FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
For the Fiscal Year Ended December 31, 2008
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
Commission File No. 1-32630
Fidelity National Financial, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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16-1725106 |
(State or other jurisdiction
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(I.R.S. Employer |
of incorporation or organization)
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Identification No.) |
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601 Riverside Avenue
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(904) 854-8100 |
Jacksonville, Florida 32204
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(Registrants telephone number, |
(Address of principal executive offices,
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including area code) |
including zip code) |
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Common Stock, $0.0001 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K, or any amendment to this Form 10-K. 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
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Accelerated filer o
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Non-accelerated filer o
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Smaller Reporting company o |
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(Do not check if a smaller reporting company)
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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 aggregate market value of the shares of the Common Stock held by non-affiliates of the
registrant as of June 30, 2008 was $2,503,346,693, based on the closing price of $12.60 as reported
by the New York Stock Exchange.
As of January 31, 2009, there were 215,087,639 shares of Common Stock outstanding.
The information in Part III hereof is incorporated herein by reference to the registrants
Proxy Statement on Schedule 14A for the fiscal year ended December 31, 2008, to be filed within 120
days after the close of the fiscal year that is the subject of this Report.
TABLE OF CONTENTS
FORM 10-K
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PART I
Item 1. Business
We are a holding company that is a provider, through our subsidiaries, of title insurance,
specialty insurance, claims management services, and information services. Following our
acquisition of Commonwealth Land Title Insurance Company (Commonwealth) and Lawyers Title
Insurance Corporation (Lawyers), we are the nations largest title insurance company through our
title insurance underwriters Fidelity National Title, Chicago Title, Commonwealth Land Title,
Lawyers Title, Ticor Title, Security Union Title, and Alamo Title which collectively issued more
title insurance policies in 2007 than any other title company in the United States. We also provide
flood insurance, personal lines insurance, and home warranty insurance through our specialty
insurance subsidiaries. We are also a leading provider of outsourced claims management services to
large corporate and public sector entities through our minority-owned affiliate, Sedgwick CMS
Holdings (Sedgwick) and a provider of information services in the human resources, retail, and
transportation markets through another minority-owned affiliate, Ceridian Corporation (Ceridian).
On December 22, 2008, we completed the acquisition of LandAmerica Financial Group, Inc.s
(LFG) two principal title insurance underwriters, Commowealth and Lawyers, as well as United
Capital Title Insurance Company (United) (collectively, the LFG Underwriters). As a result, the
results of operations of the companies acquired are included in our results of operations for the
period from December 22 through December 31, 2008. For more information on this acquisition, see
note B of Notes to Consolidated Financial Statements.
Prior to October 24, 2006, we were known as Fidelity National Title Group, Inc. (FNT) and
were a majority-owned subsidiary of another publicly traded company, also called Fidelity National
Financial, Inc. (Old FNF). On October 24, 2006, Old FNF transferred certain assets to us in
return for the issuance of 45,265,956 shares of our common stock to Old FNF. Old FNF then
distributed to its shareholders all of its shares of our common stock, making FNT a stand alone
public company (the 2006 Distribution). On November 9, 2006, Old FNF was then merged with and
into another of its subsidiaries, Fidelity National Information Services, Inc. (FIS), after which
our name was changed to Fidelity National Financial, Inc. (we, FNF or the Company). On
November 10, 2006, our common stock began trading on the New York Stock Exchange under the trading
symbol FNF. On July 2, 2008, FIS completed the spin-off of its former Lender Processing Services
operating segment into a separate publicly traded company, referred to as LPS, by distributing all
of its shares of LPS to FIS shareholders through a stock dividend. Old FNFs chairman of the board
and chief executive officer is now our chairman of the board, the executive chairman of the board
of FIS, and the chairman of the board of LPS. Other key members of Old FNFs senior management have
also continued their involvement at FNF, FIS, and LPS in executive capacities. Under applicable
accounting principles, following these transactions, Old FNFs historical financial statements,
with the exception of equity and earnings per share, became our historical financial statements,
including the results of FIS through the date of our spin-off from Old FNF. For periods prior to
October 24, 2006 our equity has been derived from FNTs historical equity and our historical basic
and diluted earnings per share have been calculated using FNTs basic and diluted weighted average
shares outstanding.
We currently have three reporting segments as follows:
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Fidelity National Title Group. 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 collection and trust activities,
trustees sales guarantees, recordings and reconveyances. |
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Specialty Insurance. The specialty insurance segment consists of certain subsidiaries
that issue flood, home warranty, homeowners, automobile and other personal lines insurance
policies. |
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Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company, certain other unallocated corporate overhead expenses, other smaller
operations, and the Companys share in the operations of certain equity investments,
including Sedgwick, Ceridian, and Remy International, Inc. (Remy). |
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Through October 23, 2006, the Companys results also included the operations of FIS as a
separate segment. This segment provided transaction processing services, consisting principally of
technology solutions for banks and other financial institutions, credit and debit card services and
check risk management and related services for retailers and others. This segment also provided
lender processing services, consisting principally of technology solutions for mortgage lenders,
selected mortgage origination services, title agency and closing services, default management and
mortgage information services. FISs credit and debit card services and check risk management
services were added through its merger with Certegy Inc. (Certegy). This merger closed in
February 2006 and these businesses are not included in the financial information in this report for
periods prior to February 1, 2006.
Strategy
Fidelity National Title Group
Our strategy in the title insurance business is to maximize operating profits by increasing
our market share and managing operating expenses throughout the real estate business cycle. To
accomplish our goals, we intend to:
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Continue to operate each of our seven title brands independently. We believe that in
order to maintain and strengthen our title insurance customer base, we must leave the
Fidelity National Title, Chicago Title, Commonwealth Land Title, Lawyers Title, Ticor Title,
Security Union Title and Alamo Title brands intact and operate these brands independently.
In most of our largest markets, we operate two, and in a few cases as many as five, brands,
including the brands acquired with the LFG Underwriters. This approach allows us to continue
to attract customers who identify with one brand over another and allows us to utilize a
broader base of local agents and local operations than we would have with a single
consolidated brand. |
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Consistently deliver superior customer service. We believe customer service and
consistent product delivery are the most important factors in attracting and retaining
customers. Our ability to provide superior customer service and provide consistent product
delivery requires continued focus on providing high quality service and products at
competitive prices. Our goal is to continue to improve the experience of our customers in
all aspects of our business. |
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Manage our operations successfully through business cycles. We operate in a cyclical
business and our ability to diversify our revenue base within our core title insurance
business and manage the duration of our investments may allow us to better operate in this
cyclical business. Maintaining a broad geographic revenue base, utilizing both direct and
independent agency operations and pursuing both residential and commercial title insurance
business help diversify our title insurance revenues. Maintaining shorter durations on our
investment portfolio allows us to mitigate our interest rate risk and, in a rising interest
rate environment, to increase our investment revenue, which may offset some of the decline
in premiums and service revenues we would expect in such an environment. For a more detailed
discussion of our investment strategies, see Investment Policies and Investment Portfolio. |
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Continue to improve our products and technology. As a national provider of real estate
transaction products and services, we participate in an industry that is subject to
significant change, frequent new product and service introductions and evolving industry
standards. We believe that our future success will depend in part on our ability to
anticipate industry changes and offer products and services that meet evolving industry
standards. In connection with our service offerings, we are continuing to deploy new
information system technologies to our direct and agency operations. We expect to improve
the process of ordering title and escrow services and improve the delivery of our products
to our customers. |
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Maintain values supporting our strategy. We believe that our continued focus on and
support of our long-established corporate culture will reinforce and support our business
strategy. Our goal is to foster and support a corporate culture where our agents and
employees seek to operate independently and profitably at the local level while forming
close customer relationships by meeting customer needs and improving customer service.
Utilizing a relatively flat managerial structure and providing our employees with a sense of
individual ownership supports this goal. |
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Effectively manage costs based on economic factors. We believe that our focus on our
operating margins is essential to our continued success in the title insurance business.
Regardless of the business cycle in which we may be operating, we seek to continue to
evaluate and manage our cost structure and make appropriate adjustments where economic
conditions dictate. This continual focus on our cost structure helps us to better
maintain our operating margins. |
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Specialty Insurance
Our strategy in the specialty insurance business is to provide an efficient and effective
delivery mechanism for property insurance policies placed directly and through independent agents.
We are positioned to be a low expense provider, while continuing to strictly adhere to pricing and
underwriting disciplines to maintain our underwriting profitability.
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We offer coverage under the U.S. National Flood Insurance Program (NFIP) through
Fidelity National Property and Casualty Insurance Company, which provides flood insurance in
all 50 states. We are the largest provider of NFIP flood insurance in the U.S. through our
independent agent network. |
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We provide an efficient methodology for obtaining insurance on newly acquired homes,
whether new construction or upon resale. We have an easy to use fully integrated website,
which our agents use as a completely paperless and fully automated quoting and policy
delivery system. This system is in use for all of our property products, including flood
insurance. |
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Our underwriting practice is conservative. Catastrophe exposure is closely managed on a
real time basis. We also buy reinsurance to assist in maintaining our profitability and
growing our surplus. |
Possible Acquisitions, Dispositions, Minority Owned Operating Subsidiaries and Financings
With assistance from our advisors, on an ongoing basis we actively evaluate possible strategic
transactions, such as acquisitions and dispositions of business units and operating assets and
business combination transactions, as well as possible means of financing the growth and operations
of our business units or raising funds, through securities offerings or otherwise, for debt
repayment or other purposes. In the current economic environment, we may seek to sell certain
investments or other assets to increase our liquidity. Our Board of Directors has authorized us to
investigate strategic alternatives for certain of our specialty insurance businesses. The assets to
be evaluated include the flood insurance and personal lines insurance businesses, but not the home
warranty business. Further, our management has stated that we may make acquisitions in lines of
business that are not directly tied to or synergistic with our core operating segments. There can
be no assurance, however, that any suitable opportunities will arise or that any particular
transaction will be completed.
Acquisitions
Strategic acquisitions have been an important part of our growth strategy. We made a number of
acquisitions over the past three years to strengthen and expand our service offerings and customer
base in our various businesses, to expand into other businesses or where we otherwise saw value.
Acquisition of the LFG Underwriters. On December 22, 2008, we completed the acquisition of the
LFG Underwriters. The total purchase price for Commonwealth and
Lawyers was $238.0 million, net of
cash acquired of $8.8 million, and was comprised of $134.8 million paid in cash by two of our title
insurance underwriters, Fidelity National Title Insurance Company and Chicago Title Insurance
Company, a $50 million subordinated note due in 2013 (see note I of Notes to Consolidated Financial
Statements), and $50 million in FNF common stock (3,176,620 shares valued at $15.74 per share at
the time of closing). In addition, Fidelity National Title Insurance Company purchased United from
an indirect subsidiary of LFG for a purchase price of approximately $12 million, equal to an
estimate (subject to post-closing adjustment) of the statutory net worth of United at the time of
closing.
Acquisition of Equity Interest in Ceridian. On November 9, 2007, we and Thomas H. Lee
Partners, L.P. (THL), along with certain co-investors, completed the acquisition of Ceridian for
$36 in cash per share of common stock, or approximately $5.3 billion. We contributed approximately
$527 million of the total $1.6 billion equity funding for the acquisition of Ceridian, resulting in
a 33% ownership interest by us, which we account for using the equity method of accounting for
financial statement purposes. Ceridian is an information services company servicing the human
resources, transportation, and retail industries. Specifically, Ceridian offers a range of human
resources outsourcing solutions and is a payment processor and issuer of credit, debit, and
stored-value cards.
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Property Insight, LLC. On August 31, 2007, we completed the acquisition of Property Insight,
LLC (Property Insight), a former FIS subsidiary, from FIS for $95 million in cash. Property
Insight is a leading provider of title plant services for us, as well as various national and
regional underwriters. Property Insight primarily manages, maintains, and updates the title plants
that are owned by us. Additionally, Property Insight manages potential title plant construction
activities for us.
ATM Holdings, Inc. On August 13, 2007, we completed the acquisition of ATM Holdings, Inc.
(ATM), a provider of nationwide mortgage vendor management services to the loan origination
industry, for $100 million in cash. ATMs primary subsidiary is a licensed title insurance agency
which provides centralized valuation and appraisal services, as well as title and closing services,
to residential mortgage originators, banks and institutional mortgage lenders throughout the United
States.
Equity
Interest in Remy. We held an investment in Remys Senior Subordinated Notes
(the Notes) with a total fair value of $139.9 million until December 6, 2007, at which time Remy
implemented a pre-packaged plan of bankruptcy under Chapter 11 of the Bankruptcy Code. Pursuant to
the plan of bankruptcy, the Notes were converted into 4,935,065 shares of Remy common stock and
rights to buy 19,909 shares of Remy Series B preferred stock. Upon execution of the plan of
bankruptcy, the Company purchased all 19,909 shares of the preferred stock for $1,000 per share, or
a total of $19.9 million, and then sold 1,000 of those shares to William P. Foley, II, the
Companys chairman of the board, for $1,000 per share, or a total of $1.0 million. The Company now
holds a 47% ownership interest in Remy, made up of 4,935,065 shares of Remy common stock with a
cost basis of $64.3 million and 18,909 shares of purchased Remy Series B preferred stock with a
cost basis of $19.5 million. We account for our investment in Remy using the equity method. As a
result of the exchange of the Notes for the shares of common and preferred stock, the Company
reversed the unrealized gain of $75.0 million that had previously been recorded in accumulated
other comprehensive earnings in relation to the Notes. Remy, headquartered in Anderson, Indiana, is
a leading manufacturer, remanufacturer and distributor of Delco Remy brand heavy-duty systems and
Remy brand starters and alternators, locomotive products and hybrid power technology.
Cascade Timberlands LLC. During 2006, we purchased equity interests in Cascade Timberlands
LLC (Cascade Timberlands) totaling 71% of Cascade Timberlands. As of December 31, 2008, we owned
approximately 70% of the outstanding interests of Cascade Timberlands which was purchased for $88.5
million. The primary assets of Cascade Timberlands are approximately 266,909 acres of productive
timberlands located on the eastern side of the Cascade mountain range extending from Bend, Oregon
south on State Highway 20 toward the California border. Cascade Timberlands was created by the
secured creditors of Crown Pacific LP upon the conclusion of the bankruptcy case of Crown Pacific
LP in December 2004.
Acquisition of Equity Interest in Sedgwick. On January 31, 2006, we, along with our equity
partners, THL and Evercore Capital Partners, completed the acquisition of Sedgwick, which resulted
in FNF obtaining a 40% interest in Sedgwick for approximately $126 million. In September 2006, we
invested an additional $6.8 million in Sedgwick, maintaining our 40% ownership interest. During
2008, we sold 20% of our interest in Sedgwick (reducing our interest in Sedgwick from 40% to 32%)
for proceeds of $53.9 million, resulting in a gain of $24.8 million. Sedgwick, headquartered in
Memphis, Tennessee, is a leading provider of outsourced insurance claims management services to
large corporate and public sector entities.
Title Insurance
Market for title insurance. While we have seen declines during 2007 and 2008 in the title
insurance market in the United States, the market remains large and grew significantly from 1995
until 2005. Demotech Inc. (Demotech), an independent firm providing services to the insurance
industry, publishes an annual compilation of financial information from the title insurance
industry called Demotech Performance of Title Insurance Companies. According to this publication,
total operating income for the entire U.S. title insurance industry grew from $4.8 billion in 1995
to $17.8 billion in 2005 and then decreased to $17.6 billion in 2006 and to $15.2 billion in 2007.
Growth in the industry is closely tied to various macroeconomic factors, including, but not limited
to, growth in the gross domestic product, inflation, interest rates and sales of and prices for new
and existing homes, as well as the volume of refinancing of previously issued mortgages.
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Most real estate transactions consummated in the U.S. require the use of title insurance by a
lending institution before the transaction can be completed. Generally, revenues from title
insurance policies are directly correlated with the value of the property underlying the title
policy, and appreciation in the overall value of the real estate market helps drive growth in total
industry revenues. Industry revenues are also driven by factors affecting the volume of residential
real estate closings, such as the state of the economy, the availability of mortgage funding, and
changes in interest rates, which affect demand for new mortgage loans and refinancing transactions.
Both the volume and the average price of residential real estate transactions have experienced
significant declines in many parts of the country, and it is uncertain how long these trends will
continue. In 2008, the sharply rising mortgage delinquency and default rates have caused negative
operating results at a number of banks and financial institutions and, as a result, have
significantly reduced the level of lending activity. Several banks have failed in recent months and
others may fail in the short to medium term, further reducing the capacity of the mortgage industry
to make loans. Our revenues in future periods will continue to be subject to these and other
factors which are beyond our control and, as a result, are likely to fluctuate.
The U.S. title insurance industry is concentrated among a handful of industry participants.
According to Demotech the top five title insurance companies (which included FNF and LFG) accounted
for 92.8% of net premiums collected in 2007. Over 40 independent title insurance companies
accounted for the remaining 7.2% of net premiums collected in 2007. Over the years, the title
insurance industry has been consolidating, beginning with the merger of Lawyers and Commonwealth in
1998 to create LFG, followed by our acquisition of Chicago Title in March 2000. Then, in December
2008, we acquired LFGs two principal title insurance underwriters, Commonwealth and Lawyers, as
well as United. Consolidation has created opportunities for increased financial and operating
efficiencies for the industrys largest participants and should continue to drive profitability and
market share in the industry.
Title Insurance Policies. Generally, real estate buyers and mortgage lenders purchase title
insurance to insure good and marketable title to real estate and priority of lien. A brief
generalized description of the process of issuing a title insurance policy is as follows:
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The customer, typically a real estate salesperson or broker, escrow agent, attorney or
lender, places an order for a title policy. |
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Company personnel note the specifics of the title policy order and place a request with
the title company or its agents for a preliminary report or commitment. |
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After the relevant historical data on the property is compiled, the title officer
prepares a preliminary report that documents the current status of title to the property,
any exclusions, exceptions and/or limitations that the title company might include in the
policy, and specific issues that need to be addressed and resolved by the parties to the
transaction before the title policy will be issued. |
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The preliminary report is circulated to all the parties for satisfaction of any specific
issues. |
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After the specific issues identified in the preliminary report are satisfied, an escrow
agent closes the transaction in accordance with the instructions of the parties and the
title companys conditions. |
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Once the transaction is closed and all monies have been released, the title company
issues a title insurance policy. |
In a real estate transaction financed with a mortgage, virtually all real property mortgage
lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is
made. This lenders policy insures the lender against any defect affecting the priority of the
mortgage in an amount equal to the outstanding balance of the related mortgage loan. An owners
policy is typically also issued, insuring the buyer against defects in title in an amount equal to
the purchase price. In a refinancing transaction, only a lenders policy is generally purchased
because ownership of the property has not changed. In the case of an all-cash real estate purchase,
no lenders policy is issued but typically an owners title policy is issued.
Title insurance premiums paid in connection with a title insurance policy are based on (and
typically a percentage
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of) either the amount of the mortgage loan or the purchase price of the property insured.
Applicable state insurance regulations or regulatory practices may limit the maximum, or in some
cases the minimum, premium that can be charged on a policy. Title insurance premiums are due in
full at the closing of the real estate transaction. The lenders policy generally terminates upon
the refinancing or resale of the property.
The amount of the insured risk or face amount of insurance under a title insurance policy is
generally equal to either the amount of the loan secured by the property or the purchase price of
the property. The title insurer is also responsible for the cost of defending the insured title
against covered claims. The insurers actual exposure at any given time, however, generally is less
than the total face amount of policies outstanding because the coverage of a lenders policy is
reduced and eventually terminated as a result of payment of the mortgage loan. A title insurer also
generally does not know when a property has been sold or refinanced except when it issues the
replacement coverage. Because of these factors, the total liability of a title underwriter on
outstanding policies cannot be precisely determined.
Title insurance companies typically issue title insurance policies directly through branch
offices or through title agencies which are subsidiaries of the title insurance company, or
indirectly through independent third party agencies unaffiliated with the title insurance company.
Where the policy is issued through a branch or wholly- owned subsidiary agency operation, the title
insurance company typically performs or directs the search, and the premiums collected are retained
by the title company. Where the policy is issued through an independent agent, the agent generally
performs the search (in some areas searches are performed by approved attorneys), examines the
title, collects the premium and retains a majority of the premium. The remainder of the premium is
remitted to the title insurance company as compensation, part of which is for bearing the risk of
loss in the event a claim is made under the policy. The percentage of the premium retained by an
agent varies from region to region and is sometimes regulated by the states. The title insurance
company is obligated to pay title claims in accordance with the terms of its policies, regardless
of whether the title insurance company issues policies through its direct operations or through
independent agents.
Prior to issuing policies, title insurers and their agents attempt to reduce the risk of
future claim losses by accurately performing searches and examinations. A title insurance companys
predominant expense relates to such searches and examinations, the preparation of preliminary title
reports, policies or commitments, the maintenance of title plants, which are indexed compilations
of public records, maps and other relevant historical documents, and the facilitation and closing
of real estate transactions. Claim losses generally result from errors made in the title search and
examination process, from hidden defects such as fraud, forgery, incapacity, or missing heirs of
the property, and from closing related errors.
Residential real estate business results from the construction, sale, resale and refinancing
of residential properties, while commercial real estate business results from similar activities
with respect to properties with a business or commercial use. Commercial real estate title
insurance policies insure title to commercial real property, and generally involve higher coverage
amounts and yield higher premiums. Residential real estate transaction volume is primarily affected
by macroeconomic and seasonal factors while commercial real estate transaction volume is affected
primarily by fluctuations in local supply and demand conditions for commercial space.
Direct and Agency Operations. We provide title insurance services through our direct
operations and through independent title insurance agents who issue title policies on behalf of our
title insurance companies. Our title insurance companies determine the terms and conditions upon
which they will insure title to the real property according to their underwriting standards,
policies and procedures.
Direct Operations. In our direct operations, the title insurer issues the title insurance
policy and retains the entire premium paid in connection with the transaction. Our direct
operations provide the following benefits:
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higher margins because we retain the entire premium from each transaction instead of
paying a commission to an independent agent; |
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continuity of service levels to a broad range of customers; and |
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additional sources of income through escrow and closing services. |
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Prior to the acquisition of the LFG Underwriters, we had over 1,000 offices throughout the
U.S. primarily providing residential real estate title insurance. With the acquisition of the LFG
underwriters on December 22, 2008, we added approximately 500 direct offices, of which
approximately 180 have been eliminated. Management is currently in the process of analyzing certain
of these direct offices to determine how many additional offices may be eliminated. During 2008 and
2007, as title insurance activity has decreased, we have closed and consolidated a number of our
offices. Our commercial real estate title insurance business is operated almost exclusively through
our direct operations. We maintain direct operations for our commercial title insurance business in
all the major real estate markets including New York, Los Angeles, Chicago, Atlanta, Dallas,
Philadelphia, Phoenix, Seattle and Houston.
Agency Operations. In our agency operations, the search and examination function is performed
by an independent agent or the agent may purchase the search and examination from us. In either
case, the agent is responsible to ensure that the search and examination is completed. The agent
thus retains the majority of the title premium collected, with the balance remitted to the title
underwriter for bearing the risk of loss in the event that a claim is made under the title
insurance policy. Independent agents may select among several title underwriters based upon their
relationship with the underwriter, the amount of the premium split offered by the underwriter,
the overall terms and conditions of the agency agreement and the scope of services offered to the
agent. Premium splits vary by geographic region, and in some states are fixed by insurance
regulatory requirements. Our relationship with each agent is governed by an agency agreement
defining how the agent issues a title insurance policy on our behalf. The agency agreement also
sets forth the agents liability to us for policy losses attributable to the agents errors. An
agency agreement is usually terminable without cause upon 30 days notice or immediately for cause.
In determining whether to engage or retain an independent agent, we consider the agents
experience, financial condition and loss history. For each agent with whom we enter into an agency
agreement we maintain financial and loss experience records. We also conduct periodic audits of our
agents and periodically decrease the number of agents with which we transact business in an effort
to reduce future expenses and manage risks. During 2008, prior to the acquisition of the LFG
Underwriters, we decreased the number of agents with which we transact business by approximately
1,300. With the acquisition of the LFG Underwriters on December 22, 2008, we added a total of
approximately 7,000 agency relationships. Since that acquisition, we have terminated our agreements
with approximately 3,000 of those agents and we expect to terminate our agreements with an
additional 500 agents. During 2007, we reduced the number of agents with which we transact business
by over 1,000.
Fees and Premiums. One method of analyzing our business is to examine the level of premiums
generated by direct and agency operations. The following table presents the percentages of our
title insurance premiums generated by direct and agency operations:
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Year Ended December 31, |
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|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Direct |
|
$ |
1,140,266 |
|
|
|
42.3 |
% |
|
$ |
1,601,768 |
|
|
|
42.1 |
% |
|
$ |
1,957,064 |
|
|
|
42.5 |
% |
Agency |
|
|
1,554,743 |
|
|
|
57.7 |
|
|
|
2,198,690 |
|
|
|
57.9 |
|
|
|
2,649,136 |
|
|
|
57.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title insurance premiums |
|
$ |
2,695,009 |
|
|
|
100.0 |
% |
|
$ |
3,800,458 |
|
|
|
100.0 |
% |
|
$ |
4,606,200 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The premium for title insurance is due in full when the real estate transaction is closed. We
recognize title insurance premium revenues from direct operations upon the closing of the
transaction, whereas premium revenues from agency operations include an accrual based on estimates
of the volume of transactions that have closed in a particular period for which premiums have not
yet been reported to us. The accrual for agency premiums is necessary because of the lag between
the closing of these transactions and the reporting of these policies to us by the agent, and is
based on estimates utilizing historical information.
Geographic Operations. Prior to the acquisition of the LFG Underwriters, our direct
operations were divided into approximately 170 profit centers. With the acquisition of the LFG
Underwriters, we added approximately 80 profit centers, approximately 30 of which have been
eliminated or combined. Each profit center processes title insurance transactions within its
geographical area, which is usually identified by a county, a group of counties forming a region,
or a state, depending on the management structure in that part of the country. We also transact
title insurance
8
business through a network of approximately 9,000 agents, primarily in those areas in which
agents are the more prevalent title insurance provider. This includes approximately 4,000 agents
that were added through our acquisition of the LFG Underwriters.
The following table sets forth the approximate dollar and percentage volumes of our title
insurance premium revenue by state.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in thousands) |
|
California |
|
$ |
473,768 |
|
|
|
17.6 |
% |
|
$ |
625,993 |
|
|
|
16.5 |
% |
|
$ |
810,961 |
|
|
|
17.6 |
% |
Texas |
|
|
337,907 |
|
|
|
12.5 |
|
|
|
479,973 |
|
|
|
12.6 |
|
|
|
514,228 |
|
|
|
11.2 |
|
Florida |
|
|
208,412 |
|
|
|
7.7 |
|
|
|
412,313 |
|
|
|
10.8 |
|
|
|
635,066 |
|
|
|
13.8 |
|
New York |
|
|
199,240 |
|
|
|
7.4 |
|
|
|
305,142 |
|
|
|
8.0 |
|
|
|
360,779 |
|
|
|
7.8 |
|
Illinois |
|
|
118,518 |
|
|
|
4.4 |
|
|
|
161,936 |
|
|
|
4.3 |
|
|
|
199,936 |
|
|
|
4.3 |
|
All others |
|
|
1,357,164 |
|
|
|
50.4 |
|
|
|
1,815,101 |
|
|
|
47.8 |
|
|
|
2,085,230 |
|
|
|
45.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
2,695,041 |
|
|
|
100.2 |
% |
|
$ |
3,800,458 |
|
|
|
100.0 |
% |
|
$ |
4,606,200 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Escrow, Title-Related and Other Fees. In addition to fees for underwriting title insurance
policies, we derive a significant amount of our revenues from escrow, title-related and other
services, including closing services. The escrow and other services provided by us include all of
those typically required in connection with residential and commercial real estate purchase and
refinance activities. Escrow, title-related and other fees represented approximately 26.5%, 20.5%,
and 11.8% of our revenues in 2008, 2007, and 2006, respectively.
Reinsurance and Coinsurance. In a limited number of situations we limit our maximum loss
exposure by reinsuring certain risks with other title insurers under agent fidelity, excess of loss
and case-by-case reinsurance agreements. We also earn a small amount of additional income, which is
reflected in our direct premiums, by assuming reinsurance for certain risks of other title
insurers. Reinsurance agreements provide generally that the reinsurer is liable for loss and loss
adjustment expense payments exceeding the amount retained by the ceding company. However, the
ceding company remains primarily liable in the event the reinsurer does not meet its contractual
obligations.
We also use coinsurance in our commercial title business to provide coverage in amounts
greater than we would be willing or able to provide individually. In coinsurance transactions, each
individual underwriting company issues a separate policy and assumes a portion of the overall total
risk. As a coinsurer we are only liable for the portion of the risk we assume.
Specialty Insurance
We issue various insurance policies and contracts, which include the following:
|
|
|
Flood insurance. We issue new and renewal flood insurance policies in conjunction with
the NFIP. The NFIP bears all insurance risk related to these policies. |
|
|
|
|
Home warranty. We issue one-year, renewable contracts that protect homeowners against
defects in household systems and appliances. |
|
|
|
|
Personal lines insurance. We offer and underwrite homeowners insurance in 49 states.
Automobile insurance is currently underwritten in 29 states. We will expand into several
additional states in 2009 where favorable underwriting potential exists. In addition, we
underwrite personal umbrella, inland marine (boat and recreational watercraft), and other
personal lines niche products in selected markets. |
Sales and Marketing
Our sales and marketing efforts are primarily organized around our lines of business.
9
Fidelity National Title Group
We market and distribute our title and escrow products and services to customers in the
residential and commercial market sectors of the real estate industry through customer solicitation
by sales personnel. Although in many instances the individual homeowner is the beneficiary of a
title insurance policy, we do not focus our marketing efforts on the homeowner. We actively
encourage our sales personnel to develop new business relationships with persons in the real estate
community, such as real estate sales agents and brokers, financial institutions, independent escrow
companies and title agents, real estate developers, mortgage brokers and attorneys who order title
insurance policies for their clients. While our smaller, local clients remain important, large
customers, such as national residential mortgage lenders, real estate investment trusts and
developers have become an increasingly important part of our business. The buying criteria of
locally based clients differ from those of large, geographically diverse customers in that the
former tend to emphasize personal relationships and ease of transaction execution, while the latter
generally place more emphasis on consistent product delivery across diverse geographical regions
and ability of service providers to meet their information systems requirements for electronic
product delivery.
Specialty Insurance
Specialty insurance is marketed through three distinct channels. We market our program through
our in-house agency via direct mail to customers of our affiliated operations. This direct channel
constituted approximately 15%, 15%, and 17% of our non-flood premium writings in 2008, 2007, and
2006, respectively. The second distribution channel is through independent agents and brokers
nationwide. Approximately 83%, 79%, and 76% of our non-flood premium and the vast majority of our
flood business was placed through this channel in 2008, 2007, and 2006, respectively. We currently
have in excess of 17,000 independent agencies nationwide actively producing business on our behalf.
The third distribution channel is through captive independent agents in California. This channel,
comprised of 11 captive independent agents at the end of 2008,
accounted for 2%, 6%, and 7% of the
non-flood premium volume in 2008, 2007, and 2006, respectively.
Patents, Trademarks and Other Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, and
copyright and trade secret law to establish and protect our software, technology, and expertise.
Further, we have developed a number of brands that have accumulated substantial goodwill in the
marketplace, and we rely on trademark law to protect our rights in that area. We intend to continue
our policy of taking all measures we deem necessary to protect our copyright, trade secret, and
trademark rights. These legal protections and arrangements afford only limited protection of our
proprietary rights, and there is no assurance that our competitors will not independently develop
or license products, services, or capabilities that are substantially equivalent or superior to
ours. In general, we believe that we own most proprietary rights necessary for the conduct of our
business, although we do license certain items, none of which is material, under arms-length
agreements for varying terms.
Technology and Research and Development
As a national provider of real estate transaction products and services, we participate in an
industry that is subject to significant change, frequent new product and service introductions and
evolving industry standards. We believe that our future success will depend in part on our ability
to anticipate industry changes and offer products and services that meet evolving industry
standards. In connection with our service offerings, we are continuing to deploy new information
system technologies to our direct and agency operations. We expect to improve the process of
ordering title and escrow services and improve the delivery of our products to our customers.
Competition
Fidelity National Title Group
The title insurance industry is highly competitive, with the top five insurance companies
(which included FNF and LFG) accounting for 92.8% of net premiums collected in 2007 according to
Demotech. The number and size of competing companies varies in the different geographic areas in
which we conduct our business. In our principal
10
markets, competitors include other major title underwriters such as The First American
Corporation, Old Republic International Corporation and Stewart Information Services Corporation,
as well as numerous smaller title insurance companies, underwritten title companies and independent
agency operations at the regional and local level. These smaller companies may expand into other
markets in which we compete. Several of these smaller competitors have closed their operations as a
result of the significant decrease in activity in the residential real estate market. Also, the
removal of regulatory barriers might result in new competitors entering the title insurance
business, and those new competitors may include diversified financial services companies that have
greater financial resources than we do and possess other competitive advantages. Competition among
the major title insurance companies, expansion by smaller regional companies and any new entrants
with alternative products could affect our business operations and financial condition.
Competition in the title insurance industry is based primarily on expertise, service and
price. In addition, the financial strength of the insurer has become an increasingly important
factor in decisions relating to the purchase of title insurance, particularly in multi-state
transactions and in situations involving real estate-related investment vehicles such as real
estate investment trusts and real estate mortgage investment conduits.
The title insurance industry has also experienced periods of consolidation. We expect that,
from time to time, we may evaluate opportunities for the acquisition of books of business or of
title insurance companies or other complementary businesses, for business combinations with other
concerns and for the provision of insurance related advisory services to third parties. There can
be no assurance, however, that any suitable business opportunity will arise.
Specialty Insurance
In our specialty insurance segment, we compete with the national, regional and local insurance
carriers. Depending on geographic location, various personal lines carriers, such as State Farm,
Allstate, Farmers, Travelers, Hartford, Nationwide and numerous other companies compete for this
personal lines business. In our home warranty business, our competitors include American Home
Shield and The First American Corporation. In addition to price, service and convenience are
competitive factors. We strive to compete primarily through providing an efficient and streamlined
product delivery platform.
Regulation
Our insurance subsidiaries, including title insurers, property and casualty insurers,
underwritten title companies and insurance agencies, are subject to extensive regulation under
applicable state laws. Each of the insurers is subject to a holding company act in its state of
domicile, which regulates, among other matters, the ability to pay dividends and enter into
transactions with affiliates. The laws of most states in which we transact business establish
supervisory agencies with broad administrative powers relating to issuing and revoking licenses to
transact business, regulating trade practices, licensing agents, approving policy forms, accounting
practices, financial practices, establishing reserve and capital and surplus as regards
policyholders (capital and surplus) requirements, defining suitable investments for reserves and
capital and surplus and approving rate schedules. The process of state regulation of changes in
rates ranges from states which set rates, to states where individual companies or associations of
companies prepare rate filings which are submitted for approval, to a few states in which rate
changes do not need to be filed for approval.
Since we are governed by both state and federal governments and the applicable insurance laws
and regulations are constantly subject to change, it is not possible to predict the potential
effects on our insurance operations, particularly our Fidelity National Title Group segment, of any
laws or regulations that may become more restrictive in the future or if new restrictive laws will
be enacted. See Item 3 Legal Proceedings for a description of certain recent regulatory
developments in California.
Pursuant to statutory accounting requirements of the various states in which our title
insurers are domiciled, these insurers must defer a portion of premiums earned as an unearned
premium reserve for the protection of policyholders (in addition to their reserves for known
claims) and must maintain qualified assets in an amount equal to the statutory requirements. The
level of unearned premium reserve required to be maintained at any time is determined by statutory
formula based upon either the age, number of policies, and dollar amount of policy
11
liabilities underwritten, or the age and dollar amount of statutory premiums written. As of
December 31, 2008, the combined statutory unearned premium reserve required and reported for our
title insurers was $2,137.2 million. In addition to statutory unearned premium reserves and
reserves for known claims, each of our insurers maintains surplus funds for policyholder protection
and business operations.
Each of our insurance subsidiaries is regulated by the insurance regulatory authority in its
respective state of domicile, as well as that of each state in which it is licensed. The insurance
commissioners of their respective states of domicile are the primary regulators of our insurance
subsidiaries. Each of the insurers is subject to periodic regulatory financial examination by
regulatory authorities, and certain of these examinations are currently ongoing.
Under the statutes governing insurance holding companies in most states, insurers may not
enter into certain transactions, including sales, reinsurance agreements and service or management
contracts, with their affiliates unless the regulatory authority of the insurers state of domicile
has received notice at least 30 days prior to the intended effective date of such transaction and
has not objected to, or has approved, the transaction within the 30 day period.
As a holding company with no significant business operations of our own, we depend on
dividends or other distributions from our subsidiaries as the principal source of cash to meet our
obligations, including the payment of interest on and repayment of principal of any debt
obligations, and to pay any dividends to our stockholders. The payment of dividends or other
distributions to us by our insurers is regulated by the insurance laws and regulations of their
respective states of domicile. In general, an insurance company subsidiary may not pay an
extraordinary dividend or distribution unless the applicable insurance regulator has received
notice of the intended payment at least 30 days prior to payment and has not objected to or has
approved the payment within the 30-day period. In general, an extraordinary dividend or
distribution is statutorily defined as a dividend or distribution that, together with other
dividends and distributions made within the preceding 12 months, exceeds the greater of:
|
|
|
10% of the insurers statutory surplus as of the immediately prior year end; or |
|
|
|
|
the statutory net income of the insurer during the prior calendar year. |
The laws and regulations of some jurisdictions also prohibit an insurer from declaring or
paying a dividend except out of its earned surplus or require the insurer to obtain prior
regulatory approval. During 2009, our directly owned title insurers can pay dividends or make
distributions to us of approximately $214.7 million without prior regulatory approval; however,
insurance regulators have the authority to prohibit the payment of ordinary dividends or other
payments by our title insurers to us (such as a payment under a tax sharing agreement or for
employee or other services) if they determine that such payment could be adverse to our
policyholders.
The combined statutory capital and surplus of our title insurers was $634.9 million and $652.6
million as of December 31, 2008 and 2007, respectively. The combined statutory earnings of our
title insurers were $170.9 million (excluding the LFG Underwriters), $204.8 million, and $413.8
million for the years ended December 31, 2008, 2007, and 2006, respectively.
As a condition to continued authority to underwrite policies in the states in which our
insurers conduct their business, they are required to pay certain fees and file information
regarding their officers, directors and financial condition.
Pursuant to statutory requirements of the various states in which our insurers are domiciled,
they must maintain certain levels of minimum capital and surplus. Each of our insurers has complied
with the minimum statutory requirements as of December 31, 2008.
Our underwritten title companies are also subject to certain regulation by insurance
regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth
requirements for each underwritten title company is as follows: $7.5 million for Fidelity National
Title Company, $2.5 million for Fidelity National Title Company of California, $3.0 million for
Chicago Title Company, $0.4 million for Ticor Title Company of California, Commonwealth Land Title
Company, Lawyers Title Company, and Gateway Title Company, and $0.1 million
for Napa Valley Title Company. All of our companies were in compliance with
their respective minimum net worth requirements at December 31, 2008.
12
We receive inquiries and requests for information from state insurance departments, attorneys
general and other regulatory agencies from time to time about various matters relating to our
business. Sometimes these take the form of civil investigative subpoenas. We attempt to cooperate
with all such inquiries. From time to time, we are assessed fines for violations of regulations or
other matters or enter into settlements with such authorities which require us to pay money or take
other actions. For a discussion of certain pending matters, see Item 3, Legal Proceedings.
Before a person can acquire control of a U.S. insurance company, prior written approval must
be obtained from the insurance commissioner of the state in which the insurer is domiciled. Prior
to granting approval of an application to acquire control of a domestic insurer, the state
insurance commissioner will consider such factors as the financial strength of the applicant, the
integrity and management of the applicants board of directors and executive officers, the
acquirers plans for the insurers board of directors and executive officers, the acquirers plans
for the future operations of the domestic insurer and any anti-competitive results that may arise
from the consummation of the acquisition of control. Generally, state statutes provide that control
over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls,
holds with the power to vote, or holds proxies representing 10% or more of the voting securities of
the domestic insurer. (In the state of Florida, where one of our title insurers is commercially
domiciled, control may be presumed to exist upon acquisition of 5% or more of the insurers voting
securities.) Because a person acquiring 10% or more of our common shares would indirectly control
the same percentage of the stock of our insurers, the insurance change of control laws would likely
apply to such a transaction (and any acquisition of 5% or more would require filing a disclaimer of
control with, or obtaining a change of control approval from, the State of Florida).
