Fidelity National Financial, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the Quarter Ended March 31, 2007
Commission File Number 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 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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601 Riverside Avenue, Jacksonville, Florida
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32204 |
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(Address of principal executive offices)
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(Zip Code) |
(904) 854-8100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO o
As of March 31, 2007, 221,588,791 shares of the Registrants Common Stock were outstanding.
FORM 10-Q
QUARTERLY REPORT
Quarter Ended March 31, 2007
INDEX
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
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March 31, |
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December 31, |
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2007 |
|
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2006 |
|
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(Unaudited) |
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ASSETS |
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Investments: |
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Fixed maturities available for sale, at fair value, at March 31, 2007 includes $387,863 and
$230,314 of pledged fixed maturities related to secured trust deposits and the securities
lending program, respectively, and at December 31, 2006 includes $288,420 and $305,313 of
pledged fixed maturity securities related to secured trust deposits and the securities
lending program, respectively |
|
$ |
3,124,296 |
|
|
$ |
2,901,964 |
|
Equity securities, at fair value |
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|
199,211 |
|
|
|
207,307 |
|
Other long-term investments |
|
|
169,571 |
|
|
|
164,109 |
|
Short-term investments at March 31, 2007 includes $113,907 and at December 31, 2006
includes $408,363 of pledged short-term investments related to secured trust deposits |
|
|
401,927 |
|
|
|
848,371 |
|
|
|
|
|
|
|
|
Total investments |
|
|
3,895,005 |
|
|
|
4,121,751 |
|
Cash and cash equivalents, at March 31, 2007 includes $264,170 and $237,859 of pledged fixed
maturities related to secured trust deposits and the securities lending program, respectively,
and at December 31, 2006 includes $228,458 and $316,019 of pledged fixed maturity securities
related to secured trust deposits and the securities lending program, respectively |
|
|
594,522 |
|
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|
676,444 |
|
Trade and notes receivables, net of allowance of $12,598 at March 31, 2007 and $12,674 at
December 31, 2006, includes a $13,883 note receivable from FIS |
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|
250,722 |
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|
251,544 |
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Goodwill |
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1,201,832 |
|
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|
1,154,298 |
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Prepaid expenses and other assets |
|
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301,853 |
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|
271,732 |
|
Capitalized software |
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84,174 |
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|
83,538 |
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Other intangible assets |
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90,730 |
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95,787 |
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Title plants |
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328,494 |
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324,155 |
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Property and equipment, net |
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268,244 |
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254,350 |
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Income taxes receivable |
|
|
|
|
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25,960 |
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|
|
|
|
|
|
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$ |
7,015,576 |
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$ |
7,259,559 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Accounts payable and accrued liabilities, at March 31, 2007 and December 31, 2006, includes
$237,859 and $316,019, respectively, of security loans related to the securities lending
program |
|
$ |
755,413 |
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|
$ |
937,687 |
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Accounts payable to FIS |
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31,323 |
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|
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Deferred revenue |
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127,885 |
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130,543 |
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Notes payable |
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502,132 |
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491,167 |
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Reserve for claim losses |
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1,237,496 |
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1,220,636 |
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Secured trust deposits |
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756,264 |
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905,461 |
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Deferred tax liabilities |
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43,937 |
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43,653 |
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Income taxes payable |
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12,897 |
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|
|
|
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3,467,347 |
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3,729,147 |
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Minority interests |
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54,456 |
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56,044 |
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Stockholders equity: |
|
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Common stock, $.0001 par value; authorized 600,000,000 shares as of March 31, 2007 and
December 31, 2006; issued 221,683,572 as of March 31, 2007 and 221,507,939 as of December
31, 2006 |
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|
22 |
|
|
|
22 |
|
Additional paid-in capital |
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3,204,314 |
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3,193,904 |
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Retained earnings |
|
|
363,160 |
|
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|
345,516 |
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|
|
|
|
|
|
|
|
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3,567,496 |
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3,539,442 |
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Accumulated other comprehensive loss |
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|
(71,695 |
) |
|
|
(63,046 |
) |
Less treasury stock, 94,781 shares as of March 31, 2007 and as of December 31, 2006, at cost |
|
|
(2,028 |
) |
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(2,028 |
) |
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|
|
|
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|
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3,493,773 |
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3,474,368 |
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$ |
7,015,576 |
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$ |
7,259,559 |
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See Notes to Condensed Consolidated Financial Statements
3
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
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Three months ended |
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March 31, |
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2007 |
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2006 |
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(Unaudited) |
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REVENUE: |
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Direct title insurance premiums |
|
$ |
418,597 |
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$ |
468,922 |
|
Agency title insurance premiums |
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542,146 |
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606,054 |
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Escrow and other title related fees |
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|
244,806 |
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253,527 |
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Transaction processing |
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|
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843,199 |
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Specialty insurance |
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94,998 |
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106,743 |
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Interest and investment income |
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49,959 |
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51,363 |
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Realized gains and losses, net |
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6,382 |
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|
11,930 |
|
Other income |
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|
12,174 |
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12,761 |
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Total revenue |
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1,369,062 |
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2,354,499 |
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EXPENSES: |
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Personnel costs |
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435,260 |
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877,931 |
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Other operating expenses |
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234,441 |
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|
493,344 |
|
Agent commissions |
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420,157 |
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469,707 |
|
Depreciation and amortization |
|
|
29,354 |
|
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|
124,631 |
|
Provision for claim losses |
|
|
110,986 |
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|
114,492 |
|
Interest expense |
|
|
11,977 |
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|
54,645 |
|
|
|
|
|
|
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Total expenses |
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1,242,175 |
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2,134,750 |
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Earnings before income taxes and minority interest |
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|
126,887 |
|
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|
219,749 |
|
Income tax expense |
|
|
45,045 |
|
|
|
81,747 |
|
|
|
|
|
|
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Earnings before minority interest |
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|
81,842 |
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|
138,002 |
|
Minority interest |
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(1,557 |
) |
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|
31,631 |
|
|
|
|
|
|
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Net earnings |
|
$ |
83,399 |
|
|
$ |
106,371 |
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Basic earnings per share |
|
$ |
0.38 |
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$ |
0.61 |
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Weighted average shares outstanding, basic basis |
|
|
219,014 |
|
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|
173,473 |
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|
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Diluted earnings per share |
|
$ |
0.37 |
|
|
$ |
0.61 |
|
|
|
|
|
|
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|
Weighted average shares outstanding, diluted basis |
|
|
222,912 |
|
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|
173,654 |
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|
|
|
|
|
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Cash dividends paid per share |
|
$ |
0.30 |
|
|
$ |
0.29 |
|
|
|
|
|
|
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|
See Notes to Condensed Consolidated Financial Statements
4
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
|
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|
|
|
|
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|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Net earnings |
|
$ |
83,399 |
|
|
$ |
106,371 |
|
Other
comprehensive (loss) gain: |
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments, net (1) |
|
|
(5,617 |
) |
|
|
11,454 |
|
Foreign currency translation unrealized (loss) gain (2) |
|
|
(14 |
) |
|
|
1,288 |
|
Reclassification adjustments for gains included in net earnings (3) |
|
|
(3,018 |
) |
|
|
(8,195 |
) |
Reclassification adjustments relating to minority interests |
|
|
|
|
|
|
(436 |
) |
|
|
|
|
|
|
|
Other comprehensive (loss) gain |
|
|
(8,649 |
) |
|
|
4,111 |
|
|
|
|
|
|
|
|
Comprehensive earnings |
|
$ |
74,750 |
|
|
$ |
110,482 |
|
|
|
|
|
|
|
|
|
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|
(1) |
|
Net of income tax (benefit) expense of $(3.1) million and $3.0 million for the three month periods
ended March 31, 2007 and 2006, respectively. |
|
(2) |
|
Net of income tax (benefit) expense of less than $(0.1) million and $0.8 million for the three month
periods ended March 31, 2007 and 2006, respectively. |
|
(3) |
|
Net of income tax expense of $1.7 million and $4.8 million for the three month periods ended
March 31, 2007 and 2006, respectively. |
See Notes to Condensed Consolidated Financial Statements
5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Additional |
|
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Other |
|
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|
|
|
|
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|
Common Stock |
|
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Paid - in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance, December 31, 2006 |
|
|
221,508 |
|
|
$ |
22 |
|
|
$ |
3,193,904 |
|
|
$ |
345,516 |
|
|
$ |
(63,046 |
) |
|
|
95 |
|
|
$ |
(2,028 |
) |
|
$ |
3,474,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
176 |
|
|
|
|
|
|
|
2,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,138 |
|
Tax benefit associated with
the exercise of stock options |
|
|
|
|
|
|
|
|
|
|
784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
784 |
|
Other comprehensive income
(loss) unrealized gain on
investments and other
financial instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,635 |
) |
|
|
|
|
|
|
|
|
|
|
(8,635 |
) |
Other comprehensive income
(loss) unrealized gain on
foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
(14 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
7,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.30 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
|
221,684 |
|
|
$ |
22 |
|
|
$ |
3,204,314 |
|
|
$ |
363,160 |
|
|
$ |
(71,695 |
) |
|
|
95 |
|
|
$ |
(2,028 |
) |
|
$ |
3,493,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
83,399 |
|
|
$ |
106,371 |
|
Reconciliation of net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
29,354 |
|
|
|
124,631 |
|
Net increase in reserve for claim losses |
|
|
16,860 |
|
|
|
31,475 |
|
Gain on sales of assets |
|
|
(6,382 |
) |
|
|
(11,930 |
) |
Stock-based compensation cost |
|
|
7,488 |
|
|
|
34,347 |
|
Minority interest |
|
|
(1,557 |
) |
|
|
31,631 |
|
Change in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Leases and lease securitization residual interests |
|
|
|
|
|
|
(2,646 |
) |
Secured trust deposits |
|
|
10,105 |
|
|
|
3,576 |
|
Trade receivables |
|
|
1,882 |
|
|
|
60,085 |
|
Prepaid expenses and other assets |
|
|
(19,243 |
) |
|
|
(92,939 |
) |
Accounts payable, accrued liabilities |
|
|
(81,065 |
) |
|
|
(233,333 |
) |
Income taxes |
|
|
44,277 |
|
|
|
(43,256 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
85,118 |
|
|
$ |
8,012 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale |
|
$ |
1,323,148 |
|
|
$ |
772,386 |
|
Proceeds from maturities of investment securities available for sale |
|
|
104,252 |
|
|
|
112,792 |
|
Proceeds from sale of assets |
|
|
20 |
|
|
|
1,286 |
|
Cash (paid) received as collateral on loaned securities, net |
|
|
(3,162 |
) |
|
|
3,497 |
|
Collections of notes receivable |
|
|
2,808 |
|
|
|
1,300 |
|
Additions to title plants |
|
|
(4,451 |
) |
|
|
(4,653 |
) |
Additions to property and equipment |
|
|
(28,922 |
) |
|
|
(42,801 |
) |
Additions to capitalized software |
|
|
(5,739 |
) |
|
|
(50,770 |
) |
Purchases of investment securities available for sale |
|
|
(1,933,599 |
) |
|
|
(897,260 |
) |
Net proceeds of short-term investment securities |
|
|
446,444 |
|
|
|
433,423 |
|
Additions to notes receivable |
|
|
|
|
|
|
(906 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(51,675 |
) |
|
|
(21,282 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
$ |
(150,876 |
) |
|
$ |
307,012 |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings |
|
$ |
11,121 |
|
|
$ |
187,545 |
|
Debt service payments |
|
|
(164 |
) |
|
|
(288,307 |
) |
Dividends paid |
|
|
(65,755 |
) |
|
|
(41,542 |
) |
Tax benefit associated with the exercise of stock options |
|
|
784 |
|
|
|
8,431 |
|
Stock options exercised |
|
|
2,138 |
|
|
|
5,577 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
$ |
(51,876 |
) |
|
$ |
(128,296 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents, excluding pledged cash
related to secured trust deposits |
|
|
(117,634 |
) |
|
|
186,728 |
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits at beginning of period |
|
|
447,986 |
|
|
|
278,685 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to secured trust
deposits at end of period |
|
$ |
330,352 |
|
|
$ |
465,413 |
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
503 |
|
|
$ |
123,300 |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
19,674 |
|
|
$ |
68,633 |
|
|
|
|
|
|
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Capital transactions of FIS |
|
$ |
|
|
|
$ |
862,296 |
|
See Notes to Condensed Consolidated Financial Statements
7
Fidelity National Financial, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
Note A Basis of Financial Statements
The unaudited financial information in this report includes the accounts of Fidelity National
Financial, Inc. and its subsidiaries (collectively, the Company or FNF) prepared in accordance
with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of
Regulation S-X. All adjustments considered necessary for a fair presentation have been included.
