e10vq
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 June 30, 2008
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, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
| Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
YES o NO þ
As
of July 31, 2008, 211,457,680 shares of the Registrants Common Stock were outstanding.
FORM 10-Q
QUARTERLY REPORT
Quarter Ended June 30, 2008
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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June 30, |
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December 31, |
|
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2008 |
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2007 |
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(Unaudited) |
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ASSETS
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Investments: |
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|
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Fixed maturities available for sale, at fair value, at June 30,
2008 includes $367,903 and $173,665, respectively, of pledged
fixed maturities related to secured trust deposits and the
securities lending program, at December 31, 2007 includes
$335,270 and $264,202, respectively, of pledged fixed maturity
securities related to secured trust deposits and the securities
lending program |
|
$ |
2,517,347 |
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|
$ |
2,824,572 |
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Equity securities, at fair value |
|
|
38,174 |
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|
93,272 |
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Investments in unconsolidated affiliates |
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|
694,693 |
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|
738,356 |
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Other long-term investments |
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|
18,112 |
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|
18,255 |
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Short-term investments at June 30, 2008 and December 31,
2007 includes $63,935 and $178,568, respectively, of pledged
short-term investments related to secured trust deposits |
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499,048 |
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427,366 |
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|
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|
|
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Total investments |
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3,767,374 |
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4,101,821 |
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Cash and cash equivalents, at June 30, 2008 includes $224,385 and
$179,416, respectively, of pledged cash related to secured trust
deposits and the securities lending program, and at December 31,
2007 includes $193,484 and $271,807, respectively, of pledged cash
related to secured trust deposits and the securities lending
program |
|
|
495,120 |
|
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|
569,562 |
|
Trade and notes receivables, net of allowance of $14,072 and
$13,091, respectively, at June 30, 2008 and December 31, 2007 |
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238,787 |
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|
227,849 |
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Goodwill |
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1,338,274 |
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1,339,705 |
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Prepaid expenses and other assets |
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569,198 |
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|
467,831 |
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Capitalized software |
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91,395 |
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93,413 |
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Other intangible assets |
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107,221 |
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122,383 |
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Title plants |
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334,629 |
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331,888 |
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Property and equipment, net |
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247,804 |
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266,156 |
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Income taxes receivable |
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58,334 |
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|
67,245 |
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|
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$ |
7,248,136 |
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$ |
7,587,853 |
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LIABILITIES AND STOCKHOLDERS EQUITY
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Liabilities: |
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Accounts payable and accrued liabilities, at June 30, 2008 and
December 31, 2007, includes $179,416 and $271,807,
respectively, of security loans related to the securities
lending program |
|
$ |
679,738 |
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$ |
823,109 |
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Accounts payable to Fidelity National Information Services, Inc. |
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5,223 |
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13,890 |
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Deferred revenue |
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113,277 |
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114,705 |
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Notes payable, at June 30, 2008 and December 31, 2007, includes
$6,708 and $7,059, respectively, in notes payable to Fidelity
National Information Services, Inc. |
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1,196,907 |
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1,167,739 |
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Reserve for claim losses |
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1,394,921 |
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1,419,910 |
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Secured trust deposits |
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643,916 |
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689,935 |
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Deferred tax liabilities |
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55,899 |
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60,609 |
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|
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|
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4,089,881 |
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4,289,897 |
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Minority interests |
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48,594 |
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53,868 |
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Stockholders equity: |
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Preferred stock, $0.0001 par value; authorized 50,000,000
shares; issued and outstanding, none |
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Common stock, Class A, $0.0001 par value; authorized
600,000,000 shares as of June 30, 2008 and December 31, 2007;
issued 224,328,557 as of June 30, 2008 and 223,069,076 as of
December 31, 2007 |
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22 |
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22 |
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Additional paid-in capital |
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3,259,590 |
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3,236,866 |
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Retained earnings |
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|
119,344 |
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213,103 |
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|
|
|
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3,378,956 |
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3,449,991 |
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Accumulated other comprehensive loss |
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|
(46,863 |
) |
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(16,630 |
) |
Less treasury stock, 12,235,103 shares and 10,032,449 shares as