The National Association of Insurance Commissioners (NAIC) has adopted an instruction
requiring an annual certification of reserve adequacy by a qualified actuary. Because all of the
states in which our title insurers are domiciled require adherence to NAIC filing procedures, each
such insurer, unless it qualifies for an exemption, must file an actuarial opinion with respect to
the adequacy of its reserves.
Ratings
Our title insurance underwriters are regularly assigned ratings by independent agencies
designed to indicate their financial condition and/or claims paying ability. The rating agencies
determine ratings by quantitatively and qualitatively analyzing financial data and other
information. Our title subsidiaries include Alamo Title, Chicago Title, Commonwealth Land Title,
Fidelity National Title, Lawyers Title, LandAmerica Title of New Jersey, Security Union Title,
Ticor Title, and United Capital Title. Standard & Poors Ratings Group (S&P), Moodys Investors
Service (Moodys), Fitch Ratings, Ltd. (Fitch), and A. M. Best Company (A.M. Best) provide
ratings for the entire FNF family of companies as a whole as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P |
|
Moodys |
|
Fitch
(1) |
|
A.M. Best |
FNF family of companies |
|
|
A |
|
|
|
A3 |
|
|
BBB |
|
|
A |
|
(1) Fitch
has also assigned a rating of BBB- to the LFG Underwriters.
Demotech provides financial strength/stability ratings for each of our principal title
insurance underwriters individually, as follows:
|
|
|
|
|
Alamo Title Insurance |
|
|
A |
|
Chicago Title Insurance Co. |
|
|
A |
|
Chicago Title Insurance Co. of Oregon |
|
|
A |
|
Commonwealth Land Title Insurance Co. |
|
|
A |
|
Fidelity National Title Insurance Co. |
|
|
A |
|
Lawyers Title Insurance Corporation |
|
|
A |
|
LandAmerica NJ Title Insurance Company |
|
|
N/A |
|
Security Union Title Insurance Co. |
|
|
A |
|
Ticor Title Insurance Co. |
|
|
A |
|
Ticor Title Insurance Co. of Florida |
|
|
A |
|
United Capital Title Insurance Co. |
|
|
A |
|
13
The ratings of S&P, Moodys, A.M. Best, Fitch, and Demotech described above are not designed
to be, and do not serve as, measures of protection or valuation offered to investors. These
financial strength ratings should not be relied on with respect to making an investment in our
securities. See Risk Factors If the rating agencies downgrade
our Company, our results of operations and competitive position in the
title insurance industry may suffer for further information.
Investment Policies and Investment Portfolio
Our investment policy is designed to maximize total return through investment income and
capital appreciation consistent with moderate risk of principal, while providing adequate liquidity
and complying with internal and regulatory guidelines. We also make investments in certain equity
securities in order to take advantage of perceived value and for strategic purposes. Various states
regulate what types of assets qualify for purposes of capital and surplus and statutory unearned
premium reserves. We manage our investment portfolio and do not utilize third party investment
managers. Due to the magnitude of our investment portfolio in relation to our claims loss reserves,
we do not specifically match durations of our investments to the cash outflows required to pay
claims, but do manage outflows on a shorter time frame. Maintaining shorter durations on our
investment portfolio allows us to mitigate our interest rate risk and, in a rising interest rate
environment, to increase our investment revenue, which may offset some of the decline in premiums
and service revenues we would expect in such an environment.
As of December 31, 2008 and 2007, the carrying amount, which approximates the fair value, of
total investments excluding investments in unconsolidated affiliates was $3.7 billion and $3.4
billion, respectively.
We purchase investment grade fixed maturity securities, selected non-investment grade fixed
maturity securities and equity securities. The securities in our portfolio are subject to economic
conditions and normal market risks and uncertainties. Our fixed maturities at December 31, 2008
include auction rate securities with a par value of $88.8 million and fair value of $32.1 million,
which were included in the assets of the LFG Underwriters that we acquired on December 22, 2008.
These auction rate securities make up one percent of our total portfolio and are our only
securities classified as level 3 for valuation purposes.
The following table presents certain information regarding the investment ratings of our fixed
maturity portfolio at December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
Amortized |
|
|
% of |
|
|
|
|
|
|
% of |
|
|
Amortized |
|
|
% of |
|
|
|
|
|
|
% of |
|
Rating(1) |
|
Cost |
|
|
Total |
|
|
Fair Value |
|
|
Total |
|
|
Cost |
|
|
Total |
|
|
Fair Value |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
AAA |
|
$ |
1,154,868 |
|
|
|
40.7 |
% |
|
$ |
1,194,028 |
|
|
|
41.8 |
% |
|
$ |
1,681,547 |
|
|
|
60.0 |
% |
|
$ |
1,706,834 |
|
|
|
60.4 |
% |
AA |
|
|
621,375 |
|
|
|
21.9 |
|
|
|
627,731 |
|
|
|
22.0 |
|
|
|
597,608 |
|
|
|
21.3 |
|
|
|
602,881 |
|
|
|
21.4 |
|
A |
|
|
778,528 |
|
|
|
27.5 |
|
|
|
760,964 |
|
|
|
26.7 |
|
|
|
399,995 |
|
|
|
14.3 |
|
|
|
399,074 |
|
|
|
14.1 |
|
BBB |
|
|
231,919 |
|
|
|
8.2 |
|
|
|
223,293 |
|
|
|
7.8 |
|
|
|
100,784 |
|
|
|
3.6 |
|
|
|
97,340 |
|
|
|
3.5 |
|
BB |
|
|
5,136 |
|
|
|
0.2 |
|
|
|
4,448 |
|
|
|
0.2 |
|
|
|
3,913 |
|
|
|
0.1 |
|
|
|
3,827 |
|
|
|
0.1 |
|
Other |
|
|
42,383 |
|
|
|
1.5 |
|
|
|
43,365 |
|
|
|
1.5 |
|
|
|
19,785 |
|
|
|
0.7 |
|
|
|
14,616 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,834,209 |
|
|
|
100.0 |
% |
|
$ |
2,853,829 |
|
|
|
100.0 |
% |
|
$ |
2,803,632 |
|
|
|
100.0 |
% |
|
$ |
2,824,572 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Ratings as assigned by Standard & Poors Ratings Group and Moodys Investors Services. |
The following table presents certain information regarding contractual maturities of our fixed
maturity securities at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
% of |
|
|
|
|
|
|
% of |
|
Maturity |
|
Cost |
|
|
Total |
|
|
Fair Value |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
One year or less |
|
$ |
313,583 |
|
|
|
11.1 |
% |
|
$ |
315,826 |
|
|
|
11.1 |
% |
After one year through five years |
|
|
1,123,303 |
|
|
|
39.6 |
|
|
|
1,129,429 |
|
|
|
39.6 |
|
After five years through ten years |
|
|
845,396 |
|
|
|
29.8 |
|
|
|
848,144 |
|
|
|
29.7 |
|
After ten years |
|
|
288,220 |
|
|
|
10.2 |
|
|
|
295,974 |
|
|
|
10.3 |
|
Mortgage-backed securities |
|
|
263,707 |
|
|
|
9.3 |
|
|
|
264,456 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,834,209 |
|
|
|
100.0 |
% |
|
$ |
2,853,829 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
14
At December 31, 2008, the majority of our mortgage-backed securities were acquired as a result
of the acquisition of the LFG Underwriters. Of the total balance, 97% of these securities are
rated AAA. They are made up of $150.5 million of agency
mortgage-backed securities, $38.8 million of agency collateralized
mortgage obligations, and $75.2 million of commercial mortgage-backed securities.
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. Fixed maturity
securities with an amortized cost of $440.1 million and a fair
value of $448.6 million were
callable at December 31, 2008.
Our equity securities at December 31, 2008 and 2007 consisted of investments in various
industry groups at a cost basis of $79.8 million and $96.1 million, respectively, and fair value of
$71.5 million and $93.3 million, respectively. There were no significant investments in banks,
trust and insurance companies at December 31, 2008 or 2007.
In addition, at December 31, 2008 and 2007, we held $644.5 million and $738.4 million,
respectively, in investments that are accounted for using the equity method (see note D of Notes to
Consolidated Financial Statements).
Short-term investments, which consist primarily of securities purchased under agreements to
resell, commercial paper and money market instruments which have an original maturity of one year
or less, are carried at amortized cost, which approximates fair value. As of December 31, 2008 and
2007, short-term investments amounted to $788.4 million and $427.4 million, respectively.
Our investment results for the years ended December 31, 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Net investment income(1) |
|
$ |
153,770 |
|
|
$ |
219,771 |
|
|
$ |
244,185 |
|
Average invested assets |
|
$ |
3,545,490 |
|
|
$ |
4,414,951 |
|
|
$ |
5,088,863 |
|
Effective return on average invested assets |
|
|
4.3 |
% |
|
|
5.0 |
% |
|
|
4.8 |
% |
|
|
|
(1) |
|
Net investment income as reported in our Consolidated Statements of
Earnings has been adjusted in the presentation above to provide the
tax equivalent yield on tax exempt investments. |
Employees
As of January 31, 2009, we had approximately 13,700 full-time equivalent employees, excluding
the employees that were added with the acquisition of the LFG Underwriters. With that acquisition,
we added approximately 5,500 employees, including 1,600 employees that have been terminated since
the acquisition. During the three years ended December 31, 2008, we sought to reduce our head count
as activity in our Fidelity National Title Group segment declined. In that segment, we have reduced
our full-time equivalent employees by about 2,100 during 2008, 3,100 during 2007 and 1,700 during
2006. We believe that our relations with employees are generally good. None of our employees are
subject to collective bargaining agreements.
Statement Regarding Forward-Looking Information
The statements contained in this Form 10-K or in our other documents or in oral presentations
or other statements made by our management that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, including statements regarding our expectations, hopes,
intentions, or strategies regarding the future. These statements relate to, among other things,
future financial and operating results of Fidelity. In many cases, you can identify forward-looking
statements by terminology such as may, will, should, expect, plan, anticipate,
believe,
15
estimate, predict, potential, or continue, or the negative of these terms and other
comparable terminology. Actual results could differ materially from those anticipated in these
statements as a result of a number of factors, including, but not limited to:
|
|
|
the possibility that revenues, cost savings, growth prospects, and any other synergies
expected from our acquisition of the LFG Underwriters will not be realized (see Recent
Developments in Item 7, Managements Discussion and Analysis of Financial Condition and
Results of Operations); |
|
|
|
|
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, as well as the risks
associated with acquisitions in lines of business that will not necessarily be limited to
our traditional areas of focus, or difficulties 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 and adverse
changes in applicable laws or regulations or in their application by regulators; |
|
|
|
|
regulatory investigations of the title insurance industry; |
|
|
|
|
our business concentration in the State of California, the
source of approximately 18% of
our title insurance premiums; and |
|
|
|
|
other risks detailed elsewhere in this document and in our other filings with the SEC. |
We are not under any obligation (and expressly disclaim any such obligation) to update or
alter our forward-looking statements, whether as a result of new information, future events or
otherwise. You should carefully consider the possibility that actual results may differ materially
from our forward-looking statements.
Additional Information
Our website address is www.fnf.com. We make available free of charge on or through our website
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is
electronically filed with or furnished to the Securities and Exchange Commission. However, the
information found on our website is not part of this or any other report.
Item 1A. Risk Factors
In addition to the normal risks of business, we are subject to significant risks and
uncertainties, including those listed below and others described elsewhere in this Annual Report on
Form 10-K. Any of the risks described herein could result in a significant or material adverse
effect on our results of operations or financial condition.
General
If adverse changes in the levels of real estate activity occur, our revenues may decline.
Title insurance revenue is closely related to the level of real estate activity which includes
sales, mortgage financing and mortgage refinancing. The levels of real estate activity are
primarily affected by the average price of real estate sales, the availability of funds to finance
purchases and mortgage interest rates. Both the volume and the
16
average price of residential real estate transactions have recently experienced declines in
many parts of the country, and these trends appear likely to continue. The volume of refinancing
transactions in particular and mortgage originations in general declined in the 2006 through 2008
period from 2005 and prior levels, resulting in reduction of revenues in some of our businesses.
We have found that residential real estate activity generally decreases in the following
situations:
|
|
|
when mortgage interest rates are high or increasing; |
|
|
|
|
when the mortgage funding supply is limited; and |
|
|
|
|
when the United States economy is weak. |
Declines in the level of real estate activity or the average price of real estate sales are
likely to adversely affect our title insurance revenues. In 2008, the sharply rising mortgage
delinquency and default rates caused negative operating results at a number of banks and financial
institutions and, as a result, have significantly reduced the level of lending activity. The
current Mortgage Bankers Association forecast is for approximately $2.0 trillion of mortgage
originations in 2009 compared to $1.7 trillion in 2008. In December 2008 and continuing into
February 2009, our open order volumes for refinancing transactions have increased, reflecting lower
interest rates. However, it is too soon to tell if the portion of these open orders that actually
closes will be consistent with our closing percentages in prior periods or how long this increased
activity will last. Several banks have failed in recent months and others may fail in the short to
medium term, further reducing the capacity of the mortgage industry to make loans. Our revenues in
future periods will continue to be subject to these and other factors which are beyond our control
and, as a result, are likely to fluctuate.
We have recorded goodwill as a result of prior acquisitions, and an economic downturn could
cause these balances to become impaired, requiring write-downs that would reduce our operating
income.
Goodwill
aggregated approximately $1,581.7 million, or 18.9% of our total assets, as of
December 31, 2008. Current accounting rules require that goodwill be assessed for impairment at
least annually or whenever changes in circumstances indicate that the carrying amount may not be
recoverable from estimated future cash flows. Factors that may be considered a change in
circumstance indicating the carrying value of our intangible assets, including goodwill, may not be
recoverable include, but are not limited to, significant underperformance relative to historical or
projected future operating results, a significant decline in our stock price and market
capitalization, and negative industry or economic trends. However, if the current worldwide
economic downturn continues, the carrying amount of our goodwill may no longer be recoverable, and
we may be required to record an impairment charge, which would have a negative impact on our
results of operations and financial condition. We will continue to monitor our market
capitalization and the impact of the current economic downturn on our business to determine if
there is an impairment of goodwill in future periods.
If the recent worsening of economic and credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio.
Our investment portfolio is exposed to economic and financial market risks, including changes
in interest rates, credit markets and prices of marketable equity and fixed-income securities. Our
investment policy is designed to maximize total return through investment income and capital
appreciation consistent with moderate risk of principal, while providing adequate liquidity and
complying with internal and regulatory guidelines. To achieve this objective, our marketable debt
investments are primarily investment grade, liquid, fixed-income securities and money market
instruments denominated in U.S. dollars. We also make investments in certain equity securities in
order to take advantage of perceived value and for strategic purposes. Recent economic and credit
market conditions have adversely affected the ability of some issuers of investment securities to
repay their obligations and have affected and may further affect the values of investment
securities. If the carrying value of our investments exceeds the fair value, and the decline in
fair value is deemed to be other-than-temporary, we will be required to write down the value of our
investments, which could materially harm our results of operations and financial condition.
17
If we observe changes in the rate of title insurance claims, it may be necessary for us to
record additional charges to our claim loss reserve. This may result in lower net earnings and the
potential for earnings volatility.
At each quarter end, our recorded reserve for claim losses is initially the result of taking
the prior recorded reserve for claim losses, adding the current provision to that balance and
subtracting actual paid claims from that balance, resulting in an amount that management then
compares to the actuarial point estimate provided in the actuarial calculation. Due to the
uncertainty and judgment used by both management and our actuary, our ultimate liability may be
greater or less than our current reserves and/or our actuarys calculation. If the recorded amount
is within a reasonable range of the actuarys point estimate, but not at the point estimate,
management assesses other factors in order to be comfortable with the position of the recorded
reserve within a range. These factors, which are more qualitative than quantitative, can change
from period to period and include items such as current trends in the real estate industry (which
management can assess, but for which there is a time lag in the development of the data used by our
actuary), the stratification of certain claims (large vs. small), improvements in our claims
management processes, and other cost saving measures. If the recorded amount is not within a
reasonable range of the actuarys point estimate, we would record a charge and reassess the
long-term provision on a go forward basis.
As a result of adverse claim loss development on prior policy years, we recorded charges in
2008 and 2007 totaling $261.6 million ($157.0 million net of income taxes) and $217.2 million
($159.5 million net of income taxes) in our provision for claim losses. These charges were recorded
in addition to our provision for claim losses of 8.5% and 7.5%, respectively. These charges brought
our reserve position to a level that represents our best estimate of our ultimate liability. We
will reassess the provision to be recorded in future periods consistent with this methodology and
can make no assurance that we will not need to record charges in the future to increase reserves in
respect of prior periods.
Our insurance subsidiaries must comply with extensive regulations. These regulations may
increase our costs or impede or impose burdensome conditions on actions that we might seek to take
to increase the revenues of those subsidiaries.
Our insurance businesses are subject to extensive regulation by state insurance authorities in
each state in which they operate. These agencies have broad administrative and supervisory power
relating to the following, among other matters:
|
|
|
licensing requirements; |
|
|
|
|
trade and marketing practices; |
|
|
|
|
accounting and financing practices; |
|
|
|
|
capital and surplus requirements; |
|
|
|
|
the amount of dividends and other payments made by insurance subsidiaries; |
|
|
|
|
investment practices; |
|
|
|
|
rate schedules; |
|
|
|
|
deposits of securities for the benefit of policyholders; |
|
|
|
|
establishing reserves; and |
|
|
|
|
regulation of reinsurance. |
Most states also regulate insurance holding companies like us with respect to acquisitions,
changes of control and the terms of transactions with our affiliates. State regulations may impede
or impose burdensome conditions on our ability to increase or maintain rate levels or on other
actions that we may want to take to enhance our operating results. In addition, we may incur
significant costs in the course of complying with regulatory requirements. We
18
cannot assure you that future legislative or regulatory changes will not adversely affect our
business operations. See Business Regulation.
State regulation of the rates we charge for title insurance could adversely affect our results
of operations.
Our title insurance subsidiaries are subject to extensive rate regulation by the applicable
state agencies in the jurisdictions in which they operate. Title insurance rates are regulated
differently in the various states, with some states requiring the subsidiaries to file and receive
approval of rates before such rates become effective and some states promulgating the rates that
can be charged. In almost all states in which our title subsidiaries operate, our rates must not be
excessive, inadequate or unfairly discriminatory. See also the risk factor below relating to
regulatory conditions in California.
Regulatory investigations of the insurance industry may lead to fines, settlements, new
regulation or legal uncertainty, which could negatively affect our results of operations.
We receive inquiries and requests for information from state insurance departments, attorneys
general and other regulatory agencies from time to time about various matters relating to our
business. Sometimes these take the form of civil investigative subpoenas. We attempt to cooperate
with all such inquiries. From time to time, we are assessed fines for violations of regulations or
other matters or enter into settlements with such authorities which require us to pay money or take
other actions. These fines may be significant and actions we are required to take may adversely
affect our business.
Because
we are dependent upon California for approximately 18 percent of our title insurance
premiums, our business may be adversely affected by regulatory conditions in California.
California is the largest source of revenue for the title insurance industry and, in 2008,
California-based premiums accounted for 32% of premiums earned by our direct operations and 8% of
our agency premium revenues. In the aggregate, California accounted
for approximately 17.6% of our
total title insurance premiums for 2008. A significant part of our revenues and profitability are
therefore subject to our operations in California and to the prevailing regulatory conditions in
California. Adverse regulatory developments in California, which could include reductions in the
maximum rates permitted to be charged, inadequate rate increases or more fundamental changes in the
design or implementation of the California title insurance regulatory framework, could have a
material adverse effect on our results of operations and financial condition.
In January 2007, the State of California adopted regulations that would have significant
effects on the title insurance industry in California. The Company, as well as others, has been
engaged in discussions with the California Department of Insurance (the CDI) regarding possible
industry reforms that may result in the CDIs decision to modify or repeal the regulations prior to
their implementation. On June 17, 2008, the CDI filed with the Office of Administrative Law revised
title insurance regulations containing substantial changes to the existing regulations. Hearings on
revised regulations were held in August. We, through the California Land Title Association,
continue to work with the CDI to refine certain aspects of the proposed regulations, including the
statistical reporting provisions.
If the rating agencies downgrade our Company, our results of operations and competitive
position in the title insurance industry may suffer.
Ratings have always been an important factor in establishing the competitive position of
insurance companies. Our title insurance subsidiaries are rated by S&P, Moodys, Fitch, A.M. Best,
and Demotech. Ratings reflect the opinion of a rating agency with regard to an insurance companys
or insurance holding companys financial strength, operating performance and ability to meet its
obligations to policyholders and are not evaluations directed to investors. On December 23, 2008,
Fitch downgraded FNFs financial strength ratings from A- to BBB. The following announcements have
been made by the rating agencies regarding the current status of our ratings: S&P CreditWatch
with negative implications, Fitch Rating Watch Negative, A.M. Best under review with negative
implications, and Moodys stable. In addition, Fitch has
announced that the ratings of the underwriters that
we recently acquired from LFG are on Rating Watch Evolving. Our ratings are subject to continued
periodic review by rating agencies and the continued retention of those ratings cannot be assured.
If our ratings are reduced from their current levels by those entities, our results of operations
could be adversely affected.
19
Our rate of growth could be adversely affected if we are unable to acquire suitable
acquisition candidates.
As part of our growth strategy, we have made numerous acquisitions and we plan to continue to
acquire complementary businesses, products and services. This strategy depends on our ability to
identify suitable acquisition candidates and, assuming we find them, to finance such acquisitions
on acceptable terms. We have historically used, and in the future may continue to use, a variety of
sources of financing to fund our acquisitions, including cash from operations, debt and equity. Our
ability to finance our acquisitions is subject to a number of risks, including the availability of
adequate cash reserves from operations or of acceptable financing terms and variability in our
stock price. These factors may inhibit our ability to pursue attractive acquisition targets. If we
are unable to acquire suitable acquisition candidates, we may experience slower growth.
Our management has articulated a willingness to seek growth through acquisitions in lines of
business that will not necessarily be limited to our traditional areas of focus or geographic
areas. This expansion of our business subjects us to associated risks, such as the diversion of
managements attention and lack of experience in operating such businesses, and may affect our
credit and ability to repay our debt.
Our management has stated that we may make acquisitions in lines of business that are not
directly tied to or synergistic with our core operating segments. Accordingly, we have in the past
year acquired, and may in the future acquire, businesses in industries or geographic areas with
which management is less familiar than we are with our core businesses. These activities involve
risks that could adversely affect our operating results, such as diversion of managements
attention and lack of substantial experience in operating such businesses. There can be no
guarantee that we will not enter into transactions or make acquisitions that will cause us to incur
additional debt, increase our exposure to market and other risks and cause our credit or financial
strength ratings to decline.
We may encounter difficulties managing our growth and successfully integrating new businesses,
which could adversely affect our results of operations.
We have historically achieved growth through a combination of developing new products and
services, increasing our market share for existing products, and making acquisitions. Part of our
strategy is to pursue opportunities to diversify and expand our operations by acquiring or making
investments in other companies. The success of each acquisition will depend upon:
|
|
|
our ability to integrate the acquired business operations, products and personnel; |
|
|
|
|
our ability to retain key personnel of the acquired business; |
|
|
|
|
our ability to expand our financial and management controls and reporting systems and
procedures; |
|
|
|
|
our ability to maintain the customers and goodwill of the acquired business; and |
|
|
|
|
any unexpected costs or unforeseen liabilities associated with the acquired business. |
The integration of two previously separate companies is a challenging, time-consuming and
costly process. It is possible that the integration process could result in the loss of key
employees, the disruption of each companys ongoing businesses or inconsistencies in standards,
controls, procedures and policies that adversely affect each companys ability to maintain
relationships with suppliers, customers and employees or to achieve the anticipated benefits of the
combination. In addition, any successful integration of companies will require the dedication of
significant management resources, which will temporarily detract attention from our day-to-day
businesses.
Our recent acquisition of subsidiaries of LandAmerica Financial Group, Inc. (LFG) may expose
us to certain risks.
On December 22, 2008, we completed the acquisition of LFGs two principal title insurance
underwriters, Lawyers Title Insurance Corporation and Commonwealth Land Title Insurance Company, as
well as United Capital Title Insurance Company (collectively, the LFG Subsidiaries).
20
The LFG Subsidiaries have experienced financial difficulties in recent quarters. The
acquisition may have unforeseen negative effects on our company, including potentially if there are
significant undisclosed liabilities that we did not discover in our due diligence review or
otherwise prior to closing. Further, we face challenges in integrating the LFG Subsidiaries. These
challenges include eliminating redundant operations, facilities and systems, coordinating
management and personnel, retaining key employees, managing different corporate cultures, and
achieving cost reductions. There can be no assurance that we will be able to fully integrate all
aspects of the acquired business successfully or achieve the level of cost reductions we hope to
achieve, and the process of integrating this acquisition may disrupt our business and divert our
resources.
We are a holding company and depend on distributions from our subsidiaries for cash.
We are a holding company whose primary assets are the securities of our operating
subsidiaries. Our ability to pay interest on our outstanding debt and our other obligations and to
pay dividends is dependent on the ability of our subsidiaries to pay dividends or make other
distributions or payments to us. Our subsidiaries are not obligated to make funds available to us.
If our operating subsidiaries are not able to pay dividends to us, we may not be able to meet our
obligations or pay dividends on our common stock.
Our title insurance and specialty insurance subsidiaries must comply with state laws which
require them to maintain minimum amounts of working capital, surplus and reserves, and place
restrictions on the amount of dividends that they can distribute to us. Compliance with these laws
will limit the amounts our regulated subsidiaries can dividend to us. During 2009, our title
insurers will be able to pay dividends or make distributions to us without prior regulatory
approval of approximately $214.7 million.
The maximum dividend permitted by law is not necessarily indicative of an insurers actual
ability to pay dividends, which may be constrained by business and regulatory considerations, such
as the impact of dividends on surplus, which could affect an insurers ratings or competitive
position, the amount of premiums that can be written and the ability to pay future dividends.
Further, depending on business and regulatory conditions, we may in the future need to retain cash
in our underwriters or even contribute cash to one or more of them in order to maintain their
ratings or their statutory capital position. Such a requirement could be the result of investment
losses, reserve charges, adverse operating conditions in the current economic environment or
changes in interpretation of statutory accounting requirements by regulators. Further, the LFG
Underwriters recently acquired by us could have unexpected liabilities or asset exposures that only
become apparent over time which adversely affect their surplus.
Our specialty insurance segment is a smaller operation with respect to which we have announced
that we are considering our strategic alternatives and, as a result, it is unlikely to be a
significant source of dividends to us in 2009.
We could have conflicts with FIS and LPS, and our chairman of our board of directors and other
officers and directors could have conflicts of interest due to their relationships with FIS or LPS.
FIS and we were under common ownership by another publicly traded company, also called Fidelity
National Financial, Inc. (Old FNF) until October 2006, when Old FNF distributed all of its FNF
shares to the stockholders of Old FNF. In November 2006, Old FNF then merged into FIS. On July 2,
2008, FIS completed the spin-off of its former Lender Processing Services operating segment into a
separate publicly traded company, referred to as LPS, by distributing all of its shares of LPS to
FIS shareholders through a stock dividend.
Conflicts may arise between FIS and us, or LPS and us, in each case as a result of our ongoing
agreements and the nature of our respective businesses. Among other things, following the merger
between Old FNF and FIS, FIS and we have remained parties to a variety of agreements, some of which
were assigned to LPS by FIS in the spin-off. We also became a party to a variety of agreements with
FIS and LPS in connection with the spin-off, and we may enter into further agreements with FIS or
LPS. Certain of our executive officers and directors could be subject to conflicts of interest with
respect to such agreements and other matters due to their relationships with FIS or LPS.
21
Some of our executive officers and directors own substantial amounts of FIS and LPS stock and
stock options. Such ownership could create or appear to create potential conflicts of interest when
our directors and officers are faced with decisions that involve FIS or LPS or any of their
respective subsidiaries.
William P. Foley, II, is the chairman of our board of directors, the executive chairman of the
board of FIS and the chairman of the board of LPS. As a result of his roles, he has obligations to
us, FIS and LPS and may have conflicts of interest with respect to matters potentially or actually
involving or affecting our and FISs or LPSs respective businesses. In addition, Mr. Foley may
also have conflicts of time with respect to his multiple responsibilities. If his duties to each of
these companies require more time than Mr. Foley is able to allot, then his oversight of that
companys activities could be diminished. Finally, FIS, LPS and we have overlapping directors and
officers.
Matters that could give rise to conflicts between us and FIS or LPS include, among other
things:
|
|
|
our ongoing and future relationships with FIS or LPS, including
related party agreements and other arrangements with respect to the
administration of tax matters, employee benefits, indemnification, claims
administration and handling, and other matters; and |
|
|
|
|
the quality and pricing of services that we have agreed to provide
to FIS or LPS or that it has agreed to provide to us. |
We seek to manage these potential conflicts through dispute resolution and other provisions of
our agreements with FIS and LPS and through oversight by independent members of our board of
directors. However, there can be no assurance that such measures will be effective or that we will
be able to resolve all potential conflicts with FIS and LPS, or that the resolution of any such
conflicts will be no less favorable to us than if we were dealing with a third party.
Provisions of our certificate of incorporation may prevent us from receiving the benefit of
certain corporate opportunities.
Because FIS may engage in some of the same activities in which we engage, there is a risk that
we may be in direct competition with FIS over business activities and corporate opportunities. To
address these potential conflicts, a corporate opportunity policy is incorporated into our
certificate of incorporation. Among other things, this policy provides that FIS has no duty not to
compete with us. The policy also limits the situations in which one of our directors or officers,
if also a director or officer of FIS, must offer corporate opportunities to us of which such
individual becomes aware. These provisions may limit the corporate opportunities of which we are
made aware or which are offered to us.
The markets in which our principal operating subsidiaries operate are highly competitive. Some
of our potential competitors have greater resources than we do, and we may face competition from
new entrants with alternative products or services.
The title insurance industry is highly competitive. According to Demotech, the top five title
insurance companies (which included FNF and LFG) accounted for 92.8% of net premiums collected in
2007. Over 40 independent title insurance companies accounted for the remaining 7.2% of the market.
The number and size of competing companies varies in the different geographic areas in which we
conduct our title insurance business. In our principal markets, competitors include other major
title underwriters such as The First American Corporation, Old Republic International Corporation
and Stewart Information Services Corporation, as well as numerous smaller title insurance
companies, underwritten title companies, and independent agency operations at the regional and
local level. These smaller companies may expand into other markets in which we compete.
Also, the removal of regulatory barriers might result in new competitors entering the title
insurance business, and those new competitors may include companies that have greater financial
resources than we do and possess other competitive advantages. Competition among the major title
insurance companies, expansion by smaller regional companies and any new entrants with alternative
products could affect our business operations and financial condition.
From time to time, we adjust the title insurance rates we charge in a particular state as a
result of competitive conditions in that state. Changes in price could have an adverse impact on
our results of operations, although its
22
ultimate impact will depend, among other things, on the volume and mix of our future business in
that state and within various portions of the state.
The markets for our other products and services are also very competitive, and we expect the
markets for all of our products and services to remain highly competitive. Our failure to remain
competitive may have a material adverse effect on our business, financial condition and results of
operations.
Our 1031 exchange business may be adversely affected by proposed regulations under Section 468B and
Section 7872 of the Internal Revenue Code.
The IRS has proposed regulations under Section 468B regarding the taxation of the income earned on
escrow accounts, trusts and other funds used during deferred exchanges of like-kind property and under
Section 7872 regarding below-market loans to facilitators of these exchanges. The proposed regulations affect taxpayers
that engage in like-kind exchanges and escrow holders, trustees, qualified intermediaries, and others that hold funds
during like-kind exchanges. We currently do not know what effect these changes will have on our 1031 exchange businesses.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company has its corporate headquarters on its campus in Jacksonville, Florida, which it
leases from its former affiliate, LPS. The majority of our branch offices are leased from third
parties (see note L to Notes to Consolidated Financial Statements). Our subsidiaries conduct their
business operations primarily in leased office space in 44 states, Washington, DC, Puerto Rico,
Canada, and Mexico.
Item 3. Legal Proceedings
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. We believe that no actions, other than those listed below, depart from customary
litigation incidental to our business. As background to the disclosure below, please note the
following:
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These matters raise difficult and complicated factual and legal issues and are subject to
many uncertainties and complexities, including but not limited to the underlying facts of each
matter, novel legal issues, variations between jurisdictions in which matters are being
litigated, differences in applicable laws and judicial interpretations, the length of time
before many of these matters might be resolved by settlement or through litigation and, in
some cases, the timing of their resolutions relative to other similar cases brought against
other companies, the fact that many of these matters are putative class actions in which a
class has not been certified and in which the purported class may not be clearly defined, the
fact that many of these matters involve multi-state class actions in which the applicable law
for the claims at issue is in dispute and therefore unclear, and the current challenging legal
environment faced by large corporations and insurance companies. |
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|
In these matters, plaintiffs seek a variety of remedies including equitable relief in the
form of injunctive and other remedies and monetary relief in the form of compensatory damages.
In most cases, the monetary damages sought include punitive or treble damages. Often more
specific information beyond the type of relief sought is not available because plaintiffs have
not requested more specific relief in their court pleadings. In addition, the dollar amount of
damages sought is frequently not stated with specificity. In those cases where plaintiffs have
made a statement with regard to monetary damages, they often specify damages either just above
or below a jurisdictional limit regardless of the facts of the case. These limits represent
either the jurisdictional threshold for bringing a case in federal court or the maximum they
can seek without risking removal from state court to federal court. In our experience,
monetary demands in plaintiffs court pleadings bear little relation to the ultimate loss, if
any, that we may experience. None of the cases described below includes a statement as to the
dollar amount of damages demanded. Instead, each of the cases includes a demand in an amount
to be proved at trial. |
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|
For the reasons specified above, it is not possible to make meaningful estimates of the
amount or range of loss that could result from these matters at this time. We review these
matters on an ongoing basis and follow the provisions of Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies when making accrual and disclosure
decisions. When assessing reasonably possible and probable outcomes, management bases its
decision on its assessment of the ultimate outcome following all appeals. |
23
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|
We intend to vigorously defend each of these matters. In our opinion, while some of these
matters may be material to our operating results for any particular period if an unfavorable
outcome results, none will have a material adverse effect on our overall financial condition. |
There are class actions (Dubin v. Security Union Title Insurance Company, filed on March 12,
2003, in the Court of Common Pleas, Cuyahoga County, Ohio and Randleman v. Fidelity National Title
Insurance Company, filed on February 15, 2006 in the U.S. District Court for the Northern District
of Ohio, Western Division; Patterson v. Fidelity National Title Insurance Company of New York,
filed on October 27, 2003 in the Court of Common Pleas of Allegheny County, Pennsylvania; ODay v.
Ticor Title Insurance Company of Florida, filed on October 18, 2006 in the U.S. District Court for
the Eastern District of Pennsylvania; Cohen v. Chicago Title Insurance Company, filed on January
27, 2006 in the Court of Common Pleas of Philadelphia County, Pennsylvania; Guizarri v. Ticor
Title Insurance Company, filed on October 17, 2006 in the U.S. District Court for the Eastern
District of Pennsylvania; Alberton v. Commonwealth Land Title Insurance Company filed on July 24,
2006 in the United States District Court of the Eastern District of Pennsylvania; Henderson, Miles,
individually and on behalf of all others similarly situated v. Lawyers Title Insurance Corporation,
filed on January 25, 2002, in the Common Pleas Court of Cuyahoga County, Ohio; Simon, Rodney P. and
Tracy L. v. Commonwealth Land Title Insurance Company, filed on March 5, 2003, in the Court of
Common Pleas for Cuyahoga County, Ohio; Macula v. Lawyers Title Insurance Corporation, filed on
May 25, 2007 in the U.S. District Court for the Northern District of Ohio, Eastern Division;
Higgins, Kenneth and Deete, individually and on behalf of others similarly situated v. Commonwealth
Land Title Insurance Company, filed on September 20, 2004, in the Circuit Court of Nassau County,
State of Florida; DeCooman, Shariee L., individually and on behalf of all others similarly situated
v. Lawyers Title Insurance Corporation, filed on August 12, 2005 in the Court of Common Pleas of
Allegheny County, Pennsylvania; Hancock v. Chicago Title Insurance Company, filed on August 22,
2007; Villafranca v. Ticor Title Insurance Company, filed on January 25, 2008; Chapman v.
Commonwealth Land Title Insurance Company, filed on January 29, 2009; filed in the United States
District Court for the Northern District of Texas; Leslie v. Fidelity National Title Insurance
Company, filed on August 22, 2008; Kingsberry v. Chicago Title Insurance Company, filed on January
8, 2008, in the United States District Court for the Western District
of Washington; Tenhundfeld v. Chicago Title Insurance Company, filed on February 15, 2007, in the United States District Court
for the Eastern District of Kentucky; Lind v. Fidelity National Title Insurance Company, filed on
April 24, 2008, in the United States District Court for the District of Oregon) pending against
several title insurance companies, including Security Union Title Insurance Company, Fidelity
National Title Insurance Company, Chicago Title Insurance Company, Ticor Title Insurance Company of
Florida, Commonwealth Land Title Insurance Company, Lawyers Title Insurance Corporation, and Ticor
Title Insurance Company, alleging improper premiums were charged for title insurance. These cases
allege that the named defendant companies failed to provide notice of premium discounts to
consumers refinancing their mortgages, and failed to give discounts in refinancing transactions in
violation of the filed rates.
In February 2008, thirteen putative class actions were commenced against several title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, Security Union Title Insurance Company and Ticor Title Insurance Company (collectively,
the Fidelity Affiliates). The complaints also name FNF (together with the Fidelity Affiliates,
the Fidelity Defendants) as a defendant based on its ownership of the Fidelity Affiliates. The
complaints, which are brought on behalf of a putative class of consumers who purchased title
insurance in New York, allege that the defendants conspired to inflate rates for title insurance
through the Title Insurance Rate Service Association, Inc. (TIRSA), a New York State-approved
rate service organization which is also named as a defendant. Each of the complaints asserts a
cause of action under the Sherman Act and several of the complaints include claims under the Real
Estate Settlement Procedures Act as well as New York State statutory and common law claims. The
complaints seek monetary damages, including treble damages, as well as injunctive relief.
Subsequently, similar complaints were filed in many federal courts. There are now approximately 65
complaints pending alleging that the Fidelity Defendants conspired with their competitors to
unlawfully inflate rates for title insurance in every major market in the United States. A motion
was filed before the Multidistrict Litigation Panel to consolidate and or coordinate these actions
in the United States District Court in the Southern District of New York. However, that motion was
denied. The cases are generally being consolidated before one district court judge in each state
and scheduled for the filing of consolidated complaints and motion
practice. (These cases are Dolan, et al. v.
Fidelity Natl Title Ins. Co., et al. (Consolidated New York Actions), filed on February 1, 2008 in
the Eastern District of New York; In re California Title Insurance Litigation, filed on March 10,
2008 in the Northern District of California; In re Washington Title Insurance Litigation, filed on
March 10, 2008 in the Western District of
24
Washington; In re Pennsylvania Title Insurance Litigation, filed on March 11, 2008 in the
Eastern District of Pennsylvania; Gougeon, et al. v. Chicago Title Ins. Co., et al. filed on March
12, 2008 in D. Massachusetts; In Re Title Insurance Antitrust Cases, filed March 18, 2008 in the
Northern District of Ohio; Classic Homes and Development v. Fidelity Natl Title Ins. Co., et al.
filed on March 19, 2008 in the Eastern District of Arkansas; In re New Jersey Title Insurance
Litigation filed on March 19, 2008 in D. New Jersey; Backel, et al. v. Fidelity Natl Title Ins.
Co., et al., filed on March 20, 2008 in the Southern District of West Virginia; Winn, et al v.
Alamo Title Ins. Co., et al., filed on April 3, 2008 in the Eastern District of Texas; McCray, et
al. v. Fidelity Natl Title Ins. Co., et al filed on
October 15, 2008 in the District of Delaware).