This report should be read in conjunction with the Companys Annual Report on Form 10-K for the
year ended December 31, 2006.
In the course of an internal review of its treatment of certain costs relating to insurance
policies issued by its specialty insurance group, the Company determined that certain costs should
be deferred and amortized over the life of the policy consistent with the recognition of the
premiums. The Company recorded an adjustment as of March 31, 2007, increasing prepaid and other
assets and reducing other operating costs 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 reflected in the accompanying unaudited condensed consolidated financial statements and is not
material to the Companys financial position or results of operations for any previously reported
annual periods.
Certain other reclassifications have been made in the 2006 Condensed Consolidated Financial
Statements to conform to classifications used in 2007.
Description of Business
Fidelity National Financial, Inc. is a holding company that is a provider of title insurance,
specialty insurance, and claims management services. FNF is one of the nations largest title
insurance companies through its title insurance underwriters, with an approximately 29.0% national
market share. FNF also provides flood insurance, personal lines insurance, and home warranty
insurance through its specialty insurance subsidiaries and is a leading provider of outsourced
claims management services to large corporate and public sector entities through its minority-owned
subsidiary, Sedgwick CMS (Sedgwick).
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 to FNT in return for the issuance of 45,265,956 shares of FNT common stock to Old FNF (the
Asset Contribution). Old FNF then distributed to its shareholders all of its shares of FNT common
stock, making FNT a stand alone publicly traded company (the Distribution). 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. 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 the Companys spin-off from Old FNF. The Companys
historical equity has been derived from FNTs historical equity and the Companys historical basic
and diluted earnings per share have been calculated using FNTs basic and diluted weighted average
shares outstanding.
Acquisitions among entities under common control such as the Asset Contribution 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 the Asset Contribution and 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; however, the criteria to account for FIS as
discontinued operations as prescribed by Financial Accounting Standards Board (FASB) Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) 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
8
continuing business relationships. As a result, for periods prior to October
24, 2006, FIS continues to be included in the Companys consolidated financial statements.
Transactions with Related Parties
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 the Companys consolidated results.
A detail of related party items included in revenues and expenses is as follows:
|
|
|
|
|
|
|
Three months |
|
|
|
ended March 31, |
|
|
|
2007 |
|
|
|
(in millions) |
|
Agency title premiums earned |
|
$ |
36.6 |
|
Interest revenue |
|
|
0.2 |
|
|
|
|
|
Total revenue |
|
|
36.8 |
|
|
|
|
|
|
Agency title commissions |
|
|
32.2 |
|
Data processing costs |
|
|
12.0 |
|
Corporate services allocated |
|
|
(0.9 |
) |
Title insurance information expense |
|
|
6.2 |
|
Other real-estate related information |
|
|
3.3 |
|
Software
development and services expense |
|
|
12.1 |
|
Rental expense |
|
|
(0.2 |
) |
License and cost sharing agreements |
|
|
2.3 |
|
|
|
|
|
Total expenses |
|
$ |
67.0 |
|
|
|
|
|
An FIS subsidiary acts as the title agent in the issuance of title insurance policies by a
title insurance underwriter owned by the Company and in connection with certain trustee sales
guarantees, a form of title insurance issued as part of the foreclosure process. As a result, the
Companys title insurance subsidiaries pay commissions on title insurance policies sold through
FIS. These FIS operations generated revenues of $36.6 million for the three month period ended
March 31, 2007, for the Company, which the Company records as agency title premiums. The Company
paid FIS commissions at the rate of 88% of premiums generated, equal to $32.2 million for the three
month period ended March 31, 2007.
Included in the Companys expenses for the period presented are amounts paid to a subsidiary
of FIS for the provision by FIS to the Company of information technology infrastructure support,
data center management and related IT support services. The amounts included in the Companys
expenses to FIS for these services were $11.7 million for the three month period ended March 31,
2007. In addition, the Company incurred software expenses relating to an agreement with a
subsidiary of FIS that amounted to expenses of $12.4 million for the three month period ended March
31, 2007.
Historically, the Company has provided corporate services to FIS. These corporate services
include accounting, internal audit, treasury, payroll, human resources, tax, legal, purchasing,
risk management, mergers and acquisitions and general management. For the three month period ended
March 31, 2007 the Companys expenses were reduced by $0.9 million related to the provision of
corporate services to FIS by the Company.
Certain title plant assets of the Companys title insurance subsidiaries are managed or
maintained by a subsidiary of FIS. The underlying title plant information and software continues to
be owned by each of the Companys title insurance underwriters, but FIS manages and updates 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, FIS is responsible for keeping the title plant assets
current and fully functioning, for which the Company pays a fee to FIS based on the Companys use
of, or access to, the title plant. The Companys payments to FIS under these arrangements were $6.7
million for the three month period ended March 31, 2007. In addition, each applicable title
insurance underwriter in turn receives a
royalty on sales of access to its title plant assets. The revenues from these title plant
royalties were $0.5 million for the three month period ended March 31, 2007. The Company has also
entered into agreements with FIS that permit
9
FIS 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. Each of the Companys applicable title insurance subsidiaries receives a fee for any
access to or use of its starters and back plant databases by FIS. The Company also does business
with additional entities of FIS that provide real estate information to the Companys operations,
for which the Company recorded expenses of $3.3 million for the three month period ended March 31,
2007.
The Company also has certain license and cost sharing agreements with FIS. The Company
recorded expense relating to these agreements of $2.3 million for the three month period ended
March 31, 2007.
The Companys expenses included expenses for a lease of office space to the Company from FIS
for the Companys corporate headquarters and business operations in the amount of $1.2 million and
were reduced by $1.4 million for leases of office space, furniture and equipment to FIS by the
Company for the three month period ended March 31, 2007.
The Company believes the amounts earned by the Company or charged to the Company under each of
the foregoing arrangements are fair and reasonable. Although the commission rate paid on the title
insurance premiums written by the FIS title agencies was set without negotiation, the Company
believes the commissions earned 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. In connection with the title plant
management and maintenance services provided by FIS, the Company believes that the fees charged to
the Company by FIS are at approximately the same rates that FIS and other similar vendors charge
unaffiliated title insurers. The information technology infrastructure support and data center
management services provided to the Company by FIS are priced within the range of prices that FIS
offers to its unaffiliated third party customers for the same types of services. However, the
amounts the Company 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 from/ (to) FNF and FIS were as follows:
|
|
|
|
|
|
|
March 31, |
|
|
2007 |
|
|
(In millions) |
Note receivable from FIS |
|
$ |
13.9 |
|
Due to FIS |
|
|
(31.3 |
) |
At March 31, 2007, the Company has a note receivable balance of $13.9 million due from a
subsidiary of FIS. The Company earned interest revenue of $0.2 million on this note for the three
months ended March 31, 2007.
During the period, the Company paid amounts to a subsidiary of FIS for capitalized software
development and for title plant construction. These amounts included capitalized software
development costs of $1.6 million during the three month period ended March 31, 2007. Amounts
paid to FIS for capitalized title plant construction costs were $5.6 million during the three month
period ended March 31, 2007.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159), which permits entities to choose to measure financial
instruments and certain other items at fair value that are not currently required to be measured at
fair value. SFAS 159 mandates certain financial statement presentation and disclosure requirements
when a company elects to report assets and liabilities at fair value under SFAS 159. SFAS 159 is
effective as of the beginning of January 1, 2008 for calendar year entities. Management is
currently evaluating the impact on the Companys statements of financial position and operations.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Post Retirement Plans (SFAS 158). SFAS 158 requires entities to recognize on
their balance sheets the
10
funded status of pension and other postretirement benefit plans. Entities
are required to recognize actuarial gains and losses, prior service cost, and any remaining
transition amounts from the initial application of Statement of Financial Accounting Standards No.
87, Employers Accounting for Pensions, and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions, when recognizing a plans funded status, with the
offset to accumulated other comprehensive income. SFAS 158 will not change the amounts recognized
in the income statement as net periodic benefit cost. All of the requirements of SFAS 158 were
effective as of December 31, 2006 for calendar-year public companies, except for a requirement for
fiscal-year-end measurements of plan assets and benefit obligations with which the Company is
already in compliance. The Company adopted SFAS 158 in 2006.
