the modified retrospective method. The adoption of ASC Topic 606 did not have an impact on the recognition of our primary sources of revenue, direct and agency title premiums, as those revenue streams are subject to the accounting and reporting requirements under ASC Topic 944. Timing of recognition of substantially all of our remaining revenue was also not impacted and we therefore did not record any cumulative effect adjustment to opening equity.
Disaggregation of Revenue
Our revenue consists of:
|
| | | | | | | | | | | | |
| | | | | | Three months ended March 31, |
| | | | | | 2019 | | 2018 |
Revenue Stream | | Income Statement Classification | | Segment | | Total Revenue |
Revenue from insurance contracts: | | | | | | (in millions) |
Direct title insurance premiums | | Direct title insurance premiums | | Title | | $ | 440 |
|
| $ | 472 |
|
Agency title insurance premiums | | Agency title insurance premiums | | Title | | 552 |
| | 564 |
|
Home warranty | | Escrow, title-related and other fees | | Title | | 41 |
| | 45 |
|
Total revenue from insurance contracts | | | | | | 1,033 |
| | 1,081 |
|
Revenue from contracts with customers: | | | | | | | | |
Escrow fees | | Escrow, title-related and other fees | | Title | | 165 |
| | 183 |
|
Other title-related fees and income | | Escrow, title-related and other fees | | Title | | 136 |
| | 140 |
|
ServiceLink, excluding title premiums, escrow fees, and subservicing fees | | Escrow, title-related and other fees | | Title | | 83 |
| | 94 |
|
Real estate technology | | Escrow, title-related and other fees | | Corporate and other | | 25 |
| | 25 |
|
Real estate brokerage | | Escrow, title-related and other fees | | Corporate and other | | 7 |
| | 76 |
|
Other | | Escrow, title-related and other fees | | Corporate and other | | 21 |
| | 2 |
|
Total revenue from contracts with customers | | | | | | 437 |
| | 520 |
|
Other revenue: | | | | | | | | |
Loan subservicing revenue | | Escrow, title-related and other fees | | Title | | 56 |
| | 53 |
|
Interest and investment income | | Interest and investment income | | Various | | 54 |
| | 38 |
|
Realized gains and losses, net | | Realized gains and losses, net | | Various | | 142 |
| | 1 |
|
Total revenues | | Total revenues | | | | $ | 1,722 |
| | $ | 1,693 |
|
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Our Direct title insurance premiums are recognized as revenue at the time of closing of the underlying transaction as the earnings process is then considered complete. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each states' respective Department of Insurance. Cash associated with such revenue is typically collected at closing of the underlying real estate transaction. Premium revenues from agency title operations are recognized when the underlying title order and transaction closing, if applicable, are complete.
Revenues from our home warranty business are generated from contracts with customers to provide warranty for major home appliances. Substantially all of our home warranty contracts are one year in length and revenue is recognized ratably over the term of the contract.
Escrow fees and Other title-related fees and income in our Title segment are closely related to Direct title insurance premiums and are primarily associated with managing the closing of real estate transactions including the processing of funds on behalf of the transaction participants, gathering and recording the required closing documents, providing notary and home inspection services, and other real estate or title-related activities. Revenue is primarily recognized upon closing of the underlying real estate transaction or completion of services. Cash associated with such revenue is typically collected at closing.
Revenues from ServiceLink, excluding its title premiums, escrow fees, and loan subservicing fees primarily include revenues from real estate appraisal services and foreclosure processing and facilitation services. Revenues from real estate appraisal services are recognized when all appraisal work is complete, a final report is issued to the client and the client is billed. Revenues from foreclosure processing and facilitation services are primarily recognized upon completion of the services and when billing to the client is complete.
Real estate technology revenues are primarily comprised of subscription fees for use of software provided to real estate professionals. Subscriptions are only offered on a month-by-month basis and fees are billed monthly. Revenue is recognized in the month services are provided.
Real estate brokerage revenues are primarily comprised of commission revenues earned in association with the facilitation of real estate transactions and are recognized upon closing of the sale of the underlying real estate transaction.
Loan subservicing revenues are generated by certain subsidiaries of ServiceLink and are associated with the servicing of mortgage loans on behalf of its customers. Revenue is recognized when the underlying work is performed and billed. Loan subservicing revenues are subject to the recognition requirements of ASC Topic 860.
Interest and investment income consists primarily of interest payments received on fixed maturity security holdings and dividends received on equity and preferred security holdings.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, primarily related to revenue from our home warranty business, and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.
Contract Balances
The following table provides information about trade receivables and deferred revenue:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (In millions) |
Trade receivables | $ | 273 |
| | $ | 284 |
|
Deferred revenue (contract liabilities) | 106 |
| | 105 |
|
Deferred revenue is recorded primarily for our home warranty contracts. Revenues from home warranty products are recognized over the life of the policy, which is primarily one year. The unrecognized portion is recorded as deferred revenue in accounts payable and other accrued liabilities in the Condensed Consolidated Balance Sheets. During the three months ended March 31, 2019, we recognized $46 million of revenue which was included in deferred revenue at the beginning of the period.