On September 24, 2007 a third party complaint was filed in the In Re Ameriquest Mortgage
Lending Practices Litigation in the United States District Court for the Northern District of
Illinois by Ameriquest Mortgage Company (Ameriquest) and Argent Mortgage Company (Argent)
against numerous title insurers and agents including Chicago Title Company, Fidelity National Title
Company, Fidelity National Title Insurance Company, American Pioneer Title Insurance Company (now
known as Ticor Title Insurance Company of Florida), Chicago Title of Michigan, Fidelity National
Title Insurance Company of New York, Transnation Title Insurance Company (now known as Lawyers
Title Insurance Corporation), Commonwealth Land Title Company, and Ticor Title Insurance Company
(collectively, the FNF Affiliates). The third party complaint alleges that Ameriquest and Argent
have been sued by a class of borrowers alleging that they violated the Truth in Lending Act
(TILA) by failing to comply with the notice of right to cancel provisions and making
misrepresentations in lending to the borrowers, who now seek money damages. Ameriquest and Argent
allege that the FNF Affiliates contracted and warranted to close these loans in conformity with the
lenders instructions which correctly followed the requirements of TILA and contained no
misrepresentations; therefore, if Ameriquest and Argent are liable to the class, then the FNF
Affiliates are liable to them for failing to close the lending transactions as agreed. Ameriquest
and Argent seek to recover the cost of resolving the class action against them including their
attorneys fees and costs in the action. The title defendants are organizing to form a defense
group and, as requested by the court, are exploring the possibility of filing a single collective
response. Recently, the Seventh Circuit, in which these matters are pending, ruled that TILA
violations as alleged in these complaints could not be the subject of a class action.
There are class actions pending against FNF, Fidelity National Title Group and several title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, United Title, Inc. (Halpin v. United Title, Inc. filed on January 25, 2008 in the Boulder
County District Court, Colorado, Case No. 2008CV99), and Ticor Title Insurance Company, alleging
overcharges for government recording fees. These cases allege that the named defendant companies
charged fees in excess of the fees charged by government entities in closing transactions and seek
various remedies including compensatory damages, prejudgment interest, punitive damages and
attorneys fees. One case recently filed in Kansas seeks to certify a national class against
Chicago Title Insurance Company (Hartis v. CTIC filed on August 21, 2008 in the U.S. District Court
for the Western District of Missouri, Case No. 08-CV-0607-W-DW). Although the Federal District
Court in Kansas refused to certify a national class previously filed by the same plaintiffs
attorneys, this suit seeks to overcome that Courts objections to certification (Doll v. Chicago
Title Insurance Company, filed on September 28, 2006 in the U.S. District Court for the District of
Kansas). And, although a similar case filed in Indiana was decertified by the appellate court
(Gresh v CTIC filed on April 29, 2003 in the Lake Superior Court, Hammond, Indiana, Case No.
45D01-0304-PL-0064), and we have moved to decertify a companion case there (Roark v Ticor filed on
April 29, 2003 in Lake Superior Court, Hammond, Indiana), the Missouri courts have refused to
decertify a case now pending and set for trial June 1, 2009 (Krause v. CTIC filed on September 2,
2005 in Circuit Court of Jackson County, Kansas City, Missouri). On January 30, 2009, the court
granted the Fidelity defendants motion for summary judgment in the recording fee class action in
the Federal District Court in Texas, which alleged recording fee overcharges in five states
(Arevalo v. Chicago Title Insurance Company and Ticor Title Insurance Company, filed on March 24,
2006 in the U.S. District Court for the Western District of Texas, San Antonio Division, Case No.
SA 06CA0265 0G). On January 26, 2009 a recording fee class action was filed in New Jersey.
(Arthur Chassen individually and on behalf of all others similarly situated v Fidelity National
Financial, filed in the U. S. District Court for New Jersey, Case Number 09-291 (PGS).
There are class actions (Cornelius et al. individually and on behalf of all others similarly
situated, v. Fidelity National Title Company et al., W.D.Wash. Case No. 2:08-cv-00754-MJP, filed on
May 14, 2008, in the U.S. District Court for the Western District of Washington; Bushbeck,
individually and on behalf of all others similarly situated, v. Chicago Title Insurance Co.,
W.D.Wash. Case No. 2:08-CV-00755-JLR filed on May 14, 2008, in the U.S.
25
District Court for the Western District of Washington; Hanka, individually and on behalf of
all others similarly situated, v. Chicago Title Insurance Company, W.D. Wash. Case No.
2:08-cv-00984-JLR filed on June 26, 2008, in the U.S. District Court for the Western District of
Washington) pending against Fidelity National Title Company, Fidelity National Title Company of
Washington, Inc., and Chicago Title Insurance Company, alleging that the named defendants in each
case charged unnecessary reconveyance fees (Cornelius, Bushbeck) and unnecessary junk fees (wire
fees; document download fees) (Hanka) without performing any separate service for those fees which
was not already included as a service for the escrow fee. Additionally, two of the cases
(Cornelius and Hanka) allege that the named defendants wrongfully earned interest or other benefits
on escrowed funds from the time funds were deposited into escrow until any disbursement checks
cleared the account. Motions for class certification have not yet been filed in any of these
cases.
On December 3, 2007, a former title officer for Lawyers Title Insurance Corporation in
California filed a putative class action suit against Lawyers and LandAmerica Financial Group, Inc.
(LFG) (together, the Defendants) in the Superior Court of California for Los Angeles County
(Chaffin v. Lawyers Title Company and LandAmerica Financial Group, Inc., filed on December 3, 2007
in the Superior Court for Los Angeles County). A similar putative class action was filed against
the Defendants by former Lawyers escrow officers in California, in the same court on December 12,
2007 (Hay et al. v. Lawyers Title Company and LandAmerica Financial Group, Inc., filed on December
12, 2007 in the Superior Court for Los Angeles County). The plaintiffs complaints in both lawsuits
allege failure to pay overtime and other related violations of the California Labor Code, as well
as unfair business practices under the California Business and Professions Code § 17200 on behalf
of all current and former California title and escrow officers. The underlying basis for both
lawsuits is an alleged misclassification of title and escrow officers as exempt employees for
purposes of the California Labor Code, which resulted in a failure to pay overtime and provide for
required meal and rest breaks. Although such employees were reclassified as non-exempt beginning
on January 1, 2006, the complaints allege similar violations of the California Labor Code even
after that date for alleged off-the-clock work. The plaintiffs complaints in both cases demand
an unspecified amount of back wages, statutory penalties, declaratory and injunctive relief,
punitive damages, interest, and attorneys fees and costs. The plaintiffs have yet to file a motion
for class certification, as the parties have agreed to mediation in May 2009. Should further
litigation prove necessary following the mediation, we believe we have meritorious defenses both to
class certification and to liability.
Various governmental entities are studying the title insurance product, market, pricing,
business practices, and potential regulatory and legislative changes. We receive inquiries and
requests for information from state insurance departments, attorneys general and other regulatory
agencies from time to time about various matters relating to our business. Sometimes these take the
form of civil investigative subpoenas. We attempt to cooperate with all such inquiries. From time
to time, we are assessed fines for violations of regulations or other matters or enter into
settlements with such authorities which require us to pay money or take other actions. For a
description of certain pending regulatory matters in California, see Item 1A, Risk Factors.
Item 4. Submission of Matters to a Vote of Security Holders
None.
26
PART II
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Item 5. |
|
Market for Registrants Common Equity and Related Stockholder Matters and Issuer
Purchases of Equity Securities |
Our common stock is traded on the New York Stock Exchange under the symbol FNF. The
following table shows, for the periods indicated, the high and low sales prices of our common
stock, as reported by the New York Stock Exchange, and the amounts of dividends per share declared
on our common stock.
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends |
|
|
|
High |
|
|
Low |
|
|
Declared |
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
20.96 |
|
|
$ |
12.60 |
|
|
$ |
0.30 |
|
Second quarter |
|
|
19.17 |
|
|
|
12.56 |
|
|
|
0.30 |
|
Third quarter |
|
|
18.19 |
|
|
|
11.93 |
|
|
|
0.30 |
|
Fourth quarter |
|
|
18.51 |
|
|
|
6.66 |
|
|
|
0.15 |
|
Year ended December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
First quarter |
|
$ |
26.21 |
|
|
$ |
22.92 |
|
|
$ |
0.30 |
|
Second quarter |
|
|
28.62 |
|
|
|
22.92 |
|
|
|
0.30 |
|
Third quarter |
|
|
24.22 |
|
|
|
16.46 |
|
|
|
0.30 |
|
Fourth quarter |
|
|
17.81 |
|
|
|
13.10 |
|
|
|
0.30 |
|
On January 30, 2009 the last reported sale price of our common stock on the New York Stock
Exchange was $14.62 per share. As of January 30, 2009, we had approximately 5,487 stockholders of
record.
On February 3, 2009, our Board of Directors formally declared a $0.15 per share cash dividend
that is payable on March 31, 2009 to stockholders of record as of March 17, 2009.
Our current dividend policy anticipates the payment of quarterly dividends in the future. The
declaration and payment of dividends will be at the discretion of our Board of Directors and will
be dependent upon our future earnings, financial condition and capital requirements. Our ability to
declare dividends is subject to restrictions under our existing credit agreement. We do not believe
the restrictions contained in our credit agreement will, in the foreseeable future, adversely
affect our ability to pay cash dividends at the current dividend rate.
Since we are a holding company, our ability to pay dividends will depend largely on the
ability of our subsidiaries to pay dividends to us, and the ability of our title insurance
subsidiaries to do so is subject to, among other factors, their compliance with applicable
insurance regulations. As of December 31, 2008, $1,547.5 million of the Companys net assets are
restricted from dividend payments without prior approval from the Departments of Insurance in the
States where our title insurance subsidiaries are domiciled. During 2009, our directly owned title
insurance subsidiaries can pay dividends or make distributions to us of approximately $214.7
million without prior approval. The limits placed on such subsidiaries abilities to pay dividends
affect our ability to pay dividends.
On October 25, 2006, our Board of Directors approved a three-year stock repurchase program
under which we can repurchase up to 25 million shares of our common stock. We may make purchases
from time to time in the open market, in block purchases or in privately negotiated transactions,
depending on market conditions and other factors. We began purchasing shares under this program on
a regular basis on April 30, 2007, and, through December 31, 2008, we had repurchased a total of
12,840,470 shares for $229.1 million, or an average of $17.84 per share, none of which were
purchased in the three months ended December 31, 2008. We have not repurchased any shares under
this program since December 31, 2008. For more information, please see Liquidity and Capital
Resources in Item 7 of this Form 10-K.
27
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with the consolidated financial
statements and related notes and Managements Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Form 10-K. Certain reclassifications have been
made to the prior year amounts to conform with the 2008 presentation.
Acquisitions among entities under common control such as Old FNFs 2006 contribution of assets
to us in connection with the 2006 Distribution are not considered business combinations and are to
be accounted for at historical cost in accordance with Emerging Issues Task Force (EITF) 90-5,
Exchanges of Ownership Interests between Enterprises under Common Control. Furthermore, the
substance of that asset contribution, the 2006 Distribution and the Old FNF-FIS merger is
effectively a reverse spin-off of FIS by Old FNF in accordance with EITF 02-11, Accounting for
Reverse Spinoffs. Accordingly, the historical financial statements of Old FNF became those of FNF.
As a result, the data shown below for periods or dates prior to October 24, 2006, the date the 2006
Distribution was completed, are the data of Old FNF, including the results of both FIS and us
(referred to as FNT) as subsidiaries of Old FNF. Following completion of the 2006 Distribution,
however, the criteria to account for FIS as discontinued operations as prescribed by SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, were not met. This is primarily
due to our continuing involvement with and significant influence over FIS subsequent to the merger
of Old FNF and FIS through common board members, common senior management and continuing business
relationships. As a result, for periods prior to October 24, 2006, FIS continues to be included in
our consolidated financial statements.
28
|
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|
|
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|
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|
|
|
|
Year Ended December 31, |
|
|
|
2008(1) |
|
|
2007(2) |
|
|
2006(3) |
|
|
2005(4) |
|
|
2004(5) |
|
|
|
(In thousands, except per share and other data) |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
4,329,095 |
|
|
$ |
5,523,175 |
|
|
$ |
9,434,399 |
|
|
$ |
9,654,226 |
|
|
$ |
8,293,623 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
1,355,845 |
|
|
|
1,700,935 |
|
|
|
3,225,319 |
|
|
|
3,224,678 |
|
|
|
2,786,297 |
|
Other operating expenses |
|
|
1,208,647 |
|
|
|
1,109,438 |
|
|
|
2,075,101 |
|
|
|
1,702,353 |
|
|
|
1,598,942 |
|
Agent commissions |
|
|
1,218,044 |
|
|
|
1,698,215 |
|
|
|
2,035,423 |
|
|
|
2,060,467 |
|
|
|
2,028,926 |
|
Depreciation and Amortization |
|
|
142,759 |
|
|
|
130,092 |
|
|
|
460,750 |
|
|
|
406,259 |
|
|
|
338,434 |
|
Provision for claim losses |
|
|
630,404 |
|
|
|
653,876 |
|
|
|
486,334 |
|
|
|
480,556 |
|
|
|
311,916 |
|
Interest expense |
|
|
68,789 |
|
|
|
54,941 |
|
|
|
209,972 |
|
|
|
172,327 |
|
|
|
47,214 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,624,488 |
|
|
|
5,347,497 |
|
|
|
8,492,899 |
|
|
|
8,046,640 |
|
|
|
7,111,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes,
equity in (loss) earnings of
unconsolidated affiliates, and
minority interest |
|
|
(295,393 |
) |
|
|
175,678 |
|
|
|
941,500 |
|
|
|
1,607,586 |
|
|
|
1,181,894 |
|
Income tax (benefit) expense |
|
|
(125,542 |
) |
|
|
46,776 |
|
|
|
350,871 |
|
|
|
573,391 |
|
|
|
438,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before equity in (loss)
earnings of unconsolidated
affiliates and minority interest |
|
|
(169,851 |
) |
|
|
128,902 |
|
|
|
590,629 |
|
|
|
1,034,195 |
|
|
|
743,780 |
|
Equity in (loss) earnings of
unconsolidated affiliates |
|
|
(13,375 |
) |
|
|
835 |
|
|
|
1,702 |
|
|
|
354 |
|
|
|
2,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before minority
interest |
|
|
(183,226 |
) |
|
|
129,737 |
|
|
|
592,331 |
|
|
|
1,034,549 |
|
|
|
745,977 |
|
Minority interest |
|
|
(4,210 |
) |
|
|
(32 |
) |
|
|
154,570 |
|
|
|
70,443 |
|
|
|
5,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
|
$ |
964,106 |
|
|
$ |
740,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data(6): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.60 |
|
|
$ |
2.40 |
|
|
$ |
5.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
basic basis |
|
|
209,974 |
|
|
|
216,583 |
|
|
|
182,031 |
|
|
|
173,463 |
|
|
|
|
|
Diluted net (loss) earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.59 |
|
|
$ |
2.39 |
|
|
$ |
5.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
diluted basis |
|
|
209,974 |
|
|
|
219,989 |
|
|
|
182,861 |
|
|
|
173,575 |
|
|
|
|
|
Unaudited pro forma net earnings per
share basic and diluted(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma weighted average
shares basic and diluted(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
172,951 |
|
Dividends declared per share |
|
$ |
1.05 |
|
|
$ |
1.20 |
|
|
$ |
1.17 |
|
|
|
0.25 |
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(8) |
|
$ |
4,376,493 |
|
|
$ |
4,101,821 |
|
|
$ |
4,121,751 |
|
|
$ |
4,564,189 |
|
|
$ |
3,346,276 |
|
Cash and cash equivalents(9) |
|
|
315,297 |
|
|
|
569,562 |
|
|
|
676,444 |
|
|
|
513,394 |
|
|
|
331,222 |
|
Total assets |
|
|
8,368,240 |
|
|
|
7,587,853 |
|
|
|
7,259,559 |
|
|
|
11,104,617 |
|
|
|
9,270,535 |
|
Notes payable |
|
|
1,350,849 |
|
|
|
1,167,739 |
|
|
|
491,167 |
|
|
|
3,217,019 |
|
|
|
1,370,556 |
|
Reserve for claim losses(10) |
|
|
2,738,625 |
|
|
|
1,419,910 |
|
|
|
1,220,636 |
|
|
|
1,113,506 |
|
|
|
1,000,474 |
|
Minority interests and preferred
stock of subsidiary |
|
|
51,199 |
|
|
|
53,868 |
|
|
|
56,044 |
|
|
|
636,304 |
|
|
|
18,874 |
|
Stockholders equity |
|
|
2,805,573 |
|
|
|
3,244,088 |
|
|
|
3,474,368 |
|
|
|
3,279,775 |
|
|
|
4,700,091 |
|
Book value per share(11) |
|
$ |
13.05 |
|
|
$ |
15.23 |
|
|
$ |
15.75 |
|
|
|
18.81 |
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008(1) |
|
|
2007(2) |
|
|
2006(3) |
|
|
2005(4) |
|
|
2004(5) |
|
|
|
(In thousands, except per share and other data) |
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title
operations |
|
|
1,860,400 |
|
|
|
2,259,800 |
|
|
|
3,146,200 |
|
|
|
3,615,400 |
|
|
|
3,680,200 |
|
Orders closed by direct title
operations |
|
|
1,121,200 |
|
|
|
1,434,800 |
|
|
|
2,051,500 |
|
|
|
2,487,000 |
|
|
|
2,636,300 |
|
Provision for title insurance claim
losses to title insurance
premiums(10) |
|
|
18.2 |
% |
|
|
13.2 |
% |
|
|
7.5 |
% |
|
|
7.2 |
% |
|
|
5.5 |
% |
Title related revenue(12): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage direct operations |
|
|
59.5 |
% |
|
|
55.4 |
% |
|
|
53.7 |
% |
|
|
56.4 |
% |
|
|
55.2 |
% |
Percentage agency operations |
|
|
40.5 |
% |
|
|
44.6 |
% |
|
|
46.3 |
% |
|
|
43.6 |
% |
|
|
44.8 |
% |
|
|
|
(1) |
|
Our financial results for the year ended December 31, 2008, include a
charge to our provision for claim losses of $261.6 million ($157.0 million
net of income taxes) which we recorded as a result of adverse claim loss
development on prior policy years and the results of various entities
acquired on various dates during 2008. |
|
(2) |
|
Our financial results for the year ended December 31, 2007, include
charges to our provision for claim losses totaling $217.2 million ($159.5
million net of income taxes) which we recorded as a result of adverse
claim loss development on prior policy years and the results of various
entities acquired on various dates during 2007. |
|
(3) |
|
Beginning October 24, 2006, the date on which the 2006 Distribution was
completed, our financial results no longer include the results of FIS. The
operations of FIS continue to be included in our results for periods prior
to October 24, 2006. In addition, FISs financial results for 2006 include
the results of operations of Certegy Inc. (Certegy) since February 1,
2006, the date on which Certegy was acquired by FIS (see note B of Notes
to Consolidated Financial Statements). |
|
(4) |
|
Our financial results for the year ended December 31, 2005 include in
revenue and net earnings a $318.2 million gain on sale relating to the
issuance of subsidiary stock, approximately $100.0 million in additional
income tax expense relating to the distribution to our shareholders of a
17.5% interest of FNT and additional minority interest expense related to
the minority interests issued in FNT and FIS. (See note A of the Notes to
Consolidated Financial Statements). |
|
(5) |
|
Our financial results for the year ended December 31, 2004 include the
results of various entities acquired on various dates during 2004. |
|
(6) |
|
Our historical basic and diluted earnings per share for 2006 and 2005 have
been calculated using FNTs basic and diluted weighted average shares
outstanding. |
|
(7) |
|
Unaudited pro forma net earnings per share for 2004 is calculated using
the number of outstanding shares of Old FNF on a date prior to the
distribution of FNT shares to Old FNF shareholders in 2005. |
|
(8) |
|
Investments as of December 31, 2008, 2007, 2006, 2005, and 2004 include
securities pledged to secure trust deposits of $382.5 million, $513.8
million, $696.8 million, $656.0 million, and $546.0 million, respectively.
Investments as of December 31, 2008, 2007, 2006, and 2005 include
securities pledged relating to our securities lending program of $103.6
million, $264.2 million, $305.3 million and $138.7 million, respectively. |
|
(9) |
|
Cash and cash equivalents as of December 31, 2008, 2007, 2006, 2005, and
2004 include cash pledged to secure trust deposits of $109.6 million,
$193.5 million, $228.5 million, $234.7 million, and $195.2 million,
respectively. Cash and cash equivalents as of December 31, 2008, 2007,
2006 and 2005 include cash pledged relating to our securities lending
program of $107.6 million, $271.8 million, $316.0 million, and $143.4
million, respectively. |
|
(10) |
|
As a result of adverse title insurance claim loss development on prior
policy years, we recorded charges in 2008 totaling $261.6 million, or
$157.0 million net of income taxes, and in 2007 totaling $217.2 million,
or $159.5 million net of income taxes, to our provision for claim losses.
These charges were recorded in addition to our provision for claim losses
of 8.5% and 7.5% for the years ended December 31, 2008 and 2007,
respectively. |
30
|
|
|
(11) |
|
Book value per share is calculated as stockholders equity at December 31
of each year presented divided by actual shares outstanding at December 31
of each year presented. |
|
(12) |
|
Includes title insurance premiums and escrow, title-related and other fees. |
Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30,(1) |
|
|
December 31,(2) |
|
|
|
(In thousands, except per share data) |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,137,160 |
|
|
$ |
1,179,798 |
|
|
$ |
989,683 |
|
|
$ |
1,022,454 |
|
Earnings (loss) before income
taxes, equity in income of
unconsolidated affiliates, and
minority interest |
|
|
36,367 |
|
|
|
13,527 |
|
|
|
(322,874 |
) |
|
|
(22,413 |
) |
Net earnings (loss) |
|
|
27,245 |
|
|
|
6,925 |
|
|
|
(198,302 |
) |
|
|
(14,884 |
) |
Basic earnings (loss) per share |
|
|
0.13 |
|
|
|
0.03 |
|
|
|
(0.95 |
) |
|
|
(0.07 |
) |
Diluted earnings (loss) per share |
|
|
0.13 |
|
|
|
0.03 |
|
|
|
(0.95 |
) |
|
|
(0.07 |
) |
Dividends paid per share |
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,366,880 |
|
|
$ |
1,495,000 |
|
|
$ |
1,361,408 |
|
|
$ |
1,299,887 |
|
Earnings (loss) before income
taxes, equity in income of
unconsolidated affiliates, and
minority interest |
|
|
124,705 |
|
|
|
126,441 |
|
|
|
(66 |
) |
|
|
(75,402 |
) |
Net earnings (loss) |
|
|
83,399 |
|
|
|
84,835 |
|
|
|
6,472 |
|
|
|
(44,937 |
) |
Basic earnings (loss)per share |
|
|
0.38 |
|
|
|
0.39 |
|
|
|
0.03 |
|
|
|
(0.21 |
) |
Diluted earnings (loss) per share |
|
|
0.37 |
|
|
|
0.38 |
|
|
|
0.03 |
|
|
|
(0.21 |
) |
Dividends paid per share |
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
0.30 |
|
|
|
|
(1) |
|
Includes loss provision charge of $261.6 million, or $157.0 million net of income taxes, in 2008
and $81.5 million, or $55.5 million net of income taxes, in 2007. |
|
(2) |
|
Includes loss provision charge of $135.7 million, or $104.0 million net of income taxes, in 2007. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and Selected Financial Data included elsewhere in this Form 10-K.
The results of operations and statement of financial position reported on this Form 10-K have
been adjusted for certain items and reclassifications determined subsequent to our earnings release
on February 4, 2009. These adjustments primarily relate to purchase accounting reclassifications
on the balance sheet that arose as we continued to analyze balances in conjunction with the
acquisition of the LFG Underwriters on December 22, 2008 and other adjustments arising during the
completion of the audit of our reported results. These adjustments reduced our 2008 year to date
earnings approximately $21.7 million pre-tax, $
13.2 million after-tax, or $0.06 per share, as
compared with the amounts reported in our earnings release on February 4, 2009.
Premium revenues from agency operations and agency commissions include an accrual based on
estimates using historical information of the volume of transactions that have closed in a
particular period for which premiums have not yet been reported to us. The accrual for agency
premiums is necessary because of the lag between the closing of
31
these transactions and the reporting of these policies to us by the agent. During the third
quarter of 2008, we re-evaluated and refined the method that we use to estimate this accrual, which
resulted in a reduction in revenue from agency title insurance premiums of $138.5 million compared
to the revenues that would have been accrued under our prior method. The impact of this adjustment
was a decrease of $11.8 million in pre-tax earnings and $7.6 million in net income, or
approximately $0.04 per share, compared to the amounts that would have been recorded under our
prior method. We believe that this adjustment is properly reflected as a change in accounting
estimate in the third quarter of 2008.
Recent Developments
On December 22, 2008, we completed the acquisition of LandAmerica Financial Group, Inc.s
(LFG) two principal title insurance underwriters, Commowealth Land Title Insurance Company
(Commonwealth) and Lawyers Title Insurance Corporation (Lawyers), as well as United Capital
Title Insurance Company (United). The total purchase price for Commonwealth and Lawyers was
$238.0 million, net of cash acquired of $8.8 million, and was comprised of $134.8 million paid in
cash by two of our title insurance underwriters, Fidelity National Title Insurance Company and
Chicago Title Insurance Company, a $50 million subordinated note due in 2013 (see note I of Notes
to Consolidated Financial Statements), and $50 million in FNF common stock (3,176,620 shares valued
at $15.74 per share at the time of closing). In addition, Fidelity National Title Insurance Company
purchased United from an indirect subsidiary of LFG for a purchase price of approximately $12
million, equal to an estimate (subject to post-closing adjustment) of the statutory net worth of
United at the time of closing. The operations of these companies are included in the Fidelity
National Title Group segment from their acquisition date of December 22, 2008.
During 2008, prior to the acquisition, the LFG
Underwriters generated significant revenue but had substantial losses from operations. Since the acquisition,
FNF has been engaged in an effort to reduce overhead at the LFG Underwriters and restore them to profitability.
Through the end of January, FNF had eliminated approximately 1,500 of the 5,500 employees and closed
approximately 125 of the offices acquired in the transaction. Agent relationships are also being evaluated
and reductions in the agency base have also occurred and are continuing. As a result of these measures, and
due in part to the loss of business momentum at the LFG Underwriters prior to the acquisition resulting from
the Chapter 11 case of LFG and other causes, it seems likely that the operations of the LFG Underwriters
will, at least initially, be somewhat less sizable than they were historically. For the months of January and
February 2009, the direct operations of the LFG Underwriters contributed an average of approximately 16% of
the total direct orders opened by the Company. Therefore, the reported results of the LFG Underwriters for
prior periods are not necessarily indicative of the results to be expected for any future period.
Overview
We are a holding company that is a provider, through our subsidiaries, of title insurance,
specialty insurance, claims management services, and information services. We are the nations
largest title insurance company through our title insurance underwriters Fidelity National
Title, Chicago Title, Commonwealth Land Title, Lawyers Title, Ticor Title, Security Union Title,
and Alamo Title which collectively issued more title insurance policies in 2007 than any other
title company in the United States. We also provide flood insurance, personal lines insurance, and
home warranty insurance through our specialty insurance subsidiaries. We are also a leading
provider of outsourced claims management services to large corporate and public sector entities
through our minority-owned affiliate, Sedgwick CMS Holdings (Sedgwick) and a provider of
information services in the human resources, retail, and transportation markets through another
minority-owned affiliate, Ceridian Corporation (Ceridian).
Prior to October 24, 2006, we were known as Fidelity National Title Group, Inc. (FNT) and were a
majority-owned subsidiary of another publicly traded company, also called Fidelity National
Financial, Inc. (Old FNF). On October 24, 2006, Old FNF transferred certain assets to us in
return for the issuance of 45,265,956 shares of our common stock to Old FNF. Old FNF then
distributed to its shareholders all of its shares of our common stock, making FNT a stand alone
public company (the 2006 Distribution). On November 9, 2006, Old FNF was then merged with and
into another of its subsidiaries, Fidelity National Information Services, Inc. (FIS), after which
we changed our name to Fidelity National Financial, Inc. (FNF or the Company). On November 10,
2006, our common stock began trading on the New York Stock Exchange under the trading symbol FNF.
On July 2, 2008, FIS completed the spin-off of its former Lender Processing Services operating
segment into a separate publicly traded company, referred to as LPS, by distributing all of its
shares of LPS to FIS shareholders through a stock dividend. Old FNFs chairman of the board and
chief executive officer is now our chairman of the board, the executive chairman of the board of
FIS, and the chairman of the board of LPS. Other key members of Old FNFs senior management have
also continued their involvement at FNF, FIS, and LPS in executive capacities. Under applicable
accounting principles, following these transactions, Old FNFs historical financial statements,
with the exception of equity and earnings per share, became our historical financial statements,
including the results of FIS through the date of our spin-off from Old FNF. For periods prior to
October 24, 2006 our equity has been derived from FNTs historical equity and our historical basic
and diluted earnings per share have been calculated using FNTs basic and diluted weighted average
shares outstanding.
32
We currently have three reporting segments as follows:
|
|
|
Fidelity National Title Group. This segment consists of the operation of our title
insurance underwriters and related businesses. This segment provides core title insurance
and escrow and other title-related services including collection and trust activities,
trustees sales guarantees, recordings and reconveyances. |
|
|
|
|
Specialty Insurance. The specialty insurance segment consists of certain subsidiaries
that issue flood, home warranty, homeowners, automobile and other personal lines insurance
policies. Our Board of Directors has authorized us to investigate strategic alternatives
for certain of our specialty insurance businesses. The assets to be evaluated include the
flood insurance and personal lines insurance businesses, but not the home warranty
business. However, there can be no assurance that any transaction will be completed. |
|
|
|
|
Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company, certain other unallocated corporate overhead expenses, other
smaller operations, and our share in the operations of certain equity investments,
including Sedgwick, Ceridian and Remy International, Inc. (Remy). |
Through October 23, 2006, our results also included the operations of FIS as a separate
segment. This segment provided transaction processing services, consisting principally of
technology solutions for banks and other financial institutions, credit and debit card services and
check risk management and related services for retailers and others. This segment also provided
lender processing services, consisting principally of technology solutions for mortgage lenders,
selected mortgage origination services such as title agency and closing services, default
management and mortgage information services. FISs credit and debit card services and check risk
management services were added through its merger with Certegy Inc. (Certegy). This merger closed
in February 2006 and as a result these businesses are not included in FISs financial information
prior to the closing.
Related Party Transactions
Our financial statements reflect transactions with FIS and LPS, which are related parties.
Please see note A of the Notes to Consolidated Financial Statements.
Business Trends and Conditions
Fidelity National Title Group
Title insurance revenue is closely related to the level of real estate activity which includes
sales, mortgage financing and mortgage refinancing. The levels of real estate activity are
primarily affected by the average price of real estate sales, the availability of funds to finance
purchases and mortgage interest rates. Both the volume and the average price of residential real
estate transactions have recently experienced declines in many parts of the country, and these
trends appear likely to continue. Declines in the level of real estate activity or the average
price of real estate sales are likely to adversely affect our title insurance revenues. The volume
of refinancing transactions in particular and mortgage originations in general declined in the 2006
through 2008 period from 2005 and prior levels, resulting in reduction of revenues in some of our
businesses.
We have found that residential real estate activity generally decreases in the following
situations:
|
|
|
when mortgage interest rates are high or increasing; |
|
|
|
|
when the mortgage funding supply is limited; and |
|
|
|
|
when the United States economy is weak. |
Because these factors can change dramatically, revenue levels in the title insurance industry
can also change dramatically. For example, from January 2001 through June 2004, the Federal Reserve
decreased interest rates by a total of 550 basis points, bringing interest rates down to a level
not seen before in recent history and increasing the volume of residential real estate purchases
and refinance activity. From June 2004 through September 2007, the Federal Reserve increased
interest rates by a total of 425 basis points. In 2007, as interest rates on adjustable rate
33
mortgages reset to higher rates, foreclosures on subprime mortgage loans increased to record
levels. This resulted in a significant decrease in levels of available mortgage funding as
investors became wary of the risk associated with investing in subprime mortgage loans. In
addition, tighter lending standards and a bearish outlook on the real estate environment caused
potential home buyers to become reluctant to purchase homes. In 2008, the increase in foreclosure
activity, which had previously been limited to the subprime mortgage market, became more widespread
as borrowers encountered difficulties in attempting to refinance their adjustable rate mortgages.
In 2008, the sharply rising mortgage delinquency and default rates caused negative operating
results at a number of banks and financial institutions and, as a result, significantly reduced the
level of lending activity. Several banks have failed in recent months and others may fail in the
short to medium term, further reducing the capacity of the mortgage industry to make loans. As a
result of these factors, our title insurance order counts and revenues have decreased
substantially. The Federal Reserve tried to alleviate investors concerns by reducing interest
rates by a total of 75 basis points in late 2007, 325 basis points through October 2008, and
another 75-100 basis points in December 2008. The federal funds rate is now 0.0%-0.25% compared to
5.25% in August 2007. A reduction in rates in the first quarter of 2008 resulted in a temporary
increase in refinance order volumes that was not sustained. The further reduction in rates in the
fourth quarter of 2008 has resulted in another increase in refinance order volumes in December 2008
and continuing into February 2009. However, it is too soon to tell if the portion of these open
orders that actually closes will be consistent with our closing percentages in prior periods or how
long this increased activity will last. According to the Mortgage Bankers Associations (MBA)
current mortgage finance forecast, U.S. mortgage originations (including refinancings) were
approximately $1.7 trillion, $2.3 trillion, and $2.7 trillion in 2008, 2007, and 2006,
respectively. The MBAs Mortgage Finance Forecast estimates a $2.0 trillion mortgage origination
market for 2009, which would be an increase of 12.1% from 2008. The MBA further forecasts that the
12.1% increase will result primarily from refinance transactions.
Our revenues in future periods will continue to be subject to these and other factors which
are beyond our control and, as a result, are likely to fluctuate.
In October 2008, we announced our plans to begin the process of reviewing and increasing our
title insurance rates across the country. Since that time, we have instituted revised rates that
are now effective in approximately 21 states, including a 10% increase in California. The pricing
increases have been generally in the range 5-10%. Additional rate revisions are pending in a number
of other states and we are also analyzing the filed rates of the LFG Underwriters to make them
consistent with the rest of our underwriters.
Because commercial real estate transactions tend to be driven more by supply and demand for
commercial space and occupancy rates in a particular area rather than by macroeconomic events, our
commercial real estate title insurance business can generate revenues which are not dependent on
the industry cycles discussed above.
Historically, real estate transactions have produced seasonal revenue levels for title
insurers. The first calendar quarter is typically the weakest quarter in terms of revenue due to
the generally low volume of home sales during January and February. The third calendar quarter has
been typically the strongest in terms of revenue primarily due to a higher volume of home sales in
the summer months and the fourth quarter is usually also strong due to commercial entities desiring
to complete transactions by year-end. In 2007 and 2008, we have seen a divergence from these
historical trends as tighter lending standards, including a significant reduction in the
availability of mortgage lending, combined with rising default levels and a bearish outlook on the
real estate environment have caused potential home buyers to be more reluctant to buy homes and
have suppressed refinance activity. In addition, we have experienced a significant decrease in our
commercial fee per file, which we believe is due, in part, to delays in the closings of many larger
deals resulting from difficulties or delays in obtaining financing.
Specialty Insurance
Our specialty insurance business participates in the NFIP. We earn fees under that program for
settling flood claims and administering the program. We serve as administrator and processor in our
flood insurance business, and bear none of the underwriting or claims risk. The U.S. federal
government is guarantor of flood insurance coverage written under NFIP and bears the underwriting
risk. Revenues from our flood insurance business are impacted by the volume and magnitude of claims
processed as well as the volume and rates for policies written. For example, when a large number of
claims are processed as a result of a natural disaster, such as a hurricane, we experience an
increase in the fees that we receive for settling the claims.
34
Revenues from our homeowners insurance and home warranty businesses are impacted by the level
of residential real estate purchase activity in the U.S. and the general state of the economy as
well as our market share. Recently, revenues from our homeowners insurance business have decreased
as a result of efforts to tighten our underwriting standards and eliminate unprofitable agents and
territories, a strategy which we believe will benefit the Company in the long term.
Critical Accounting Estimates
The accounting estimates described below are those we consider critical in preparing our
Consolidated Financial Statements. Management is required to make estimates and assumptions that
can affect the reported amounts of assets and liabilities and disclosures with respect to
contingent assets and liabilities at the date of the Consolidated Financial Statements and the
reported amounts of revenues and expenses during the reporting period. Actual amounts could differ
from those estimates. See note A of Notes to the Consolidated Financial Statements for a more
detailed description of the significant accounting policies that have been followed in preparing
our Consolidated Financial Statements.
Reserve for Claim Losses. Title companies issue two types of policies since both the buyer
and lender in real estate transactions want to know that their interest in the property is insured
against certain title defects outlined in the policy. An owners policy insures the buyer against
such defects for as long as he or she owns the property (as well as against warranty claims arising
out of the sale of the property by such owner). A lenders policy insures the priority of the
lenders security interest over the claims that other parties may have in the property. The maximum
amount of liability under a title insurance policy is generally the face amount of the policy plus
the cost of defending the insureds title against an adverse claim. While most non-title forms of
insurance, including property and casualty, provide for the assumption of risk of loss arising out
of unforeseen future events, title insurance serves to protect the policyholder from risk of loss
from events that predate the issuance of the policy.
Unlike many other forms of insurance, title insurance requires only a one-time premium for
continuous coverage until another policy is warranted due to changes in property circumstances
arising from refinance, resale, additional liens, or other events. Unless we issue the subsequent
policy, we receive no notice that our exposure under our policy has ended and, as a result, we are
unable to track the actual terminations of our exposures.
Our reserve for claim losses includes reserves for known claims (PLR) as well as for losses
that have been incurred but not yet reported to us (IBNR), net of recoupments. We reserve for
each known claim based on our review of the estimated amount of the claim and the costs required to
settle the claim. Reserves for IBNR claims are estimates that are established at the time the
premium revenue is recognized and are based upon historical experience and other factors, including
industry trends, claim loss history, legal environment, geographic considerations, and the types of
policies written. We also reserve for losses arising from escrow, closing and disbursement
functions due to fraud or operational error.
The table below summarizes our reserves for known claims and incurred but not reported claims
related to title insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
As of |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
|
(In thousands) |
|
PLR |
|
$ |
369,085 |
|
|
|
13.8 |
% |
|
$ |
214,243 |
|
|
|
16.2 |
% |
IBNR |
|
|
2,309,902 |
|
|
|
86.2 |
% |
|
|
1,108,379 |
|
|
|
83.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Reserve |
|
$ |
2,678,987 |
|
|
|
100.0 |
% |
|
$ |
1,322,622 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Although most claims against title insurance policies are reported relatively soon after the
policy has been issued, claims may be reported many years later. By their nature, claims are often
complex, vary greatly in dollar amounts and are affected by economic and market conditions and the
legal environment existing at the time of settlement of the claims. 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.
35
Our process for recording our reserves for claim losses begins with analysis of our loss
provision rate. Management forecasts ultimate losses for each policy year based upon examination of
historical policy year loss emergence (development) and adjustment of the emergence patterns to
reflect policy year differences in the effects of various influences on the timing, frequency and
severity of claims. Management also uses a technique that relies on historical loss emergence and
on a premium-based exposure measurement. The latter technique is particularly applicable to the
most recent policy years, which have few reported claims relative to an expected ultimate claim
volume. After considering historical claim losses, reporting patterns and current market
information, and analyzing quantitative and qualitative data provided by our legal, claims and
underwriting departments, management determines a loss provision rate, which it records as a
percentage of current premiums. This loss provision rate is set to provide for losses on current
year policies. We have been recording our loss provision at 8.5% and 7.5% of premiums during 2008
and 2007, respectively. At each quarter end, our recorded reserve for claim losses is initially the
result of taking the prior recorded reserve for claim losses, adding the current provision to that
balance and subtracting actual paid claims from that balance, resulting in an amount that
management then compares to the actuarial point estimate provided in the actuarial calculation.