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 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 has adopted FIN 48 (see
Note F).
Note 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. The
Company employs an outside third party valuation firm to value the identifiable intangible and
tangible assets and liabilities of each of its acquisitions. Based on this valuation any difference
between the fair value of the identifiable assets and liabilities and the purchase price paid is
recorded as goodwill. There were no individually significant acquisitions during the three months
ended March 31, 2007.
Cascade Timberlands LLC
The Company began purchasing equity interests in Cascade Timberlands LLC (Cascade
Timberlands) in March 2006. As of December 31, 2006, the Company had acquired approximately 71% of
the outstanding interests in Cascade Timberlands for $89.2 million. As of March 31, 2006, the
Company owned approximately 25.1% of Cascade Timberlands. The primary assets of Cascade Timberlands
are approximately 293,000 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, Thomas H. Lee Partners
(THL) and Evercore Capital Partners, completed an acquisition of a 40% interest in Sedgwick CMS
Holdings, Inc. (Sedgwick), for approximately $126 million. Sedgwick, headquartered in Memphis,
Tennessee, is a leading provider of outsourced insurance claims management services to large
corporate and public sector entities. In September 2006, the Company invested an additional $6.8
million in Sedgwick, but maintained its 40% interest.
Certegy, Inc.
On February 1, 2006, Old FNF, through a subsidiary formerly known as Fidelity National
Information Services, Inc. (Former FIS) merged with Certegy, Inc. (Certegy) to form a single
publicly traded company called Fidelity National Information Services, Inc. Certegy was a payment
processing company headquartered in St. Petersburg,
Florida. Its results of operations are not included in the Companys financial statements for
periods after October 23, 2006, but were included for the three months ended March 31, 2006.
11
Generally accepted accounting principles in the U.S. require that one of the two companies in
the transaction be designated as the acquirer for accounting purposes. FIS was designated as the
accounting acquirer because immediately after the merger its shareholders held more than 50% of the
common stock of the combined company. As a result, the merger was accounted for as a reverse
acquisition under the purchase method of accounting. Under this accounting treatment, FIS was
considered the acquiring entity and Certegy was considered the acquired entity for financial
reporting purposes.
The purchase price was based on the number of outstanding shares of common stock of Certegy on
February 1, 2006, the date of consummation of the merger, valued at $33.38 per share (which was the
average of the trading price of Certegy common stock two days before and two days after the
announcement of the merger on September 15, 2005 of $37.13, less the $3.75 per share special
dividend declared prior to closing). The purchase price also included the estimated fair value of
Certegys stock options and restricted stock units outstanding at the transaction date.
The total purchase price was as follows (in millions):
|
|
|
|
|
Value of Certegys common stock |
|
$ |
2,121.0 |
|
Value of Certegys stock options |
|
|
54.2 |
|
FISs estimated transaction costs |
|
|
5.9 |
|
|
|
|
|
|
|
$ |
2,181.1 |
|
|
|
|
|
Note C Earnings Per Share
Basic earnings per share is computed by dividing net earnings by the weighted average number
of common shares outstanding during the period. Diluted earnings per share is calculated by
dividing net earnings by the weighted average number of shares outstanding plus the impact of
assumed conversions of potentially dilutive common stock equivalents. The Company has granted
certain options and restricted stock, which have been treated as common share equivalents for
purposes of calculating diluted earnings per share. The following table presents the computation of
basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except |
|
|
|
per share amounts) |
|
Net earnings, basic and diluted basis |
|
$ |
83,399 |
|
|
$ |
106,371 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period, basic |
|
|
219,014 |
|
|
|
173,473 |
|
Plus: Common stock equivalent shares assumed from conversion of options |
|
|
3,898 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Weighted average shares outstanding during the period, diluted |
|
|
222,912 |
|
|
|
173,654 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.38 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.37 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
Options
to purchase 4,322,799 shares and 2,206,500 shares of the Companys common stock for
the three months ended March 31, 2007 and 2006, respectively, were not included in the computation
of diluted earnings per share because they were antidilutive.
Note D Investments
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. These short-term
security lending arrangements increase investment income with minimal risk. At March 31, 2007 and
December 31, 2006, the Company had security loans outstanding with fair values of $237.9 million
and $316.0 million included in accounts payable and accrued liabilities, respectively and the
Company held cash in the same amounts as collateral for the loaned securities.
12
Gross unrealized losses on investment securities and the fair value of the related securities,
aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position at March 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
4,217 |
|
|
$ |
(13 |
) |
|
$ |
675,614 |
|
|
$ |
(9,302 |
) |
|
$ |
679,831 |
|
|
$ |
(9,315 |
) |
States and
political
subdivisions |
|
|
98,820 |
|
|
|
(533 |
) |
|
|
771,797 |
|
|
|
(9,140 |
) |
|
|
870,617 |
|
|
|
(9,673 |
) |
Corporate securities |
|
|
51,778 |
|
|
|
(22,500 |
) |
|
|
479,248 |
|
|
|
(9,290 |
) |
|
|
531,026 |
|
|
|
(31,790 |
) |
Foreign securities |
|
|
|
|
|
|
|
|
|
|
24,377 |
|
|
|
(326 |
) |
|
|
24,377 |
|
|
|
(326 |
) |
Equity securities |
|
|
129,979 |
|
|
|
(10,181 |
) |
|
|
7,641 |
|
|
|
(997 |
) |
|
|
137,620 |
|
|
|
(11,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
284,794 |
|
|
$ |
(33,227 |
) |
|
$ |
1,958,677 |
|
|
$ |
(29,055 |
) |
|
$ |
2,243,471 |
|
|
$ |
(62,282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the Companys unrealized losses relate to debt securities. These
unrealized losses were primarily caused by interest rate increases. Since the decline in fair value
of these investments is primarily attributable to changes in interest rates, and the Company has
the intent and ability to hold these securities, the Company does not consider these investments
other-than-temporarily impaired. The unrealized losses relating to equity securities were caused by
market changes that the Company considers to be temporary and thus the Company does not consider
these investments other-than-temporarily impaired.
Gross realized gains on investments for the quarters ended March 31, 2007 and 2006 were $14.5
million and 14.7 million, respectively. Gross realized losses on investments for the quarters ended
March 31, 2007 and 2006 were $9.8 million and $1.7 million, respectively.
Note E Stock-Based Compensation Plans
There were no grants of stock-based compensation awards during the first quarter of 2007.
During the first quarter of 2006, the Company granted options to purchase 30,000 shares of common
stock, with a weighted average exercise price of $22.22 per share and a weighted average fair value
of $3.73 per share.
Net income for the quarters ended March 31, 2007 and 2006 reflects stock based compensation
expense of $7.5 million and $34.3 million, respectively, which is included in personnel costs in
the reported financial results. The expense for the first quarter of 2006 included $24.1 million in
expense relating to performance based options at FIS for which the performance and market based
criteria were met during the quarter.
Note F Uncertainty in Income Taxes
FNF adopted FASB Interpretation 48, Accounting for Income Taxes (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 January 1, 2007, FNF had approximately $3.7 million (including $0.3 million
of interest) of total gross unrecognized tax benefits that, if recognized would favorably affect
the rate.
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 beginning with the 2005 tax
year. In 2006, the IRS completed its examination of the Companys tax returns for years 2002
through 2005. The Company is currently under audit by the Internal Revenue Service for the 2006 and
2007 tax years.
Note G Segment Information
Summarized financial information concerning the Companys reportable segments is shown in the
following table.
13
As of and for the three months ended March 31, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
Title premiums |
|
$ |
960,743 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
960,743 |
|
Other revenues |
|
|
240,173 |
|
|
|
94,998 |
|
|
|
16,807 |
|
|
|
351,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
|
1,200,916 |
|
|
|
94,998 |
|
|
|
16,807 |
|
|
|
1,312,721 |
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
45,170 |
|
|
|
3,972 |
|
|
|
7,199 |
|
|
|
56,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,246,086 |
|
|
$ |
98,970 |
|
|
$ |
24,006 |
|
|
$ |
1,369,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
26,917 |
|
|
|
1,558 |
|
|
|
879 |
|
|
|
29,354 |
|
Interest expense |
|
|
3,309 |
|
|
|
405 |
|
|
|
8,263 |
|
|
|
11,977 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
114,772 |
|
|
|
25,426 |
|
|
|
(13,311 |
) |
|
|
126,887 |
|
Income tax expense |
|
|
40,743 |
|
|
|
9,569 |
|
|
|
(5,267 |
) |
|
|
45,045 |
|
Minority interest |
|
|
(71 |
) |
|
|
|
|
|
|
(1,486 |
) |
|
|
(1,557 |
) |
Net earnings (loss) |
|
$ |
74,100 |
|
|
$ |
15,857 |
|
|
$ |
(6,558 |
) |
|
$ |
83,399 |
|
Assets |
|
|
5,668,441 |
|
|
|
484,897 |
|
|
|
862,238 |
|
|
|
7,015,576 |
|
Goodwill |
|
|
1,086,315 |
|
|
|
44,856 |
|
|
|
70,661 |
|
|
|
1,201,832 |
|
As of and for the three months ended March 31, 2006 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Information |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
|
|
|
Title Group |
|
|
Services |
|
|
Insurance |
|
|
and Other |
|
|
Eliminations |
|
|
Total |
|
Title premiums |
|
$ |
1,076,189 |
|
|
$ |
18,615 |
|
|
$ |
|
|
|
$ |
(1,213 |
) |
|
$ |
(18,615 |
) |
|
$ |
1,074,976 |
|
Other revenues |
|
|
264,557 |
|
|
|
882,320 |
|
|
|
106,743 |
|
|
|
1,731 |
|
|
|
(39,121 |
) |
|
|
1,216,230 |
|
Intersegment revenue |
|
|
|
|
|
|
(57,736 |
) |
|
|
|
|
|
|
|
|
|
|
57,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from
external customers |
|
$ |
1,340,746 |
|
|
$ |
843,199 |
|
|
$ |
106,743 |
|
|
$ |
518 |
|
|
$ |
|
|
|
$ |
2,291,206 |
|
Interest and
investment income,
including realized
gains and (losses) |
|
|
51,245 |
|
|
|
2,732 |
|
|
|
3,652 |
|
|
|
5,664 |
|
|
|
|
|
|
|
63,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,391,991 |
|
|
$ |
845,931 |
|
|
$ |
110,395 |
|
|
$ |
6,182 |
|
|
$ |
|
|
|
$ |
2,354,499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and
amortization |
|
|
26,237 |
|
|
|
96,795 |
|
|
|
1,470 |
|
|
|
129 |
|
|
|
|
|
|
|
124,631 |
|
Interest expense |
|
|
2,082 |
|
|
|
43,268 |
|
|
|
256 |
|
|
|
9,039 |
|
|
|
|
|
|
|
54,645 |
|
Earnings (loss)
before income tax
and minority
interest |
|
|
132,528 |
|
|
|
64,255 |
|
|
|
32,458 |
|
|
|
(9,492 |
) |
|
|
|
|
|
|
219,749 |
|
Income tax expense |
|
|
43,766 |
|
|
|
24,586 |
|
|
|
12,566 |
|
|
|
829 |
|
|
|
|
|
|
|
81,747 |
|
Minority interest |
|
|
416 |
|
|
|
311 |
|
|
|
|
|
|
|
30,904 |
|
|
|
|
|
|
|
31,631 |
|
Net earnings (loss) |
|
$ |
88,346 |
|
|
$ |
39,358 |
|
|
$ |
19,892 |
|
|
$ |
(41,225 |
) |
|
$ |
|
|
|
$ |
106,371 |
|
Assets |
|
|
5,897,476 |
|
|
|
7,405,369 |
|
|
|
443,684 |
|
|
|
344,328 |
|
|
|
|
|
|
|
14,090,857 |
|
Goodwill |
|
|
1,051,514 |
|
|
|
3,710,714 |
|
|
|
44,856 |
|
|
|
(86,611 |
) |
|
|
|
|
|
|
4,720,473 |
|
The activities of the reportable segments include the following:
Fidelity National Title Group.