Note K. Leases
We adopted ASC Topic 842 on January 1, 2019 using a modified retrospective approach. Prior year periods continue to be reported under ASC Topic 840. See Note A Basis of Financial Statements for further discussion of the current period effects of adoption of ASU No. 2016-02 Leases (Topic 842).
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued
Right-of-use assets and lease liabilities related to operating leases under ASC Topic 842 are recorded when we are party to a contract which conveys the right for the Company to control an asset for a specified period of time. Substantially all of our operating lease arrangements relate to rented office space and real estate for our title operations. We generally are not a party to any material contracts considered finance leases. Right-of-use assets and lease liabilities under ASC Topic 842 are recorded as Lease assets and Lease liabilities, respectively, on the Condensed Consolidated Balance Sheet as of March 31, 2019.
Our operating leases range in term from one to ten years. As of March 31, 2019, the weighted-average remaining lease term of our operating leases was 4.1 years.
Our lease agreements do not contain material variable lease payments, buyout options, residual value guarantees or restrictive covenants.
Most of our leases include one or more options to renew, with renewal terms that can extend the lease term by varying amounts. The exercise of lease renewal options is at our sole discretion. We do not include options to renew in our measurement of right-of-use assets and lease liabilities as they are not considered reasonably assured of exercise.
Our operating lease liability is determined by discounting future lease payments using a discount rate based on the Company's incremental borrowing rate for similar collateralized borrowing. The discount rate is calculated as an average of the current yield on our unsecured notes payable and 140 basis points in excess of the current five year LIBOR swap rate. As of March 31, 2019 the weighted-average discount rate used to determine our operating lease liability was 4.36%.
We do not separate lease components from nonlease components for any of our right-of-use assets.
Our lease costs are included in Other operating expenses on the Condensed Consolidated Statements of Income and were $37 million for the three months ended March 31, 2019. We do not have any material short term lease costs, variable lease costs, or sublease income.
Future payments under operating lease arrangements accounted for under ASC Topic 842 as of March 31, 2019 are as follows (in millions):
|
| | | |
2019 (remaining) | $ | 109 |
|
2020 | 122 |
|
2021 | 94 |
|
2022 | 67 |
|
2023 | 41 |
|
Thereafter | 26 |
|
Total operating lease payments, undiscounted | $ | 459 |
|
Less: interest | 40 |
|
Lease liability, at present value | $ | 419 |
|
Future payments under operating lease arrangements accounted for under ASC Topic 840 as of December 31, 2018 are as follows (in millions):
|
| | | |
2019 | $ | 145 |
|
2020 | 121 |
|
2021 | 93 |
|
2022 | 68 |
|
2023 | 41 |
|
Thereafter | 28 |
|
Total future minimum operating lease payments | $ | 496 |
|
See Note I. Supplemental Cash Flow Information for certain information on noncash investing and financing activities related to our operating lease arrangements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, hopes, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. It is important to note that our actual results could vary materially from those forward-looking statements contained herein due to many factors, including, but not limited to: changes in general economic, business and political conditions, including changes in the financial markets; continued weakness or adverse changes in the level of real estate activity, which may be caused by, among other things, high or increasing interest rates, a limited supply of mortgage funding or a weak U.S. economy; our potential inability to find suitable acquisition candidates, acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus, or difficulties in integrating acquisitions; our dependence on distributions from our title insurance underwriters as our main source of cash flow; significant competition that our operating subsidiaries face; compliance with extensive government regulation of our operating subsidiaries; the risk that the necessary regulatory approvals for the Stewart Merger may not be obtained or may be obtained subject to conditions that are not anticipated; risks that any of the closing conditions to the proposed Stewart Merger may not be satisfied in a timely manner; the risk that our and Stewart's businesses will not be integrated successfully, that such integration may be more difficult, time-consuming or more costly than expected or that the expected benefits of the Stewart Merger will not be realized; and other risks detailed in the “Statement Regarding Forward-Looking Information,” “Risk Factors” and other sections of our Annual Report on Form 10-K (our "Annual Report") for the year ended December 31, 2018 and other filings with the SEC.
The following discussion should be read in conjunction with our Annual Report for the year ended December 31, 2018.
Overview
For a description of our business, including descriptions of segments and recent business developments, see the discussion under Basis of Financial Statements in Note A to the Condensed Consolidated Financial Statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part I, Item 2.
Business Trends and Conditions
Title
Our Title segment revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues.
We have found that residential real estate activity is generally dependent on the following factors:
| |
• | mortgage interest rates; |
| |
• | mortgage funding supply; |
| |
• | housing inventory and home prices; and |
| |
• | the strength of the United States economy, including employment levels. |
As of April 18, 2019, the Mortgage Bankers Association ("MBA") estimated (actual for fiscal year 2018) the size of the U.S. mortgage originations market as shown in the following table for 2018 - 2021 in its "Mortgage Finance Forecast" (in trillions):
|
| | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 | | 2018 |
Purchase transactions | $ | 1.3 |
| | $ | 1.3 |
| | $ | 1.3 |
| | $ | 1.2 |
|
Refinance transactions | 0.4 |
| | 0.4 |
| | 0.4 |
| | 0.4 |
|
|