Due to the uncertainty inherent in the process and to the judgment used by both management and
our actuary, our ultimate liability may be greater or less than our current reserves and/or our
actuarys calculation. If the recorded amount is within a reasonable range of the actuarys point
estimate, but not at the point estimate, management assesses other factors in order to be
comfortable with the position of the recorded reserve within a range. These factors, which are more
qualitative than quantitative, can change from period to period, and include items such as current
trends in the real estate industry (which management can assess, but for which there is a time lag
in the development of the data used by our internal actuary), the stratification of certain claims
(large vs. small), improvements in the Companys claims management processes, and other cost saving
measures. If the recorded amount is not within a reasonable range of our internal actuarys point
estimate, we would record a charge and reassess the loss provision rate on a go forward basis. We
will continue to reassess the provision to be recorded in future periods consistent with this
methodology.
At December 31, 2008, our initial reserve for claim losses, excluding the reserve for claim
losses included in the net assets that we purchased from LFG, was $1.563 billion, which was $16.1
million, or 1.0%, higher than our internal actuarys point estimate of $1.547 billion. We believe
our recorded position is adequate as of December 31, 2008. As of September 30, 2008, our initial
recorded reserve for claim losses was $1.303 billion, $261.6 million lower than our internal
actuarys point estimate of $1.565 billion. As a result, at September 30, 2008, management
determined that our initial recorded amount was outside of a reasonable range from our internal
actuarys estimate and we recorded a charge of $261.6 million in addition to our 8.5% provision for
claim losses. This charge resulted in a balance of $1.565 billion in our title insurance claim loss
reserve, which was in agreement with our actuarys point estimate at September 30, 2008. The
significant development during the quarter ended September 30, 2008, was due to changes in our
actuarial model resulting, in part, from adverse claim loss development on prior policy years.
Because of continued adverse reported and paid claim trends over the previous six quarters, our
actuarial model in the third quarter of 2008 was modified to more heavily weight the three most
recent full years data on loss experience and to incorporate that data into the assumptions and
factors that determine ultimate expected loss experience for all prior calendar years. We also had
an external actuary perform an independent review of our reserve position at September 30, 2008,
and the conclusion reached by the external actuary was consistent with that of our internal
actuarial model.
In connection with the acquisition
of the LFG Underwriters on December 22, 2008, we have recorded a reserve for claim losses of $1.116
billion. The acquired reserves were computed by performing an actuarial analysis which utilized a
process similar to FNFs process described above and then applying an adjustment to the actuarial
balance to record the acquired reserves at their estimated fair value as of December 31, 2008.
The fair value adjustments were calculated by taking the estimated payment stream of the actuarial
reserves and discounting them utilizing the U.S. Treasury Yield
Curve. We then applied a discounted
risk and profit load to the discounted reserves to estimate the fair value of the claim loss reserves at
December 31, 2008.
As of December 31, 2007, our initial recorded reserve for claim losses was $1.187 billion,
$97.3 million lower than our internal actuarys point estimate of $1.284 billion. As of September
30, 2007, our initial recorded reserve
36
for claim losses was $1.152 billion, $81.5 million lower than our internal actuarys estimate
of $1.233 billion. As a result, at December 31, 2007 and at September 30, 2007, management
determined that our initial recorded amounts were outside of a reasonable range from our internal
actuarys estimates and we recorded total charges in 2007 of $217.2 million (made up of $81.5
million in the third quarter and $135.7 million in the fourth quarter) in addition to our 7.5%
provision for claim losses. These charges resulted in a balance of $1.323 billion in our title
insurance claim loss reserve at December 31, 2007, which was $39 million, or 3%, higher than the
actuarys point estimate but still within a reasonable range. Management believed the appropriate
reserve was higher than the actuarys point estimate because, in our judgment, as a result of the
actuarial models and assumptions used, the full extent of adverse development in the trend of paid
claims had not yet been fully reflected in the actuarys estimate at December 31, 2007. We believed
that such adverse paid development would result in an increase in ultimate losses for prior years
over and above those projected by our internal actuarys point estimate, thus we provided for
ultimate loss in excess of such estimate. Please see Item IA, Risk Factors, If we observe changes
in the rate of title insurance claims, it may be necessary for us to record additional charges to
our claim loss reserve. This may result in lower net earnings and the potential for earnings
volatility.
The table below presents our title insurance loss development experience for the past three
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Beginning balance |
|
$ |
1,354,061 |
|
|
$ |
1,154,872 |
|
|
$ |
1,068,072 |
|
Reserve assumed/(transferred)(a) |
|
|
1,115,803 |
|
|
|
|
|
|
|
(8,515 |
) |
Claims loss provision related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
229,076 |
|
|
|
285,034 |
|
|
|
306,179 |
|
Prior years |
|
|
261,876 |
|
|
|
217,216 |
|
|
|
39,399 |
|
|
|
|
|
|
|
|
|
|
|
Total claims loss provision |
|
|
490,952 |
|
|
|
502,250 |
|
|
|
345,578 |
|
|
|
|
|
|
|
|
|
|
|
Claims paid, net of recoupments related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(12,865 |
) |
|
|
(16,982 |
) |
|
|
(18,815 |
) |
Prior years |
|
|
(268,964 |
) |
|
|
(286,079 |
) |
|
|
(231,448 |
) |
|
|
|
|
|
|
|
|
|
|
Total claims paid, net of recoupments |
|
|
(281,829 |
) |
|
|
(303,061 |
) |
|
|
(250,263 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,678,987 |
|
|
$ |
1,354,061 |
|
|
$ |
1,154,872 |
|
|
|
|
|
|
|
|
|
|
|
Title premiums |
|
$ |
2,695,009 |
|
|
$ |
3,800,458 |
|
|
$ |
4,608,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Provision for claim losses as a percentage
of title insurance premiums: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
8.5 |
% |
|
|
7.5 |
% |
|
|
6.6 |
% |
Prior years |
|
|
9.7 |
% |
|
|
5.7 |
% |
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
Total provision |
|
|
18.2 |
% |
|
|
13.2 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reserves assumed in 2008 were assumed in the purchase of the LFG Underwriters. |
An approximate $27.0 million increase (decrease) in our annualized provision for claim losses
would occur if our loss provision rate were 1% higher (lower), based on 2008 title premiums of
$2,695.0 million. A 5% increase (decrease) in our estimate of the reserve for claim losses would
result in an increase (decrease) in our provision for claim
losses of approximately $133.9 million.
Additionally, for our specialty insurance businesses, we had claims reserves of $59.6 million
and $65.8 million as of December 31, 2008 and 2007.
Valuation of Investments. We regularly review our investment portfolio for factors that may
indicate that a decline in fair value of an investment is other-than-temporary. Some factors
considered in evaluating whether or not a decline in fair value is other-than-temporary include:
(i) our ability and intent to retain the investment for a period of time sufficient to allow for a
recovery in value; (ii) the duration and extent to which the fair value has been less than cost;
and (iii) the financial condition and prospects of the issuer. Such reviews are inherently
uncertain and the value of the investment may not fully recover or may decline in future periods
resulting in a realized loss.
37
Investments are selected for analysis whenever an unrealized loss is greater than a certain
threshold that we determine based on the size of our portfolio. Fixed maturity investments that
have unrealized losses caused by interest rate movements are not at risk as we have the ability and
intent to hold them to maturity. Unrealized losses on investments in equity securities and fixed
maturity instruments that are susceptible to credit related declines are evaluated based on the
aforementioned factors. Currently available market data is considered and estimates are made as to
the duration and prospects for recovery, and the ability to retain the investment until such
recovery takes place. These estimates are revisited quarterly and any material degradation in the
prospect for recovery will be considered in the other than temporary impairment analysis. We
believe that our monitoring and analysis has allowed for the proper recognition of other than
temporary impairments over the past three year period. Any change in estimate in this area will
have an impact on the results of operations of the period in which a charge is taken. Our
investment portfolio exposure to sub-prime mortgage backed securities is immaterial.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements by establishing a fair
value hierarchy based on the quality of inputs used to measure fair value.
SFAS 157 does not require any new fair value measurements, but applies under other accounting
pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial
statements for fiscal years beginning after November 15, 2007. We adopted SFAS 157 as of January 1,
2008. FASB Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157, delays the
effective date of SFAS 157 with respect to nonfinancial assets and nonfinancial liabilities that
are not remeasured at fair value on a recurring basis until fiscal years beginning after November
15, 2008. Accordingly, the Company has not yet applied the disclosure requirements of SFAS 157 to
certain such nonfinancial assets for which fair value measurements are determined on a
non-recurring basis only when there is an indication of potential impairment.
The fair value hierarchy established by SFAS 157 includes three levels which are based on the
priority of the inputs to the valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial
instruments fall within different levels of the hierarchy, the categorization is based on the
lowest level input that is significant to the fair value measurement of the instrument. In
accordance with SFAS No. 157, our financial assets and liabilities that are recorded in the
Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as
follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for
identical assets or liabilities in an active market that we have the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets
that are not active or model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on model inputs that are
unobservable.
The following table presents our fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Fixed maturities available for sale |
|
$ |
|
|
|
$ |
2,821,774 |
|
|
$ |
32,055 |
|
|
$ |
2,853,829 |
|
Equity securities available for sale |
|
|
71,516 |
|
|
|
|
|
|
|
|
|
|
|
71,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,516 |
|
|
$ |
2,821,774 |
|
|
$ |
32,055 |
|
|
$ |
2,925,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 portfolio and another for
our municipal bond portfolio. These pricing services are leading global providers of financial
market data, analytics and related services to financial institutions. We only 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
38
and reference data including market research publications. We believe that these investments
are in actively traded markets. We review the pricing methodologies for all of our level 2
securities to ensure that we are comfortable with them and compare the resulting prices to other
publicly available measures of fair value. Our fixed maturities classified as level 3 consist of
auction rate securities for which there is no active market and are valued using models with some
non-observable inputs. Fair values for these securities are provided by a third-party pricing
service. These securities represent one percent of our total portfolio.
During 2008, 2007, and 2006, we recorded other than temporary impairments totaling $59.0
million, $3.1 million, and $9.1 million, respectively. Impairment charges in 2008 included $25.4
million related to our fixed maturity securities, $30.1 million related to our equity securities,
and $3.4 million related to other investments that were deemed other than temporarily impaired. The
impairment charges relating to the fixed maturity securities primarily related to our conclusion
that the credit risk relating to the holdings was too high to not impair the assets and record the
loss through earnings. The impairment charges relating to the equity securities related primarily
to the duration of the unrealized loss and inability to predict the time to recover if the
investment continued to be held.
Goodwill. We have made acquisitions in the past that have resulted in a significant amount of
goodwill. As of December 31, 2008 and 2007, goodwill aggregated $1,581.7 million and $1,344.6
million, respectively. The majority of our goodwill as of December 31, 2008 and 2007 relates to
goodwill recorded in connection with the Chicago Title merger in 2000. The increase of $237.1
million for the year ended December 31, 2008, relates primarily to our acquisition of the LFG
Underwriters. The process of determining whether or not an asset, such as goodwill, is impaired or
recoverable relies on projections of future cash flows, operating results and market conditions.
While we believe that our estimates of future cash flows are reasonable, these estimates are not
guarantees of future performance and are subject to risks and uncertainties that may cause actual
results to differ from what is assumed in our impairment tests. In evaluating the recoverability of
goodwill, we perform an annual goodwill impairment test based on an analysis of the discounted
future cash flows generated by the underlying assets. We have completed our annual goodwill
impairment tests in each of the past three years and have determined that we have a fair value in
excess of our carrying value. Such analyses are particularly sensitive to changes in estimates of
future cash flows and discount rates. Changes to these estimates might result in material changes
in fair value and determination of the recoverability of goodwill which may result in charges
against earnings and a reduction in the carrying value of our goodwill.
Other Intangible Assets. We have significant intangible assets that were acquired through
business acquisitions. These assets consist of purchased customer relationships, contracts, and the
excess of purchase price over the fair value of identifiable net assets acquired (goodwill),
discussed above. The determination of estimated useful lives and the allocation of the purchase
price to the fair values of the intangible assets requires significant judgment and may affect the
amount of future amortization on intangible assets other than goodwill.
The valuation of intangible assets such as software, purchased customer relationships and
contracts involves significant estimates and assumptions concerning matters such as customer
retention, future cash flows and discount rates. If any of these assumptions change, it could
affect the carrying value of these assets. Purchased customer relationships are amortized over
their estimated useful lives using an accelerated method which takes into consideration expected
customer attrition rates over a ten-year period. Contractual relationships are generally amortized
using the straight-line method over their contractual life. In 2008, we determined that the
carrying value of certain of our intangible assets may not be recoverable and recorded impairment
charges of $4.0 million, relating to the write-off of these assets. These impairments were recorded
as other operating expense in our 2008 Consolidated Statements of Earnings. There
were no impairment charges recorded relating to intangible assets during 2007 or 2006.
Computer Software. Computer software includes the fair value of software acquired in business
combinations, purchased software and capitalized software development costs. Purchased software is
recorded at cost and amortized using the straight line method over a 3 year period and software
acquired in business combinations is recorded at its fair value and amortized using straight line
and accelerated methods over their estimated useful lives, ranging from 5 to 10 years. During 2008,
we recorded impairment expense of $4.5 million related to computer software. These impairments were
recorded as depreciation and amortization expense in our 2008 Consolidated Statement of Earnings.
39
Capitalized software development costs are accounted for in accordance with either SFAS No.
86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed
(SFAS 86), or with The American Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use (SOP 98-1). After the technological feasibility of the software has been
established (for SFAS 86 software), or at the beginning of application development (for SOP 98-1
software), software development costs, which include salaries and related payroll costs and costs
of independent contractors incurred during development, are capitalized. Research and development
costs incurred prior to the establishment of technological feasibility (for SFAS 86 software), or
prior to application development (for SOP 98-1 software), are expensed as incurred. For software
subject to the provisions of SFAS 86, software development costs are amortized on a product by
product basis commencing on the date of general release of the products, generally the greater of
(1) the straight line method over its estimated useful life, which ranges from three to seven years
or (2) the ratio of current revenues to total anticipated revenue over its useful life. The cost of
purchased software that is subject to the provisions of SOP 98-1 is amortized on a straight-line
basis over its estimated useful life.
Revenue Recognition. The following describes our revenue recognition policies as they pertain
to each of our segments:
Fidelity National Title Group. Our direct title insurance premiums and escrow, title-related
and other fees are recognized as revenue at the time of closing of the related transaction as the
earnings process is then considered complete, whereas premium revenues from agency operations and
agency commissions include an accrual based on estimates using historical information of the volume
of transactions that have closed in a particular period for which premiums have not yet been
reported to us. The accrual for agency premiums is necessary because of the lag between the closing
of these transactions and the reporting of these policies to us by the agent. During the second
half of 2008, we re-evaluated and refined the method that we use to estimate this accrual, which
resulted in a reduction in 2008 revenue from agency title insurance premiums of $138.5 million
compared to the revenues that would have been accrued under our prior method. The impact of this
adjustment was a decrease of $11.8 million in 2008 pre-tax earnings and $7.6 million in 2008 net
income, or approximately $0.04 per share, compared to the amounts that would have been recorded
under our prior method. We believe that this adjustment is properly reflected as a change in
accounting estimate in 2008. We are likely to continue to have changes to our accrual for agency
revenue in the future.
Specialty Insurance Segment. Revenues from home warranty and personal lines insurance
policies are recognized over the life of the policy, which is one year. Revenues and commissions
related to the sale of flood insurance are recognized when the policy is reported.
Accounting for Income Taxes. As part of the process of preparing the consolidated financial
statements, we are required to determine income taxes in each of the jurisdictions in which we
operate. This process involves estimating actual current tax expense together with assessing
temporary differences resulting from differing recognition of items for income tax and accounting
purposes. These differences result in deferred income tax assets and liabilities, which are
included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred
income tax assets will be recovered from future taxable income and, to the extent we believe that
recovery is not likely, establish a valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must reflect this increase as an expense
within income tax expense in the statement of earnings. Determination of the income tax expense
requires estimates and can involve complex issues that may require an extended period to resolve.
Further, the estimated level of annual pre-tax income can cause the overall effective income tax
rate to vary from period to period. We believe that our tax positions comply with applicable tax
law and that we adequately provide for any known tax contingencies. We believe the estimates and
assumptions used to support our evaluation of tax benefit realization are reasonable. However,
final determination of prior-year tax liabilities, either by settlement with tax authorities or
expiration of statutes of limitations, could be materially different than estimates reflected in
assets and liabilities and historical income tax provisions. The outcome of these final
determinations could have a material effect on our income tax provision, net income or cash flows
in the period that determination is made.
40
Certain Factors Affecting Comparability
Year ended December 31, 2008. As a result of a change in our actuarial model resulting, in
part, from adverse claim loss development on prior policy years, we recorded a charge in 2008 of
$261.6 million, or $157.0 million net of income taxes, to our provision for claim losses. This
charge was recorded in addition to our 8.5% provision for claim losses.
Year ended December 31, 2007. As a result of adverse claim loss development on prior policy
years, we recorded charges in 2007 totaling $217.2 million, or $159.5 million net of income taxes,
to our provision for claim losses. These charges were recorded in addition to our 7.5% provision
for claim losses.
Year ended December 31, 2006. For periods prior to October 24, 2006, the date of the closing
of the 2006 Distribution, our Consolidated Statements of Earnings included the results of FIS. (See
note A of the Notes to Consolidated Financial Statements for a description of the accounting
treatment of the 2006 asset contribution by FNF and the 2006 Distribution).
Results of Operations
Consolidated Results of Operations
Net (loss) earnings. The following table presents certain financial data for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Total revenue |
|
$ |
4,329,095 |
|
|
$ |
5,523,175 |
|
|
$ |
9,434,064 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
4,624,488 |
|
|
$ |
5,347,497 |
|
|
$ |
8,492,899 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
|
|
|
|
|
|
|
|
|
|
Revenue. The following table presents the components of our revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Direct title insurance premiums |
|
$ |
1,140,266 |
|
|
$ |
1,601,768 |
|
|
$ |
1,957,064 |
|
Agency title insurance premiums |
|
|
1,554,743 |
|
|
|
2,198,690 |
|
|
|
2,649,136 |
|
Escrow, title-related and other fees |
|
|
1,148,539 |
|
|
|
1,132,415 |
|
|
|
1,114,047 |
|
Transaction processing |
|
|
|
|
|
|
|
|
|
|
3,094,370 |
|
Specialty insurance |
|
|
373,392 |
|
|
|
386,427 |
|
|
|
394,613 |
|
Interest and investment income |
|
|
134,370 |
|
|
|
185,417 |
|
|
|
206,607 |
|
Realized gains and losses, net |
|
|
(22,215 |
) |
|
|
18,458 |
|
|
|
18,562 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
4,329,095 |
|
|
$ |
5,523,175 |
|
|
$ |
9,434,399 |
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations |
|
|
1,860,400 |
|
|
|
2,259,800 |
|
|
|
3,146,200 |
|
Orders closed by direct title operations |
|
|
1,121,200 |
|
|
|
1,434,800 |
|
|
|
2,051,500 |
|
Total revenue in 2008 decreased $1,194.1 million compared to 2007, reflecting decreases across
all business segments. Total revenue in 2007 decreased $3,911.2 million compared to 2006,
reflecting decreases in the Fidelity National Title Group and specialty insurance segments,
partially offset by an increase in the corporate and other segment. In addition, revenues in 2006
included $3,289.1 million of revenues from FIS and LPS operations .
41
The following table presents the percentages of title insurance premiums generated by our
direct and agency operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Direct |
|
$ |
1,140,266 |
|
|
|
42.3 |
% |
|
$ |
1,601,768 |
|
|
|
42.1 |
% |
|
$ |
1,957,064 |
|
|
|
42.5 |
% |
Agency |
|
|
1,554,743 |
|
|
|
57.7 |
|
|
|
2,198,690 |
|
|
|
57.9 |
|
|
|
2,649,136 |
|
|
|
57.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total title insurance premiums |
|
$ |
2,695,009 |
|
|
|
100.0 |
% |
|
$ |
3,800,458 |
|
|
|
100.0 |
% |
|
$ |
4,606,200 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Title insurance premiums were $2,695.0 million in 2008, $3,800.5 million in 2007, and $4,606.2
million in 2006. Both direct and agency title premiums decreased in each period.
In 2008 and 2007, our mix of direct and agency title premiums stayed relatively consistent,
with agency premiums making up 57.7% of total premiums in 2008, compared with 57.9% in 2007 and
57.5% in 2006.
LPS operates a title agency business that serves as an agent for our title operations.
However, because the operations of LPS were included in our results for periods prior to October
24, 2006, title premiums generated by LPS were included in our direct title premiums prior to that
date and in our agency title premiums after that date. Direct title premiums decreased $461.5
million, or 28.8%, in 2008 compared to 2007. Direct title premiums decreased $281.8 million, or
15.0%, in 2007 compared to 2006, excluding $73.5 million in direct title premiums generated by LPS
prior to October 24, 2006. The decreased level of direct title premiums in 2008 is the result of
decreases in closed order volumes and fee per file. The decrease in direct title premiums in 2007
is the result of a decrease in closed order volumes partially offset by increases in fee per file.
Excluding the operations of LPS in 2006, closed order volumes in our direct operations were
approximately 1,121,200 in 2008, 1,434,800 in 2007, and 1,777,900 in 2006, with decreases in each
case reflecting declines in the purchase and refinance markets, which were partially offset by some
strengthening in the refinance market very close to the end of 2008. These declines can be
attributed to the lack of liquidity in the mortgage market as mortgage default levels continued to
increase, and to falling home prices, which have caused potential buyers to defer purchase
decisions. Average mortgage interest rates in the year ended December 31, 2008, were slightly lower
than rates in the year ended December 31, 2007 and decreased substantially at the end of 2008 as
the government introduced programs intended to increase liquidity in the mortgage markets. In
September 2007, the Federal Reserve began decreasing interest rates to infuse money into the
economy, decreasing rates by a total of 100 basis points during 2007. During 2008, the Federal
Reserve continued to decrease the federal funds rate by a total of 325 basis points through October
2008 and an additional 75-100 basis points in December 2008. The federal funds rate is now
0.0%-0.25% compared to 5.25% in August 2007. A reduction in rates in the first quarter of 2008
resulted in a temporary increase in refinance order volumes that was not sustained. The further
reduction in rates in the fourth quarter of 2008 resulted in another increase in refinance order
volumes in the last several weeks of 2008 and the start of 2009. The average fee per file in our
direct operations, excluding the operations of LPS in 2006, was $1,503, $1,635, and $1,580 for the
years ended December 31, 2008, 2007, and 2006, respectively. The decrease in 2008 reflects a
decline in home values, a slowing commercial market and an increase in refinance volumes relative
to purchase volumes, while the increase in 2007 reflects strength in the commercial market.
For the years ended December 31, 2008, 2007, and 2006, agency title premiums include premiums
generated by LPS of $212.3 million, $149.4 million and $22.4 million, respectively. Excluding those
title premiums generated by LPS, agency title premiums decreased $706.9 million, or 34.5%, in 2008
compared to 2007 and $577.4 million, or 22.0%, in 2007 compared to 2006. The decreases in 2008 and
2007 were primarily due to decreases in accrued agency premiums that were relatively consistent
with the decreases in direct title premiums. The decrease in 2008 also includes a change in
accounting estimate related to an accrual that is included in agency premium revenues and
commissions. The accrual is based on estimates using historical information of the volume of
transactions that have closed in a particular period for which premiums have not yet been reported
to us. The accrual for agency premiums is necessary because of the lag between the closing of these
transactions and the reporting of these policies to us by the agent. During 2008, we re-evaluated
and refined the method that we use to estimate this accrual, which resulted in a reduction in
revenue from agency title insurance premiums of $138.5 million compared to the revenues that would
have been accrued under our prior method. The impact of this adjustment was a decrease of $11.8
million in pre-tax earnings and $7.6 million in net income, or approximately $0.04 per share,
compared to the amounts that would have been recorded under our prior method. We believe that this
adjustment is properly reflected as a change in accounting estimate in 2008.
Escrow, title-related and other fees increased $16.1 million, or 1.4%, from 2007 to 2008 and
increased $18.4 million, or 1.6%, from 2006 to 2007. Escrow, title-related, and other fees were
$1,148.5 million, $1,132.4
42
million,
and $1,114.0 million in 2008, 2007, and 2006, respectively. At Fidelity National Title Group,
escrow and other title-related fees, which are more directly related to our direct operations,
fluctuated in a pattern generally consistent with the fluctuation in direct title insurance
premiums and order counts during the three years ended December 31, 2008. They were also impacted
in 2007 by an increase in the proportionate share of direct title premiums provided by commercial
activity, for which escrow fees as a percentage of premiums are lower, and by reduced escrow rates
in the western part of the country. Offsetting the decline in escrow and title-related fees, other
fees increased $113.6 million, or 22.4%, and $61.0 million, or 13.7%, at Fidelity National Title
Group for the years ended December 31, 2008 and 2007, respectively. The increase in 2008 included
the impact of recent acquisitions, including the recently acquired Colorado title insurance
operations, Property Insight, LLC, and ATM Holdings, Inc. The increases in 2008 and 2007 were also
partly due to increases of $75.7 million and $19.6 million,
respectively, in revenues associated with a division of our business
that manages real estate owned by financial institutions. Other fees increased $16.4 million and
$93.1 million in the corporate and other segment for the years ended December 31, 2008 and 2007,
respectively, reflecting increases in revenues relating to recent acquisitions, including the
purchase of certain leasing assets from FIS in 2007. Other fees in the corporate and other segment
also reflected a gain of $0.4 million relating to our timberland holdings in 2008 and income of
$12.3 million in fees associated with the syndication of investors in the acquisition of Ceridian
in 2007.
Interest and investment income levels are primarily a function of securities markets, interest
rates and the amount of cash available for investment. Interest and investment income was $134.4
million, $185.4 million, and $206.6 million for the years ended December 31, 2008, 2007, and 2006,
respectively. Average invested assets were $3,545.5 million, $4,531.2 million, and $5,088.9 million
for the years ended December 31, 2008, 2007, and 2006, respectively. The tax equivalent yield,
excluding realized gains and losses, was 4.3%, 5.0%, and 4.8% for the years ended December 31,
2008, 2007, and 2006, respectively.
Net realized (losses) gains were $(22.2) million, $18.5 million, and $18.6 million for the
years ended December 31, 2008, 2007, and 2006, respectively. The net realized loss for the year
ended December 31, 2008, included impairment charges totaling $59.0 million on fixed maturity and
equity securities and other investments that were deemed to be other than temporarily impaired, net
realized gains on sales of investments of $4.4 million, net gains on sales of other assets of $7.5
million, and a gain of $24.8 million on the sale of 20% of our interest in Sedgwick. During the
years ended December 31, 2007 and 2006, we recorded impairment charges on equity investments that
we considered to be other-than-temporarily impaired, resulting in charges of $3.1 million and $9.1
million, respectively, with the remainder of net realized gains each made up of a number of gains
and losses on various transactions, none of which were individually significant.
Expenses. The following table presents the components of our expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Personnel costs |
|
$ |
1,355,845 |
|
|
$ |
1,700,935 |
|
|
$ |
3,225,319 |
|
Other operating expenses |
|
|
1,208,647 |
|
|
|
1,109,438 |
|
|
|
2,075,101 |
|
Agent commissions |
|
|
1,218,044 |
|
|
|
1,698,215 |
|
|
|
2,035,423 |
|
Depreciation and amortization |
|
|
142,759 |
|
|
|
130,092 |
|
|
|
460,750 |
|
Provision for claim losses |
|
|
630,404 |
|
|
|
653,876 |
|
|
|
486,334 |
|
Interest expense |
|
|
68,789 |
|
|
|
54,941 |
|
|
|
209,972 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
4,624,488 |
|
|
$ |
5,347,497 |
|
|
$ |
8,492,899 |
|
|
|
|
|
|
|
|
|
|
|
Our operating expenses consist primarily of personnel costs, other operating expenses, which
in our title insurance business are incurred as orders are received and processed, and agent
commissions, which are incurred as revenue is recognized. Title insurance premiums, escrow and
other title-related fees are generally recognized as income at the time the underlying transaction
closes. As a result, direct title operations revenue lags approximately 45-60 days behind expenses
and therefore gross margins may fluctuate. The changes in the market environment, mix of business
between direct and agency operations and the contributions from our various business units have
impacted margins and net earnings. We have implemented programs and have taken necessary actions to
maintain expense levels consistent with revenue streams. However, a short time lag exists in
reducing variable costs, and certain fixed costs are incurred regardless of revenue levels.
43
Personnel costs include base salaries, commissions, benefits, stock-based compensation and
bonuses paid to employees, and are one of our most significant operating expenses. Excluding
personnel costs related to FIS of $1,357.4 million in 2006, personnel costs totaled $1,355.8
million, $1,700.9 million, and $1,867.9 million for the years ended December 31, 2008, 2007 and
2006, respectively. Excluding FIS operations, personnel costs as a percentage of total revenues
were 31.3%, 30.8%, and 30.4% for the years ended December 31, 2008, 2007, and 2006, respectively.
The decrease in personnel costs in 2008 was primarily due to employee reductions in the Fidelity
National Title Group and corporate and other business segments, partially offset by an increase in
the specialty insurance segment. The decrease in 2007 was primarily due to a decrease in the
Fidelity National Title Group segment, partially offset by an increase in the corporate and other
segment. On a consolidated basis, we reduced our full-time equivalent employees by about 2,100
during 2008 and 3,100 during 2007. The increases in the corporate and other segment are primarily
the result of acquisitions. Included in personnel costs is stock-based compensation expense of
$32.7 million, $29.9 million, and $65.0 million for the years ended December 31, 2008, 2007, and
2006, respectively. Excluding stock-based compensation related to FIS, stock based compensation
costs were $29.9 million for the year ended December 31, 2006.
Other operating expenses consist primarily of facilities expenses, title plant maintenance,
premium taxes (which insurance underwriters are required to pay on title premiums in lieu of
franchise and other state taxes), postage and courier services, computer services, professional
services, travel expenses, general insurance, and trade and notes receivable allowances. Excluding
other operating expenses of $1,115.2 million in 2006 related to FIS, other operating expenses were
$1,208.6 million, $1,109.4 million, and $959.9 million for the years ended December 31, 2008, 2007,
and 2006, respectively, with increases in all three business segments.
Agent commissions represent the portion of premiums retained by agents pursuant to the terms
of their respective agency contracts. Agent commissions and the resulting percentage of agent
premiums we retain vary according to regional differences in real estate closing practices and
state regulations.
The following table illustrates the relationship of agent title premiums and agent
commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
(Dollars in thousands) |
|
Agent title premiums |
|
$ |
1,554,743 |
|
|
|
100.0 |
% |
|
$ |
2,198,690 |
|
|
|
100.0 |
% |
|
$ |
2,649,136 |
|
|
|
100.0 |
% |
Agent commissions |
|
|
1,218,044 |
|
|
|
78.3 |
|
|
|
1,698,215 |
|
|
|
77.2 |
|
|
|
2,035,423 |
|
|
|
76.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
336,699 |
|
|
|
21.7 |
% |
|
$ |
500,475 |
|
|
|
22.8 |
% |
|
$ |
613,713 |
|
|
|
23.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums we retain as a percentage of total agency
premiums remained relatively consistent at 22% to 23% for the three years ended December 31, 2008,
2007, and 2006.
Depreciation and amortization expense, excluding FIS depreciation and amortization of $343.6
million in 2006, was $142.8 million, $130.1 million, and $117.2 million for the years ended
December 31, 2008, 2007, and 2006, respectively. The increase in 2008 reflects increases in the
corporate and other segment, partially offset by decreases in the Fidelity National Title Group and
specialty insurance segments. The increase in 2007 reflects increases in the Fidelity National
Title Group and corporate and other segments, partially offset by a decrease in the specialty
insurance segment. The increases in the corporate and other segment in each case reflect recent
acquisitions.
The provision for claim losses includes an estimate of anticipated title and title-related
claims, escrow losses and claims relating to our specialty insurance segment. We monitor our claims
loss experience on a continual basis and adjust the provision for claim losses accordingly as new
information becomes known, new loss patterns emerge, or as other contributing factors are
considered and incorporated into the analysis of the reserve for claim losses. The provision for
claim loss for the years ended December 31, 2008, 2007, and 2006, was made up of $491.0 million,
$502.3 million, and $345.6 million, respectively, from the Fidelity National Title Group segment
and $139.5 million, $151.6 million, and $140.6 million, respectively, from the specialty insurance
segment. The provision for claim loss is discussed in further detail in the segment level below.
Excluding interest expense attributable to FIS of $154.2 million in 2006, interest expense for
the years ended
44
December 31, 2008, 2007, and 2006 was $68.8 million, $54.9 million, and $55.8 million,
respectively. The increase in 2008 was primarily due to increased borrowings resulting from our
investment in Ceridian during the fourth quarter of 2007 and 2008 borrowings used for general
corporate purposes.
Income tax (benefit) expense was $(125.5) million, $46.8 million, and $350.9 million for the
years ended December 31, 2008, 2007, and 2006, respectively. Income tax (benefit) expense as a
percentage of (loss) earnings before income taxes for the years ended December 31, 2008, 2007, and
2006 was 42.5%, 26.6%, and 37.3%, respectively. The fluctuation in income tax (benefit) expense as
a percentage of (loss) earnings before income taxes is attributable to our estimate of ultimate
income tax liability, and changes in the characteristics of net (loss) earnings year to year, such
as the weighting of operating income versus investment income. Income tax (benefit) expense as a
percentage of earnings before income taxes was higher than normal for the year ended December 31,
2008, due to the fact that, in periods when a net loss is recognized, the effect of tax-exempt
interest income is reversed. Generally, when pretax income is recognized, tax-exempt income has the
effect of lowering the effective tax rate whereas, when a pretax loss is recognized, tax-exempt
income has the effect of increasing the effective tax rate. Income tax expense as a percentage of
earnings before income taxes was lower for the year ended December 31, 2007 compared to 2006
primarily due to the increase in the proportion of tax-exempt interest income to pre-tax earnings.
Equity in (losses) earnings of unconsolidated affiliates was $(13.4) million, $0.8 million,
and $1.7 million for the years ended December 31, 2008, 2007, and 2006 and, in 2008, primarily
consisted of our equity in the net (losses) earnings of Ceridian, Remy, and Sedgwick.
Minority interest for the years ended December 31, 2008, 2007, and 2006 was $(4.2) million,
less than $0.1 million, and $154.6 million, respectively. For the year ended December 31, 2006,
minority interest is primarily attributable to earnings generated by FIS and FNT, in which, prior
to October 24, 2006, Old FNF held ownership positions of 50.7% and 82.5%, respectively.
Segment Results of Operations
Fidelity National Title Group
The following table presents certain financial data for the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Direct title insurance premiums |
|
$ |
1,140,266 |
|
|
$ |
1,601,768 |
|
|
$ |
1,883,357 |
|
Agency title insurance premiums |
|
|
1,554,743 |
|
|
|
2,198,690 |
|
|
|
2,724,972 |
|
Escrow, title-related and other fees |
|
|
1,034,250 |
|
|
|
1,034,574 |
|
|
|
1,109,293 |
|
Interest and investment income |
|
|
120,157 |
|
|
|
164,874 |
|
|
|
165,305 |
|
Realized gains and losses, net |
|
|
(32,889 |
) |
|
|
5,080 |
|
|
|
14,627 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
3,816,527 |
|
|
|
5,004,986 |
|
|
|
5,897,554 |
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
1,253,563 |
|
|
|
1,594,516 |
|
|
|
1,789,805 |
|
Other operating expenses |
|
|
964,282 |
|
|
|
891,838 |
|
|
|
891,112 |
|
Agent commissions |
|
|
1,218,044 |
|
|
|
1,698,085 |
|
|
|
2,099,244 |
|
Depreciation and amortization |
|
|
114,989 |
|
|
|
120,223 |
|
|
|
110,486 |
|
Provision for claim losses |
|
|
490,952 |
|
|
|
502,250 |
|
|
|
345,578 |
|
Interest expense |
|
|
5,657 |
|
|
|
14,597 |
|
|
|
12,755 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
4,047,487 |
|
|
|
4,821,509 |
|
|
|
5,248,980 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income
taxes, equity in (loss) income of
unconsolidated affiliates, and
minority interest |
|
$ |
(230,960 |
) |
|
$ |
183,477 |
|
|
$ |
648,574 |
|
|
|
|
|
|
|
|
|
|
|
Total revenues in 2008 decreased $1,188.5 million to $3,816.5 million, a decrease of 23.7%
compared to 2007. Total revenues in 2007 decreased $892.6 million to $5,005.0 million, a decrease
of 15.1% compared to 2006. For an analysis of this segments revenues, please see the analysis of
direct and agency title insurance premiums and
escrow and other title-related fees under Consolidated Results of Operations.
45
Interest and investment income levels are primarily a function of securities markets, interest
rates and the amount of cash available for investment. Interest and investment income for the years
ended December 31, 2008, 2007 and 2006, was $120.2 million, $164.9 million, and $165.3 million,
respectively. The decrease in 2008 compared to 2007 was the result of decreases in both average
invested assets and a decrease in interest rates. In 2007, an increase in interest rates was
partially offset by a decrease in the short-term investment asset base. For the years ended
December 31, 2008, 2007, and 2006, average invested assets were $3,104.7 million, $3,791.4 million,
and $4,009.4 million, respectively, and the tax equivalent yield, excluding realized gains and
losses, was 4.4%, 5.3%, and 4.8%, respectively.
Net realized gains and losses for the years ended December 31, 2008, 2007, and 2006 were
$(32.9) million, $5.1 million, $14.6 million, respectively. Net realized gains and losses recorded
in the year ended December 31, 2008, included impairment charges of $48.8 million on fixed maturity
and equity securities and other investments that were deemed other than temporarily impaired, net
realized gains on investments of $15.0 million, and net gains from sales of other assets of $1.6
million. The impairment charges relating to the fixed maturity securities primarily related to our
conclusion that the credit risk relating to the holdings was high and thus the assets are likely
permanently impaired. The impairment charges relating to the equity securities were based on the
duration of the unrealized loss and inability to predict the time to recover if the investment
continued to be held. For the years ended December 31, 2007 and 2006, realized gains and losses
were each made up of a number of gains and losses on various transactions, none of which were
individually significant.
Personnel costs include base salaries, commissions, benefits and bonuses paid to employees,
and are one of our most significant operating expenses. Personnel costs totaled $1,253.6 million,
$1,594.5 million, and $1,789.8 million for the years ended December 31, 2008, 2007, and 2006,
respectively. The decreases in each case resulted from decreases in the number of personnel
implemented in response to the decline in order volumes and from decreases in average annualized
personnel costs per employee. Personnel costs, as a percentage of direct title insurance premiums
and escrow, title-related and other fees, were 57.6% in 2008, 60.5% in 2007, and 59.8% in 2006.
Average employee count decreased to 13,957 in 2008, excluding the impact of the LFG Underwriters,
from 16,416 in 2007 and 18,352 in 2006.
Other operating expenses consist primarily of facilities expenses, title plant maintenance,
premium taxes (which insurance underwriters are required to pay on title premiums in lieu of
franchise and other state taxes), postage and courier services, computer services, professional
services, advertising expenses, general insurance, and trade and notes receivable allowances. Other
operating expenses totaled $964.3 million, $891.8 million, and $891.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Other operating expenses as a percentage of direct
title insurance premiums and escrow, title-related and other fees were 44.3% in 2008, 33.8% in
2007, and 29.8% in 2006. Other operating expenses for the years ended December 31, 2008 and 2007,
included $23.4 million and $13.0 million, respectively, in abandoned lease charges relating to
office closures. The increase in other operating expenses in 2008 also included a decrease of
$101.4 million in benefits related to our escrow balances, which are reflected as an offset to
other operating expenses, equal increases in revenues and expenses of $75.7 million associated with
a division of our business that manages real estate owned by financial institutions, and recent
acquisitions. These increases were partially offset by operating expense reductions in our core
title operations as we continue to cut costs in response to the decrease in title insurance and
other title-related activity. The increase in 2007 was primarily due to a decrease in benefits
related to our escrow balances, which are reflected as an offset to other operating expenses, an
increase in legal and regulatory expenses, and the abandoned lease charge noted above. As a result
of holding customers assets in escrow, we have ongoing programs for realizing economic benefits.
Those economic benefits related to escrow balances decreased in 2008 and 2007 due to decreases in
escrow balances and increases in the portion of those benefits derived from tax exempt income.
Legal and regulatory expenses increased in 2007 due to an increase in class action litigation and
our response to a target letter received from the United States Attorneys Office in the Southern
District of Texas, which was successfully resolved in 2007.