This segment consists of the operation of FNFs title insurance underwriters Fidelity
National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title which together
issued approximately 29.0% of all title
14
insurance policies issued nationally during 2005. 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
This segment consists of certain subsidiaries that issue flood, home warranty, homeowners,
automobile, and other personal lines insurance policies.
Corporate and Other
The corporate and other segment consists of the operations of the parent holding company,
certain other unallocated corporate overhead expenses, and the Companys share in the operations of
certain equity investments, including Sedgwick and Fidelity National Real Estate Solutions.
Fidelity National Information Services, Inc.
Through October 24, 2006, this segment consisted of the operation of Old FNFs majority owned
subsidiary, FIS, which 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.
Note H Dividends
On January 23, 2007, the Companys Board of Directors declared a cash dividend of $0.30 per
share, payable on March 29, 2007, to stockholders of record as of March 14, 2007. On April 25,
2007, the Companys Board of Directors declared a cash dividend of $0.30 per share, payable on June
28, 2007, to stockholders of record as of June 14, 2007.
Note I Pension and Postretirement Benefits
The following details the Companys periodic (income) expense for pension and postretirement
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
(In thousands, except per share amounts) |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
Interest cost |
|
|
2,219 |
|
|
|
2,097 |
|
|
|
272 |
|
|
|
242 |
|
Expected return on assets |
|
|
(2,660 |
) |
|
|
(2,453 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
(13 |
) |
|
|
(195 |
) |
Amortization of actuarial loss |
|
|
2,149 |
|
|
|
2,217 |
|
|
|
316 |
|
|
|
86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic (income) expense |
|
$ |
1,708 |
|
|
$ |
1,861 |
|
|
$ |
575 |
|
|
$ |
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no material changes to the Companys projected benefit payments under these
plans since December 31, 2006 as disclosed in the Companys Form 10-K filed on March 1, 2007.
Note J Legal Proceedings
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 |
15
|
|
|
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 general, the
dollar amount of damages sought is not specified. In those cases where plaintiffs have made
a specific statement with regard to monetary damages, they often specify damages just below
a jurisdictional limit regardless of the facts of the case. This represents 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, the Company may experience. |
|
|
|
|
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. Management
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,
the Company bases its decision on its assessment of the ultimate outcome following all
appeals. |
|
|
|
|
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 the Companys overall financial
condition. |
Several class actions are pending in Alabama, Connecticut, Florida, Kentucky, Ohio, New
Mexico, New Hampshire, Pennsylvania, and Washington alleging improper premiums were charged for
title insurance. The 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. The actions seek refunds of the premiums
charged and punitive damages. The Company intends to vigorously defend these actions.
A class action in California alleges that the Company violated the Real Estate Settlement
Procedures Act (RESPA) and state law by giving favorable discounts or rates to builders and developers for
escrow fees and requiring purchasers to use Chicago Title Insurance Company (CTIC) for escrow
services. The action seeks refunds of the premiums charged and additional damages. The Company
intends to vigorously defend this action.
A class action in Texas alleges that the Company overcharged for recording fees in Arizona,
California, Colorado, Oklahoma and Texas. The suit seeks to recover the recording fees for the
class that was overcharged, interest and attorneys fees. Similar suits are pending in Indiana,
Kansas and Missouri. In one of the Kansas suits, the plaintiffs seek to certify a national class.
The Company intends to vigorously defend these actions.
A class action in New Mexico alleges the Company has engaged in anti-competitive price fixing
in New Mexico. The suit seeks an injunction against price fixing and writs issued to the State
regulators mandating the law be interpreted to provide a competitive market, compensatory damages,
punitive damages, statutory damages, interest and attorneys fees for the injured class. The
Company intends to vigorously defend this action.
Two class actions filed in Illinois allege the Company has paid attorneys to refer business to
the Company by paying them for core title services in conjunction with orders when the attorneys,
in fact, did not perform any core title services and the payments were to steer business to the
Company. The suits seek compensatory damages,
attorneys fees and injunctive relief to terminate the practice. The Company intends to
vigorously defend these actions.
16
A class action in Connecticut alleges that the Company uses unauthorized agents in violation
of state law. The suit seeks compensatory damages, attorneys fees and injunctive relief to
terminate the practice. The Company intends to vigorously defend this action.
A class action in California alleges that the Company participated in a fraudulent loan scheme
with mortgage brokers. The suit seeks compensatory damages, and attorneys fees. The Company
intends to vigorously defend this action.
Two class actions, one in Michigan and one in Ohio, allege the Company has violated RESPA by engaging in affiliated business arrangements in
violation of RESPA. The suits seek to recover three times the title charges, interest and
attorneys fees. The Company intends to vigorously defend these actions.
A class action in Washington alleges that the Company has violated state law by making
prohibited payments for the referral of business increasing the cost of title insurance to
consumers. Ticor Title Insurance Company and Fidelity National Title Insurance Company were added
as defendants in this suit in March 2007. The suit seeks compensatory damages, and attorneys
fees. The Companies intend to vigorously defend this action.
Canadian lawyers who have traditionally played a role in real property transactions in Canada
allege that the Companys practices in processing residential mortgages are the unauthorized
practice of law. Their Law Societies have demanded an end to the practice, and have begun
investigations into those practices. In several provinces, bills have been filed that ostensibly
would affect the way the Company does business. The Company is unable to predict the outcome of
this inquiry or whether it will adversely affect the Companys business or results of operations.
In Missouri, a class action is pending alleging that certain acts performed by the Company in
closing real estate transactions are the unlawful practice of law. The Company intends to
vigorously defend this action.
None of the cases described above 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. Two of
the Ohio cases state that the damages per class member are less than the jurisdictional limit for
removal to federal court.
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.
On February 16, 2007, CTIC received a letter from the United States Attorneys Office in the
Southern District of Texas advising the company that it is the target of a federal grand jury
investigation in Houston, Texas concerning possible violations of law involving loans made by three
banks in Texas. CTIC believes that the investigation relates to certain mortgage loan transactions
that were closed between 1999 and 2001 by a branch office of CTIC located in the Houston
Metropolitan area. As previously disclosed, in February 2005, without any admission of fault or
liability, CTIC entered into an Order with the U.S. Office of the Comptroller of the Currency and
certain other regulators including the Office of Thrift Supervision and the Texas Department of
Insurance in connection with their investigations of matters relating to these loans. Under the
Order, the Company agreed to, among other things, pay a civil money penalty, provide training to
current and prospective employees, and audit branch offices at least every two years to ensure
compliance with applicable rules and regulations. In addition, without admitting any liability,
CTIC concurrently entered into a settlement agreement with the U.S. Department of Housing and Urban
Development with respect to any violations of the Real Estate Settlement Procedures Act in
connection with these loans following HUDs investigation of the matter. The U.S. Attorneys Office
now is investigating possible violations of the bank fraud laws in connection with the same loans.
CTIC is fully cooperating with the U.S. Attorneys investigation. CTIC has launched an internal
investigation, and has been reporting thereon to the U.S. Attorneys office on a confidential
basis. The internal investigation has revealed potentially criminal
conduct involving former employees which
CTIC has turned over to the U.S. Attorney. However, the Company believes it should not be
indicted. In the event that CTIC were to be indicted, the consequences to the Company could
have a material adverse effect on the Companys business.
17
The National Association of Insurance Commissioners and various state insurance regulators
have been investigating so called captive reinsurance agreements since 2004. The investigations
have focused on arrangements in which title insurers would write title insurance generated by
realtors, developers and lenders and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business. The U.S. Department of Housing and Urban
Development (the HUD) also has made formal or informal inquiries of the Company regarding these
matters. The Company has been cooperating and intends to continue to cooperate with all ongoing
investigations. The Company has discontinued all captive reinsurance arrangements. The total amount
of premiums the Company ceded to reinsurers was approximately $10 million over the existence of
these agreements. The Company has settled most of the accusations of wrongdoing that arose from
these investigations by discontinuing the practice and paying fines. Some investigations are
continuing. The Company anticipates they will be settled in a similar manner.
Additionally, the Company has received inquiries from regulators about its business
involvement with title insurance agencies affiliated with builders, realtors and other traditional
sources of title insurance business, some of which the Company participated in forming as joint
ventures with its subsidiaries. These inquiries have focused on whether the placement of title
insurance with the Company through these affiliated agencies is proper or an improper form of
referral payment. Like most other title insurers, the Company participates in these affiliated
business arrangements in a number of states. The Company has settled the accusations of wrongdoing
that arose from some of these investigations by discontinuing the practice and paying fines. Other
investigations are continuing. The Company anticipates they will be settled in a similar manner.
In 2006, the Company and its subsidiaries settled all allegations of wrongdoing arising from a
wide-ranging review of the title insurance industry by the New York State Attorney General (the
NYAG). Under the terms of the settlement, the Company paid a $2 million fine and was required to
reduce premiums by 15% on owners policies under $1 million. Rate hearings will be conducted by the
New York State Insurance Department (the NYSID) in 2007 where all rates will be considered
industry-wide. The settlement clarifies practices considered wrongful under New York law by the
NYAG and the NYSID, and the Company has agreed not to engage in those practices. The Company will
take steps to assure that consumers are aware of the filed rates for premiums on title insurance
products and that the products are correctly rated. The settlement also resolves all issues raised
by the market conduct investigation of the Company and its subsidiaries by the NYSID except the
issues of rating errors found by the NYSID. As part of the settlement, the Company and its
subsidiaries denied any wrongdoing. Neither the fines nor the 15% rate reduction are expected to
have a material impact on the Companys earnings. The Company cooperated fully with the NYAG and
NYSID inquiries into these matters and will continue to cooperate with the NYSID.
Further, in 2006, U.S. Representative Oxley, the Chairman of the House Financial Services
Committee (the Committee), asked the Government Accountability Office (the GAO) to investigate
the title insurance industry. A congressional hearing was held regarding title insurance practices
on April 27, 2006. The results of the GAOs study were delivered in a report entitled Title
Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers
(the Report) to Congressman Oxleys successor on the GOP side (now Minority), Rep. Spencer Bachus
(R-AL), the ranking member of the Committee on April 16, 2007. The GAOs report, issued April 17,
2007, offered positive recommendations for the industry, the HUD and state regulators.
In January 2007, the California Insurance Commissioner submitted to the California Office of
Administrative Law (the OAL) proposed regulations (the Proposed Regulations) that would have
significant effects on the title insurance industry in California. Among other things, the Proposed
Regulations would set maximum rates, effective as of October 1, 2009, for title and escrow using
industry data to be reported through the statistical plan described below and published by the
California Department of Insurance (the CDI). In addition, the Proposed Regulations would
establish an interim reduction of all title and escrow rates effective October 1, 2009 if the CDI
is unable to publish the data necessary for the calculation of the maximum rates by August 1, 2009.
These interim rate reductions are intended to roll rates back so that in effect, premiums are
charged on the basis of real property values from the year 2000. Title insurers would be required
to reduce their rates to a level below their 2000 rates, with the
amount of the reduction determined by a formula adjusting for real estate appreciation and
inflation. FNF is concerned that the reduced rates set by the Proposed Regulations will
significantly reduce the title and escrow rates that are charged in California, while precluding
title insurers from seeking relief from those reduced or maximum
18
rates. In addition, the Proposed
Regulations contemplate the creation of a detailed statistical plan, requiring data to be collected
by each title insurer, underwritten title company, and controlled escrow company at the individual
transaction level beginning on January 1, 2008. Compliance with the data collection and reporting
requirements of the Proposed Regulations, if adopted, would necessitate a significant revision and
augmentation of the Companys existing data collection and accounting systems before January 1,
2008, and would require a significant expenditure to comply with the April 30, 2009 deadline. The
proposed required rate reductions and maximum rates would significantly reduce the title insurance
rates that the Companys subsidiaries can charge, and would likely have a significant negative
impact on the Companys California revenues. In addition, the increased cost of compliance with the
statistical data collection and reporting requirements would negatively impact the Companys cost
of doing business in California. California is the largest source of revenue for the title
insurance industry, including for the Company. On February 21, 2007, the OAL disapproved the
Proposed Regulations and requested certain clarifications from the CDI. On February 22, 2007, the
CDI announced its intention to move forward expeditiously to satisfy the OALs request in
consultation with consumer groups and the title industry and resubmit the Proposed Regulations for
approval. The Commissioner hosted a workshop on April 11, 2007, allowing the industry to document
their concerns about the Proposed Regulations. A second workshop is scheduled for May 9, 2007;
however, the Commissioner intends to issue a 15 day notice signaling their intent to resubmit the
Proposed Regulations to the OAL in some revised format. The Commissioner must resubmit on or before
June 22, 2007.
In addition, the Florida Office of Insurance Regulation (the OIR) has released three studies
of the title insurance industry which purport to demonstrate that title insurance rates in Florida
are too high and that the Florida title insurance industry is overwhelmingly dominated by five
firms, which includes the Company. The studies recommend tying premium rates to loss ratios thereby
making the rates a reflection of the actual risks born by the insurer. The OIR is presently
developing a rule to establish and govern the annual collection of statistical data and has said
that it will use the information gathered to begin a full review of the title insurance rates
charged in Florida. The Company and one competitor have filed procedural challenges to the
currently proposed rule. A hearing is scheduled for June 27, 2007.
The Washington Insurance Commissioner has issued a report concluding that the title insurance
industry has engaged in illegal referral fees. The Commissioner has appointed a panel to recommend
title industry reforms.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical
are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including statements regarding our
expectations, hopes, intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to us on the date hereof, and we
assume no obligation to update any such forward-looking statements. It is important to note that
our actual results could vary materially from those forward-looking statements contained herein due
to many factors, including, but not limited to: changes in general economic, business and political
conditions, including changes in the financial markets; adverse changes in the level of real estate
activity, which may be caused by, among other things, high or increasing interest rates, a limited
supply of mortgage funding or a weak U. S. economy; our potential inability to find suitable
acquisition candidates, acquisitions in lines of business that will not necessarily be limited to
our traditional areas of focus, or difficulties in integrating acquisitions; our dependence on
operating subsidiaries as a source of cash flow; significant competition that our operating
subsidiaries face; compliance with extensive government regulation of our operating subsidiaries;
and other risks detailed in the Statement Regarding Forward-Looking Information, Risk Factors
and other sections of the Companys Form 10-K and other filings with the Securities and Exchange
Commission.
In the course of an internal review of our treatment of certain costs relating to insurance
policies issued by our specialty insurance group, 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 costs 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 reflected in the unaudited condensed consolidated financial statements and is not
material to the Companys financial position or results of operations for any previously reported
annual periods.
19
The following discussion should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2006.
Overview
We are a holding company that is a provider, through our subsidiaries, of title insurance,
specialty insurance, and claims management services. We are one of the nations largest title
insurance companies through our title insurance underwriters, with an approximate 29.0% national
market share. We also provide flood insurance, personal lines insurance, and home warranty
insurance through our specialty insurance subsidiaries and are a leading provider of outsourced
claims management services to large corporate and public sector entities through our minority-owned
subsidiary, Sedgwick CMS (Sedgwick).
Prior to October 24, 2006, we were known as Fidelity National Title Group, Inc. (FNT) and we
were a majority-owned public subsidiary of another company that was also called Fidelity National
Financial (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, making FNT a stand alone public company. 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). 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. Our historical 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:
|
|
|
Fidelity National Title Group. This segment consists of the operations of our title
insurance underwriters Fidelity National Title, Chicago Title, Ticor Title, Security
Union Title and Alamo Title which together issued approximately 29.0% of all title
insurance policies issued nationally during 2005. 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. |
|
|
|
|
Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company, certain other unallocated corporate overhead expenses, and our
share in the operations of certain equity investments, including Sedgwick and Fidelity
National Real Estate Solutions. |
Prior to October 24, 2006, through FIS, Old FNF provided industry leading data processing,
payment and risk management services to financial institutions and retailers. Through October 23,
2006, our results also include 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 these
businesses are not included in the financial information in this report for periods prior to
February 1, 2006.
Transactions with Related Parties
Beginning on October 24, 2006, our 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. Please see Note A of Notes to Condensed Consolidated Financial Statements.
20
Factors Affecting Comparability
Beginning October 24, 2006, our Condensed Consolidated Statements of Earnings no longer
include the results of FIS. The operations of FIS continue to be included in our Condensed
Consolidated Statements of Earnings for periods prior to October 24, 2006.
Results of Operations
Consolidated Results of Operations
Net Earnings. The following table presents certain financial data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands, |
|
|
|
except per share data) |
|
Total revenue |
|
$ |
1,369,062 |
|
|
$ |
2,354,499 |
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
1,242,175 |
|
|
$ |
2,134,750 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
83,399 |
|
|
$ |
106,371 |
|
|
|
|
|
|
|
|
Basic net earnings per share |
|
$ |
0.38 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
Diluted net earnings per share |
|
$ |
0.37 |
|
|
$ |
0.61 |
|
|
|
|
|
|
|
|
21
Revenue. The following table presents the components of our revenue:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Direct title insurance premiums |
|
$ |
418,597 |
|
|
$ |
468,922 |
|
Agency title insurance premiums |
|
|
542,146 |
|
|
|
606,054 |
|
Escrow and other title related fees |
|
|
244,806 |
|
|
|
253,527 |
|
Transaction processing |
|
|
|
|
|
|
843,199 |
|
Specialty insurance |
|
|
94,998 |
|
|
|
106,743 |
|
Interest and investment income |
|
|
49,959 |
|
|
|
51,363 |
|
Realized gains and losses, net |
|
|
6,382 |
|
|
|
11,930 |
|
Other income |
|
|
12,174 |
|
|
|
12,761 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,369,062 |
|
|
$ |
2,354,499 |
|
|
|
|
|
|
|
|
Orders opened by direct title operations |
|
|
652,400 |
|
|
|
831,400 |
|
Orders closed by direct title operations |
|
|
390,400 |
|
|
|
526,700 |
|
Total consolidated revenues for the first quarter of 2007 decreased $985.4 million to $1,369.1
million. Excluding revenues related to operations that were transferred to FIS in October 2006,
total revenues for the first quarter of 2007 decreased $137.2 million, consisting primarily of a
decrease of $123.0 million in title related revenues, and a $11.7 million decrease in specialty
insurance revenues.
Consolidated title insurance premiums for the three-month periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
2007 |
|
|
Total |
|
|
2006 |
|
|
Total |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Title premiums from direct operations (1) |
|
$ |
418,597 |
|
|
|
43.6 |
% |
|
$ |
468,922 |
|
|
|
43.6 |
% |
Title premiums from agency operations |
|
|
542,146 |
|
|
|
56.4 |
|
|
|
606,054 |
|
|
|
56.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
960,743 |
|
|
|
100.0 |
% |
|
$ |
1,074,976 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes premiums reported by FIS in 2006. |
Title insurance premiums decreased 10.6% to $960.7 million in the first quarter of 2007 as
compared with the first quarter of 2006. The decrease was made up of a $50.3 million or 10.7%
decrease in direct premiums and a $63.9 million or 10.5% decrease in premiums from agency
operations.