Agent commissions represent the portion of premiums retained by agents pursuant to the terms
of their respective agency contracts. Agent commissions and the resulting percentage of agent
premiums we retain vary according to regional differences in real estate closing practices and
state regulations.
46
The provision for claim losses includes an estimate of anticipated title and title-related
claims and escrow losses. The estimate of anticipated title and title-related claims is accrued as
a percentage of title premium revenue based on our historical loss experience and other relevant
factors. We monitor our claims loss experience on a continual basis and adjust the provision for
claim losses accordingly as new information becomes known, new loss patterns emerge, or as other
contributing factors are considered and incorporated into the analysis of the reserve for claim
losses. The claim loss provision for title insurance was $491.0 million, $502.3 million, and $345.6
million for the years ended December 31, 2008, 2007, and 2006, respectively. These amounts
reflected claim loss provision rates of 8.5%, 7.5%, and 7.5% of title premiums for the years ended
December 31, 2008, 2007, and 2006, respectively, and also included additional charges as follows:
For the year ended December 31, 2008, an additional charge of $261.6 million was due to a change in
our actuarial model which resulted, in part, from adverse claim loss development on prior policy
years, and, for the year ended December 31, 2007, additional charges totaling $217.2 million
resulted from adverse claim loss development on prior policy years. For the year ended December 31,
2008, in response to greater than anticipated claims experience, we increased our claim loss
provision rate from 7.5% to 8.5% of total title premiums. See Critical Accounting Estimates for
further discussion relating to the Companys reserve for claim losses and the related charges. Our
claim loss provision as a percentage of total title premiums was 18.2%, 13.2%, and 7.5% for the
years ended December 31, 2008, 2007, and 2006, respectively. Starting in the fourth quarter of
2008, we began to revise certain aspects of our approach to processing claims. Key changes
implemented include a greater effort to collect contributions from agents that bear responsibility
for losses, more stringent enforcement of documentation requirements for proof of claims, a more
efficient process for dealing with minor, technical claim matters, and a greater focus on hiring
counsel with lower rates. Our claims paid in the fourth quarter declined compared to the third
quarter of 2008. We have also continued, in 2008, a process of reducing our total number of
agents, with a focus in part on dropping agents producing higher claims ratios. These measures are
collectively designed to reduce our claims expenses, although we have not yet had enough experience
with the new approaches to accurately predict how successful we will be. We are taking similar
measures with respect to the LFG Underwriters we recently acquired.
Specialty Insurance Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
$ |
373,392 |
|
|
$ |
386,427 |
|
|
$ |
394,613 |
|
Interest and investment income |
|
|
12,929 |
|
|
|
16,231 |
|
|
|
15,565 |
|
Realized gains and losses, net |
|
|
(3,007 |
) |
|
|
23 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
383,314 |
|
|
|
402,681 |
|
|
|
410,195 |
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
45,228 |
|
|
|
45,499 |
|
|
|
45,145 |
|
Other operating expenses |
|
|
158,269 |
|
|
|
144,992 |
|
|
|
144,702 |
|
Depreciation and amortization |
|
|
4,896 |
|
|
|
6,046 |
|
|
|
6,254 |
|
Provision for claim losses |
|
|
139,452 |
|
|
|
151,626 |
|
|
|
140,625 |
|
Interest expense |
|
|
487 |
|
|
|
1,478 |
|
|
|
1,443 |
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
348,332 |
|
|
|
349,641 |
|
|
|
338,169 |
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
$ |
34,982 |
|
|
$ |
53,040 |
|
|
$ |
72,026 |
|
|
|
|
|
|
|
|
|
|
|
Revenues from specialty insurance include revenues from the issuance of flood, homeowners,
automobile, and other personal lines insurance policies and home warranty policies. In our flood
insurance business, we provide coverage under the National Flood Insurance Program, which is the
U.S. federal flood insurance program, and receive fees for selling policies and for assistance in
settling claims. Specialty insurance revenues were $383.3 million, $402.7 million, and $410.2
million for the years ended December 31, 2008, 2007, and 2006, respectively. The decrease in
revenues in 2008 compared to 2007 was due to decreases in revenues from the homeowners and
automobile insurance and home warranty lines of business and to a decrease in interest and
investment income, partially offset by an increase in flood revenues. The decrease in revenues in
2007 compared to 2006 was due to decreases in flood and home warranty revenues, partially offset by
an increase in revenues from the homeowners and automobile insurance lines.
Flood revenues increased $11.9 million, or 8.2%, in 2008 compared to 2007, reflecting volume
and rate increases, and claims processing revenues related to the
2008 hurricane season,
47
partially offset by a decrease in the annual marketing incentive bonus received from the
Federal Emergency Management Agency. Flood revenues decreased $7.4 million, or 4.8%, in 2007
compared to 2006, reflecting a less active hurricane season, partially offset by volume and rate
increases.
Revenues from the homeowners and automobile insurance lines of business decreased $20.1
million, or 11.9%, in 2008 compared to 2007, reflecting a declining housing market and a decrease
in volume as we have undergone efforts to tighten our underwriting standards and eliminate
unprofitable agents and territories. Revenues from these business lines increased $6.6 million, or
4.3%, in 2007 compared to 2006, primarily due to growth as we expanded this business.
Revenues from the home warranty line of business decreased $4.9 million, or 6.9%, in 2008
compared to 2007 and decreased $7.4 million, or 9.5% in 2007, in each case primarily due to the
decrease in real estate transaction volumes.
Personnel costs were $45.2 million, $45.5 million, and $45.1 million for the years ended
December 31, 2008, 2007, and 2006, respectively. As a percentage of total specialty insurance
revenues, personnel costs were 11.8% in 2008, 11.3% in 2007, and 11.0% in 2006.
Other operating expenses in the specialty insurance segment were $158.3 million, $145.0
million, and $144.7 million for the years ended December 31, 2008, 2007, and 2006, respectively.
Other operating expenses in 2007 were impacted by the results of an internal review of our
treatment of certain costs relating to insurance policies issued by our specialty insurance
segment, in the course of which we determined that certain costs should be deferred and amortized
over the life of the policy consistent with the recognition of the premiums. We recorded an
adjustment as of March 31, 2007, increasing prepaid and other assets and reducing other operating
expenses by $12.2 million, representing amounts that should have been deferred as of March 31, 2007
on policies issued over the prior twelve months. This adjustment is not material to the Companys
financial position or results of operations for any previously reported annual periods. Excluding
this adjustment, other operating expenses as a percentage of revenues was 41.3% in 2008, 36.0% in
2007, and 35.3% in 2006, with the increase in 2008 primarily due to increases in premium tax
expense and commission expense in the homeowners and flood insurance businesses.
The provision for claim loss expense was $139.5 million, $151.6 million, and $140.6 million
for the years ended December 31, 2008, 2007, and 2006, respectively. The decrease in 2008 reflects
the decreased business in the homeowners and automobile insurance and home warranty businesses.
The increase in 2007 was primarily the result of an increase in volumes in the homeowners
insurance business. The 2007 provision also reflects positive development in trends of prior
accident years. As a percentage of premiums earned, the claim loss provision was relatively
consistent at 64.8% in 2008, 63.9% in 2007, and 62.7% in 2006.
A summary of the reserve for claim losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Beginning balance |
|
$ |
65,849 |
|
|
$ |
65,764 |
|
|
$ |
45,434 |
|
Claim loss provision related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
148,824 |
|
|
|
165,659 |
|
|
|
148,328 |
|
Prior years |
|
|
(9,372 |
) |
|
|
(14,033 |
) |
|
|
(7,703 |
) |
|
|
|
|
|
|
|
|
|
|
Total claim loss provision |
|
|
139,452 |
|
|
|
151,626 |
|
|
|
140,625 |
|
Claims paid, net of recoupments related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(106,534 |
) |
|
|
(115,643 |
) |
|
|
(92,893 |
) |
Prior years |
|
|
(39,129 |
) |
|
|
(35,898 |
) |
|
|
(27,402 |
) |
|
|
|
|
|
|
|
|
|
|
Total claims paid, net of recoupments |
|
|
(145,663 |
) |
|
|
(151,541 |
) |
|
|
(120,295 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
59,638 |
|
|
$ |
65,849 |
|
|
$ |
65,764 |
|
|
|
|
|
|
|
|
|
|
|
48
Corporate and Other Segment
The corporate and other segment is primarily comprised of the operations of our parent holding
company and smaller entities not included in our operating segments. It generated pretax losses of
$99.4 million, $60.8 million, and $97.5 million for the years ended December 31, 2008, 2007, and
2006, respectively. During 2008, we sold 20% of our interest in Sedgwick (reducing our interest in
Sedgwick from 40% to 32%) for proceeds of $53.9 million, resulting in a gain of $24.8 million in
the corporate and other segment. Interest expense in this segment was $62.6 million, $38.9 million,
and $41.6 million for the years ended December 31, 2008, 2007, and 2006, respectively, with the
increase in 2008 primarily due to increased borrowings resulting from our investment in Ceridian
during the fourth quarter of 2007 and 2008 borrowings used for general corporate purposes.
Additionally, during 2008, we recorded $4.0 million in impairment charges to intangible assets in
the corporate and other segment. In 2007, we recorded income of $12.3 million in management fees
under an agreement entered into in connection with the acquisition of Ceridian.
Fidelity National Information Services, Inc.
The Companys consolidated results of operations include FISs results of operations through
October 23, 2006, the closing date of the 2006 Distribution. The FIS segment generated revenues of
$3,280.4 million and net earnings of $200.0 million for the year ended December 31, 2006.
Liquidity and Capital Resources
Cash Requirements. Our current cash requirements include operating expenses, taxes, payments
of interest and principal on our debt, capital expenditures, business acquisitions, dividends on
our common stock, and the repurchase of shares of our common stock. Our Board of Directors has
reduced our quarterly dividend from $0.30 per share to $0.15 per share, or approximately $32.2
million per quarter, effective in the fourth quarter of 2008. We continually assess our capital
allocation strategy, including decisions relating to the amount of our dividend, reducing debt,
repurchasing our stock, and/or conserving cash. The declaration of any future dividends is at the
discretion of our Board of Directors. We believe that all anticipated cash requirements for current
operations will be met from internally generated funds, through cash dividends from subsidiaries,
cash generated by investment securities, potential sales of non-strategic assets, borrowings on
existing credit facilities, and possible issuances of debt, equity, or hybrid securities under our
existing universal shelf registration statement. Our short-term and long-term liquidity
requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast
the needs of all of our subsidiaries and periodically review their short-term and long-term
projected sources and uses of funds, as well as the asset, liability, investment and cash flow
assumptions underlying such forecasts.
Our insurance subsidiaries generate cash from premiums earned and their respective investment
portfolios and these funds are adequate to satisfy the payments of claims and other liabilities.
Due to the magnitude of our investment portfolio in relation to our claims loss reserves, we do not
specifically match durations of our investments to the cash outflows required to pay claims, but do
manage outflows on a shorter time frame.
Our two significant sources of internally generated funds are dividends and other payments
from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of
dividends and as reimbursement for operating and other administrative expenses we incur. The
reimbursements are paid within the guidelines of management agreements among us and our
subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay
dividends and make distributions. Each state of domicile regulates the extent to which our title
underwriters can pay dividends or make distributions. As of
December 31, 2008, $1.5 billion of our
net assets were restricted from dividend payments without prior approval from the relevant
departments of insurance. During 2009, our first tier title insurance subsidiaries can pay or make
distributions to us of approximately $214.7 million without prior regulatory approval. Our
underwritten title companies and non-title insurance subsidiaries collect revenue and pay operating
expenses. However, they are not regulated to the same extent as our insurance subsidiaries.
The maximum dividend permitted by law is not necessarily indicative of an insurers actual
ability to pay dividends, which may be constrained by business and regulatory considerations, such
as the impact of dividends on surplus, which could affect an insurers ratings or competitive
position, the amount of premiums that can be written and the ability to pay future dividends.
Further, depending on business and regulatory conditions, we may in the future need to retain cash
in our underwriters or even contribute cash to one or more of them in order to maintain their
ratings or their statutory capital position. Such a requirement could be the result of investment
losses, reserve
49
charges, adverse operating conditions in the current economic environment or changes in
interpretation of statutory accounting requirements by regulators. Further, the LFG Subsidiaries
recently acquired by us could have unexpected liabilities or asset exposures that only become
apparent over time which adversely affect their surplus.
We previously announced that our Board of Directors has authorized us to investigate strategic
alternatives for certain of our specialty insurance businesses. The assets being evaluated include
the flood insurance and personal lines insurance businesses, but not the home warranty business. We
are focused on evaluating our non-core assets and investments as potential vehicles for creating
liquidity. Our intent is to use that liquidity for general corporate purposes, including payment of
dividends as declared by the Board of Directors and potentially reducing debt, repurchasing shares
of our stock, and/or conserving cash.
Our cash flows provided by operations for the year ended December 31, 2008, totaled $4.6 million compared to $341.1 million for the year ended December 31, 2007. Cash used in operations in the year ended December 31, 2008, included payments totaling $68.1 million to settle a group of related claims for third party losses. We believe that these payments and certain previous payments on these related claims are recoverable under various
insurance policies and, as of December 31, 2008, we had a receivable in the amount of $81.4 million in respect of these payments.
Capital Expenditures. Total capital expenditures for property and equipment were $84.2
million, $83.9 million, and $145.4 million for the years ended December 31, 2008, 2007, and 2006,
respectively. For the years ended December 31, 2008 and 2007, capital expenditures included $60.6
million and $36.8 million, respectively, for the purchase of assets leased to others, including
FIS. For the year ended December 31, 2006, capital expenditures included expenditures made by FIS
of $87.7 million. Total capital expenditures for software were $17.1 million, $29.3 million, and
$180.9 million in 2008, 2007, and 2006, respectively, and were primarily comprised of FIS
expenditures in 2006.
Financing. Effective October 24, 2006, we entered into a credit agreement (the Credit
Agreement) with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other
financial institutions party thereto. Effective October 11, 2007, we exercised an option to
increase the size of the credit facility by an additional $300 million. The Credit Agreement, which
replaced our previous credit agreement, provides for a $1.1 billion unsecured revolving credit
facility, including the $300 million increase, maturing on the fifth anniversary of the closing
date. Amounts under the revolving credit facility may be borrowed, repaid and reborrowed by the
borrower from time to time until the maturity of the revolving credit facility. Voluntary
prepayment of the revolving credit facility under the Credit Agreement is permitted at any time
without fee upon proper notice and subject to a minimum dollar requirement. Revolving loans under
the credit facility bear interest at a variable rate based on either (i) the higher of (a) a rate
per annum equal to one-half of one percent in excess of the Federal Reserves Federal Funds rate,
or (b) Bank of Americas prime rate or (ii) a rate per annum equal to the British Bankers
Association London Interbank Offered Rate (LIBOR) plus a margin of between 0.23%-0.675%,
depending on our then current senior unsecured long-term debt rating from the rating agencies. In
addition, we pay a commitment fee between 0.07%-0.175% on the entire facility, also depending on
our senior unsecured long-term debt rating. During 2008, we drew a total of $170 million from the
Credit Agreement and used the proceeds for general corporate purposes. We repaid $120 million on
the credit facility in 2008 and an additional $50 million in January 2009. As of December 31, 2008,
we had outstanding debt with a principal amount of $585 million under the Credit Agreement, bearing
interest at 3.53%.
The Credit Agreement contains affirmative, negative and financial covenants customary for
financings of this type, including, among other things, limits on the creation of liens, sales of
assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and
certain amendments. The Credit Agreement prohibits us from paying dividends to our stockholders if
an event of default has occurred and is continuing or would result therefrom. The Credit Agreement
requires us to maintain certain financial ratios and levels of capitalization. The Credit Agreement
includes customary events of default for facilities of this type (with customary grace periods, as
applicable). These events of default include a cross-default provision that, subject to limited
exceptions, permits the lenders to declare the Credit Agreement in default if: (i) (A) we fail to
make any payment after the applicable grace period under any indebtedness with a principal amount
(including undrawn committed amounts) in excess of 3% of our net worth, as defined in the Credit
Agreement, or (B) we fail to perform any other term under any such indebtedness, or any other event
occurs, as a result of which the holders thereof may cause it to become due and payable prior to
its maturity; or (ii) certain termination events occur under significant interest rate, equity or
other swap contracts. The Credit Agreement provides that, upon the occurrence of an event of
default, the interest rate on all outstanding obligations will be increased and payments of all
outstanding loans may be accelerated and/or the lenders commitments may be terminated. In
addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all
amounts payable under the Credit Agreement shall automatically become immediately due and payable,
and the lenders commitments will automatically terminate.
50
On December 22, 2008, in connection with the acquisition of the LFG Underwriters, the Company
entered into a
$50 million subordinated note payable to LFG, due December 2013. This note bears interest at
2.36%, payable annually. In addition, the LFG Underwriters had $15.7 million of notes payable which
are included on FNFs consolidated balance sheet at December 31, 2008.
In connection with the purchase of certain leasing assets from FIS (see Transactions with
Related Parties in note A of Notes to Consolidated Financial Statements), we assumed certain
liabilities associated with those assets, including various bank promissory notes, totaling $134.9
at the date of purchase. We have continued to use bank promissory notes with similar terms to
finance purchases of assets within our leasing operation and, as of December 31, 2008 these
promissory notes totaled $197.5 million, bore interest at various fixed rates and matured at
various dates. These bank promissory notes are non-recourse obligations and are secured by
interests in certain leases and underlying equipment. In addition, we also assumed a $20 million
revolving credit facility, which is secured by interests in certain leases and underlying equipment
and bears interest at Prime-0.5%. As of December 31, 2008, $13.9 million was unused. On September
30, 2007, also in connection with the acquisition of certain leasing assets from FIS, we entered
into an unsecured note due to FIS in the amount of $7.3 million. The note bears interest at
LIBOR+0.45%, includes principal amortization of $0.2 million per quarter and is due October, 2012.
The balance at December 31, 2008, was $6.2 million.
Our outstanding debt also includes $241.1 million aggregate principal amount of our 7.30%
notes due 2011 and $249.2 million aggregate principal amount of our 5.25% notes due 2013. These
notes contain customary covenants and events of default for investment grade public debt. They do
not include a cross-default provision.
We lend fixed maturity and equity securities to financial institutions in short-term security
lending transactions. Our security lending policy requires that the cash received as collateral be
102% or more of the fair value of the loaned securities. At December 31, 2008, we had security
loans outstanding with fair values totaling of $103.6 million. Securities loaned under such
transactions may be sold or repledged by the transferee. We were liable for cash collateral under
our control of $107.6 million at December 31, 2008, which has been included in cash and in accounts
payable and accrued liabilities.
In addition to the foregoing financing arrangements of the Company, our historical financial
statements for 2006 reflect debt and interest expense of Old FNF and its other subsidiaries,
principally FIS.
Seasonality. Historically, real estate transactions have produced seasonal revenue levels for
title insurers. The first calendar quarter is typically the weakest quarter in terms of revenue due
to the generally low volume of home sales during January and February. The third calendar quarter
has been typically the strongest in terms of revenue primarily due to a higher volume of home sales
in the summer months and the fourth calendar quarter is usually also strong due to commercial
entities desiring to complete transactions by year-end. In 2007 and 2008, we have seen a
divergence from these historical trends as tighter lending standards, including a significant
reduction in the availability of mortgage lending, combined with rising default levels and a
bearish outlook on the real estate environment have caused potential home buyers to be more
reluctant to buy homes and have suppressed refinance activity.
Contractual Obligations. Our long term contractual obligations generally include our loss
reserves, our credit agreements and other debt facilities and operating lease payments on certain
of our premises and equipment. As of December 31, 2008, our required annual payments relating to
these contractual obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Notes payable |
|
$ |
87,639 |
|
|
$ |
58,835 |
|
|
$ |
870,671 |
|
|
$ |
20,956 |
|
|
$ |
309,344 |
|
|
$ |
3,404 |
|
|
$ |
1,350,849 |
|
Operating lease
payments |
|
|
166,626 |
|
|
|
125,972 |
|
|
|
86,451 |
|
|
|
51,112 |
|
|
|
23,542 |
|
|
|
101,580 |
|
|
|
555,283 |
|
Pension and post
retirement payments |
|
|
14,672 |
|
|
|
12,861 |
|
|
|
13,611 |
|
|
|
13,048 |
|
|
|
13,296 |
|
|
|
92,781 |
|
|
|
160,269 |
|
Title claim losses |
|
|
443,992 |
|
|
|
370,625 |
|
|
|
294,034 |
|
|
|
229,232 |
|
|
|
178,349 |
|
|
|
1,162,755 |
|
|
|
2,678,987 |
|
Specialty insurance
claim losses |
|
|
42,364 |
|
|
|
11,309 |
|
|
|
4,847 |
|
|
|
895 |
|
|
|
223 |
|
|
|
|
|
|
|
59,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
755,293 |
|
|
$ |
579,602 |
|
|
$ |
1,269,614 |
|
|
$ |
315,243 |
|
|
$ |
524,754 |
|
|
$ |
1,360,520 |
|
|
$ |
4,805,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
As of December 31, 2008,
we had title insurance reserves of $2,679.0 million. The amounts and
timing of these obligations are estimated and are not set contractually. Nonetheless, based on
historical title insurance claim experience, we anticipate the above payment patterns. While we
believe that historical loss payments are a reasonable source for projecting future claim payments,
there is significant inherent uncertainty in this payment pattern estimate because of the potential
impact of changes in:
|
|
|
future mortgage interest rates, which will affect the number of real estate and
refinancing transactions and, therefore, the rate at which title insurance claims will
emerge; |
|
|
|
|
the legal environment whereby court decisions and reinterpretations of title insurance
policy language to broaden coverage could increase total obligations and influence claim
payout patterns; |
|
|
|
|
events such as fraud, defalcation, and multiple property title defects that can
substantially and unexpectedly cause increases in both the amount and timing of estimated
title insurance loss payments; |
|
|
|
|
loss cost trends whereby increases or decreases in inflationary factors (including the
value of real estate) will influence the ultimate amount of title insurance loss payments;
and |
|
|
|
|
claims staffing levels whereby claims may be settled at a different rate based on the
future staffing levels of the claims department. |
In addition to our title insurance reserves, at December 31, 2008, we
held claim reserves of $59.6 million in our specialty insurance
business segment. There is uncertainty with respect to the precise
payout pattern of these reserves, which we have estimated in the
table above based on historical experience.
Capital Stock Transactions. On October 25, 2006, our Board of Directors approved a three-year
stock repurchase program under which we can repurchase up to 25 million shares of our common stock.
We may make purchases from time to time in the open market, in block purchases or in privately
negotiated transactions, depending on market conditions and other factors. During 2008, we
repurchased a total of 3,165,470 shares of our common stock for $46.0 million, or an average of
$14.53 per share. Since the commencement of this plan, we have repurchased a total of 12,840,470
shares for $229.1 million, or an average of $17.84 per share. This includes 1,000,000 shares which
we purchased in 2007 from our Chairman of the Board, William P. Foley, II. In August 2007, Mr.
Foley planned to sell 1,000,000 shares of FNF stock on the open market. Because the Company was
actively purchasing shares of treasury stock on the open market at the same time, the Company
agreed to purchase 1,000,000 shares from Mr. Foley on August 8, 2007, for $22.1 million, or $22.09
per share, the market price at the time of the purchase.
Additional Minimum Pension Liability Adjustment. We recorded a net-of-tax charge of $17.9
million to accumulated other comprehensive loss in 2008 for the change in our minimum pension
liability.
Equity Investments. Our equity investments are in companies whose values are subject to
significant volatility. Should the fair value of these investments fall below our cost basis and/or
the financial condition or prospects of these companies deteriorate, we may determine in a future
period that this decline in fair value is other-than-temporary, requiring that an impairment loss
be recognized in the period such a determination is made. During the year ended December 31, 2008,
we recorded impairment charges of $30.1 million related to equity investments that we determined
were other-than-temporarily impaired.
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than
facility and equipment leasing arrangements. On June 29, 2004, Old FNF entered into an off-balance
sheet financing arrangement (commonly referred to as a synthetic lease). The owner/lessor in this
arrangement acquired land and various real property improvements associated with new construction
of an office building in Jacksonville, Florida that is part of our corporate campus and
headquarters. The lease expires on June 28, 2011, with renewal subject to consent of the lessor and
the lenders. The lessor is a third-party limited liability company. The synthetic lease facility
provides for amounts up to $75.0 million. As of December 31, 2008, the full $75.0 million had been
drawn on the facility to finance land costs and related fees and expenses and the outstanding
balance was $70.1 million. The lease includes guarantees by us of up to 86.7% of the outstanding
lease balance, and options to purchase the facilities at the outstanding lease balance. The
guarantee becomes effective if we decline to purchase the facilities at
52
the end of the lease and
also decline to renew the lease. The lessor financed the acquisition of the facilities through
funding provided by third-party financial institutions. We have no affiliation or relationship
with the lessor or any of its employees, directors or affiliates, and our transactions with the
lessor are limited to the operating lease agreement and the associated rent expense that is
included in other operating expenses in the Consolidated Statements of Earnings.
We do not believe the lessor is a variable interest entity, as defined in FASB Interpretation
No. 46R, Consolidation of Variable Interest Entities (FIN 46). In addition, we have verified
that even if the lessor was determined to be a variable interest entity, we would not be required
to consolidate the lessor or the assets and liabilities associated with the assets leased to us.
This is because the assets leased by us will not exceed 50% of the total fair value of the lessors
assets excluding any assets that should be excluded from such calculation under FIN 46, nor did the
lessor finance 95% or more of the leased balance with non-recourse debt, target equity or similar
funding.
In conducting our operations, we routinely hold customers assets in escrow, pending
completion of real estate transactions. Certain of these amounts are maintained in segregated bank
accounts and have not been included in the Consolidated Balance Sheets. As a result of holding
these customers assets in escrow, we have ongoing programs for realizing economic benefits during
the year through favorable borrowing and vendor arrangements with various banks. There were no
investments or loans outstanding as of December 31, 2008 related to these arrangements.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, please see note A of Notes to
Consolidated Financial Statements included elsewhere herein.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
In the normal course of business, we are routinely subject to a variety of risks, as described
in the Risk Factors section of this Annual Report on Form 10-K and in our other filings with the
Securities and Exchange Commission. For example, we are exposed to the risk that decreased real
estate activity, which depends in part on the level of interest rates, may reduce our title
insurance revenues.
The risks related to our business also include certain market risks that may affect our debt
and other financial instruments. At present, we face the market risks associated with our
marketable equity securities subject to equity price volatility and with interest rate movements on
our outstanding debt and fixed income investments.
We regularly assess these market risks and have established policies and business practices
designed to protect against the adverse effects of these exposures.
At December 31, 2008, we had $1.4 billion in long-term debt, of which $0.6 billion bears
interest at a floating rate. Our fixed maturity investments and borrowings are subject to an
element of market risk from changes in interest rates. Increases and decreases in prevailing
interest rates generally translate into decreases and increases in fair values of those
instruments. Additionally, fair values of interest rate sensitive instruments may be affected by
the creditworthiness of the issuer, prepayment options, relative values of alternative investments,
the liquidity of the instrument and other general market conditions. We manage interest rate risk
through a variety of measures. We monitor our interest rate risk and make investment decisions to
manage the perceived risk. However, we do not currently use derivative financial instruments in any
material amount to hedge these risks.
Equity price risk is the risk that we will incur economic losses due to adverse changes in
equity prices. In the past, our exposure to changes in equity prices primarily resulted from our
holdings of equity securities. At December 31, 2008, we held $71.5 million in marketable equity
securities (not including our equity method investments such as Sedgwick, Ceridian, and Remy, which
amounted to $644.5 million at December 31, 2008). The carrying values of investments subject to
equity price risks are based on quoted market prices as of the balance sheet date. Market prices
are subject to fluctuation and, consequently, the amount realized in the subsequent sale of an
investment may
53
significantly differ from the reported market value. Fluctuation in the market price
of a security may result from
perceived changes in the underlying economic characteristics of the investee, the relative
price of alternative investments and general market conditions. Furthermore, amounts realized in
the sale of a particular security may be affected by the relative quantity of the security being
sold. We principally manage equity price risk in our equity securities portfolio through industry
and issuer diversification and asset allocation techniques.
For purposes of this Annual Report on Form 10-K, we perform a sensitivity analysis to
determine the effects that market risk exposures may have on the fair values of our debt and other
financial instruments.
The financial instruments that are included in the sensitivity analysis with respect to
interest rate risk include fixed maturity investments and notes payable. The financial instruments
that are included in the sensitivity analysis with respect to equity price risk include marketable
equity securities. With the exception of equity method investments, it is not anticipated that
there would be a significant change in the fair value of other long-term investments or short-term
investments if there were a change in market conditions, based on the nature and duration of the
financial instruments involved.
To perform the sensitivity analysis, we assess the risk of loss in fair values from the effect
of hypothetical changes in interest rates and equity prices on market-sensitive instruments. The
changes in fair values for interest rate risks are determined by estimating the present value of
future cash flows using various models, primarily duration modeling. The changes in fair values for
equity price risk are determined by comparing the market price of investments against their
reported values as of the balance sheet date.
Information provided by the sensitivity analysis does not necessarily represent the actual
changes in fair value that we would incur under normal market conditions because, due to practical
limitations, all variables other than the specific market risk factor are held constant. For
example, our reserve for claim losses (representing 49.7% of total liabilities at December 31,
2008) is not included in the hypothetical effects.
We have no market risk sensitive instruments entered into for trading purposes; therefore, all
of our market risk sensitive instruments were entered into for purposes other than trading. The
results of the sensitivity analysis at December 31, 2008, and December 31, 2007, are as follows:
Interest Rate Risk
At December 31, 2008, an increase (decrease) in the levels of interest rates of 100 basis
points, with all other variables held constant, would result in a (decrease) increase in the fair
value of our fixed maturity securities of $96.7 million as compared with a (decrease) increase of
$91.9 million at December 31, 2007.
Additionally, for the year ended December 31, 2008, an increase (decrease) of 100 basis points
in the levels of interest rates, with all other variables held constant, would result in an
increase (decrease) in the interest expense on our average outstanding floating rate debt of $4.3
million as compared to an increase (decrease) of $1.0 million for the year ended December 31, 2007.
Equity Price Risk
At December 31, 2008, a 20% increase (decrease) in market prices, with all other variables
held constant, would result in an increase (decrease) in the fair value of our equity securities
portfolio of $14.3 million, as compared with an increase (decrease) of $18.7 million at December
31, 2007.
54
Item 8. Financial Statements and Supplementary Data
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL INFORMATION
|
|
|
|
|
|
|
Page |
|
|
Number |
|
|
|
56 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
|
|
|
62 |
|
|
|
|
63 |
|
|
|
|
64 |
|
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited Fidelity National Financial, Inc.s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fidelity
National Financial, Inc.s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Managements Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Fidelity National Financial, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Fidelity National Financial, Inc. acquired Commonwealth Land Title Insurance Company, Lawyers
Title Insurance Corporation, and United Capital Title Insurance Company (collectively, the LFG
Underwriters) during 2008, and management excluded from its assessment of the effectiveness of
Fidelity National Financial, Inc.s internal control over financial reporting as of December 31,
2008, the LFG Underwriters internal control over financial reporting associated with total assets
of $1.8 billion and total revenues of $46 million included in the consolidated financial statements of
Fidelity National Financial, Inc. and Subsidiaries as of and for the year ended December 31, 2008.
Our audit of internal control over financial reporting of Fidelity National Financial, Inc. also
excluded an evaluation of the internal control over financial reporting of the LFG Underwriters.
56
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Consolidated Balance Sheets of Fidelity National Financial,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the related Consolidated Statements of
Earnings, Comprehensive Earnings, Stockholders Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2008, and our report dated March 2, 2009 expressed an
unqualified opinion on those Consolidated Financial Statements.
/s/ KPMG LLP
March 2, 2009
Jacksonville, Florida
Certified Public Accountants
57
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Fidelity National Financial, Inc.:
We have audited the accompanying Consolidated Balance Sheets of Fidelity National Financial,
Inc. and subsidiaries as of December 31, 2008 and 2007, and the related Consolidated Statements of
Earnings, Comprehensive Earnings, Stockholders Equity and Cash Flows for each of the years in the
three-year period ended December 31, 2008. These Consolidated Financial Statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all
material respects, the financial position of Fidelity National Financial, Inc. and subsidiaries as
of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.
As discussed in Note J to the Consolidated Financial Statements, effective January 1, 2007,
the Company adopted the recognition and disclosure provisions of Financial Accounting Standards
Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Fidelity National Financial, Inc.s internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 2, 2009 expressed an unqualified opinion on the effectiveness of
the Companys internal control over financial reporting.