Direct title premiums in the first quarter of 2006 include $18.6 million in premiums generated
by FIS. Because the operations of FIS are not included in our results for periods subsequent to
October 23, 2006, title premiums generated by FIS in the first quarter of 2007 are included in
agency title premiums rather than direct title premiums. Excluding direct title premiums generated
by FIS in 2006, title premiums decreased $31.7 million, or 7.0%, from $450.3 million in the first
quarter of 2006 to $418.6 million in the first quarter of 2007. This decreased level of direct
title premiums is the result of a decrease in closed order volume partially offset by a slight
increase in fee per file. Excluding operations of FIS, closed order volumes decreased to 390,400 in
the first quarter of 2007 compared to 436,300 in the first quarter of 2006, reflecting a declining
purchase market and a relatively stable refinance market. The average fee per file in our direct
operations was $1,557 in the first quarter of 2007 compared to $1,532 in the first quarter of 2006
(excluding operations of FIS), reflecting a strong commercial market, partially offset by an
increase in refinance activity and modest appreciation in residential home prices in the first
quarter of 2007 as compared to the first quarter of 2006. The fee per file tends to change as the
mix of refinance and purchase transactions changes, because purchase transactions generally involve
the issuance of both a lenders policy and an owners policy, resulting in higher fees, whereas
refinance transactions typically only require a lenders policy, resulting in lower fees. Mortgage
interest rates were relatively consistent in the first three months of 2007 and 2006.
The decrease in agency premiums is the result of a decrease in accrued agency premiums that is
consistent with the decrease in direct title premiums. An increase in agency premiums has a much
smaller effect on profitability than the same change in direct premiums would have because our
margins as a percentage of gross premiums for
agency business are significantly lower than the
margins realized from our direct operations due to commissions paid to our agents and other costs
related to the agency business.
22
Trends in escrow and other title related fees are to some extent related to title insurance
activity generated by our direct operations. Escrow fees, which are more directly related to our
direct operations, decreased 13.1%, generally consistent with the decrease in direct title
insurance premiums and order counts, but were also impacted 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.
During the first quarter of 2007, other title related fees increased 12.9% compared to the first
quarter of 2006 due to growth in operations not directly related to title insurance and some
acquisitions made over the past couple of years.
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 $50.0
million and $51.4 million in the first three months of 2007 and 2006, respectively.
Net realized gains for the first quarter totaled $6.4 million compared with net realized gains
of $11.9 million for the corresponding period of the prior year, 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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Personnel costs |
|
$ |
435,260 |
|
|
$ |
877,931 |
|
Other operating expenses |
|
|
234,441 |
|
|
|
493,344 |
|
Agent commissions |
|
|
420,157 |
|
|
|
469,707 |
|
Depreciation and amortization |
|
|
29,354 |
|
|
|
124,631 |
|
Provision for claim losses |
|
|
110,986 |
|
|
|
114,492 |
|
Interest expense |
|
|
11,977 |
|
|
|
54,645 |
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
1,242,175 |
|
|
$ |
2,134,750 |
|
|
|
|
|
|
|
|
Our operating expenses consist primarily of personnel costs and 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.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and
bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs
totaled $435.3 million and $877.9 million for the three months ended March 31, 2007 and 2006,
respectively. Excluding personnel expenses of $408.8 million related to FIS, personnel costs were
$469.1 million in the first quarter of 2006. Excluding those FIS operations, personnel costs as a
percentage of total revenue were 31.8% in the first quarter of 2007, compared to 31.1% for the
first quarter of 2006. The decrease in personnel costs is due to a decrease at Fidelity National
Title Group, partially offset by an increase in the corporate and other segment. The decrease at
Fidelity National Title Group resulted from a decrease in the number of personnel, partially offset
by an increase in average annualized personnel costs per employee. The increase in the corporate
and other segment is primarily the result of the acquisition of Fidelity National Real Estate
Solutions. On a consolidated basis, total stock-based compensation costs were $7.5 million and
$34.3 million, or $6.4 million excluding FIS stock-based compensation, for the three months ended
March 31, 2007 and 2006, respectively.
23
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 decreased $6.6 million in the first quarter of 2007 to $234.4 million from
$241.0 million in the first quarter of 2006, excluding other operating expenses of $252.3 million
in the first quarter of 2006 related to FIS. The decrease included decreases of $11.2 million at
Fidelity National Title Group and $10.0 million in the specialty insurance segment, offset by
increases in the corporate segment primarily related to acquisitions.
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 premiums and agent commissions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Agent title premiums |
|
$ |
542,146 |
|
|
|
100.0 |
% |
|
$ |
606,054 |
|
|
|
100.0 |
% |
Agent commissions |
|
|
420,157 |
|
|
|
77.5 |
|
|
|
469,707 |
|
|
|
77.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
121,989 |
|
|
|
22.5 |
% |
|
$ |
136,347 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums as a percentage of total agency premiums
remained consistent in the first quarter of 2007 compared with the first quarter of 2006.
Depreciation and amortization was $29.4 million in the first three months of 2007 as compared
to $124.6 million in the first three months of 2006. Excluding first quarter 2006 depreciation and
amortization of $96.8 million related to FIS, depreciation and amortization was $27.8 million in
the first quarter of 2006.
The provision for claim losses includes an estimate of anticipated title and title related
claims, escrow losses and homeowners claims relating to our specialty insurance segment. 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 $72.1 million in the first quarter of 2007 as compared to $80.7
million in the first quarter of 2006. Our claim loss provision as a percentage of total title
premiums was 7.5% in both the first quarters of 2007 and 2006. The claim loss provision for our
specialty insurance businesses was $38.9 million and $33.9 million in the first quarter of 2007 and
2006, respectively, with the increase resulting primarily from a higher volume of homeowners
insurance business.
Excluding $43.9 million in FIS interest expense in the first quarter of 2006, interest expense
was $12.0 million and $10.7 million in the first quarter of 2007 and 2006, respectively. The
increase of $1.3 million relates primarily to an increase in interest expense associated with the
securities lending program.
Income tax expense as a percentage of earnings before income taxes was 35.5% for the first
quarter of 2007 and 37.2% for the first quarter of 2006. Income tax expense as a percentage of
earnings before income taxes is attributable to our estimate of ultimate income tax liability, and
changes in the characteristics of net earnings year to year.
Minority interest for the first quarter of 2007 was $(1.6) million as compared with $31.6
million for the corresponding prior year period. The decrease in minority interest expense is
primarily attributable to earnings generated by FIS and FNT, in which, prior to October 24, 2006,
we held ownership positions of 50.7% and 82.5%, respectively.
Net earnings decreased $23.0 million in the first quarter of 2007 as compared to the first
quarter of 2006. Excluding $38.1 million in first quarter 2006 net earnings related to FIS and
$30.5 million in minority interest expense attributable to minority interest holdings in FIS and
FNT prior to October 24, 2006, net earnings decreased $15.4 million from $98.8 million in the first
quarter of 2006 to $83.4 million in the first quarter of 2007.
24
Fidelity National Title Group
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Unaudited) |
|
|
|
(Dollars in thousands) |
|
REVENUE: |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,246,086 |
|
|
$ |
1,391,991 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
Personnel costs |
|
|
410,573 |
|
|
|
452,435 |
|
Other operating expenses |
|
|
198,408 |
|
|
|
209,620 |
|
Agent commissions |
|
|
420,051 |
|
|
|
488,368 |
|
Depreciation and amortization |
|
|
26,917 |
|
|
|
26,237 |
|
Provision for claim losses |
|
|
72,056 |
|
|
|
80,721 |
|
Interest expense |
|
|
3,309 |
|
|
|
2,082 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,131,314 |
|
|
|
1,259,463 |
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
114,772 |
|
|
|
132,528 |
|
Income tax expense |
|
|
40,743 |
|
|
|
43,766 |
|
|
|
|
|
|
|
|
Earnings before minority interest |
|
|
74,029 |
|
|
|
88,762 |
|
Minority interest |
|
|
(71 |
) |
|
|
416 |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
74,100 |
|
|
$ |
88,346 |
|
|
|
|
|
|
|
|
Total revenues for the Fidelity National Title Group decreased $145.9 million, or 10.5%, to
$1,246.1 million in the first quarter of 2007 from $1,392.0 million in the first quarter of 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 above.
Personnel costs include base salaries, commissions, benefits, bonuses and stock based
compensation paid to employees and are one of our most significant operating expenses. Personnel
costs totaled $410.6 million and $452.4 million for the first quarters of 2007 and 2006,
respectively. Personnel costs as a percentage of total revenues from direct title premiums and
escrow and other fees were 63.5% in the first quarter of 2007, and 64.5% for the first quarter of
2006. Personnel costs have decreased in the first quarter of 2007 primarily due to a decrease in
the number of personnel, partially offset by an increase in average annualized personnel cost per
employee due to increased salaries and employee benefit costs. Average employee count decreased to
17,047 in the first quarter of 2007 from 19,139 in the first quarter of 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 $198.4 million and $209.6 million for the first quarters of 2007 and
2006, respectively. Other operating expenses as a percentage of total revenues from direct title
premiums and escrow and other fees were 30.7% and 29.9% in the first quarters of 2007 and 2006,
respectively.
Agent commissions represent the portion of premiums retained by agents pursuant to the terms
of their respective agency contracts. Net margin from agency title insurance premiums as a
percentage of total agency premiums remained generally consistent in the first quarter of 2007
compared with the first quarter of 2006. Agent commissions and the resulting percentage of agent
premiums we retain vary according to regional differences in real estate closing practices and
state regulations.
Depreciation and amortization was $26.9 million in the first quarter of 2007 as compared to
$26.2 million in the first quarter of 2006.
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,
25
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 $72.1 million in the first quarter of 2007
as compared to $80.7 million in the first quarter of 2006. Our claim loss provision as a percentage
of total title premiums was 7.5% in both the first quarters of 2007 and 2006.
Interest expense was $3.3 million and $2.1 million in the first quarters of 2007 and 2006,
respectively. The increase of $1.2 million is due to an increase in interest expense related to the
securities lending program.