/s/ KPMG LLP
March 2, 2009
Jacksonville, Florida
Certified Public Accountants
58
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except |
|
|
|
share data) |
|
|
|
|
|
|
|
|
|
|
ASSETS
|
Investments: |
|
|
|
|
|
|
|
|
Fixed maturities available for sale, at fair value, at December 31, 2008 and 2007, includes
pledged fixed maturities of $267,353 and $335,270, respectively, related to secured trust
deposits and $103,586 and $264,202, respectively, related to the securities lending program |
|
$ |
2,853,829 |
|
|
$ |
2,824,572 |
|
Equity securities, at fair value |
|
|
71,516 |
|
|
|
93,272 |
|
Investments in unconsolidated affiliates |
|
|
644,539 |
|
|
|
738,356 |
|
Other long-term investments |
|
|
18,259 |
|
|
|
18,255 |
|
Short-term investments, at December 31, 2008 and 2007 includes $115,184 and $178,568,
respectively, of pledged short-term investments related to secured trust deposits |
|
|
788,350 |
|
|
|
427,366 |
|
|
|
|
|
|
|
|
Total investments |
|
|
4,376,493 |
|
|
|
4,101,821 |
|
Cash and cash equivalents, at December 31, 2008 and 2007, includes pledged cash of $109,587
and $193,484, respectively, related to secured trust deposits and $107,626 and $271,807,
respectively, related to the securities lending program |
|
|
315,297 |
|
|
|
569,562 |
|
Trade and
notes receivables, net of allowance of $32,627 and $13,091 at December 31, 2008 and
2007, respectively |
|
|
290,692 |
|
|
|
227,849 |
|
Goodwill |
|
|
1,581,658 |
|
|
|
1,344,580 |
|
Prepaid expenses and other assets |
|
|
632,527 |
|
|
|
467,831 |
|
Capitalized software |
|
|
85,728 |
|
|
|
93,413 |
|
Other intangible assets |
|
|
92,510 |
|
|
|
117,508 |
|
Title plants |
|
|
431,591 |
|
|
|
331,888 |
|
Property and equipment, net |
|
|
307,155 |
|
|
|
266,156 |
|
Income taxes receivable |
|
|
115,371 |
|
|
|
67,245 |
|
Deferred tax assets |
|
|
139,218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,368,240 |
|
|
$ |
7,587,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities, at December 31, 2008 and 2007, includes $107,627
and $271,807, respectively, of security loans related to the securities lending program |
|
$ |
828,945 |
|
|
$ |
823,109 |
|
Accounts payable to related parties |
|
|
9,953 |
|
|
|
13,890 |
|
Deferred revenue |
|
|
109,023 |
|
|
|
114,705 |
|
Notes payable, at December 31, 2008 and 2007, includes a note payable to FIS with a balance of
$6,199 and $7,059, respectively |
|
|
1,350,849 |
|
|
|
1,167,739 |
|
Reserve for claim losses |
|
|
2,738,625 |
|
|
|
1,419,910 |
|
Secured trust deposits |
|
|
474,073 |
|
|
|
689,935 |
|
Deferred tax liabilities |
|
|
|
|
|
|
60,609 |
|
|
|
|
|
|
|
|
|
|
|
5,511,468 |
|
|
|
4,289,897 |
|
Minority interests |
|
|
51,199 |
|
|
|
53,868 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, Class A, $0.0001 par value; authorized, 600,000,000 shares as of December 31,
2008 and 2007; issued, 228,391,066 shares and 223,069,076 shares at December 31, 2008 and
2007, respectively |
|
|
23 |
|
|
|
22 |
|
Preferred stock, $0.0001 par value; authorized, 50,000,000 shares; issued and outstanding, none |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
3,325,209 |
|
|
|
3,236,866 |
|
Retained (deficit) earnings |
|
|
(188,954 |
) |
|
|
213,103 |
|
|
|
|
|
|
|
|
|
|
|
3,136,278 |
|
|
|
3,449,991 |
|
Accumulated other comprehensive loss |
|
|
(91,757 |
) |
|
|
(16,630 |
) |
Less treasury stock, 13,488,288 shares and 10,032,449 shares as of December 31, 2008 and 2007,
respectively, at cost |
|
|
(238,948 |
) |
|
|
(189,273 |
) |
|
|
|
|
|
|
|
|
|
|
2,805,573 |
|
|
|
3,244,088 |
|
|
|
|
|
|
|
|
|
|
$ |
8,368,240 |
|
|
$ |
7,587,853 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
59
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share data) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums |
|
$ |
1,140,266 |
|
|
$ |
1,601,768 |
|
|
$ |
1,957,064 |
|
Agency title insurance premiums |
|
|
1,554,743 |
|
|
|
2,198,690 |
|
|
|
2,649,136 |
|
Escrow, title-related and other fees |
|
|
1,148,539 |
|
|
|
1,132,415 |
|
|
|
1,114,047 |
|
Transaction processing |
|
|
|
|
|
|
|
|
|
|
3,094,370 |
|
Specialty insurance |
|
|
373,392 |
|
|
|
386,427 |
|
|
|
394,613 |
|
Interest and investment income |
|
|
134,370 |
|
|
|
185,417 |
|
|
|
206,607 |
|
Realized gains and losses, net |
|
|
(22,215 |
) |
|
|
18,458 |
|
|
|
18,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,329,095 |
|
|
$ |
5,523,175 |
|
|
$ |
9,434,399 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
1,355,845 |
|
|
|
1,700,935 |
|
|
|
3,225,319 |
|
Other operating expenses |
|
|
1,208,647 |
|
|
|
1,109,438 |
|
|
|
2,075,101 |
|
Agent commissions |
|
|
1,218,044 |
|
|
|
1,698,215 |
|
|
|
2,035,423 |
|
Depreciation and amortization |
|
|
142,759 |
|
|
|
130,092 |
|
|
|
460,750 |
|
Provision for claim losses |
|
|
630,404 |
|
|
|
653,876 |
|
|
|
486,334 |
|
Interest expense |
|
|
68,789 |
|
|
|
54,941 |
|
|
|
209,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,624,488 |
|
|
|
5,347,497 |
|
|
|
8,492,899 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before income taxes, equity in
(losses) income of unconsolidated affiliates, and
minority interest |
|
|
(295,393 |
) |
|
|
175,678 |
|
|
|
941,500 |
|
Income tax (benefit) expense |
|
|
(125,542 |
) |
|
|
46,776 |
|
|
|
350,871 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before equity in (losses) income of
unconsolidated affiliates and minority interest |
|
|
(169,851 |
) |
|
|
128,902 |
|
|
|
590,629 |
|
Equity in (losses) income of unconsolidated affiliates |
|
|
(13,375 |
) |
|
|
835 |
|
|
|
1,702 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings before minority interest |
|
|
(183,226 |
) |
|
|
129,737 |
|
|
|
592,331 |
|
Minority interest |
|
|
(4,210 |
) |
|
|
(32 |
) |
|
|
154,570 |
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.60 |
|
|
$ |
2.40 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic basis |
|
|
209,974 |
|
|
|
216,583 |
|
|
|
182,031 |
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.59 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted basis |
|
|
209,974 |
|
|
|
219,989 |
|
|
|
182,861 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
60
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Net (loss) earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (losses) gains on investments and other financial
instruments, net |
|
|
(37,580 |
) |
|
|
44,516 |
|
|
|
25,632 |
|
Unrealized losses on investments in unconsolidated affiliates |
|
|
(45,103 |
) |
|
|
|
|
|
|
|
|
Foreign currency translation unrealized (loss) gain |
|
|
(7,651 |
) |
|
|
2,285 |
|
|
|
(497 |
) |
Reclassification adjustments for losses (gains) included in net earnings |
|
|
33,096 |
|
|
|
(11,101 |
) |
|
|
(13,398 |
) |
Reclassification adjustments relating to minority interests |
|
|
|
|
|
|
|
|
|
|
(2,295 |
) |
Minimum pension liability adjustment |
|
|
(17,889 |
) |
|
|
10,716 |
|
|
|
6,379 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) earnings |
|
|
(75,127 |
) |
|
|
46,416 |
|
|
|
15,821 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) earnings |
|
$ |
(254,143 |
) |
|
$ |
176,185 |
|
|
$ |
453,582 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
61
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Investment by |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Class A |
|
|
Class B |
|
|
Parent /Additional |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Paid-In Capital |
|
|
Earnings (Deficit) |
|
|
Earnings (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
|
|
(In thousands, except share data) |
|
Balance, December 31, 2005 |
|
|
31,147 |
|
|
$ |
3 |
|
|
|
143,176 |
|
|
$ |
14 |
|
|
$ |
3,254,960 |
|
|
$ |
103,665 |
|
|
$ |
(78,867 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,279,775 |
|
Exercise of Old FNF stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,051 |
|
Exercise of new stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,597 |
|
Shares withheld for taxes
and Cancelled |
|
|
170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,498 |
) |
Tax benefit associated with
the exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,776 |
|
Closing of Securities
Exchange and Distribution
Agreement |
|
|
188,646 |
|
|
|
19 |
|
|
|
(143,176 |
) |
|
|
(14 |
) |
|
|
(1,046,315 |
) |
|
|
|
|
|
|
(17,189 |
) |
|
|
|
|
|
|
|
|
|
|
(1,063,499 |
) |
Issuance of Restricted stock |
|
|
1,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Certegy Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862,296 |
|
Issuance of Subsidiary
stock, net of minority
interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,343 |
|
Other comprehensive earnings
unrealized loss on
foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
|
|
|
|
(497 |
) |
Other comprehensive earnings
unrealized gain on
investments and other
financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,234 |
|
|
|
|
|
|
|
|
|
|
|
12,234 |
|
Other comprehensive earnings
minimum pension liability
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,379 |
|
|
|
|
|
|
|
|
|
|
|
6,379 |
|
Other comprehensive earnings
minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,894 |
|
|
|
|
|
|
|
|
|
|
|
14,894 |
|
Capital Contribution to
Fidelity National
Information Services, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,218 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,912 |
|
Shares withheld for taxes
and in treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
(2,028 |
) |
|
|
(2,028 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,910 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195,910 |
) |
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
221,508 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
$ |
3,193,904 |
|
|
$ |
345,516 |
|
|
$ |
(63,046 |
) |
|
|
95 |
|
|
|
(2,028 |
) |
|
$ |
3,474,368 |
|
Exercise of stock options |
|
|
1,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,409 |
|
Treasury Stock repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,675 |
|
|
|
(183,148 |
) |
|
|
(183,148 |
) |
Tax benefit associated with
the exercise of stock
options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,687 |
|
Issuance of restricted stock |
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings
unrealized gain on
foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,285 |
|
|
|
|
|
|
|
|
|
|
|
2,285 |
|
Other comprehensive earnings
unrealized gain on
investments and other
financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,415 |
|
|
|
|
|
|
|
|
|
|
|
33,415 |
|
Other comprehensive earnings
minimum pension liability
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,716 |
|
|
|
|
|
|
|
|
|
|
|
10,716 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,866 |
|
Shares withheld for taxes
and in treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262 |
|
|
|
(4,097 |
) |
|
|
(4,097 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(262,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(262,182 |
) |
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,769 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
223,069 |
|
|
$ |
22 |
|
|
|
|
|
|
|
|
|
|
$ |
3,236,866 |
|
|
$ |
213,103 |
|
|
$ |
(16,630 |
) |
|
|
10,032 |
|
|
$ |
(189,273 |
) |
|
$ |
3,244,088 |
|
Acquisition of LandAmerica
title insurance subsidiaries |
|
|
3,177 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,001 |
|
Exercise of stock options |
|
|
775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,377 |
|
Treasury Stock repurchased |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,167 |
|
|
|
(45,998 |
) |
|
|
(45,998 |
) |
Tax benefit associated with
stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
297 |
|
Issuance of restricted stock |
|
|
1,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive earnings
unrealized loss on
investments in
unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,103 |
) |
|
|
|
|
|
|
|
|
|
|
(45,103 |
) |
Other comprehensive earnings
unrealized loss on
foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,651 |
) |
|
|
|
|
|
|
|
|
|
|
(7,651 |
) |
Other comprehensive earnings
unrealized loss on
investments and other
financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,484 |
) |
|
|
|
|
|
|
|
|
|
|
(4,484 |
) |
Other comprehensive earnings
minimum pension liability
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,889 |
) |
|
|
|
|
|
|
|
|
|
|
(17,889 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,669 |
|
Shares withheld for taxes
and in treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289 |
|
|
|
(3,677 |
) |
|
|
(3,677 |
) |
Cash dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223,041 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(223,041 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
228,391 |
|
|
$ |
23 |
|
|
|
|
|
|
|
|
|
|
$ |
3,325,209 |
|
|
$ |
(188,954 |
) |
|
$ |
(91,757 |
) |
|
|
13,488 |
|
|
$ |
(238,948 |
) |
|
$ |
2,805,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
62
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Cash Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
Adjustment to reconcile net (loss) earnings to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
142,759 |
|
|
|
130,092 |
|
|
|
460,750 |
|
Minority interest |
|
|
(4,210 |
) |
|
|
(32 |
) |
|
|
154,570 |
|
Equity in losses (income) of unconsolidated affiliates |
|
|
13,375 |
|
|
|
(835 |
) |
|
|
(1,702 |
) |
Gain on sales of investments and other assets |
|
|
22,215 |
|
|
|
(18,458 |
) |
|
|
(18,562 |
) |
Stock-based compensation cost |
|
|
32,669 |
|
|
|
29,866 |
|
|
|
64,984 |
|
Tax benefit associated with the exercise of stock options |
|
|
(297 |
) |
|
|
(4,687 |
) |
|
|
(81,776 |
) |
Transaction fee income |
|
|
|
|
|
|
(12,293 |
) |
|
|
|
|
Changes in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in secured trust deposits |
|
|
(662 |
) |
|
|
2,392 |
|
|
|
(11,700 |
) |
Net decrease in trade receivables |
|
|
27,626 |
|
|
|
22,286 |
|
|
|
98,540 |
|
Net (increase) decrease in prepaid expenses and other assets |
|
|
(65,193 |
) |
|
|
(20,087 |
) |
|
|
(227,034 |
) |
Net decrease in accounts payable, accrued liabilities, deferred revenue and other |
|
|
(115,584 |
) |
|
|
(83,664 |
) |
|
|
(173,771 |
) |
Net increase in reserve for claim losses |
|
|
202,912 |
|
|
|
199,274 |
|
|
|
114,866 |
|
Net (decrease) increase in income taxes |
|
|
(72,007 |
) |
|
|
(32,527 |
) |
|
|
(97,480 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
4,587 |
|
|
|
341,096 |
|
|
|
719,446 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale |
|
|
632,639 |
|
|
|
4,632,657 |
|
|
|
2,981,431 |
|
Proceeds from maturities of investment securities available for sale |
|
|
292,107 |
|
|
|
466,744 |
|
|
|
302,842 |
|
Proceeds from sales of assets |
|
|
3,746 |
|
|
|
8,064 |
|
|
|
4,656 |
|
Collections of notes receivable |
|
|
4,049 |
|
|
|
8,480 |
|
|
|
4,337 |
|
Cash (expended) received as collateral on loaned securities, net |
|
|
(3,567 |
) |
|
|
(3,100 |
) |
|
|
5,942 |
|
Additions to title plants |
|
|
(6,043 |
) |
|
|
(11,453 |
) |
|
|
(18,493 |
) |
Additions to property and equipment |
|
|
(84,183 |
) |
|
|
(83,852 |
) |
|
|
(145,387 |
) |
Additions to capitalized software |
|
|
(17,052 |
) |
|
|
(29,335 |
) |
|
|
(180,875 |
) |
Additions to notes receivable |
|
|
(1,023 |
) |
|
|
(980 |
) |
|
|
(4,458 |
) |
Purchases of investment securities available for sale |
|
|
(570,662 |
) |
|
|
(5,168,015 |
) |
|
|
(2,958,834 |
) |
Net proceeds from (purchases of) short-term investment activities |
|
|
(185,569 |
) |
|
|
421,006 |
|
|
|
213,340 |
|
Distribution of FIS |
|
|
|
|
|
|
|
|
|
|
(145,562 |
) |
Contributions to investments in unconsolidated affiliates |
|
|
|
|
|
|
(509,173 |
) |
|
|
|
|
Proceeds from the sale of partial interest in Sedgwick CMS |
|
|
53,872 |
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired |
|
|
(143,240 |
) |
|
|
(245,825 |
) |
|
|
(172,955 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(24,926 |
) |
|
|
(514,782 |
) |
|
|
(114,016 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings |
|
|
380,397 |
|
|
|
570,468 |
|
|
|
642,203 |
|
Debt service payments |
|
|
(263,491 |
) |
|
|
(29,431 |
) |
|
|
(873,109 |
) |
Debt issuance costs |
|
|
|
|
|
|
(904 |
) |
|
|
(1,004 |
) |
Dividends paid |
|
|
(223,041 |
) |
|
|
(262,182 |
) |
|
|
(195,910 |
) |
Subsidiary dividends paid to minority interest shareholders |
|
|
(3,570 |
) |
|
|
(2,024 |
) |
|
|
(40,896 |
) |
Exercise of stock options |
|
|
5,377 |
|
|
|
8,409 |
|
|
|
50,648 |
|
Exercise of subsidiary stock options |
|
|
|
|
|
|
|
|
|
|
45,852 |
|
Tax benefit associated with the exercise of stock options |
|
|
297 |
|
|
|
4,687 |
|
|
|
81,776 |
|
Subsidiary purchases of treasury stock |
|
|
|
|
|
|
|
|
|
|
(145,689 |
) |
Purchases of treasury stock |
|
|
(45,998 |
) |
|
|
(187,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(150,029 |
) |
|
|
101,778 |
|
|
|
(436,129 |
) |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents, excluding pledged cash
related to secured trust deposits |
|
|
(170,368 |
) |
|
|
(71,908 |
) |
|
|
169,301 |
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits, at beginning of year |
|
|
376,078 |
|
|
|
447,986 |
|
|
|
278,685 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits, at end of year |
|
$ |
205,710 |
|
|
$ |
376,078 |
|
|
$ |
447,986 |
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
63
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Summary of Significant Accounting Policies
The following describes the significant accounting policies of Fidelity National Financial,
Inc. and its subsidiaries (collectively, the Company or FNF) which have been followed in
preparing the accompanying Consolidated Financial Statements.
Description of Business
Fidelity National Financial, Inc. is a holding company that is a provider, through its
subsidiaries, of title insurance, specialty insurance, claims management services, and information
services. FNF is the nations largest title insurance company through its title insurance
underwriters Fidelity National Title, Chicago Title, Commonwealth Title, Lawyers Title, Ticor
Title, Security Union Title, and Alamo Title which collectively issued more title insurance
policies in 2007 than any other title company in the United States. FNF also provides flood
insurance, personal lines insurance, and home warranty insurance through its specialty insurance
subsidiaries. FNF is also a leading provider of outsourced claims management services to large
corporate and public sector entities through its minority-owned affiliate, Sedgwick CMS
(Sedgwick). FNF is also a provider of information services in the human resource, retail, and
transportation markets through another minority-owned affiliate, Ceridian Corporation (Ceridian).
Prior to October 24, 2006, the Company was known as Fidelity National Title Group, Inc.
(FNT) and was a majority-owned subsidiary of another publicly traded company, also called
Fidelity National Financial, Inc. (Old FNF). On October 24, 2006, Old FNF transferred certain
assets, including its specialty insurance business, its interest in certain claims management
operations, certain timber and real estate holdings, certain smaller operations, cash and certain
investment assets, to FNT in return for the issuance of 45,265,956 shares of FNT common stock to
Old FNF. Old FNF then distributed to its shareholders all of its shares of FNT common stock, making
FNT a stand alone public company (the 2006 Distribution). On November 9, 2006, Old FNF was then
merged with and into another of its subsidiaries, Fidelity National Information Services, Inc.
(FIS), after which FNTs name was changed to Fidelity National Financial, Inc. On July 2, 2008,
FIS completed the spin-off of its former Lender Processing Services operating segment into a
separate publicly traded company, referred to as LPS, by distributing all of its shares of LPS to
FIS shareholders through a stock dividend. As a result of these transactions, the Companys
chairman of the board is also executive chairman of the board of FIS and chairman of the board of
LPS and other members of our board of directors and our management serve in similar capacities at
FIS and LPS.
Under applicable accounting principles, following these transactions, Old FNFs historical
financial statements, with the exception of equity and earnings per share, became FNFs historical
financial statements, including the results of FIS through the date of FNFs spin-off from Old FNF.
For periods prior to October 24, 2006 the Companys equity has been derived from FNTs historical
equity and its historical basic and diluted earnings per share have been calculated using FNTs
basic and diluted weighted average shares outstanding.
FNF currently has three reporting segments as follows:
|
|
|
Fidelity National Title Group. This segment consists of the operation of FNFs title
insurance underwriters and related businesses. This segment provides core title insurance
and escrow and other title related services including collection and trust activities,
trustees sales guarantees, recordings and reconveyances. |
|
|
|
|
Specialty Insurance. The specialty insurance segment consists of certain subsidiaries
that issue flood, home warranty, homeowners, automobile and other personal lines insurance
policies. The Company recently announced that its Board of Directors has authorized the
investigation of strategic alternatives for certain of its specialty insurance businesses.
The assets to be evaluated include the flood insurance and personal lines insurance
businesses, but not the home warranty business. However, there can be no assurance that any
transaction will be completed. |
64
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company, certain other unallocated corporate overhead expenses, other
smaller operations, and the Companys share in the operations of certain equity
investments, including Sedgwick, Ceridian and Remy International, Inc. (Remy). |
Through October 23, 2006, the Companys results also included the operations of FIS as a
separate segment. This segment provided transaction processing services, consisting principally of
technology solutions for banks and other financial institutions, credit and debit card services and
check risk management and related services for retailers and others. This segment also provided
lender processing services, consisting principally of technology solutions for mortgage lenders,
selected mortgage origination services such as title agency and closing services, default
management and mortgage information services.
Principles of Consolidation and Basis of Presentation
The accompanying Consolidated Financial Statements include the accounts of the Company and its
wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances
have been eliminated. The Companys investments in non-majority-owned partnerships and affiliates
are accounted for using the equity method until such time that they become wholly or majority
owned. Minority interest expense is recorded on the consolidated statement of earnings relating to
majority owned subsidiaries and the appropriate minority interest liability is recorded on the
Consolidated Balance Sheets in each period.
Investments
Fixed maturity securities are purchased to support the investment strategies of the Company,
which are developed based on factors including rate of return, maturity, credit risk, tax
considerations and regulatory requirements. Fixed maturity securities which may be sold prior to
maturity to support the Companys investment strategies are carried at fair value and are
classified as available for sale as of the balance sheet dates. Fair values for fixed maturity
securities are principally a function of current interest rates and market conditions and are based
on quoted market prices. Discount or premium is recorded for the difference between the purchase
price and the principal amount. The discount or premium is amortized or accreted using the interest
method and is recorded as an adjustment to interest and investment income. The interest method
results in the recognition of a constant rate of return on the investment equal to the prevailing
rate at the time of purchase or at the time of subsequent adjustments of book value. Changes in
prepayment assumptions are accounted for prospectively.
Equity securities are considered to be available for sale and carried at fair value as of the
balance sheet dates. Fair values are based on quoted market prices.
Investments in unconsolidated affiliates are recorded using the equity method of accounting
(see note D).
Short-term investments, which consist primarily of securities purchased under agreements to
resell, commercial paper and money market instruments, which have an original maturity of one year
or less, are carried at amortized cost, which approximates fair value.
Realized gains and losses on the sale of investments are determined on the basis of the cost
of the specific investments sold and are credited or charged to income on a trade date basis.
Unrealized gains or losses on fixed maturity and equity securities which are classified as
available for sale, net of applicable deferred income taxes (benefits), are excluded from earnings
and credited or charged directly to a separate component of stockholders equity. If any unrealized
losses on fixed maturity or equity securities are deemed other-than-temporary, such unrealized
losses are recognized as realized losses. Unrealized losses are deemed other-than-temporary if
factors exist that cause management to believe that the value will not increase to a level
sufficient to recover the Companys cost basis.
Some factors considered in evaluating whether or not a decline in fair value is
other-than-temporary include: (i) the Companys ability and intent to retain the investment for a
period of time sufficient to allow for a recovery in value; (ii) the duration and extent to which
the fair value has been less than cost; and (iii) the financial condition and prospects of the
issuer. Such reviews are inherently uncertain and the value of the investment may not fully recover
or may decline in future periods resulting in a realized loss.
65
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
Highly liquid instruments purchased with original maturities of three months or less are
considered cash equivalents. The carrying amounts reported in the Consolidated Balance Sheets for
these instruments approximate their fair value.
Fair Value of Financial Instruments
The fair values of financial instruments presented in the Companys Consolidated Financial
Statements are estimates of the fair values at a specific point in time using available market
information and appropriate valuation methodologies. These estimates are subjective in nature and
involve uncertainties and significant judgment in the interpretation of current market data.
Therefore, the fair values presented are not necessarily indicative of amounts the Company could
realize or settle currently. The Company does not necessarily intend to dispose of or liquidate
such instruments prior to maturity.
Trade and Notes Receivables
The carrying values reported in the Consolidated Balance Sheets for trade and notes
receivables approximate their fair value.
Goodwill
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and
assumed in a business combination. SFAS No. 142, Goodwill and Intangible Assets (SFAS 142)
provides that goodwill and other intangible assets with indefinite useful lives should not be
amortized, but shall be tested for impairment annually, or more frequently if circumstances
indicate potential impairment, through a comparison of fair value to its carrying amount.
In evaluating the recoverability of goodwill, the Company performs an annual goodwill impairment
test based on an analysis of the discounted future cash flows generated by the underlying assets.
As required by SFAS 142, the Company completed its annual goodwill impairment tests in the
fourth quarter of each respective year using a September 30 measurement date, and determined fair
values were in excess of carrying values. Accordingly, no goodwill impairments have been recorded.
Capitalized Software
Capitalized software includes software acquired in business acquisitions, purchased software
and internally developed capitalized software. Purchased software is recorded at cost and amortized
using the straight-line method over a 3-year period and software acquired in a business acquisition
is recorded at its fair value upon acquisition and amortized using straight-line and accelerated
methods over its estimated useful life. Capitalized computer software
development costs are accounted for in accordance with either SFAS 86, Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed (SFAS 86), or with American
Institute of Certified Public Accountants Statement of Position (SOP) No. 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1). After the
technological feasibility of the software has been established (for SFAS 86 software), or at the
beginning of application development (for SOP 98-1 software), software development costs, which
include salaries and related payroll costs and costs of independent contractors incurred during
development, are capitalized. Research and development costs incurred prior to the establishment of
technological feasibility (for SFAS 86 software), or prior to application development (for SOP 98-1
software), of a product are expensed as incurred and are not significant. The cost of internally
developed computer software that is subject to the provisions of SFAS 86 is amortized on a
product-by-product basis commencing on the date of general release of the products, generally the
greater of (1) the straight-line method over its estimated useful life, which ranges from three to
seven years or (2) the ratio of current revenues to total anticipated revenue over its useful life.
The cost of purchased software that is subject to the provisions of SOP 98-1 is amortized on a
straight-line basis over its estimated useful life.
At December 31, 2008, capitalized software costs were $190.1 million, less accumulated
amortization of $104.4 million. At December 31, 2007, capitalized software costs were $176.0
million, less accumulated amortization of $82.6 million.
66
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization expense relating to computer software was $36.8 million, $24.5 million, and
$127.4 million for the years ended December 31, 2008, 2007, and 2006, respectively, and, in 2006,
was primarily made up of amortization expense recorded by FIS.
Other Intangible Assets
The Company has other intangible assets, not including software, which consist primarily of
customer relationships and contracts and trademarks which are generally recorded in connection with
acquisitions at their fair value. SFAS 142 requires that intangible assets with estimable lives be
amortized over their respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS 144. Customer relationships are amortized over
their estimated useful lives using an accelerated method which takes into consideration expected
customer attrition rates over a ten-year period. Contractual relationships are generally amortized
over their contractual life. Trademarks are considered intangible assets with indefinite lives and
are reviewed for impairment at least annually in accordance with SFAS 142.
During 2008, in accordance with SFAS 144, the Company determined that the carrying value of
certain of its intangible assets, software and license fees may not be recoverable and recorded
impairment expense of $8.5 million relating to the impairment of these assets. This expense amount
was included in other operating expenses in the Consolidated Statements of Earnings for the year
ended December 31, 2008. There was no such expense recorded in 2007 or 2006.
Title Plants
Title plants are recorded at the cost incurred to construct or obtain and organize historical
title information to the point it can be used to perform title searches. Costs incurred to
maintain, update and operate title plants are expensed as incurred. Title plants are not amortized
as they are considered to have an indefinite life if maintained. Sales of title plants are reported
at the amount received net of the adjusted costs of the title plant sold. Sales of title plant
copies are reported at the amount received. No cost is allocated to the sale of copies of title
plants unless the carrying value of the title plant is diminished or impaired.
Property and Equipment
Property and equipment are recorded at cost, less depreciation. Depreciation is computed
primarily using the straight-line method based on the estimated useful lives of the related assets:
thirty years for buildings and three to seven years for furniture, fixtures and equipment.
Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the
applicable lease or the estimated useful lives of such assets.
Reserve for Claim Losses
The Companys reserve for claim losses includes known claims for title and specialty insurance
as well as losses the Company expects to incur, net of recoupments. Each known claim is reserved
based on a review by the Company as to the estimated amount of the claim and the costs required to
settle the claim. Reserves for claims which are incurred but not reported are established at the
time premium revenue is recognized based on historical loss experience and other factors, including
industry trends, claim loss history, current legal environment, geographic considerations and type
of policy written. For specialty insurance, reserve for claims incurred but not reported are
estimated based on historical loss experience.
The reserve for claim losses also includes reserves for losses arising from the escrow,
closing and disbursement functions due to fraud or operational error.
If a loss is related to a policy issued by an independent agent, the Company may proceed
against the independent agent pursuant to the terms of the agency agreement. In any event, the
Company may proceed against third parties who are responsible for any loss under the title
insurance policy under rights of subrogation.
67
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Secured Trust Deposits
In the state of Illinois, a trust company is permitted to commingle and invest customers
assets with those of the Company, pending completion of real estate transactions. Accordingly, the
Companys Consolidated Balance Sheets reflect a secured trust deposit liability of $474.1 million
and $689.9 million at December 31, 2008 and 2007, respectively, representing customers assets held
by us and corresponding assets including cash and investments pledged as security for those trust
balances.
Income Taxes
The Company recognizes deferred tax assets and liabilities for temporary differences between
the financial reporting basis and the tax basis of the Companys assets and liabilities and
expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The impact on
deferred taxes of changes in tax rates and laws, if any, is applied to the years during which
temporary differences are expected to be settled and reflected in the financial statements in the
period enacted.
Reinsurance
In a limited number of situations, the Company limits its maximum loss exposure by reinsuring
certain risks with other insurers. The Company also earns a small amount of additional income,
which is reflected in the Companys direct premiums, by assuming reinsurance for certain risks of
other insurers. The Company also cedes a portion of certain policy and other liabilities under
agent fidelity, excess of loss and case-by-case reinsurance agreements. Reinsurance agreements
provide that in the event of a loss (including costs, attorneys fees and expenses) exceeding the
retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding
company remains primarily liable in the event the reinsurer does not meet its contractual
obligations.
Revenue Recognition
Fidelity National Title Group. Direct title insurance premiums and escrow and other
title-related fees are recognized as revenue at the time of closing of the related transaction as
the earnings process is considered complete, whereas premium revenues from agency operations and
agency commissions include an accrual based on estimates of the volume of transactions that have
closed in a particular period for which premiums have not yet been reported to us. The accrual for
agency premiums is necessary because of the lag between the closing of these transactions and the
reporting of these policies to us by the agent. During 2008, the
Company re-evaluated and refined the method
that it uses use to estimate this accrual, which resulted in a reduction in revenue from agency title
insurance premiums of $138.5 million compared to the revenues that would have been accrued under
our prior method. The impact of this adjustment was a decrease of $11.8 million in pre-tax earnings
and $7.6 million in net income, or approximately $0.04 per share, compared to the amounts that
would have been recorded under our prior method. The Company believes that this adjustment is properly
reflected as a change in accounting estimate in 2008.
Specialty Insurance. Revenues from home warranty and personal lines insurance policies are
recognized over the life of the policy, which is one year. Revenues and commissions related to the
sale of flood insurance are recognized when the policy is reported.
Fidelity National Information Services, Inc. In this segment, the Company earned revenues
from processing services, software licensing and software related services and data and information
services.
The Company recognized revenues relating to bank processing services and mortgage processing
services along with software licensing and software related services. Several of the Companys
contracts included a software license and one or more of the following services: data processing,
development, implementation, conversion, training, programming, maintenance and application
management. In some cases, these services were offered in combination with one another and in other
cases the Company offered them individually. Revenues from bank and mortgage processing services
were typically volume-based depending on factors such as the estimated number of accounts,
transactions processed and computer resources utilized.
68
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The substantial majority of the revenues in this business were from outsourced data processing
and application management arrangements. Revenues from these arrangements were recognized as
services were performed in accordance with SEC Staff Accounting Bulletin No. 104 (SAB 104),
Revenue Recognition and related interpretations. SAB 104 sets forth guidance as to when revenue
is realized or realizable and earned when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3)
the sellers price to the buyer is fixed and determinable; and
(4) collectability is reasonably
assured. Revenue and deferred costs related to implementation, conversion and programming services
associated with the Companys data processing and application management agreements were deferred
during the implementation phase and subsequently recognized using the straight-line method over the
term of the related agreement. The Company evaluated these deferred costs for impairment in the
event any indications of impairment existed.
In the event that the Companys arrangements with its customers included more than one product
or service, the Company determined whether the individual elements could be recognized separately
in accordance with the provisions of EITF No. 00-21, Revenue Arrangements with Multiple
Deliverables (EITF 00-21). EITF 00-21 addresses the determination of whether an arrangement
involving more than one deliverable contains more than one unit of accounting and how the
arrangement consideration should be measured and allocated to the separate units of accounting. If
all of the products and services were software related products and services as determined under
the provisions of SOP 97-2 (SOP 97-2), entitled Software Revenue Recognition, and SOP 98-9,
entitled Modification of SOP No. 97-2, Software Revenue Recognition, with Respect to Certain
Transactions, the Company applied these pronouncements and related interpretations to determine
the appropriate units of accounting and how the arrangement consideration should be measured and
allocated to the separate units of accounting.
The Company recognized software license and maintenance fees as well as associated
development, implementation, training, conversion and programming fees in accordance with SOP 97-2
and SOP 98-9. Initial license fees were recognized when a contract exists, the fee was fixed or
determinable, software delivery had occurred and collection of the receivable was deemed probable,
provided that vendor-specific objective evidence, or VSOE, had been established for each element or
for the undelivered elements. The Company determined the fair value of each element or the
undelivered elements in multi-element software arrangements based on VSOE. If the arrangement was
subject to accounting under SOP 97-2, VSOE for each element was based on the price charged when the
same element was sold separately. If evidence of fair value of all undelivered elements existed but
evidence did not exist for one or more delivered elements, then revenue was recognized using the
residual method. Under the residual method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is recognized as revenue. If evidence of fair
value does not exist for one or more undelivered elements of a contract, then all revenue is
deferred until all elements are delivered or fair value is determined for all remaining undelivered
elements. Revenue from maintenance and support was recognized ratably over the term of the
agreement. The Company recorded deferred revenue for maintenance amounts invoiced prior to revenue
recognition.
With respect to a small percentage of revenues, the Company used contract accounting, as
required by SOP 97-2, when the arrangement with the customer included significant customization,
modification, or production of software. For elements accounted for under contract accounting,
revenue was recognized in accordance with SOP 81-1, Accounting for Performance of Construction Type
and Certain Production-Type Contracts, using the percentage-of-completion method since reasonably
dependable estimates of revenues and contract hours applicable to various elements of a contract
could be made. Revenues in excess of billings on these agreements were recorded as unbilled
receivables and were included in accounts receivable. Billings in excess of revenue recognized on
these agreements were recorded as deferred revenue until revenue recognition criteria were met.
Changes in estimates for revenues, costs and profits were recognized in the period in which they
were determinable. When the Companys estimate indicated that the entire contract would be
performed at a loss, a provision for the entire loss was recorded in that accounting period.
The Company recognized revenues from mortgage origination services and default management
services. Mortgage origination services consisted of centralized title agency and closing services
for various types of lenders. Revenues relating to centralized title agency and closing services
were recognized at the time of closing of the
69
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
related real estate transaction. Ancillary service fees were recognized when the service is
provided. Default management services consisted of services provided to assist customers through
the default and foreclosure process, including property preservation and maintenance services (such
as lock changes, window replacement, debris removal and lawn service), posting and publication of
foreclosure and auction notices, title searches, document preparation and recording services, and
referrals for legal and property brokerage services. Revenue derived from these services was
recognized as the services were performed in accordance with SAB 104 as described above.
The Company recorded revenue from providing data or data-related services. These services
principally included appraisal and valuation services, property records information, real estate
tax services, borrower credit and flood zone information and multiple listing software and
services. Revenue derived from these services was recognized as the services were performed in
accordance with SAB 104 as described above.
The Companys flood and tax units provided various services including life-of-loan monitoring
services. Revenue for life-of-loan services was deferred and recognized ratably over the estimated
average life of the loan service period, which was determined based on the Companys historical
experience. The Company evaluated its historical experience on a periodic basis, and adjusted the
estimated life of the loan service period prospectively. Revenue derived from software and service
arrangements was recognized in accordance with SOP 97-2. Revenues from other services in this
segment were recognized as the services were performed in accordance with SAB 104 as described
above.
Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to common stockholders
by the weighted average number of common shares outstanding during the period. In periods when
earnings are positive, diluted earnings per share is calculated by dividing net earnings available
to common stockholders by the sum of the weighted average number of common shares outstanding and
the impact of assumed conversions of potentially dilutive securities. For periods when the Company
recognizes 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.
The Company has granted certain options, warrants and restricted stock 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 following table presents the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except per share data) |
|
Basic and diluted earnings |
|
$ |
(179,016 |
) |
|
$ |
129,769 |
|
|
$ |
437,761 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the year, basic basis |
|
|
209,974 |
|
|
|
216,583 |
|
|
|
182,031 |
|
Plus: Common equivalent shares assumed from conversion of options |
|
|
|
|
|
|
3,406 |
|
|
|
830 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the year, diluted basis |
|
|
209,974 |
|
|
|
219,989 |
|
|
|
182,861 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.60 |
|
|
$ |
2.40 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
(0.85 |
) |
|
$ |
0.59 |
|
|
$ |
2.39 |
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2008, 2007, and 2006, options to purchase 23,219,283 shares,
5,382,074 shares and 2,297,140 shares, respectively, of the Companys common stock were not
included in the computation of diluted earnings per share because they were anti-dilutive.
Transactions with Related Parties
The Company has historically conducted business with FIS and its subsidiaries. Beginning on
October 24, 2006, the Companys financial statements reflect transactions with FIS, which is a
related party. Prior to October 24, 2006, these transactions were eliminated because FIS results
of operations were included in our consolidated results. On July 2, 2008, FIS completed the
spin-off of its lender processing services segment into a separate publicly traded company, LPS. As
part of the spin-off of LPS, a number of the agreements that were previously between FNF and
70
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FIS were amended and renegotiated to reflect the revised relationships between FNF and FIS and
the new relationships between FNF and LPS. A summary of the agreements that were in effect with FIS
and LPS through December 31, 2008, is as follows:
|
|
Title agency services by LPS. The historical FIS subsidiaries who are party to these
agreements became subsidiaries of LPS in connection with the spin-off. These agreements allow
LPS to provide services to existing customers through loan facilitation transactions,
primarily with large national lenders. The arrangement involves the provision of title agency
services by LPS, which results in the issuance of title policies on behalf of title insurance
underwriters owned by the Company. Subject to certain early termination provisions for cause,
each of these agreements may be terminated upon five years prior written notice, which notice
may not be given until after the fifth anniversary of the effective date of each agreement,
which ranges from July 2004 through September 2006 (thus effectively resulting in a minimum
ten-year term and a rolling one-year term thereafter). Under these agreements, LPS retains
commissions which, in aggregate, are equal to approximately 89% of the total title premium
from title policies that LPS places with the Companys subsidiaries. LPS also performs similar
functions in connection with trustee sale guarantees, a form of title insurance that the
Companys subsidiaries issue as part of the foreclosure process on a defaulted loan. Effective
as of January 1, 2009, this agreement was amended to provide that LPS will retain
approximately 87% of the total title premiums. |
|
|
|
Information Technology (IT), data processing services and software development services
from FIS and LPS. These agreements govern IT support services and software development
provided to the Company by FIS and LPS, primarily consisting of infrastructure support and
data center management. Subject to certain early termination provisions (including the payment
of minimum monthly service and termination fees), both of these agreements expire on or about
June 30, 2013 with an option to renew for one or two additional years. In connection with the
spin-off, the agreement with FIS was amended so that certain of the services, primarily those
related to infrastructure support and data center management, continue to be provided by FIS
on revised terms and conditions. The Company also entered into a new agreement with LPS for
the provision of certain of the services that were previously provided under the agreement
with FIS, primarily those related to software application development services and other
IT-related services for the Company. |
|
|
|
Administrative corporate support services to and from FIS and LPS. The Company has provided
certain administrative corporate support services such as general management, statutory
accounting, claims administration, corporate aviation and other administrative support
services to FIS and, since July 2, 2008, to LPS. On a lesser scale, until recently, FIS has
provided similar support services to the Company. The pricing of these administrative services
is at cost. In connection with the spin-off, the Company entered into an agreement to provide
LPS with certain corporate services, amended the agreement with FIS to reflect the change in
the services provided to FIS, and terminated the agreement for FIS to provide services to the
Company. All of these administrative services are provided on an at-cost basis. The term of
these administrative corporate services agreements is two years, subject to early termination
because the services are no longer required by the party receiving the services or upon mutual
agreement of the parties and subject to extension in certain circumstances. |
|
|
|
Other real estate, tax, and title support related services by LPS. The historical FIS
subsidiaries who are party to these agreements with the Company became subsidiaries of LPS in
connection with the spin-off. Under these arrangements, the Company pays LPS for providing
other real estate related services to the Company, which consist primarily of real estate, tax
data and title related data services required by the Companys title insurance operations and
flood zone determination and reporting services used by the Companys title insurers in
connection with properties that may be located in special flood hazard areas. |
|
|
|
Title plant access and title production services by LPS. The historical FIS subsidiaries who
are party to these agreements with the Company became subsidiaries of LPS in connection with
the spin-off. Under these agreements, the Companys title insurers provide LPS with title
plant access for real property located in various states, including online database access,
physical access to title records, use of space, image system use, and use of special software,
as well as other title production services. For the title plant access, LPS pays monthly fees
(subject to certain minimum charges) based on the number of title reports or products ordered
and other services received. For the title production services, LPS pays for services based on
the number of properties searched, subject to certain minimum use. The title plant access
agreement has a term of 3 years beginning in November 2006 and is automatically renewable for
successive 3 year terms unless either party gives 30 days prior written |
71
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
notice. |
|
The title production services agreement can be terminated by either party upon 30 days
prior written notice. |
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|
Real estate management, real estate lease and equipment lease agreements. Included in the
Companys revenues are amounts received related to leases of certain equipment to FIS and to
LPS and the sublease of certain office space, furniture and furnishings to FIS and to LPS. In
addition, the Companys expenses include expenses for a lease of office space and equipment
for the Companys corporate headquarters and business operations as well as expenses for
property management services for the Companys corporate headquarters building. These expenses
were paid to FIS for services provided prior to the spin-off and to LPS for services provided
on and after the spin-off. In connection with the spin-off and the transfer of certain real
property from FIS to LPS, the Company terminated its real estate lease with FIS and entered
into a new lease with LPS with terms that are similar to those of the terminated FIS lease. In
addition, the Company amended its sublease with FIS to take into account a reduction in the
office space leased by FIS, and entered into a new sublease with LPS for its sublease of
office space in the Companys headquarters building. The rents paid by the Company to FIS and
LPS and paid to the Company by FIS and LPS under the leases and subleases are based on the
same rate per square foot. The lease term for all of the leases and subleases expires on June
30, 2011. The Company also entered into a new property management agreement with LPS since LPS
has replaced FIS as the principal owner and manager of the Jacksonville headquarters campus.
The management fees charged to the Company are reflective of the actual operating costs of the
property managed and are partially recovered by the Company in rents charged under the
sublease by the Company to FIS and LPS. The term of the property management agreements
coincides with that of the leases and subleases, which expire on June 30, 2011. |
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|
Licensing, cost sharing, business processing and other agreements. The historical FIS
subsidiaries who are party to these agreements with the Company became subsidiaries of LPS in
connection with the spin-off. These agreements provide for the reimbursement of certain
amounts from the Company related to various licensing and cost sharing agreements, as well as
the payment of certain amounts by LPS to the Company in connection with the use of certain
intellectual property, including software and business processes, and other assets or
services. The software licenses have various terms, but generally may be terminated on 90
days prior notice. The business processing license and services agreement has a 10-year term,
but in connection with the spin-off, its term was amended and will expire on July 2, 2009. |
On August 31, 2007, the Company completed the acquisition of Property Insight, LLC (Property
Insight), a former FIS subsidiary, from FIS for $95 million in cash. Property Insight is a leading
provider of title plant services for the Company, as well as various national and regional
underwriters. Property Insight primarily manages, maintains and updates the title plants that are
owned by the Company. Additionally, Property Insight manages potential title plant construction for
the Company. Prior to August 31, 2007, the title plant assets of several of FNFs title insurance
subsidiaries were managed or maintained by Property Insight, as a subsidiary of FIS. The underlying
title plant information and software were owned by each of the Companys title insurance
underwriters, but Property Insight managed and updated the information in return for either (i) a
cash management fee or (ii) the right to sell that information to title insurers, including title
insurance underwriters that the Company owns and other third party customers. In most cases,
Property Insight was responsible for keeping the title plant assets current and fully functioning,
for which the Company paid a fee to Property Insight based on the Companys use of, or access to,
the title plant. In addition, each applicable title insurance underwriter owned by the Company in
turn received a royalty on sales of access to its title plant assets. The Company is also a party
to agreements with LPS that permit LPS and certain of its subsidiaries to access and use (but not
resell) the starters databases and back plant databases of the Companys title insurance
subsidiaries. Starters databases are the Companys databases of previously issued title policies
and back plant databases contain historical records relating to title that are not regularly
updated. Prior to July 2, 2008, these agreements were between FNF and FIS.
The Companys payments to FIS for management and maintenance of title plant assets by Property
Insight were $14.0 million for the period from January 1 through August 31, 2007, and $5.5 million
for the period from October 24, through December 31, 2006. The Companys revenues from title plant
royalties were $3.7 million for the period from January 1 through August 31, 2007, and $0.4 million
for the period from October 24 through December 31, 2006.
72
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Through August 31, 2007, the Company paid amounts to Property Insight for capitalized software
development and for title plant construction. These amounts included capitalized software
development costs of $5.4 million for the period from January 1 through August 31, 2007, and $1.9
million for the period from October 24 through December 31, 2006, and amounts paid for capitalized
title plant construction costs of $10.3 million for the period from January 1 through August 31,
2007, and $2.7 million for the period from October 24 through December 31, 2006. During the year
ended December 31, 2008, the Company paid FIS $0.8 million for capitalized software development
costs.