Income tax expense as a percentage of earnings before income taxes was 35.5% for the first
quarter of 2007 and 33.0% for the first quarter of 2006. Income tax expense as a percentage of
earnings before income taxes is attributable to our estimate of ultimate income tax liability, and
changes in the characteristics of net earnings year to year.
Net earnings were $74.1 million and $88.3 million for the first quarters of 2007 and 2006,
respectively.
Specialty Insurance
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
REVENUE: |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
98,970 |
|
|
$ |
110,395 |
|
|
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
|
|
|
Personnel costs |
|
|
11,599 |
|
|
|
11,315 |
|
Other operating expenses |
|
|
21,052 |
|
|
|
31,027 |
|
Depreciation and amortization |
|
|
1,558 |
|
|
|
1,470 |
|
Provision for claim losses |
|
|
38,930 |
|
|
|
33,869 |
|
Interest expense |
|
|
405 |
|
|
|
256 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
73,544 |
|
|
|
77,937 |
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
25,426 |
|
|
|
32,458 |
|
Income tax expense |
|
|
9,569 |
|
|
|
12,566 |
|
|
|
|
|
|
|
|
Earnings before minority interest |
|
|
15,857 |
|
|
|
19,892 |
|
Minority interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
15,857 |
|
|
$ |
19,892 |
|
|
|
|
|
|
|
|
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, the U.S.
federal flood insurance program, and receive fees for assistance in settling claims. Specialty
insurance revenues decreased $11.4 million to $99.0 million in the first quarter of 2007 from
$110.4 million in the first quarter of 2006. Flood revenues decreased $14.6 million, reflecting
higher 2006 revenues resulting from claims processing related to the active 2005 hurricane season.
That decrease, along with smaller decreases in the home warranty and auto insurance lines of
business, was partially offset by growth in the homeowners insurance line of business.
Personnel costs were $11.6 million and $11.3 million in the first quarters of 2007 and 2006,
respectively. As a percentage of revenues, personnel costs were 11.7% and 10.2% in the first
quarters of 2007 and 2006, respectively. The increase as a percentage of revenues in the 2007
period is primarily the result of the decrease in flood revenues, partially offset by the growth of
the homeowners insurance business line, which has not required a proportionate increase in
personnel.
Other operating expenses in the specialty insurance segment were $21.1 million and $31.0
million in the first quarters of 2007 and 2006. As a percentage of revenues, other operating
expenses were 21.3% and 28.1% in the first quarters of 2007 and 2006, respectively. In the course
of an internal review of our treatment of certain costs relating
to insurance policies issued by our specialty insurance segment, 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.
26
The provision for claim losses was $38.9 million and $33.9 million in the first quarters of
2007 and 2006, respectively. The increase was primarily the result of the increase in homeowners
insurance premium revenues.
Net earnings were $15.9 million and $19.9 million for the first quarters of 2007 and 2006,
respectively.
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 a pretax loss of
$13.3 million in the first quarter of 2007, compared to a pretax loss of $9.5 million in the first
quarter of 2006.
Fidelity National Information Services Segment
First quarter 2006 results of operations for FIS, which was included in our results as a
separate segment prior to October 24, 2006, are as follows.
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
|
(Dollars in thousands) |
|
Revenue |
|
$ |
900,935 |
|
Interest and investment income |
|
|
1,709 |
|
Realized gains and losses, net |
|
|
1,023 |
|
|
|
|
|
Total revenue |
|
|
903,667 |
|
|
|
|
|
Personnel costs |
|
|
413,220 |
|
Other operating expenses |
|
|
286,064 |
|
Depreciation and amortization |
|
|
96,795 |
|
Provision for claim loss |
|
|
65 |
|
Interest expense |
|
|
43,268 |
|
|
|
|
|
Total expenses |
|
|
839,412 |
|
|
|
|
|
Earnings before income taxes and minority interest |
|
|
64,255 |
|
Income tax expense |
|
|
24,586 |
|
Minority interest expense |
|
|
311 |
|
|
|
|
|
Net earnings |
|
$ |
39,358 |
|
|
|
|
|
Liquidity and Capital Resources
Cash Requirements. Our cash requirements include operating expenses, taxes, payments of
interest and principal on our debt, capital expenditures, business acquisitions, and dividends on
our common stock. At present, we pay dividends of $66.5 million per quarter, or an aggregate of
$265.9 million per year, based on 221,588,791 shares outstanding at March 31, 2007. 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 and
borrowings on existing credit facilities. 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.
27
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 other distributions to us. As of December 31, 2006, $2.0
billion of our net assets were restricted from dividend payments without prior approval from the
departments of insurance. During the remainder of 2007, our first tier title subsidiaries can pay
or make distributions to us of approximately $234 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.
Capital Expenditures. Total capital expenditures were lower in the first quarter of 2007
compared to the first quarter of 2006 because the 2006 period includes capital expenditures made by
FIS. Total capital expenditures for property and equipment were $28.9 million and $42.8 million for
the three months ended March 31, 2007 and 2006, respectively. Total capital expenditures for
software were $5.7 million and $50.8 million for the three months ended March 31, 2007 and 2006,
respectively.
Financing. Effective October 24, 2006, we entered into a credit agreement (the New Credit
Agreement) with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other
financial institutions party thereto. The New Credit Agreement, which replaced our previous credit
agreement, provides for an $800 million unsecured revolving credit facility maturing on the fifth
anniversary of the closing date. We have the option to increase the size of the credit facility by
an additional $300 million, subject to certain requirements. 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 New 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 will pay a commitment fee
between 0.07%-0.175% on the entire facility, also depending on our senior unsecured long-term debt
rating.
The New 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 New Credit Agreement requires us to maintain certain financial ratios and
levels of capitalization. The New Credit Agreement also includes customary events of default for
facilities of this type (with customary grace periods, as applicable) and 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 New Credit Agreement shall automatically become
immediately due and payable, and the lenders commitments will automatically terminate.
In connection with the 2005 distribution of our stock by Old FNF, we issued two $250 million
intercompany notes payable to Old FNF (the Mirror Notes), with terms that mirrored Old FNFs
existing $250 million 7.30% public debentures due in August 2011 and $250 million 5.25% public
debentures due in March 2013. Following issuance of the Mirror Notes, we filed a Registration
Statement on Form S-4, pursuant to which we offered to exchange the outstanding Old FNF notes for
notes we would issue having substantially the same terms and deliver the Old FNF notes received to
Old FNF to reduce our debt under the Mirror Notes. On January 18, 2006 we completed these exchange
offers with $241.3 million aggregate principal amount of the 7.30% notes due 2011 and the entire
$250.0 million aggregate principal amount of the 5.25% notes due 2013 validly tendered and not
withdrawn in the exchange offers. Following the completion of the exchange offers, we issued a new
7.30% Mirror
Note due 2011 in the amount of $8.7 million, representing the principal amount of the portion
of the original Mirror Notes that was not exchanged. On October 23, 2006, the remaining balance of
these notes was redeemed in full.
28
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. These short-term security lending
arrangements increase investment income with minimal risk. At March 31, 2007, we had security loans
outstanding with a fair value of $237.9 million included in accounts payable and accrued
liabilities and we held cash in the same amount as collateral for the loaned securities.
In addition to the foregoing financing arrangements, our historical financial statements
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. Significant changes in interest rates may
alter these traditional seasonal patterns due to the effect the cost of financing has on the volume
of real estate transactions.
Contractual Obligations. Our long-term contractual obligations have not changed materially
since December 31, 2006.
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. We began purchasing
shares under this program on a regular basis on April 30, 2007
and through May 7, 2007, we have
repurchased a total of 600,000 shares.
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 March 31, 2007, the full $75.0 million had been
drawn on the facility to finance land costs and related fees and expenses. 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 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 Financial Accounting
Standards Board (FASB) Interpretation No. 46R, Consolidation of Variable Interest Entities
(FIN 46R). 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 certain assets that should be excluded
from such calculation under FIN 46R, 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 March 31,
2007 related to these arrangements.
29
Critical Accounting Policies
There have been no material changes in our critical accounting policies described in our
Annual Report on Form 10-K for the year ended December 31, 2006.
Recent Accounting Pronouncements
For a description of our recent accounting pronouncements, please see Note A of Notes to
Condensed Consolidated Financial Statements included elsewhere herein.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in the market risks described in our Annual Report on Form
10-K for the year ended December 31, 2006.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our
principal executive officer and principal financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective to provide reasonable assurance
that our disclosure controls and procedures will timely alert them to material information required
to be included in our periodic SEC reports.
There have been no changes in our internal controls over financial reporting that occurred
during our last fiscal quarter that have materially affected or are reasonably likely to materially
affect our internal controls over financial reporting.
Part II: OTHER INFORMATION
Item 1. 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:
|
|
|
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 general, the dollar amount of damages sought is not
specified. In those cases where plaintiffs have made a specific statement with regard to
monetary damages, they often specify damages just below a jurisdictional limit regardless of
the facts of the case. This represents 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, we may experience. |
30
|
|
|
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, we base our decision on
our assessment of the ultimate outcome following all appeals. |
|
|
|
|
In the opinion of our management, 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. |
Certain significant legal proceedings and matters have been previously disclosed in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006. The following is an
update of such proceedings:
Several class actions are pending in Alabama (Hazelwood v Ticor Title Insurance Company filed
March 6, 2007 in the U.S. District Court for the Southern District of Alabama, Southern Division)
and Kentucky (Tenhundfeld v Chicago Title Insurance Company, filed February 15, 2007 in the U.S.
District Court for the Eastern District of Kentucky, Northern Division at Covington) alleging
improper premiums were charged for title insurance. The 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. The
actions seek refunds of the premiums charged and punitive damages. We intend to vigorously defend
these actions.
A class action in Washington (Braunstein v. Chicago Title Insurance Company, filed on November
22, 2006 in the U.S. District Court for the Western District of Washington at Seattle) alleges that
we have violated state law by making prohibited payments for the referral of business increasing
the cost of title insurance to consumers. Ticor Title Insurance Company and Fidelity National Title
Insurance Company were added as defendants in this suit in March 2007. The suit seeks compensatory
damages, and attorneys fees. We intend to vigorously defend this action.
None of the cases described above 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. Two of
the Ohio cases state that the damages per class member are less than the jurisdictional limit for
removal to federal court.
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.
On February 16, 2007, Chicago Title Insurance Company (CTIC) received a letter from the
United States Attorneys Office in the Southern District of Texas advising the company that it is
the target of a federal grand jury
investigation in Houston, Texas concerning possible violations of law involving loans made by
three banks in Texas. CTIC believes that the investigation relates to certain mortgage loan
transactions that were closed between 1999 and 2001 by a branch office of CTIC located in the
Houston Metropolitan area. As previously disclosed, in February 2005, without any admission of
fault or liability, CTIC entered into an Order with the U.S. Office of the Comptroller of the
Currency and certain other regulators including the Office of Thrift Supervision and the Texas
Department of
31
Insurance in connection with their investigations of matters relating to these loans.
Under the Order, we agreed to, among other things, pay a civil money penalty, provide training to
current and prospective employees, and audit branch offices at least every two years to ensure
compliance with applicable rules and regulations. In addition, without admitting any liability,
CTIC concurrently entered into a settlement agreement with the U.S. Department of Housing and Urban
Development with respect to any violations of the Real Estate Settlement Procedures Act in
connection with these loans following the U.S. Department of Housing and Urban Developments (the
HUD) investigation of the matter. The U.S. Attorneys Office now is investigating possible
violations of the bank fraud laws in connection with the same loans. CTIC is fully cooperating with
the U.S. Attorneys investigation. CTIC has launched an internal investigation, and has been
reporting thereon to the U.S. Attorneys office on a confidential basis. The internal investigation
has revealed potentially criminal conduct involving former employees which CTIC has turned over to the U.S. Attorney. However,
we believe CTIC should not be indicted. In the event that CTIC were to be indicted, the
consequences to us could have a material adverse effect on our business.
The National Association of Insurance Commissioners and various state insurance regulators
have been investigating so called captive reinsurance agreements since 2004. The investigations
have focused on arrangements in which title insurers would write title insurance generated by
realtors, developers and lenders and cede a portion of the premiums to a reinsurance company
affiliate of the entity that generated the business. The HUD also has made formal or informal
inquiries of us regarding these matters. We have been cooperating and intend to continue to
cooperate with all ongoing investigations. We have discontinued all captive reinsurance
arrangements. The total amount of premiums we ceded to reinsurers was approximately $10 million
over the existence of these agreements. We have settled most of the accusations of wrongdoing that
arose from these investigations by discontinuing the practice and paying fines. Some investigations
are continuing. We anticipate they will be settled in a similar manner.
Additionally, we have received inquiries from regulators about our business involvement with
title insurance agencies affiliated with builders, realtors and other traditional sources of title
insurance business, some of which we participated in forming as joint ventures with our
subsidiaries. These inquiries have focused on whether the placement of title insurance with us
through these affiliated agencies is proper or an improper form of referral payment. Like most
other title insurers, we participate in these affiliated business arrangements in a number of
states. We have settled the accusations of wrongdoing that arose from some of these investigations
by discontinuing the practice and paying fines. Other investigations are continuing. We anticipate
they will be settled in a similar manner.
In 2006, we and our subsidiaries settled all allegations of wrongdoing arising from a
wide-ranging review of the title insurance industry by the New York State Attorney General (the
NYAG). Under the terms of the settlement, we paid a $2 million fine and were required to reduce
premiums by 15% on owners policies under $1 million. Rate hearings will be conducted by the New
York State Insurance Department (the NYSID) in 2007, where all rates will be considered
industry-wide. The settlement clarifies practices considered wrongful under New York law by the
NYAG and the NYSID, and we have agreed not to engage in those practices. We will take steps to
assure that consumers are aware of the filed rates for premiums on title insurance products and
that the products are correctly rated. The settlement also resolves all issues raised by the market
conduct investigation of us and our subsidiaries by the NYSID except the issues of rating errors
found by the NYSID. As part of the settlement, we and our subsidiaries denied any wrongdoing.
Neither the fines nor the 15% rate reduction are expected to have a material impact on our
earnings. We cooperated fully with the NYAG and NYSID inquiries into these matters and will
continue to cooperate with the NYSID.
Further, in 2006, U.S. Representative Oxley, the Chairman of the House Financial Services
Committee (the Committee), asked the Government Accountability Office (the GAO) to investigate
the title insurance industry. A congressional hearing was held regarding title insurance practices
on April 27, 2006. The results of the GAOs study were delivered in a report entitled Title
Insurance: Actions Needed to Improve Oversight of the Title Industry and Better Protect Consumers
(the Report) to Congressman Oxleys successor on the GOP side (not Minority),
Rep Spencer Bachus (R-AL), the ranking member of the Committee on April 16, 2007. The GAOs
report, issued April 17, 2007, offered positive recommendations for the industry, the HUD and state
regulators.
32
In January 2007, the California Insurance Commissioner submitted to the California Office of
Administrative Law (the OAL) proposed regulations (the Proposed Regulations) that would have
significant effects on the title insurance industry in California. Among other things, the Proposed
Regulations would set maximum rates, effective as of October 1, 2009, for title and escrow using
industry data to be reported through the statistical plan described below and published by the
California Department of Insurance (the CDI). In addition, the Proposed Regulations would
establish an interim reduction of all title and escrow rates effective October 1, 2009 if the CDI
is unable to publish the data necessary for the calculation of the maximum rates by August 1, 2009.
These interim rate reductions are intended to roll rates back so that in effect, premiums are
charged on the basis of real property values from the year 2000. Title insurers would be required
to reduce their rates to a level below their 2000 rates, with the amount of the reduction
determined by a formula adjusting for real estate appreciation and inflation. We are concerned that
the reduced rates set by the Proposed Regulations will significantly reduce the title and escrow
rates that are charged in California, while precluding title insurers from seeking relief from
those reduced or maximum rates. In addition, the Proposed Regulations contemplate the creation of a
detailed statistical plan, requiring data to be collected by each title insurer, underwritten title
company, and controlled escrow company at the individual transaction level beginning on January 1,
2008. Compliance with the data collection and reporting requirements of the Proposed Regulations,
if adopted, would necessitate a significant revision and augmentation of our existing data
collection and accounting systems before January 1, 2008, and would require a significant
expenditure to comply with the April 30, 2009 deadline. The proposed required rate reductions and
maximum rates would significantly reduce the title insurance rates that our subsidiaries can
charge, and would likely have a significant negative impact on our California revenues. In
addition, the increased cost of compliance with the statistical data collection and reporting
requirements would negatively impact our cost of doing business in California. California is the
largest source of revenue for the title insurance industry, including for us. On February 21, 2007,
the OAL disapproved the Proposed Regulations and requested certain clarifications from the CDI. On
February 22, 2007, the CDI announced its intention to move forward expeditiously to satisfy the
OALs request in consultation with consumer groups and the title industry and resubmit the
regulations for approval. The Commissioner hosted a workshop on April 11, 2007, allowing the
industry to document their concerns about the Proposed Regulations. A second workshop is scheduled
for May 9, 2007; however, the Commissioner intends to issue a 15 day notice signaling their intent
to resubmit the Proposed Regulations to the OAL in some revised format. The Commissioner must
resubmit on or before June 22, 2007.
In addition, the Florida Office of Insurance Regulation (the OIR) has released three studies
of the title insurance industry which purport to demonstrate that title insurance rates in Florida
are too high and that the Florida title insurance industry is overwhelmingly dominated by five
firms, which includes us. The studies recommend tying premium rates to loss ratios thereby making
the rates a reflection of the actual risks born by the insurer. The OIR is presently developing a
rule to establish and govern the annual collection of statistical data and has said that it will
use the information gathered to begin a full review of the title insurance rates charged in
Florida. We and one of our competitors have filed procedural challenges to the currently proposed
rule. A hearing is scheduled for June 27, 2007.
The Washington Insurance Commissioner has issued a report concluding that the title insurance
industry has engaged in illegal referral fees. The Commissioner has appointed a panel to recommend
title industry reforms.
Item 1A. Risk Factors. See Item 1, Legal Proceedings, for an update regarding certain matters
described in the Risk Factors section of our Form 10-K for the year ended December 31, 2006.
Adverse development arising from a pending investigation could materially adversely affect our
results of operations.
On February 16, 2007, CTIC received a letter from the United States Attorneys Office in the
Southern District of Texas advising the company that it is the target of a federal grand jury
investigation in Houston, Texas concerning possible violations of law involving loans made by three
banks in Texas. CTIC believes that the investigation relates to certain mortgage loan transactions
that were closed between 1999 and 2001 by a branch office of CTIC located in the Houston
Metropolitan area. As previously disclosed, in February 2005, without any admission of fault or
liability, CTIC entered into an Order with the U.S. Office of the Comptroller of the Currency
and certain other regulators including the Office of Thrift Supervision and the Texas Department of
Insurance in connection with their investigations of matters relating to these loans. Under the
Order, the Company agreed to, among other things, pay a civil money penalty, provide training to
current and prospective employees, and audit branch offices at least every two years to ensure
compliance with applicable rules and regulations. In addition, without admitting any liability,
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CTIC concurrently entered into a settlement agreement with the U.S. Department of Housing and Urban
Development with respect to any violations of the Real Estate Settlement Procedures Act in
connection with these loans following HUDs investigation of the matter. The U.S. Attorneys Office
now is investigating possible violations of the bank fraud laws in connection with the same loans.
CTIC is fully cooperating with the U.S. Attorneys investigation. CTIC has launched an internal
investigation, and has been reporting thereon to the U.S. Attorneys office on a confidential
basis. The internal investigation has revealed potentially criminal
conduct involving former employees which CTIC has turned
over to the U.S. Attorney. However, the Company believes it should not be indicted. In the event
that CTIC were to be indicted, the consequences to us could materially adversely affect the
Companys business.
Item 6. Exhibits
(a) Exhibits:
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31.1 |
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Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification by Chief Executive Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350. |
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32.2 |
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Certification by Chief Financial Officer of Periodic Financial
Reports pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18
U.S.C. Section 1350.
|
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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FIDELITY NATIONAL FINANCIAL, INC. |
(registrant) |
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By:
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/s/ Anthony J. Park |
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Anthony J. Park |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer)
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Date: May 8, 2007 |
35
|
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Exhibit No. |
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Description |
31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1
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Certification by Chief Executive Officer of Periodic Financial Reports
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
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32.2
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Certification by Chief Financial Officer of Periodic Financial Reports
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350. |
36