A detail of related party items between the Company and FIS and LPS that were included in
revenues and expenses for the periods presented is as follows:
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October 24 - |
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|
|
Full Year |
|
|
Full Year |
|
|
December 31 |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
(In millions) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Agency title premiums earned |
|
$ |
212.3 |
|
|
$ |
149.4 |
|
|
$ |
22.4 |
|
Rental revenue |
|
|
25.5 |
|
|
|
|
|
|
|
|
|
Title plant revenue |
|
|
8.4 |
|
|
|
|
|
|
|
|
|
Interest revenue |
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
246.2 |
|
|
|
149.9 |
|
|
|
22.4 |
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Agency title commissions |
|
$ |
187.9 |
|
|
$ |
132.2 |
|
|
$ |
19.5 |
|
Data processing costs |
|
|
42.6 |
|
|
|
46.8 |
|
|
|
17.6 |
|
Corporate services allocated |
|
|
(1.6 |
) |
|
|
(2.7 |
) |
|
|
(1.5 |
) |
Title insurance information expense |
|
|
|
|
|
|
10.3 |
|
|
|
5.1 |
|
Other real-estate related information |
|
|
11.4 |
|
|
|
13.5 |
|
|
|
2.4 |
|
Software development and services expense |
|
|
54.9 |
|
|
|
53.7 |
|
|
|
3.1 |
|
Rental expense |
|
|
0.2 |
|
|
|
(8.2 |
) |
|
|
0.7 |
|
License and cost sharing agreements |
|
|
5.7 |
|
|
|
7.8 |
|
|
|
1.2 |
|
Interest expense |
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
301.4 |
|
|
$ |
253.5 |
|
|
$ |
48.1 |
|
|
|
|
|
|
|
|
|
|
|
The Company believes the amounts earned by the Company or charged to it under each of the
foregoing arrangements are fair and reasonable. The Company believes the title commissions paid are
consistent with the average rate that would be available to a third party title agent given the
amount and the geographic distribution of the business produced and the low risk of loss profile of
the business placed. The information technology infrastructure support and data center management
services provided to the Company are priced within the range of prices that FIS and LPS offer to
their unaffiliated third party customers for the same types of services. However, the amounts FNF
earned or was charged under these arrangements were not negotiated at arms-length, and may not
represent the terms that the Company might have obtained from an unrelated third party.
Amounts due to FIS and LPS were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In millions) |
|
Note payable to FIS |
|
$ |
6.2 |
|
|
$ |
7.1 |
|
Due to FIS |
|
|
6.9 |
|
|
$ |
13.9 |
|
Due to LPS |
|
|
3.0 |
|
|
$ |
|
|
Prior to September 30, 2007, FNF had a note receivable balance of $12.5 million due from a
subsidiary of FIS. The Company earned interest revenue of $0.5 million on this note for the year
ended December 31, 2007. On September 30, 2007, the Company acquired certain leasing assets from
FIS for $15 million. As part of this acquisition, the Company assumed $134.9 million in
non-recourse notes payable (see note I), the $12.5 million note
73
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
due to a subsidiary of FIS was forgiven, and the Company entered into an unsecured note
payable to FIS in the amount of $7.3 million. The balance on this note at December 31, 2008 and
2007 was $6.2 million and $7.1 million, respectively, and the Companys related interest expense
was $0.3 million and $0.1 million for the years ended December 31, 2008 and 2007, respectively.
Also, as a result of related party transactions, as of December 31, 2008 and 2007, the Company owed
$6.9 million and $13.9 million, respectively, to FIS, and, as of December 31, 2008, the Company
owed $3.0 million to LPS.
In August 2007, FNFs Chairman of the Board, William P. Foley, II, planned to sell 1,000,000
shares of FNF stock on the open market. Because the Company was actively purchasing shares of
treasury stock on the open market at the same time, the Company agreed to purchase 1,000,000 shares
from Mr. Foley on August 8, 2007, for $22.1 million, or $22.09 per share, the market price at the
time of the purchase.
On December 6, 2007, the Company sold 1,000 shares of Series B Preferred Stock of Remy to its
Chairman of the Board, William P. Foley, II, for a total of $1.0 million, or $1,000 per share. This
per share price was equal to the per share price that the Company paid to acquire the shares.
In
February 2009, the Company transferred our ownership interest in Fidelity National Real Estate
Solutions, Inc. (FNRES) to LPS in exchange for all of the outstanding shares of Investment
Property Exchange Services, Inc. (IPEX), a company that facilitates real estate exchanges under
Section 1031 of the Internal Revenue Code.
Stock-Based Compensation Plans
The Company accounts for stock-based compensation plans using the fair value method. Using the
fair value method of accounting, compensation cost is measured based on the fair value of the award
at the grant date and recognized over the service period.
Foreign Currency Translation
The functional currency for the foreign operations of the Company is either the U.S. Dollar or
the local currency. For foreign operations where the local currency is the functional currency, the
translation of foreign currencies into U.S. Dollars is performed for balance sheet accounts using
exchange rates in effect at the balance sheet date and for revenue and expense accounts using a
weighted average exchange rate during the period. The unrealized gains and losses resulting from
the translation are included in accumulated other comprehensive earnings in the Consolidated
Statements of Stockholders Equity and are excluded from net earnings. Gains or losses resulting
from foreign currency transactions are included in realized gains and losses and are insignificant
in 2008, 2007, and 2006.
Management Estimates
The preparation of these Consolidated Financial Statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the Consolidated Financial Statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Certain Reclassifications
Certain reclassifications have been made in the 2007 and 2006 Consolidated Financial
Statements to conform to the classifications used in 2008.
B. Acquisitions
The results of operations and financial position of the entities acquired during any year are
included in the Consolidated Financial Statements from and after the date of acquisition. Based on
the Companys valuation, any differences between the fair value of the identifiable assets and
liabilities and the purchase price paid are recorded as goodwill. The only significant acquisitions
in the three years ended December 31, 2008, were the acquisitions of
74
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain underwriters from LandAmerica Financial Group, Inc. (LFG) in 2008 and the
acquisition of an equity interest in Ceridian in 2007.
Significant Acquisition
Acquisition of Commonwealth Land Title Insurance Company, Lawyers Title Insurance
Corporation, and United Capital Title Insurance Company
On December 22, 2008, FNF completed the acquisition of LFGs two principal title insurance
underwriters, Commonwealth Land Title Insurance Company (Commonwealth) and Lawyers Title
Insurance Corporation (Lawyers), as well as United Capital Title Insurance Company (United)
(collectively, the LFG Underwriters). The total purchase price for Commonwealth and Lawyers was
$238.0 million, net of cash acquired of $8.8 million, and was comprised of $134.8 million paid in
cash by two of FNFs title insurance underwriters, Fidelity National Title Insurance Company and
Chicago Title Insurance Company, a $50 million subordinated note due in 2013 (see note I), and $50
million in FNF common stock (3,176,620 shares valued at $15.74 per share at the time of closing).
In addition, Fidelity National Title Insurance Company purchased United from an indirect subsidiary
of LFG for a purchase price of approximately $12 million, equal to an estimate (subject to
post-closing adjustment) of the statutory net worth of United at the time of closing.
The total purchase price was as follows (in millions):
|
|
|
|
|
Cash paid by FNFs title insurance underwriters, net of cash acquired |
|
$ |
138.0 |
|
Subordinated note payable to LFG (see note I) |
|
|
50.0 |
|
FNF common stock (3,176,620 shares valued at $15.74 per share) |
|
|
50.0 |
|
Transaction costs |
|
|
3.8 |
|
|
|
|
|
|
|
$ |
241.8 |
|
|
|
|
|
The purchase price has been initially allocated to the LFG Underwriters assets acquired and
liabilities assumed based on our best estimates of their fair values as of December 22, 2008.
Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of
the net assets acquired. This estimate is preliminary and subject to adjustments as the Company
completes its valuation process, which it expects to have substantially complete by the end of the
first quarter of 2009. The initial purchase price allocation is as follows (in millions):
|
|
|
|
|
Cash and
Investments |
|
|
929.3 |
|
Trade and notes receivable |
|
|
81.7 |
|
Title plants |
|
|
95.1 |
|
Property and equipment |
|
|
41.5 |
|
Deferred tax assets |
|
|
151.1 |
|
Other assets |
|
|
99.7 |
|
Goodwill |
|
|
226.4 |
|
Reserve for claim losses |
|
|
(1,115.8 |
) |
Other liabilities assumed |
|
|
(267.2 |
) |
|
|
|
|
Total purchase price |
|
$ |
241.8 |
|
|
|
|
|
The following table summarizes the other liabilities assumed in the acquisition of the LFG
Underwriters (in millions):
|
|
|
|
|
Estimated facility closure costs |
|
$ |
46.7 |
|
Estimated employee termination costs |
|
|
14.0 |
|
Other merger related costs |
|
|
3.8 |
|
Other operating liabilities |
|
|
202.7 |
|
|
|
|
|
|
|
$ |
267.2 |
|
|
|
|
|
The
Company is currently evaluating various agreements, including leases, vendor and
agency agreements, title plants, and customer contracts of the LFG Underwriters. This
evaluation has resulted in the recognition of certain liabilities associated with exiting
activities of the acquired companies. The Company expects to substantially complete this evaluation
during the first half of 2009 and will adjust the amounts recorded as of December 31, 2008, to
reflect the Companys revised evaluations.
Unaudited
Pro Forma Results
Selected unaudited pro forma results of operations for years ended December 31, 2008 and 2007,
assuming the acquisition of the LFG Underwriters had occurred as of January 1, 2007, and using
actual general and administrative expenses prior to the acquisition are presented for comparative
purposes below (in millions):
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Total revenues |
|
$ |
6,413.6 |
|
|
$ |
8,614.4 |
|
Net earnings
(A) |
|
|
(413.0 |
) |
|
|
82.8 |
|
Pro forma earnings per share basic |
|
|
(1.94 |
) |
|
|
0.38 |
|
Pro forma earnings per share diluted |
|
|
(1.94 |
) |
|
|
0.37 |
|
(A) |
The pro forma net earnings for FNF and the LFG Underwriters for 2008 include charges recorded by
the LFG Underwriters of $135.1 million for impairments of other intangible assets and goodwill and
charges recorded by FNF of $261.6 million for adverse development of loss reserves. The pro forma
net earnings for 2007 include charges recorded by FNF of $217.2 million for adverse development of
loss reserves. |
75
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Acquisitions
Acquisition of Equity Interest in Ceridian
On November 9, 2007, FNF and Thomas H. Lee Partners, LP (THL), along with certain
co-investors, completed the acquisition of Ceridian for $36 in cash per share of common stock, or
approximately $5.3 billion. The Company contributed approximately $527 million of the total $1.6
billion equity funding for the acquisition of Ceridian, resulting in a 33% ownership percentage by
the Company, which the Company accounts for using the equity method of accounting for financial
statement purposes. On the closing date, the Company recorded income of $12.3 million in fees
associated with the syndication of investors in the acquisition of Ceridian. Ceridian is an
information services company servicing the human resources, transportation, and retail industries.
Specifically, Ceridian offers a range of human resources outsourcing solutions and is a payment
processor and issuer of credit, debit, and stored-value cards.
Property Insight, LLC
On August 31, 2007, the Company completed the acquisition of Property Insight, a former FIS
subsidiary, from FIS for $95 million in cash. Property Insight is a leading provider of title plant
services for the Company, as well as various national and regional underwriters. Property Insight
primarily manages, maintains, and updates the title plants that are owned by the Company.
Additionally, Property Insight manages potential title plant construction activities for the
Company.
ATM Holdings, Inc.
On August 13, 2007, the Company completed the acquisition of ATM Holdings, Inc. (ATM), a
provider of nationwide mortgage vendor management services to the loan origination industry, for
$100 million in cash. ATMs
76
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
primary subsidiary is a licensed title insurance agency which provides centralized valuation
and appraisal services, as well as title and closing services, to residential mortgage originators,
banks and institutional mortgage lenders throughout the United States.
Equity Interest in Remy
The Company held an investment in Remys Senior Subordinated Notes (the Notes) with a total
fair value of $139.9 million until December 6, 2007, at which time Remy implemented a pre-packaged
plan of bankruptcy under Chapter 11 of the Bankruptcy Code. Pursuant to the plan of bankruptcy, the
Notes were converted into 4,935,065 shares of Remy common stock and rights to buy 19,909 shares of
Remy Series B preferred stock. Upon execution of the plan of bankruptcy, the Company purchased all
19,909 shares of the preferred stock for $1,000 per share, or a total of $19.9 million, and then
sold 1,000 of those shares to William P. Foley, II, the Companys chairman of the board, for $1,000
per share, or a total of $1.0 million. The Company now holds a 47% ownership interest in Remy, made
up of 4,935,065 shares of Remy common stock with a cost basis of $64.3 million and 18,909 shares of
purchased Remy Series B preferred stock with a cost basis of $19.5 million, and will account for
this investment using the equity method. As a result of the exchange of the Notes for the shares of
common and preferred stock, the Company reversed the unrealized gain of $75.0 million that had
previously been recorded in accumulated other comprehensive earnings in relation to the Notes.
Cascade Timberlands LLC
During 2006, the Company purchased equity interests in Cascade Timberlands LLC (Cascade
Timberlands) totaling 71% of Cascade Timberlands. As of December 31, 2008, the Company owned
approximately 70% of the outstanding interests of Cascade Timberlands which was purchased for $88.5
million. The primary assets of Cascade Timberlands are approximately 266,909 acres of productive
timberlands located on the eastern side of the Cascade mountain range extending from Bend, Oregon
south on State Highway 20 toward the California border. Cascade Timberlands was created by the
secured creditors of Crown Pacific LP upon the conclusion of the bankruptcy case of Crown Pacific
LP in December 2004.
Acquisition of Equity Interest in Sedgwick
On January 31, 2006, the Company, along with its equity partners, THL and Evercore Capital
Partners, completed an acquisition of Sedgwick which resulted in the Company obtaining a 40%
interest in Sedgwick for approximately $126 million. In September 2006, the Company invested an
additional $6.8 million in Sedgwick, maintaining its 40% ownership interest. During 2008, the
Company sold 20% of its interest in Sedgwick (reducing its interest in Sedgwick from 40% to 32%)
for proceeds of $53.9 million, resulting in a gain of $24.8 million. Sedgwick, headquartered in
Memphis, Tennessee, is a leading provider of outsourced insurance claims management services to
large corporate and public sector entities.
C. Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements by establishing a fair value hierarchy based on the quality of inputs
used to measure fair value.
SFAS 157 does not require any new fair value measurements, but applies under other accounting
pronouncements that require or permit fair value measurements. SFAS 157 is effective for financial
statements for fiscal years beginning after November 15, 2007. The Company adopted SFAS 157 as of
January 1, 2008. FASB Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157,
delays the effective date of SFAS 157 with respect to nonfinancial assets and nonfinancial
liabilities that are not remeasured at fair value on a recurring basis until fiscal years beginning
after November 15, 2008. Accordingly, the Company has not yet applied the disclosure requirements
of SFAS 157 to certain such nonfinancial assets for which fair value measurements are determined on
a non-recurring basis only when there is an indication of potential impairment.
77
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair value hierarchy established by SFAS 157 includes three levels which are based on the
priority of the inputs to the valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial
instruments fall within different levels of the hierarchy, the categorization is based on the
lowest level input that is significant to the fair value measurement of the instrument. In
accordance with SFAS No. 157, our financial assets and liabilities that are recorded on the
Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as
follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for
identical assets or liabilities in an active market that the Company
has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets
that are not active or model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
Level 3. Financial assets and liabilities whose values are based on model inputs that are
unobservable.
The following table presents our fair value hierarchy for those assets and liabilities
measured at fair value on a recurring basis as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Fixed maturities available for sale |
|
$ |
|
|
|
$ |
2,821,774 |
|
|
$ |
32,055 |
|
|
$ |
2,853,829 |
|
Equity securities available for sale |
|
|
71,516 |
|
|
|
|
|
|
|
|
|
|
|
71,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
71,516 |
|
|
$ |
2,821,774 |
|
|
$ |
32,055 |
|
|
$ |
2,925,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys level 2 fair value measures for fixed-maturities available for sale are provided
by third-party pricing services. The Company utilizes one firm for its taxable bond portfolio and
another for its municipal bond portfolio. These pricing services are leading global providers of
financial market data, analytics and related services to financial institutions. The Company only
relies 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. The
Companys fixed maturities classified as level 3 consist of auction rate securities with a par
value of $88.8 million and fair value at December 31, 2008, of $32.1 million, which were included
in the assets of the LFG Underwriters that the Company acquired on December 22, 2008. There is no active
market for these auction rate securities and they are valued using models with some non-observable
inputs. Fair values for these securities are provided by a third-party pricing service and
represent one percent of our total portfolio.
D. Investments
The carrying amounts and fair values of the Companys fixed maturity securities at December
31, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Carrying |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
Fixed maturity investments (available
for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
558,651 |
|
|
$ |
526,425 |
|
|
$ |
32,469 |
|
|
$ |
(243 |
) |
|
$ |
558,651 |
|
States and political subdivisions |
|
|
1,049,125 |
|
|
|
1,029,505 |
|
|
|
24,550 |
|
|
|
(4,930 |
) |
|
|
1,049,125 |
|
Corporate debt securities |
|
|
875,005 |
|
|
|
910,533 |
|
|
|
8,413 |
|
|
|
(43,941 |
) |
|
|
875,005 |
|
Foreign government bonds |
|
|
43,510 |
|
|
|
41,582 |
|
|
|
1,943 |
|
|
|
(15 |
) |
|
|
43,510 |
|
Mortgage-backed/Asset-backed securities |
|
|
293,188 |
|
|
|
292,452 |
|
|
|
1,227 |
|
|
|
(491 |
) |
|
|
293,188 |
|
Other |
|
|
34,350 |
|
|
|
33,712 |
|
|
|
677 |
|
|
|
(39 |
) |
|
|
34,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,853,829 |
|
|
$ |
2,834,209 |
|
|
$ |
69,279 |
|
|
$ |
(49,659 |
) |
|
$ |
2,853,829 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
Carrying |
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Value |
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
|
(Dollars in thousands) |
|
Fixed maturity investments
(available for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agencies |
|
$ |
863,181 |
|
|
$ |
841,483 |
|
|
$ |
21,990 |
|
|
$ |
(292 |
) |
|
$ |
863,181 |
|
States and political subdivisions |
|
|
1,261,517 |
|
|
|
1,252,904 |
|
|
|
9,498 |
|
|
|
(885 |
) |
|
|
1,261,517 |
|
Corporate debt securities |
|
|
657,445 |
|
|
|
667,331 |
|
|
|
4,615 |
|
|
|
(14,501 |
) |
|
|
657,445 |
|
Foreign government bonds |
|
|
42,414 |
|
|
|
41,900 |
|
|
|
549 |
|
|
|
(35 |
) |
|
|
42,414 |
|
Mortgage-backed |
|
|
15 |
|
|
|
14 |
|
|
|
1 |
|
|
|
|
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,824,572 |
|
|
$ |
2,803,632 |
|
|
$ |
36,653 |
|
|
$ |
(15,713 |
) |
|
$ |
2,824,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, the majority of the Companys mortgage-backed and asset-backed
securities were acquired as a result of the acquisition of the LFG Underwriters.
They are made up of $150.5 million of agency mortgage-backed
securities, $38.8 million of
agency collateralized mortgage obligations, $75.2 million of
commercial mortgage-backed securities, and $28.7 million of
other asset-backed securities. 97% of the Companys mortgage-backed securities are rated AAA.
The change in unrealized gains (losses) on fixed maturities for the years ended December 31,
2008, 2007, and 2006 was $(1.3) million, $46.1 million, and $16.5 million, respectively.
The following table presents certain information regarding contractual maturities of the
Companys fixed maturity securities at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Amortized |
|
|
% of |
|
|
|
|
|
|
% of |
|
Maturity |
|
Cost |
|
|
Total |
|
|
Fair Value |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
One year or less |
|
$ |
313,583 |
|
|
|
11.1 |
% |
|
$ |
315,826 |
|
|
|
11.1 |
% |
After one year through five years |
|
|
1,123,303 |
|
|
|
39.6 |
|
|
|
1,129,429 |
|
|
|
39.6 |
|
After five years through ten years |
|
|
845,396 |
|
|
|
29.8 |
|
|
|
848,144 |
|
|
|
29.7 |
|
After ten years |
|
|
288,220 |
|
|
|
10.2 |
|
|
|
295,974 |
|
|
|
10.3 |
|
Mortgage-backed securities |
|
|
263,707 |
|
|
|
9.3 |
|
|
|
264,456 |
|
|
|
9.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,834,209 |
|
|
|
100.0 |
% |
|
$ |
2,853,829 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subject to call |
|
$ |
440,073 |
|
|
|
13.1 |
% |
|
$ |
448,612 |
|
|
|
13.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities valued at approximately $194.3 million and $132.6 million were on
deposit with various governmental authorities at December 31, 2008 and 2007, respectively, as
required by law.
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.
Equity securities at December 31, 2008 and 2007 consisted of investments in various industry
groups at a cost basis of $79.8 million and $96.1 million, respectively, and fair value of $71.5
million and $93.3 million, respectively. There were no significant investments in banks, trust and
insurance companies at December 31, 2008 or 2007.
The carrying value of the Companys investment in equity securities is fair value. As of
December 31, 2008, gross unrealized gains and gross unrealized losses on equity securities were
$2.2 million and $10.5 million, respectively. As of December 31, 2007, gross unrealized gains and
gross unrealized losses on equity securities were $6.0 million and $8.8 million, respectively.
The change in unrealized gains (losses) on equity securities for the years ended December 31,
2008, 2007 and 2006 was $(5.5) million, $6.5 million, and $3.0 million, respectively.
79
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest and investment income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Cash and cash equivalents |
|
$ |
11,414 |
|
|
$ |
36,223 |
|
|
$ |
36,371 |
|
Fixed maturity securities |
|
|
102,331 |
|
|
|
119,879 |
|
|
|
112,523 |
|
Equity securities |
|
|
2,614 |
|
|
|
4,231 |
|
|
|
8,725 |
|
Short-term investments |
|
|
11,485 |
|
|
|
18,200 |
|
|
|
29,141 |
|
Other |
|
|
6,526 |
|
|
|
6,884 |
|
|
|
19,847 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
134,370 |
|
|
$ |
185,417 |
|
|
$ |
206,607 |
|
|
|
|
|
|
|
|
|
|
|
The Company lends fixed maturity and equity securities to financial institutions in short-term
security lending transactions. The Companys security lending policy requires that the cash
received as collateral be 102% or more of the fair value of the loaned securities. At December 31, 2008
and 2007, the Company had security loans outstanding with fair values of $103.6 million and $264.2
million, respectively. Securities loaned under such transactions may be sold or repledged by the
transferee. The Company was liable for cash collateral under its control of $107.6 million and
$271.8 million at December 31, 2008 and 2007, respectively, which has been included in cash and
cash equivalents and in accounts payable and accrued liabilities.
Net realized (losses) gains related to investments were $(49.4) million, $18.5 million, and
$18.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.
During the years ended December 31, 2008, 2007 and 2006, gross realized gains on sales of
fixed maturity securities considered available for sale were $13.1 million, $11.0 million, and $1.2
million, respectively; gross realized losses were $9.8 million, $2.0 million, and $1.2 million,
respectively. Gross proceeds from the sale and maturity of fixed maturity securities considered
available for sale amounted to $1,231.9 million, $4,480.1 million, and
$2,476.9 million during the
years ended December 31, 2008, 2007 and 2006, respectively.
During the years ended December 31, 2008, 2007 and 2006, gross realized gains on sales of
equity securities considered available for sale were $5.9 million, $34.2 million, and $49.3
million, respectively; gross realized losses were $4.9 million, $28.8 million, and $29.4 million,
respectively. Gross proceeds from the sale of equity securities
amounted to $79.4 million, $807.3
million, and $648.5 million during the years ended December 31, 2008, 2007 and 2006, respectively.
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 December 31, 2008 and 2007 were as follows (dollars in
thousands):
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
U.S. government and agencies |
|
$ |
37,920 |
|
|
$ |
(243 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
37,920 |
|
|
$ |
(243 |
) |
States and political subdivisions |
|
|
116,364 |
|
|
|
(3,740 |
) |
|
|
10,762 |
|
|
|
(1,190 |
) |
|
|
127,126 |
|
|
|
(4,930 |
) |
Corporate debt securities |
|
|
451,615 |
|
|
|
(26,006 |
) |
|
|
90,043 |
|
|
|
(17,935 |
) |
|
|
541,658 |
|
|
|
(43,941 |
) |
Foreign securities |
|
|
2,022 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
2,022 |
|
|
|
(15 |
) |
Mortgage-backed/ asset-backed securities |
|
|
42,578 |
|
|
|
(491 |
) |
|
|
|
|
|
|
|
|
|
|
42,578 |
|
|
|
(491 |
) |
Equity securities |
|
|
22,346 |
|
|
|
(10,483 |
) |
|
|
|
|
|
|
|
|
|
|
22,346 |
|
|
|
(10,483 |
) |
Other |
|
|
2,137 |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
2,137 |
|
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
674,982 |
|
|
$ |
(41,017 |
) |
|
$ |
100,805 |
|
|
$ |
(19,125 |
) |
|
$ |
775,787 |
|
|
$ |
(60,142 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
than 12 Months |
|
|
12 Months or Longer |
|
|
Total |
|
|
|
Fair Value |
|
|
Unrealized
Losses |
|
|
Fair Value |
|
|
Unrealized
Losses |
|
|
Fair Value |
|
|
Unrealized
Losses |
|
U.S. Government and Agencies |
|
$ |
3,117 |
|
|
$ |
(3 |
) |
|
$ |
103,433 |
|
|
$ |
(289 |
) |
|
|
106,550 |
|
|
|
(292 |
) |
States and Political Subdivisions |
|
$ |
16,860 |
|
|
$ |
(153 |
) |
|
$ |
180,137 |
|
|
$ |
(732 |
) |
|
|
196,997 |
|
|
|
(885 |
) |
Corporate Securities |
|
|
97,068 |
|
|
|
(4,671 |
) |
|
|
249,452 |
|
|
|
(9,830 |
) |
|
|
346,520 |
|
|
|
(14,501 |
) |
Foreign Securities |
|
|
|
|
|
|
|
|
|
|
9,305 |
|
|
|
(35 |
) |
|
|
9,305 |
|
|
|
(35 |
) |
Equity Securities |
|
|
42,259 |
|
|
|
(8,596 |
) |
|
|
454 |
|
|
|
(182 |
) |
|
|
42,713 |
|
|
|
(8,778 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Temporarily Impaired Securities |
|
$ |
159,304 |
|
|
$ |
(13,423 |
) |
|
$ |
542,781 |
|
|
$ |
(11,068 |
) |
|
$ |
702,085 |
|
|
$ |
(24,491 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the Companys
unrealized losses relate to debt securities. These
unrealized losses were primarily caused by widening credit spreads that the Company considers to be
temporary. Because the Company has the intent and ability to hold
these securities
and the Company believes
in the quality of the holdings and their ratings, the Company
does not consider these investments to be other-than-temporarily impaired. The unrealized losses
relating to equity securities were caused by market changes that the Company considers to be
temporary; the Company expects recovery, and thus does not consider these investments other-than-temporarily impaired.
During 2008, 2007 and 2006, the Company incurred impairment charges relating to investments
that it determined to be other than temporarily impaired, which resulted in charges of $59.0
million, $3.1 million, and $9.1 million. The impairment charges in 2008 included $25.4 million
related to fixed maturity securities, $30.1 million related to equity securities, and $3.4 million
related to other investments that were deemed other-than-temporarily impaired. The impairment
charges relating to the fixed maturity securities primarily related to the Companys conclusion
that the credit risk relating to the holdings was high and thus the assets are likely other-than-temporarily
impaired. The impairment charges relating to the equity securities were based on the duration of
the unrealized loss and inability to predict the time to recover if the investment continued to be
held.
Investments in unconsolidated affiliates are recorded using the equity method of accounting
and, as of December 31, 2008 and 2007, consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
2008 |
|
|
2007 |
|
Ceridian |
|
|
33 |
% |
|
$ |
453,129 |
|
|
$ |
503,118 |
|
Sedgwick |
|
|
(a) |
|
|
|
115,646 |
|
|
|
131,160 |
|
Remy |
|
|
47 |
% |
|
|
61,786 |
|
|
|
79,958 |
|
Other |
|
various |
|
|
13,978 |
|
|
|
24,120 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
644,539 |
|
|
$ |
738,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of December 31, 2008 and 2007, the company ownership percentage in Sedgwick was 32% and 40%,
respectively. |
Summarized financial information for Ceridian is presented below for the time period
subsequent to November 9, 2007, the date of acquisition. The Company accounts for its equity in
Ceridian on a three-month lag. Accordingly, FNFs net earnings for the year ended December 31,
2008, include the Companys equity in Ceridians earnings for the period from November 10, 2007
through September 30, 2008 and there is no equity in income of Ceridian included in the Companys
2007 results of operations.
81
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
September 30, 2008 |
|
|
|
(in millions) |
|
Total current assets |
|
$ |
1,300.0 |
|
Goodwill and other intangible assets, net |
|
|
4,755.5 |
|
Other assets |
|
|
3,397.9 |
|
|
|
|
|
Total assets |
|
$ |
9,453.4 |
|
|
|
|
|
Current liabilities |
|
$ |
986.3 |
|
Long-term obligations, less current portion |
|
|
3,516.5 |
|
Other long-term liabilities |
|
|
3,557.7 |
|
|
|
|
|
Total liabilities |
|
|
8,060.5 |
|
Equity |
|
|
1,392.9 |
|
|
|
|
|
Total liabilities and equity |
|
$ |
9,453.4 |
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
November 10, 2007, |
|
|
through September 30, 2008 |
|
|
(in millions) |
Total revenues |
|
$ |
1,417.7 |
|
Loss before income taxes |
|
|
(108.4 |
) |
Net loss |
|
|
(73.0 |
) |
During the years ended December 31, 2008, 2007, and 2006, the Company recorded an aggregate of
$(13.4) million, $0.8 million, and $1.7 million, respectively, in equity in (losses) earnings of
unconsolidated affiliates.
E. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Land |
|
$ |
89,418 |
|
|
$ |
91,670 |
|
Buildings |
|
|
39,465 |
|
|
|
32,798 |
|
Leasehold improvements |
|
|
82,025 |
|
|
|
79,092 |
|
Furniture, fixtures and equipment |
|
|
550,989 |
|
|
|
485,593 |
|
|
|
|
|
|
|
|
|
|
|
761,897 |
|
|
|
689,153 |
|
Accumulated depreciation and amortization |
|
|
(454,742 |
) |
|
|
(422,997 |
) |
|
|
|
|
|
|
|
|
|
$ |
307,155 |
|
|
$ |
266,156 |
|
|
|
|
|
|
|
|
F. Goodwill
Goodwill consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group, Inc. |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
|
|
(Dollars in thousands) |
|
Balance, December 31, 2006 |
|
$ |
1,087,813 |
|
|
$ |
28,717 |
|
|
$ |
42,643 |
|
|
$ |
1,159,173 |
|
Goodwill acquired during the year |
|
|
158,517 |
|
|
|
|
|
|
|
26,890 |
|
|
|
185,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
1,246,330 |
|
|
|
28,717 |
|
|
|
69,533 |
|
|
|
1,344,580 |
|
Goodwill acquired during the year |
|
|
237,966 |
|
|
|
|
|
|
|
(888 |
) |
|
|
237,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
$ |
1,484,296 |
|
|
$ |
28,717 |
|
|
$ |
68,645 |
|
|
$ |
1,581,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
G. Other Intangible Assets
Other intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Customer relationships and contracts |
|
$ |
204,389 |
|
|
$ |
201,921 |
|
Other |
|
|
25,563 |
|
|
|
25,563 |
|
|
|
|
|
|
|
|
|
|
|
229,952 |
|
|
|
227,484 |
|
Accumulated amortization |
|
|
(137,442 |
) |
|
|
(109,976 |
) |
|
|
|
|
|
|
|
|
|
$ |
92,510 |
|
|
$ |
117,508 |
|
|
|
|
|
|
|
|
Amortization expense for amortizable intangible assets, which consist primarily of customer
relationships, was $22.3 million, $23.8 million, and $162.0 million for the years ended December
31, 2008, 2007, and 2006, respectively. Other represents non-amortizable intangible assets such as
trademarks and licenses. Estimated amortization expense for the next five years for assets owned at
December 31, 2008, is $17.2 million in 2009, $14.9 million in 2010, $11.8 million in 2011, $9.4
million in 2012 and $7.9 million in 2013.
H. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Accrued benefits |
|
$ |
235,813 |
|
|
$ |
200,793 |
|
Salaries and incentives |
|
|
100,418 |
|
|
|
121,524 |
|
Security loans |
|
|
107,627 |
|
|
|
271,807 |
|
Accrued rent |
|
|
78,624 |
|
|
|
28,141 |
|
Trade accounts payable |
|
|
56,471 |
|
|
|
46,767 |
|
Accrued recording fees and transfer taxes |
|
|
27,118 |
|
|
|
32,690 |
|
Accrued premium taxes |
|
|
8,873 |
|
|
|
16,430 |
|
Other accrued liabilities |
|
|
214,001 |
|
|
|
104,957 |
|
|
|
|
|
|
|
|
|
|
$ |
828,945 |
|
|
$ |
823,109 |
|
|
|
|
|
|
|
|
I. Notes Payable
Notes payable consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Unsecured notes net of discount,
interest payable semi-annually at
5.25%, due March 2013 |
|
$ |
249,217 |
|
|
$ |
249,033 |
|
Unsecured notes, net of discount,
interest payable semi-annually at
7.30%, due August 2011 |
|
|
241,081 |
|
|
|
240,981 |
|
Syndicated credit agreement,
unsecured, interest payable monthly
at LIBOR plus 0.36% (3.53% at
December 31, 2008), unused portion
of $515 million at December 31,
2008, due October 2011 |
|
|
585,000 |
|
|
|
535,000 |
|
Bank promissory notes, nonrecourse,
secured, interest payable monthly
at various fixed rates
(3.7%-10.67%), various maturities |
|
|
197,536 |
|
|
|
133,148 |
|
Subordinated note payable to
LandAmerica Financial Group, Inc.,
interest payable annually at 2.36%,
due December 2013 |
|
|
50,000 |
|
|
|
|
|
Other |
|
|
28,015 |
|
|
|
9,577 |
|
|
|
|
|
|
|
|
|
|
$ |
1,350,849 |
|
|
$ |
1,167,739 |
|
|
|
|
|
|
|
|
83
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 22, 2008, in connection with the acquisition of the LFG Underwriters, the Company
entered into a $50 million subordinated note payable to LFG, due December 2013. This note bears
interest at 2.36%, payable annually. In addition, the combined net assets of the LFG Underwriters
included $15.7 million of notes payable which are included on FNFs consolidated balance sheet at
December 31, 2008.
At December 31, 2008, the carrying value of the Companys outstanding notes payable was
approximately $71.8 million lower than its estimated fair value. The carrying value of the
Companys notes payable was approximately $6.3 million lower than its estimated fair value at
December 31, 2007. The fair value of the Companys unsecured notes payable is based on established
market prices for the securities on December 31, 2008 and 2007. The fair value of the Companys
remaining fixed rate and variable rate notes payable is estimated using discounted cash flow
analyses based on current market interest rates and comparison of interest rates being paid to the
Companys current incremental borrowing rates for similar types of borrowing arrangements.
Effective October 24, 2006, the Company entered into a credit agreement (the Credit
Agreement) with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and other
financial institutions party thereto. Effective October 11, 2007, the Company exercised an option
to increase the amount of its credit facility by an additional $300 million. The Credit Agreement
provides for a $1.1 billion unsecured revolving credit facility, including the additional $300
million, maturing on the fifth anniversary of the closing date. Amounts under the revolving credit
facility may be borrowed, repaid and reborrowed by the borrower thereunder from time to time until
the maturity of the revolving credit facility. Voluntary prepayment of the revolving credit
facility under the Credit Agreement is permitted at any time without fee upon proper notice and
subject to a minimum dollar requirement. Revolving loans under the credit facility bear interest at
a variable rate based on either (i) the higher of (a) a rate per annum equal to one-half of one
percent in excess of the Federal Reserves Federal Funds rate, or (b) Bank of Americas prime
rate or (ii) a rate per annum equal to LIBOR plus a margin of between 0.23%-0.675%, depending on
the Companys then current senior unsecured long-term debt rating from the rating agencies. In
addition, the Company pays a commitment fee between 0.07%-0.175% on the entire facility, also
depending on the Companys senior unsecured long-term debt rating.
The Credit Agreement contains affirmative, negative and financial covenants customary for
financings of this type, including, among other things, limits on the creation of liens, sales of
assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and
certain amendments. The Credit Agreement requires the Company to maintain certain financial ratios
and levels of capitalization. The Credit Agreement prohibits us from paying dividends to our
stockholders if an event of default has occurred and is continuing or would result therefrom. The
Credit Agreement includes customary events of default for facilities of this type (with customary
grace periods, as applicable). These events of default include a cross-default provision that,
subject to limited exceptions, permits the lenders to declare the Credit Agreement in default if:
(i) (A) the Company fails to make any payment after the applicable grace period under any indebtedness with a
principal amount (including undrawn committed amounts) in excess of 3% of our net worth, as defined
in the Credit Agreement, or (B) the Company fails to perform any other term under any such indebtedness, or
any other event occurs, as a result of which the holders thereof may cause it to become due and
payable prior to its maturity; or (ii) certain termination events occur under significant interest
rate, equity or other swap contracts. The Credit Agreement provides that, upon the occurrence of an
event of default, the interest rate on all outstanding obligations will be increased and payments
of all outstanding loans may be accelerated and/or the lenders commitments may be terminated. In
addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all
amounts payable under the Credit Agreement shall automatically become immediately due and payable,
and the lenders commitments will automatically terminate. At December 31, 2008, the Company was in
compliance with all of the covenants under the Credit Agreement.
In connection with the purchase of certain leasing assets from FIS (see Transactions with
Related Parties in note A), the Company assumed certain liabilities associated with those assets,
including various bank promissory notes, totaling $134.9 million at the date of purchase. The
Company has continued to use bank promissory notes with similar terms to finance purchases of
assets within our leasing operations. As of December 31, 2008 and 2007, these promissory notes
totaled $197.5 million and $133.1 million, respectively, bore interest at various fixed rates and
matured at various dates. These promissory notes are non-recourse obligations and are secured by
interests in certain leases and underlying equipment. In addition, the Company also assumed a $20
million revolving credit
84
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
facility. This facility is also secured by interests in certain leases and underlying
equipment and bears interest at Prime-0.5%. As of December 31, 2008, $13.9 million was unused. On
September 30, 2007, in connection with the acquisition of certain leasing assets from FIS, the
Company also entered into an unsecured note with FIS in the amount of $7.3 million. The note, with
a balance of $6.2 million and $7.1 million at December 31, 2008 and 2007, respectively, bears
interest at LIBOR+0.45%, includes principal amortization of $0.2 million per quarter and is due
October, 2012.
On August 20, 2001, Old FNF completed a public offering of $250.0 million aggregate principal
amount of 7.3% notes due August 15, 2011. The notes were priced at 99.597% of par to yield 7.358%
annual interest. As such, the Company recorded a discount of $1.0 million, which is netted against
the $250.0 million aggregate principal amount of notes. The discount is amortized to interest
expense over 10 years, the term of the notes. The Company received net proceeds of $247.0 million,
after expenses, which were used to pay down a portion of the amount outstanding under a prior
credit agreement. Interest is payable semiannually.
On March 11, 2003, Old FNF issued $250.0 million aggregate principal amount of 5.25% notes,
which are unsecured. The notes were priced at 99.247% of par to yield 5.433% annual interest. As
such, the Company recorded a discount of $1.9 million, which was netted against the $250.0 million
aggregate principal amount of notes. The discount was amortized to interest expense based on the
10-year term of the notes. The Company received net proceeds of approximately $246.2 million, after
expenses, which was used to pay a portion of the $1,069.6 million purchase price for FIS. Interest
was payable semiannually.
On January 17, 2006, $241.3 million aggregate principal amount of the Old FNF 7.30% notes due
2011 and the entire $250.0 million aggregate principal amount of the Old FNF 5.25% notes due 2013
were exchanged for FNF notes having identical terms. The remaining principal amount of $8.7 million
of the Old FNF 7.30% notes has been redeemed and cancelled.
Principal maturities of notes payable at December 31, 2008, are as follows (dollars in
thousands):
|
|
|
|
|
2009 |
|
$ |
87,639 |
|
2010 |
|
|
58,835 |
|
2011 |
|
|
870,671 |
|
2012 |
|
|
20,956 |
|
2013 |
|
|
309,344 |
|
Thereafter |
|
|
3,404 |
|
|
|
|
|
|
|
$ |
1,350,849 |
|
|
|
|
|
85
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
J. Income Taxes
Income tax (benefit) expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Current |
|
$ |
(91,847 |
) |
|
$ |
55,212 |
|
|
$ |
331,327 |
|
Deferred |
|
|
(33,695 |
) |
|
|
(8,436 |
) |
|
|
19,544 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(125,542 |
) |
|
$ |
46,776 |
|
|
$ |
350,871 |
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006, the aggregate amount above includes income tax expense
attributable to FIS operations of $118.4 million.
Total income tax (benefit) expense for the years ended December 31 was allocated as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Statement of earnings |
|
$ |
(125,542 |
) |
|
$ |
46,776 |
|
|
$ |
350,871 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Changes in unrealized foreign currency translation gains |
|
|
276 |
|
|
|
1,400 |
|
|
|
(62 |
) |
Minimum pension liability adjustment |
|
|
(10,437 |
) |
|
|
6,165 |
|
|
|
3,956 |
|
Unrealized (losses) gains on investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding (losses) gains arising during the year |
|
|
(20,683 |
) |
|
|
25,699 |
|
|
|
15,190 |
|
Reclassification adjustment for realized losses (gains)
included in net earnings |
|
|
18,215 |
|
|
|
(6,395 |
) |
|
|
(7,940 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense allocated to other
comprehensive income |
|
|
(12,629 |
) |
|
|
26,869 |
|
|
|
11,144 |
|
Additional paid-in capital (exercise of stock options) |
|
|
(297 |
) |
|
|
(4,687 |
) |
|
|
(81,776 |
) |
|
|
|
|
|
|
|
|
|
|
Total income taxes |
|
$ |
(138,468 |
) |
|
$ |
68,958 |
|
|
$ |
280,239 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the Companys effective tax rate is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
Federal benefit of state taxes |
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(1.4 |
) |
Deductible dividends paid to FNF 401(k) plan |
|
|
0.7 |
|
|
|
(1.8 |
) |
|
|
(0.4 |
) |
Tax exempt interest income |
|
|
4.0 |
|
|
|
(12.2 |
) |
|
|
(2.4 |
) |
State income taxes |
|
|
2.5 |
|
|
|
2.6 |
|
|
|
4.1 |
|
Non-deductible expenses |
|
|
1.2 |
|
|
|
3.8 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.5 |
% |
|
|
26.5 |
% |
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
86
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The significant components of deferred tax assets and liabilities at December 31, 2008 and
2007 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
Deferred Tax Assets: |
|
|
|
|
|
|
|
|
Net operating loss carryovers |
|
$ |
142,778 |
|
|
$ |
|
|
Insurance reserve discounting |
|
|
131,939 |
|
|
|
|
|
Employee benefit accruals |
|
|
54,770 |
|
|
|
52,135 |
|
Investment securities |
|
|
39,080 |
|
|
|
|
|
Pension |
|
|
14,730 |
|
|
|
3,844 |
|
Accrued liabilities |
|
|
14,625 |
|
|
|
10,117 |
|
Amortization of goodwill and intangible assets |
|
|
8,789 |
|
|
|
|
|
Deferred revenue |
|
|
333 |
|
|
|
730 |
|
State income taxes |
|
|
291 |
|
|
|
3,869 |
|
Other |
|
|
17,717 |
|
|
|
12,766 |
|
|
|
|
|
|
|
|
Total |
|
|
425,052 |
|
|
|
83,461 |
|
Less: valuation allowance |
|
|
(132,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
292,502 |
|
|
|
83,461 |
|
|
|
|
|
|
|
|
Deferred Tax Liabilities: |
|
|
|
|
|
|
|
|
Title plant |
|
|
(70,925 |
) |
|
|
(58,656 |
) |
Lease accounting |
|
|
(32,372 |
) |
|
|
(1,434 |
) |
Depreciation |
|
|
(28,042 |
) |
|
|
(7,241 |
) |
Bad debts |
|
|
(7,432 |
) |
|
|
(11,799 |
) |
Amortization of goodwill and intangible assets |
|
|
|
|
|
|
(28,821 |
) |
Insurance reserve discounting |
|
|
|
|
|
|
(18,171 |
) |
Investment securities |
|
|
|
|
|
|
(11,190 |
) |
Other |
|
|
(14,513 |
) |
|
|
(6,758 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(153,284 |
) |
|
|
(144,070 |
) |
|
|
|
|
|
|
|
Net deferred tax asset (liability) |
|
$ |
139,218 |
|
|
$ |
(60,609 |
) |
|
|
|
|
|
|
|
Management believes that, based on its historical pattern of taxable
income, the Company will produce sufficient income in the future to
realize its deferred tax assets. The Company changed from a net deferred tax liability position of $60,609 in 2007 to a net deferred tax asset
position of $139,218 in 2008. The significant components that make up this change relate to the following items.
The Insurance Reserve Discounting changed by $150 million due to the inclusion of the LFG Underwriters insurance reserves and the change in the statutory premium reserve amortization related to the 2007 redomestication of two of
the FNF underwriters. Investment securities changed by $50.3 million, consisting primarily of the inclusion of the
LFG Underwriters investment securities and the change in the FAS 115 adjustment for unrealized losses. Amortization
of Goodwill and Intangible Assets changed by approximately $38 million consisting primarily of the addition of the
LFG Underwriters Goodwill and Intangible Assets. The Company has also added a deferred tax asset for the net
operating loss attributable to the LFG Underwriters in the amount of $132,550, for which a full valuation
allowance has been applied. The deferred tax asset for the net operating loss has been fully valued at this time, as
the Company is in the process of determining the probability of its utilization.
Tax benefits of $0.3 million, $4.7 million, and $81.8 million associated with the exercise of
employee stock options and the vesting of restricted stock grants were allocated to stockholders
equity for the years ended December 31, 2008, 2007, and 2006, respectively.
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires an evaluation to
determine the likelihood
87
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that an uncertain tax position will be sustained upon examination, including resolution of any
related appeals or litigation processes. If it is determined that it is more likely than not that
an uncertain tax position will be sustained upon examination, the next step is to determine the
amount to be recognized. FIN 48 prescribes recognition of the largest amount of tax benefit that is
greater than 50 percent likely of being recognized upon ultimate settlement of an uncertain tax
position. Such amounts are to be recognized as of the first financial reporting period during which
the more-likely-than-not recognition threshold is met. Similarly, an amount that has previously
been recognized will be reversed as of the first financial reporting period during which the
more-likely-than-not recognition threshold is not met. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company adopted FIN 48 effective January 1, 2007. As a
result of the adoption, the Company had no change to reserves for uncertain tax positions.
As
of December 31, 2008 and 2007, FNF had approximately
$5.8 million and $5.5 million
(including interest of $0.6 million and $0.3 million), respectively, of total gross unrecognized
tax benefits that, if recognized, would favorably affect the Companys income tax rate. These
amounts are reported on a gross basis and do not reflect a federal tax benefit on state income
taxes. The Company records interest and penalties related to income taxes as a component of income tax
expense.
The Internal Revenue Service (IRS) has selected the Company to participate in a pilot
program (Compliance Assurance Program or CAP) that is a real-time audit. In 2008, the IRS completed
its examination of the Companys tax returns for the tax year ended December 31, 2007. The Company
is currently under audit by the Internal Revenue Service for the 2008 tax year.
K. Summary of Reserve for Claim Losses
A summary of the reserve for claim losses for title and specialty insurance follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Beginning balance |
|
$ |
1,419,910 |
|
|
$ |
1,220,636 |
|
|
$ |
1,113,506 |
|
Reserves assumed/transferred(1) |
|
|
1,115,803 |
|
|
|
|
|
|
|
(8,515 |
) |
Claim loss provision related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
377,900 |
|
|
|
450,693 |
|
|
|
454,507 |
|
Prior years |
|
|
252,504 |
|
|
|
203,183 |
|
|
|
31,827 |
|
|
|
|
|
|
|
|
|
|
|
Total claim loss provision |
|
|
630,404 |
|
|
|
653,876 |
|
|
|
486,334 |
|
Claims paid, net of recoupments related to: |
|
|
|
|
|
|
|
|
|
|
|
|
Current year |
|
|
(119,399 |
) |
|
|
(101,246 |
) |
|
|
(111,708 |
) |
Prior years |
|
|
(308,093 |
) |
|
|
(353,356 |
) |
|
|
(258,981 |
) |
|
|
|
|
|
|
|
|
|
|
Total claims paid, net of recoupments |
|
|
(427,492 |
) |
|
|
(454,602 |
) |
|
|
(370,689 |
) |
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
2,738,625 |
|
|
$ |
1,419,910 |
|
|
$ |
1,220,636 |
|
|
|
|
|
|
|
|
|
|
|
Ending balance of claim loss reserves for
title insurance only |
|
$ |
2,678,987 |
|
|
$ |
1,322,622 |
|
|
$ |
1,154,872 |
|
|
|
|
|
|
|
|
|
|
|
Provision for title insurance claim losses
as a percentage of title insurance
premiums only |
|
|
18.2 |
% |
|
|
13.2 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In 2008, the Company assumed $1,115.8 million in additional reserves
for claim losses with the acquisition of the LFG Underwriters. In
2006, the Company transferred $8.5 million in reserves to FIS in
connection with the distribution of FIS. |
Management continually updates 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.
A substantial portion of the Companys reserve for claim losses is
attributable to title insurance operations.
The prior year title loss provision amount was unfavorable
for each of the years presented. Because reported and paid claims continue to exceed expected
claims, management modified the Companys actuarial model in 2008 to more heavily weight the three
most recent full years data on loss experience and to incorporate that data into the assumptions
and factors that determine ultimate expected loss experience for all prior calendar years. In
response to the unfavorable prior year development, as well as to address higher expected costs for
policies issued in 2005, 2006 and 2007, the title loss provision amounts as a percentage of title
premiums increased in 2008 and 2007.
88
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As a result of the factors described above, during the year ended December 31, 2008, the
Company recorded a charge to the provision for claim losses of $261.6 million for development on
prior policy years. During the year ended December 31, 2007, the Company recorded charges totaling
$217.2 million, resulting from adverse claim loss development on prior policy years. These charges
were in addition to the provision for title insurance claim losses of 8.5% and 7.5%, respectively.
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.
L. Commitments and Contingencies
In the ordinary course of business, the Company is involved in various pending and threatened
litigation matters related to its operations, some of which include claims for punitive or
exemplary damages. Management believes that no actions, other than those listed below, depart from
customary litigation incidental to the Companys business. As background to the disclosure below,
please note the following:
|
|
These matters raise difficult and complicated factual and legal issues and are subject to
many uncertainties and complexities, including but not limited to the underlying facts of each
matter, novel legal issues, variations between jurisdictions in which matters are being
litigated, differences in applicable laws and judicial interpretations, the length of time
before many of these matters might be resolved by settlement or through litigation and, in
some cases, the timing of their resolutions relative to other similar cases brought against
other companies, the fact that many of these matters are putative class actions in which a
class has not been certified and in which the purported class may not be clearly defined, the
fact that many of these matters involve multi-state class actions in which the applicable law
for the claims at issue is in dispute and therefore unclear, and the current challenging legal
environment faced by large corporations and insurance companies. |
|
|
|
In these matters, plaintiffs seek a variety of remedies including equitable relief in the
form of injunctive and other remedies and monetary relief in the form of compensatory damages.
In most cases, the monetary damages sought include punitive or treble damages. Often more
specific information beyond the type of relief sought is not available because plaintiffs have
not requested more specific relief in their court pleadings. In addition, the dollar amount of
damages sought is frequently not stated with specificity. In those cases where plaintiffs have
made a statement with regard to monetary damages, they often specify damages either just above
or below a jurisdictional limit regardless of the facts of the case. These limits represent
either the jurisdictional threshold for bringing a case in federal court or the maximum they
can seek without risking removal from state court to federal court. In the Companys
experience, monetary demands in plaintiffs court pleadings bear little relation to the
ultimate loss, if any, that the Company may experience. None of the cases described below
includes a statement as to the dollar amount of damages demanded. Instead, each of the cases
includes a demand in an amount to be proved at trial. |
|
|
|
For the reasons specified above, it is not possible to make meaningful estimates of the
amount or range of loss that could result from these matters at this time. The Company reviews
these matters on an ongoing basis and follows the provisions of Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies when making accrual and
disclosure decisions. When assessing reasonably possible and probable outcomes, management
bases its decision on its assessment of the ultimate outcome following all appeals. |
|
|
|
The Company intends to vigorously defend each of these matters. In the opinion of the
Companys management, while some of these matters may be material to the Companys operating
results for any particular period if an unfavorable outcome results, none will have a material
adverse effect on its overall financial condition. |
There are class actions
89
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pending against
several title insurance companies, including Security Union Title Insurance Company, Fidelity
National Title Insurance Company, Chicago Title Insurance Company, Ticor Title Insurance Company of
Florida, Commonwealth Land Title Insurance Company, Lawyers Title Insurance Corporation, and Ticor
Title Insurance Company, alleging improper premiums were charged for title insurance. These cases
allege that the named defendant companies failed to provide notice of premium discounts to
consumers refinancing their mortgages, and failed to give discounts in refinancing transactions in
violation of the filed rates.
In February 2008, thirteen putative class actions were commenced against several title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, Security Union Title Insurance Company and Ticor Title Insurance Company (collectively,
the Fidelity Affiliates). The complaints also name FNF (together with the Fidelity Affiliates,
the Fidelity Defendants) as a defendant based on its ownership of the Fidelity Affiliates. The
complaints, which are brought on behalf of a putative class of consumers who purchased title
insurance in New York, allege that the defendants conspired to inflate rates for title insurance
through the Title Insurance Rate Service Association, Inc. (TIRSA), a New York State-approved
rate service organization which is also named as a defendant. Each of the complaints asserts a
cause of action under the Sherman Act and several of the complaints include claims under the Real
Estate Settlement Procedures Act as well as New York State statutory and common law claims. The
complaints seek monetary damages, including treble damages, as well as injunctive relief.
Subsequently, similar complaints were filed in many federal courts. There are now approximately 65
complaints pending alleging that the Fidelity Defendants conspired with their competitors to
unlawfully inflate rates for title insurance in every major market in the United States. A motion
was filed before the Multidistrict Litigation Panel to consolidate and or coordinate these actions
in the United States District Court in the Southern District of New York. However, that motion was
denied. The cases are generally being consolidated before one district court judge in each state
and scheduled for the filing of consolidated complaints and motion practice.
On September 24, 2007 a third party complaint was filed in the In Re Ameriquest Mortgage
Lending Practices Litigation in the United States District Court for the Northern District of
Illinois by Ameriquest Mortgage Company
90
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Ameriquest) and Argent Mortgage Company (Argent) against numerous title insurers and
agents including Chicago Title Company, Fidelity National Title Company, Fidelity National Title
Insurance Company, American Pioneer Title Insurance Company (now known as Ticor Title Insurance
Company of Florida), Chicago Title of Michigan, Fidelity National Title Insurance Company of New
York, Transnation Title Insurance Company (now known as Lawyers Title Insurance Corporation),
Commonwealth Land Title Company, and Ticor Title Insurance Company (collectively, the FNF
Affiliates). The third party complaint alleges that Ameriquest and Argent have been sued by a
class of borrowers alleging that they violated the Truth in Lending Act (TILA) by failing to
comply with the notice of right to cancel provisions and making misrepresentations in lending to
the borrowers, who now seek money damages. Ameriquest and Argent allege that the FNF Affiliates
contracted and warranted to close these loans in conformity with the lenders instructions which
correctly followed the requirements of TILA and contained no misrepresentations; therefore, if
Ameriquest and Argent are liable to the class, then the FNF Affiliates are liable to them for
failing to close the lending transactions as agreed. Ameriquest and Argent seek to recover the cost
of resolving the class action against them including their attorneys fees and costs in the action.
The title defendants are organizing to form a defense group and, as requested by the court, are
exploring the possibility of filing a single collective response. Recently, the Seventh Circuit, in
which these matters are pending, ruled that TILA violations as alleged in these complaints could
not be the subject of a class action.
There are class actions pending against FNF, Fidelity National Title Group and several title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, United Title, Inc. and Ticor Title Insurance Company, alleging
overcharges for government recording fees. These cases allege that the named defendant companies
charged fees in excess of the fees charged by government entities in closing transactions and seek
various remedies including compensatory damages, prejudgment interest, punitive damages and
attorneys fees. One case recently filed in Kansas seeks to certify a national class against
Chicago Title Insurance Company. Although the Federal District
Court in Kansas refused to certify a national class previously filed by the same plaintiffs
attorneys, this suit seeks to overcome that Courts objections
to certification. And, although a similar case filed in Indiana was
decertified by the appellate court and the Company has moved to decertify a companion case there the Missouri courts have refused to
decertify a case now pending and set for trial June 1, 2009. On January 30, 2009, the court
granted the Fidelity defendants motion for summary judgment in the recording fee class action in
the Federal District Court in Texas, which alleged recording fee
overcharges in five states. On January 26, 2009 a recording fee class action was filed in New Jersey.
There are class actions pending against Fidelity
National Title Company, Fidelity National Title Company of Washington, Inc., and Chicago Title
Insurance Company, alleging that the named defendants in each case charged unnecessary reconveyance
fees and unnecessary junk fees (wire fees; document download fees)
without performing any separate service for those fees which was not already included as a service
for the escrow fee. Additionally, two of the cases allege that the named
defendants wrongfully earned interest or other benefits on escrowed funds from the time funds were
deposited into escrow until any disbursement checks cleared the account. Motions for class
certification have not yet been filed in any of these cases.
91
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 3, 2007, a former title officer for Lawyers Title Insurance Corporation in
California filed a putative class action suit against Lawyers and LandAmerica Financial Group, Inc.
(LFG) (together, the Defendants) in the
Superior Court of California for Los Angeles County.
A similar putative class action was filed against
the Defendants by former Lawyers escrow officers in California, in the same court on December 12,
2007. The plaintiffs complaints in both lawsuits
allege failure to pay overtime and other related violations of the California Labor Code, as well
as unfair business practices under the California Business and Professions Code § 17200 on behalf
of all current and former California title and escrow officers. The underlying basis for both
lawsuits is an alleged misclassification of title and escrow officers as exempt employees for
purposes of the California Labor Code, which resulted in a failure to pay overtime and provide for
required meal and rest breaks. Although such employees were reclassified as non-exempt beginning
on January 1, 2006, the complaints allege similar violations of the California Labor Code even
after that date for alleged off-the-clock work. The plaintiffs complaints in both cases demand
an unspecified amount of back wages, statutory penalties, declaratory and injunctive relief,
punitive damages, interest, and attorneys fees and costs. The plaintiffs have yet to file a motion
for class certification, as the parties have agreed to mediation in May 2009. Should further
litigation prove necessary following the mediation, management believes that the Company has
meritorious defenses both to class certification and to liability.
Various governmental entities are studying the title insurance product, pricing, business
practices, and potential regulatory and legislative changes. The Company receives inquiries and
requests for information from state insurance departments, attorneys general and other regulatory
agencies from time to time about various matters relating to its business. Sometimes these take the
form of civil investigative subpoenas. The Company attempts to cooperate with all such inquiries.
From time to time, the Company is assessed fines for violations of regulations or other matters or
enters into settlements with such authorities which require the Company to pay money or take other
actions.
In January 2007, the State of California adopted regulations that would have significant
effects on the title insurance industry in California. The Company, as well as others, has been
engaged in discussions with the California Department of Insurance (the CDI) regarding possible
industry reforms that may result in the CDIs decision to modify or repeal the regulations prior to
their implementation. On June 17, 2008, the CDI filed with the Office of Administrative Law revised
title insurance regulations containing substantial changes to the existing regulations. Hearings on
the revised regulations were held in August. The Company, through the California Land Title Association,
continues to work with the CDI to refine certain aspects of the proposed regulations, including the
statistical reporting provisions.
In conducting its operations, the Company routinely holds customers assets in escrow, pending
completion of real estate transactions. Certain of these amounts are maintained in segregated bank
accounts and have not been included in the accompanying Consolidated Balance Sheets. The Company
has a contingent liability relating to proper disposition of these balances for our customers,
which amounted to $5.7 billion at December 31, 2008. As a result of holding these customers assets
in escrow, the Company has ongoing programs for realizing economic benefits during the year through
favorable borrowing and vendor arrangements with various banks. There were no investments or loans
outstanding as of December 31, 2008 and 2007 related to these arrangements.
Future minimum operating lease payments are as follows (dollars in thousands):
|
|
|
|
|
2009 |
|
$ |
166,626 |
|
2010 |
|
|
125,972 |
|
2011 |
|
|
86,451 |
|
2012 |
|
|
51,112 |
|
2013 |
|
|
23,542 |
|
Thereafter |
|
|
101,580 |
|
|
|
|
|
Total future minimum operating lease payments |
|
$ |
555,283 |
|
|
|
|
|
92
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rent expense incurred under operating leases during the years ended December 31, 2008, 2007
and 2006 was $141.2 million, $165.6 million, and $224.4 million, respectively. Rent expense in 2008
and 2007 includes abandoned lease charges related to office closures of $23.4 million and $13.0
million, respectively.
The Company is party to an off-balance sheet financing arrangement (commonly referred to as a
synthetic lease). The owner/lessor in this arrangement acquired land and various real property
improvements associated with new construction of an office building in Jacksonville, Florida, that
are part of FNFs corporate campus and headquarters. The lease expires on June 28, 2011, with
renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited
liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of
December 31, 2008, the full $75.0 million had been drawn on the facility to finance land costs and
related fees and expenses and the outstanding balance was $70.1 million. The lease includes
guarantees by the Company of up to 86.7% of the outstanding lease balance, and options to purchase
the facilities at the outstanding lease balance. The guarantee becomes effective if the Company
declines to purchase the facilities at the end of the lease and also declines to renew the lease.
The lessor financed the acquisition of the facilities through funding provided by third-party
financial institutions. The Company has no affiliation or relationship with the lessor or any of
its employees, directors or affiliates, and transactions with the lessor are limited to the
operating lease agreements and the associated rent expense that have been included in other
operating expenses in the Consolidated Statements of Earnings.
The Company does not believe the lessor is a variable interest entity, as defined in FASB
Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46). In addition, the
Company has verified that even if the lessor was determined to be a variable interest entity, the
Company would not have to consolidate the lessor nor the assets and liabilities associated with the
assets leased to the Company. This is because the assets leased do not exceed 50% of the total fair
value of the lessors assets excluding any assets that should be excluded from such calculation
under FIN 46, nor did the lessor finance 95% or more of the leased balance with non-recourse debt,
target equity or similar funding.
M. Regulation and Stockholders Equity
The Companys insurance subsidiaries, including title insurers, property and casualty
insurers, underwritten title companies and insurance agencies, are subject to extensive regulation
under applicable state laws. Each of the insurance underwriters is subject to a holding company act
in its state of domicile which regulates, among other matters, the ability to pay dividends and
enter into transactions with affiliates. The laws of most states in which the Company transacts
business establish supervisory agencies with broad administrative powers relating to issuing and
revoking licenses to transact business, regulating trade practices, licensing agents, approving
policy forms, accounting practices, financial practices, establishing reserve and capital and
surplus as regards policyholders (capital and surplus) requirements, defining suitable
investments for reserves and capital and surplus and approving rate schedules.
Since the Company is governed by both state and federal governments and the applicable
insurance laws and regulations are constantly subject to change, it is not possible to predict the
potential effects on the Companys insurance operations, particularly its Fidelity National Title
Group segment, of any laws or regulations that may become more restrictive in the future or if new
restrictive laws will be enacted. See note L for a description of certain recent regulatory
developments in California.
Pursuant to statutory accounting requirements of the various states in which the Companys
insurers are domiciled, these insurers must defer a portion of premiums earned as an unearned
premium reserve for the protection of policyholders and must maintain qualified assets in an amount
equal to the statutory requirements. The level of unearned premium reserve required to be
maintained at any time is determined by statutory formula based upon either the age, number of
policies and dollar amount of policy liabilities underwritten, or the age and dollar amount of
statutory premiums written. As of December 31, 2008, the combined statutory unearned premium
reserve required and reported for the Companys title insurers was $2,137.2 million. In addition to
statutory unearned premium reserves, each of our insurers maintains reserves for known claims and
surplus funds for policyholder protection and business operations.
Each of the Companys insurance subsidiaries is regulated by the insurance regulatory
authority in its respective
93
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
state of domicile, as well as that of each state in which it is licensed. The insurance
commissioners of their respective states of domicile are the primary regulators of the Companys
title insurance subsidiaries. Each of the insurers is subject to periodic regulatory financial
examination by regulatory authorities, and certain of these examinations are currently ongoing.
The Companys insurance subsidiaries are subject to regulations that restrict their ability to
pay dividends or make other distributions of cash or property to their immediate parent company
without prior approval from the Department of Insurance of their respective states of domicile. As
of December 31, 2008, $1,547.4 million of the Companys net assets are restricted from dividend
payments without prior approval from the Departments of Insurance. During 2009, the Companys title
insurers can pay or make distributions to the Company of approximately $214.7 million, without
prior approval.
The combined statutory capital and surplus of the Companys title insurers was $634.9 million
and $652.6 million as of December 31, 2008 and 2007, respectively. The combined statutory net
earnings of the Companys title insurance subsidiaries were $170.9 million (excluding the LFG
Underwriters), $204.8 million, and $413.8 million for the years ended December 31, 2008, 2007, and
2006, respectively.
As a condition to continued authority to underwrite policies in the states in which the
Companys insurers conduct their business, the insurers are required to pay certain fees and file
information regarding their officers, directors and financial condition. In addition, the Companys
escrow and trust business is subject to regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in which the Companys insurers are
domiciled, such insurers must maintain certain levels of minimum capital and surplus. Each of the
Companys underwriters has complied with the minimum statutory requirements as of December 31,
2008.
The Companys underwritten title companies are also subject to certain regulation by insurance
regulatory or banking authorities, primarily relating to minimum net worth. Minimum net worth
requirements for each underwritten title company are as follows: $7.5 million for Fidelity National
Title Company, $2.5 million for Fidelity National Title Company of California, $3.0 million for
Chicago Title Company, $0.4 million for Ticor Title Company of California, Commonwealth Land Title
Company, Lawyers Title Company, and Gateway Title Company, and $0.1 million
for Napa Valley Title. All of the Companys underwritten title companies are in compliance with all
of their respective minimum net worth requirements at December 31, 2008.
On October 25, 2006, our Board of Directors approved a three-year stock repurchase program
under which the Company can repurchase up to 25 million shares of its common stock. The Company may
make purchases from time to time in the open market, in block purchases or in privately negotiated
transactions, depending on market conditions and other factors. The Company began purchasing shares
under this program on a regular basis on April 30, 2007 and, through December 31, 2008, the Company
has repurchased a total of 12,840,470 shares for $229.1 million, or an average of $17.84 per share.
This includes 3,165,470 shares repurchased in 2008 for $46.0 million, or $14.53 per share and
9,675,000 shares repurchased in 2007 for a total of $183.1 million, or $18.93 per share. Shares
repurchased in 2007 include 1,000,000 shares which the Company purchased from its Chairman of the
Board, William P. Foley, II. In August 2007, Mr. Foley planned to sell 1,000,000 shares of FNF
stock on the open market. Because the Company was actively purchasing shares of treasury stock on
the open market at the same time, the Company agreed to purchase 1,000,000 shares from Mr. Foley on
August 8, 2007, for $22.1 million, or $22.09 per share, the market price at the time of the
purchase. The Company did not repurchase any shares under this plan during 2006.
N. Employee Benefit Plans
Stock Purchase Plan
During the three-year period ended December 31, 2008, eligible employees of the Company and
its subsidiaries could voluntarily participate in employee stock purchase plans (ESPPs) sponsored
by the Company and its subsidiaries. Pursuant to the ESPPs, employees may contribute an amount
between 3% and 15% of their base salary and certain commissions. The Company and its subsidiaries
contribute varying amounts as specified in the ESPPs.
94
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company and its subsidiaries contributed $15.2 million, $17.2 million, and $24.5 million
to the ESPPs in the years ended December 31, 2008, 2007, and 2006, respectively, in accordance with
the employers matching contribution.
401(k) Profit Sharing Plan
During the three-year period ended December 31, 2008, the Company and its subsidiaries have
offered their employees the opportunity to participate in 401(k) profit sharing plans (the 401(k)
Plans), qualified voluntary contributory savings plans which are available to substantially all
Fidelity employees. Eligible employees may contribute up to 40% of their pretax annual
compensation, up to the amount allowed pursuant to the Internal Revenue Code. During the years
ended December 31, 2007 and 2006, the Company and its subsidiaries matched 50% of each dollar of
employee contribution up to six percent of the employees total compensation. There was no employer
match for the year ended December 31, 2008. The Companys contributions to the 401(k) Plans for the
years ended December 31, 2007 and 2006 were $22.8 million, and $39.5 million, respectively.
Stock Option Plans
In connection with the 2005 distribution of FNT stock by Old FNF, the Company established the
FNT 2005 Omnibus Incentive Plan (the Omnibus Plan) authorizing the issuance of up to 8 million
shares of common stock, subject to the terms of the Omnibus Plan. On October 23, 2006, the
stockholders of FNT approved an amendment to increase the number of shares available for issuance
under the Omnibus Plan by 15.5 million shares. The increase was in part to provide capacity for
options and restricted stock to be issued to replace Old FNF options and restricted stock. The
Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock,
restricted stock units and performance shares, performance units, other cash and stock-based awards
and dividend equivalents. As of December 31, 2008, there were 2,252,300 shares of restricted stock
and 23,219,283 stock options outstanding under this plan.
On October 24, 2006, as part of the closing of the 2006 Distribution and spin-off from Old
FNF, the Company granted options and restricted stock to replace Old FNF options and Old FNF
restricted stock to its employees. The Company issued approximately 10.0 million options with a
weighted average strike price of $10.47 per share to replace 5.0 million outstanding Old FNF
options granted out of the historical FNF plans in an intrinsic value swap. The Company also issued
approximately 0.7 million shares of restricted stock to employees as part of the distribution and
to replace Old FNF restricted stock. During 2006, at the closing of the 2006 Distribution the
Company also granted 790,000 shares of restricted stock to certain executive officers and the board
of directors. Subsequent to the closing of the 2006 Distribution, the Company also granted 754,500
shares of restricted stock to other officers and employees and 2,116,500 options to other officers
and employees.
A detail of Old FNF option activity from December 31, 2005 through the closing of the 2006
Distribution transaction on October 24, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Options |
|
|
Exercise Price |
|
|
Exercisable |
|
Balance, December 31, 2005 |
|
|
15,890,293 |
|
|
$ |
18.47 |
|
|
|
11,480,299 |
|
Granted |
|
|
183,500 |
|
|
|
39.20 |
|
|
|
|
|
Exercised |
|
|
(8,403,694 |
) |
|
|
12.40 |
|
|
|
|
|
Cancelled |
|
|
(204,894 |
) |
|
|
38.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 24, 2006 |
|
|
7,465,205 |
|
|
$ |
24.19 |
|
|
|
5,017,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Following the closing of the 2006 Distribution on October 24, former Old FNF options and
restricted stock held by employees of the Company were converted in an intrinsic value swap to
options and restricted stock of the Company as noted above. Options and restricted stock held by
FIS employees were converted into FIS options and restricted stock.
95
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock option transactions under the Current Omnibus Plan for 2006, 2007, and 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Options |
|
|
Exercise Price |
|
|
Exercisable |
|
Balance, December 31, 2005 |
|
|
2,206,500 |
|
|
$ |
21.90 |
|
|
|
|
|
Granted |
|
|
2,116,500 |
|
|
|
23.40 |
|
|
|
|
|
Granted in intrinsic
value swap in connection
with 2006 Distribution |
|
|
10,009,967 |
|
|
|
10.47 |
|
|
|
|
|
Exercised |
|
|
(158,116 |
) |
|
|
10.08 |
|
|
|
|
|
Cancelled |
|
|
(33,441 |
) |
|
|
5.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
14,141,410 |
|
|
$ |
14.55 |
|
|
|
7,406,280 |
|
Granted |
|
|
5,257,997 |
|
|
|
13.64 |
|
|
|
|
|
Exercised |
|
|
(1,087,946 |
) |
|
|
7.73 |
|
|
|
|
|
Cancelled |
|
|
(302,627 |
) |
|
|
21.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
18,008,834 |
|
|
$ |
14.57 |
|
|
|
9,904,089 |
|
Granted |
|
|
6,162,942 |
|
|
|
7.09 |
|
|
|
|
|
Exercised |
|
|
(775,092 |
) |
|
|
6.93 |
|
|
|
|
|
Cancelled |
|
|
(177,401 |
) |
|
|
17.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
23,219,283 |
|
|
$ |
12.82 |
|
|
|
11,971,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock transactions under the Omnibus Plan in 2006, 2007, and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Shares |
|
|
Value |
|
Balance, December 31, 2005 |
|
|
777,500 |
|
|
$ |
21.90 |
|
Granted |
|
|
1,544,500 |
|
|
|
22.82 |
|
Granted in intrinsic value swap in connection with 2006 Distribution |
|
|
702,620 |
|
|
|
15.14 |
|
Cancelled |
|
|
(11,250 |
) |
|
|
21.90 |
|
Vested |
|
|
(416,721 |
) |
|
|
17.13 |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
2,596,649 |
|
|
$ |
21.38 |
|
Granted |
|
|
510,503 |
|
|
|
13.87 |
|
Cancelled |
|
|
(34,289 |
) |
|
|
17.54 |
|
Vested |
|
|
(996,811 |
) |
|
|
20.07 |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
2,076,052 |
|
|
|
16.82 |
|
Granted |
|
|
1,370,358 |
|
|
|
11.46 |
|
Cancelled |
|
|
(28,973 |
) |
|
|
16.98 |
|
Vested |
|
|
(1,165,137 |
) |
|
|
19.54 |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
2,252,300 |
|
|
|
12.71 |
|
|
|
|
|
|
|
|
|
The following table summarizes information related to stock options outstanding and
exercisable as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
Range of |
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
Exercise Prices |
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
$0.00 $5.60 |
|
|
1,800,782 |
|
|
|
2.32 |
|
|
$ |
3.82 |
|
|
$ |
25,089 |
|
|
|
1,800,782 |
|
|
|
2.32 |
|
|
$ |
3.82 |
|
|
$ |
25,087 |
|
$5.61 $12.52 |
|
|
7,174,533 |
|
|
|
7.24 |
|
|
|
7.38 |
|
|
|
74,400 |
|
|
|
1,011,591 |
|
|
|
3.70 |
|
|
|
9.15 |
|
|
|
8,703 |
|
$12.53 $12.77 |
|
|
2,268,493 |
|
|
|
3.70 |
|
|
|
12.77 |
|
|
|
11,307 |
|
|
|
2,268,493 |
|
|
|
3.70 |
|
|
|
12.77 |
|
|
|
11,307 |
|
$12.78 $16.65 |
|
|
6,841,827 |
|
|
|
6.37 |
|
|
|
14.35 |
|
|
|
23,232 |
|
|
|
2,948,345 |
|
|
|
5.71 |
|
|
|
15.30 |
|
|
|
7,229 |
|
96
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
Range of |
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
|
Number of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
Exercise Prices |
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
$16.66 $20.92 |
|
|
1,125,270 |
|
|
|
5.92 |
|
|
|
17.80 |
|
|
|
|
|
|
|
1,084,900 |
|
|
|
5.87 |
|
|
|
17.75 |
|
|
|
|
|
$20.93 $22.22 |
|
|
2,126,878 |
|
|
|
6.83 |
|
|
|
21.88 |
|
|
|
|
|
|
|
1,599,461 |
|
|
|
6.82 |
|
|
|
21.88 |
|
|
|
|
|
$22.23 $23.44 |
|
|
1,881,500 |
|
|
|
7.98 |
|
|
|
23.44 |
|
|
|
|
|
|
|
1,257,691 |
|
|
|
7.98 |
|
|
|
23.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,219,283 |
|
|
|
6.21 |
|
|
$ |
12.82 |
|
|
$ |
134,028 |
|
|
|
11,971,263 |
|
|
|
5.05 |
|
|
$ |
14.53 |
|
|
$ |
52,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for stock-based compensation plans in accordance with SFAS No. 123R,
Share-Based Payment (SFAS 123R), which requires that compensation cost relating to share-based
payments be recognized in the Companys consolidated financial statements based on the fair value
of each award. Using the fair value method of accounting, compensation cost is measured based on
the fair value of the award at the grant date and recognized over the service period. SFAS 123R
required the recording of expense relating to the vesting of all unvested options beginning in the
first quarter of 2006. The adoption of SFAS 123R on January 1, 2006 had no material impact on the
Companys income before income taxes, net income, cash flow from operations, cash flow from
financing activities, or basic or diluted earnings per share in 2006 due to the fact that all
options accounted for using the intrinsic value method under Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, were fully vested as of December 31, 2005. Net
earnings reflect stock-based compensation expense amounts of $32.7 million, $29.9 million, and
$65.0 million, for the years ended December 31, 2008, 2007, and 2006, respectively, which are
included in personnel costs in the reported financial results of each period. Included in the 2006
amount is a $24.5 million charge related to the vesting of performance based options at FIS for
which the vesting criteria was met during the first quarter and a $0.3 million charge for
accelerated vesting, which was approved by the compensation committee, of stock options and
restricted stock shares granted to a director who resigned from the board of directors in the third
quarter of 2006.
Old FNF options granted prior to the closing of the 2006 Distribution
The risk free interest rate used in the calculation was the rate that corresponded to the
weighted average expected life of an option. For options granted in 2006, the Company used a risk
free interest rate of 4.9%, a volatility factor for the expected market price of the common stock
of 28%, an expected dividend yield of 2.6%, and a weighted average expected live of 4.1 years. The
weighted average fair value of each option granted during 2006 was $9.25 ($4.66 as adjusted for the
2006 Distribution intrinsic value conversion).
FNF options granted from the 2005 Omnibus Plan
The risk free interest rates used in the calculation are the rates that correspond to the
weighted average expected life of an option. For options granted in the years ended December 31,
2008, 2007, and 2006, the Company used risk free interest rates of 2.5%, 3.8%, and 4.6%,
respectively, volatility factors for the expected market price of the common stock of 40%, 29%, and
29%, respectively, expected dividend yields of 4.0%, 5.0%, and 5.1%, respectively, and weighted
average expected lives of 5.0 years, 4.4 years, and 4.4 years, respectively. The weighted average
fair value of each option granted in the years ended December 31, 2008, 2007, and 2006, were $1.87,
$2.36, and $4.23, respectively.
At December 31, 2008, the total unrecognized compensation cost related to non-vested stock
option grants and restricted stock grants was $49.8 million, which is expected to be recognized in
pre-tax income over a weighted average period of 1.58 years.
Pension Plans
In connection with the Chicago Title merger, the Company assumed Chicago Titles
noncontributory defined contribution plan and noncontributory defined benefit pension plan (the
Pension Plan).
The Pension Plan covers certain Chicago Title employees. The benefits are based on years of
service and the employees average monthly compensation in the highest 60 consecutive calendar
months during the 120 months ending at retirement or termination. Effective December 31, 2000, the
Pension Plan was frozen and there will be no future credit given for years of service or changes in
salary.
The following table sets forth the funded status of the Pension Plan and amounts reflected in
the Companys Consolidated Balance Sheets as of December 31, 2008, 2007 and 2006:
97
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year |
|
$ |
149,670 |
|
|
$ |
158,258 |
|
|
$ |
162,875 |
|
Effects of change in actuarial assumptions |
|
|
(1,866 |
) |
|
|
(7,212 |
) |
|
|
(3,970 |
) |
Interest cost |
|
|
9,008 |
|
|
|
8,876 |
|
|
|
8,780 |
|
Actuarial loss |
|
|
844 |
|
|
|
2,667 |
|
|
|
1,856 |
|
Gross benefits paid |
|
|
(12,682 |
) |
|
|
(12,919 |
) |
|
|
(11,283 |
) |
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at end of year |
|
$ |
144,974 |
|
|
$ |
149,670 |
|
|
$ |
158,258 |
|
|
|
|
|
|
|
|
|
|
|
Change in Pension Plan Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
142,546 |
|
|
$ |
126,991 |
|
|
$ |
112,636 |
|
Actual return on plan assets |
|
|
(25,600 |
) |
|
|
11,373 |
|
|
|
13,511 |
|
Employer contributions |
|
|
3,842 |
|
|
|
17,101 |
|
|
|
12,127 |
|
Gross benef |