of June 30, 2008 and December 31, 2007, respectively, at cost |
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(222,432 |
) |
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(189,273 |
) |
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|
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3,109,661 |
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3,244,088 |
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$ |
7,248,136 |
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$ |
7,587,853 |
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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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Six months ended |
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June 30, |
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June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Unaudited) |
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(Unaudited) |
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REVENUE: |
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Direct title insurance premiums |
|
$ |
321,040 |
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|
$ |
448,504 |
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|
$ |
625,819 |
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$ |
867,101 |
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Agency title insurance premiums |
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423,915 |
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597,862 |
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847,351 |
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1,140,008 |
|
Escrow, title related and other fees |
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|
292,838 |
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|
299,476 |
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|
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566,459 |
|
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556,456 |
|
Specialty insurance |
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|
94,161 |
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|
99,731 |
|
|
|
178,988 |
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|
|
194,729 |
|
Interest and investment income |
|
|
30,053 |
|
|
|
45,528 |
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|
|
72,073 |
|
|
|
93,305 |
|
Realized gains and losses, net |
|
|
17,791 |
|
|
|
3,899 |
|
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|
26,268 |
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|
|
10,281 |
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|
|
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|
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|
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Total revenue |
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1,179,798 |
|
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|
1,495,000 |
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|
2,316,958 |
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2,861,880 |
|
EXPENSES: |
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|
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Personnel costs |
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366,254 |
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452,752 |
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728,132 |
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|
888,012 |
|
Other operating expenses |
|
|
319,856 |
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|
296,221 |
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|
587,726 |
|
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|
530,662 |
|
Agent commissions |
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|
328,800 |
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|
462,876 |
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|
656,809 |
|
|
|
883,033 |
|
Depreciation and amortization |
|
|
34,716 |
|
|
|
31,192 |
|
|
|
71,611 |
|
|
|
60,546 |
|
Provision for claim losses |
|
|
100,427 |
|
|
|
113,083 |
|
|
|
187,932 |
|
|
|
224,069 |
|
Interest expense |
|
|
16,218 |
|
|
|
12,435 |
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|
|
34,854 |
|
|
|
24,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,166,271 |
|
|
|
1,368,559 |
|
|
|
2,267,064 |
|
|
|
2,610,734 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Earnings before income taxes, equity in (losses)
income of unconsolidated affiliates, and minority
interest |
|
|
13,527 |
|
|
|
126,441 |
|
|
|
49,894 |
|
|
|
251,146 |
|
Income tax expense |
|
|
1,167 |
|
|
|
40,471 |
|
|
|
13,342 |
|
|
|
85,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before equity in (losses) income of
unconsolidated affiliates and minority interest |
|
|
12,360 |
|
|
|
85,970 |
|
|
|
36,552 |
|
|
|
165,630 |
|
Equity in (losses) income of unconsolidated affiliates |
|
|
(6,349 |
) |
|
|
(323 |
) |
|
|
(4,668 |
) |
|
|
1,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before minority interest |
|
|
6,011 |
|
|
|
85,647 |
|
|
|
31,884 |
|
|
|
167,489 |
|
Minority interest |
|
|
(914 |
) |
|
|
812 |
|
|
|
(2,286 |
) |
|
|
(745 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
6,925 |
|
|
$ |
84,835 |
|
|
$ |
34,170 |
|
|
$ |
168,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.03 |
|
|
$ |
0.39 |
|
|
$ |
0.16 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic |
|
|
210,814 |
|
|
|
218,707 |
|
|
|
210,962 |
|
|
|
218,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.03 |
|
|
$ |
0.38 |
|
|
$ |
0.16 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, diluted |
|
|
213,107 |
|
|
|
222,968 |
|
|
|
213,318 |
|
|
|
222,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per share |
|
$ |
0.30 |
|
|
$ |
0.30 |
|
|
$ |
0.60 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
4
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Net earnings |
|
$ |
6,925 |
|
|
$ |
84,835 |
|
|
$ |
34,170 |
|
|
$ |
168,234 |
|
Other comprehensive earnings (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on
investments and other financial
instruments, net (excluding
investments in unconsolidated
affiliates) (1) |
|
|
(34,651 |
) |
|
|
62,440 |
|
|
|
(22,520 |
) |
|
|
56,823 |
|
Unrealized loss on investments
in unconsolidated affiliates |
|
|
(15,530 |
) |
|
|
|
|
|
|
(14,238 |
) |
|
|
|
|
Unrealized gain (loss) on
foreign currency translation (2) |
|
|
1,412 |
|
|
|
(145 |
) |
|
|
3,119 |
|
|
|
(159 |
) |
Reclassification adjustments for
losses (gains) included in net
earnings (3) |
|
|
4,445 |
|
|
|
(2,433 |
) |
|
|
3,406 |
|
|
|
(5,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) earnings |
|
|
(44,324 |
) |
|
|
59,862 |
|
|
|
(30,233 |
) |
|
|
51,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) earnings |
|
$ |
(37,399 |
) |
|
$ |
144,697 |
|
|
$ |
3,937 |
|
|
$ |
219,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of income tax (benefit) expense of $(19.1) million and $36.1 million for the three month
periods ended June 30, 2008 and 2007, respectively, and $(11.7) million and $33.0 million for
the six month periods ended June 30, 2008 and 2007, respectively. |
|
(2) |
|
Net of income tax expense (benefit) of $0.8 million and $(0.1) million for the three month
periods ended June 30, 2008 and 2007, respectively, and $1.7 million and $(0.1) million for
the six month periods ended June 30, 2008 and 2007, respectively. |
|
(3) |
|
Net of income tax (benefit) expense of $(2.4) million and $1.4 million for the three month
periods ended June 30, 2008 and 2007, respectively, and $(1.8) million and $3.1 million for
the six month periods ended June 30, 2008 and 2007, respectively. |
See Notes to Condensed Consolidated Financial Statements
5
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid - in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance, December 31, 2007 |
|
|
223,069 |
|
|
$ |
22 |
|
|
$ |
3,236,866 |
|
|
$ |
213,103 |
|
|
$ |
(16,630 |
) |
|
|
10,032 |
|
|
$ |
(189,273 |
) |
|
$ |
3,244,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
660 |
|
|
|
|
|
|
|
4,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,578 |
|
Tax benefit associated with the
exercise of stock options |
|
|
|
|
|
|
|
|
|
|
2,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,681 |
|
Other comprehensive income
(loss)- unrealized gain on
investments and other financial
instruments (excluding
investments in unconsolidated
affiliates) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,114 |
) |
|
|
|
|
|
|
|
|
|
|
(19,114 |
) |
Other comprehensive loss
unrealized loss on investments
in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,238 |
) |
|
|
|
|
|
|
|
|
|
|
(14,238 |
) |
Other comprehensive income
(loss)- unrealized gain on
foreign currency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,119 |
|
|
|
|
|
|
|
|
|
|
|
3,119 |
|
Stock based compensation,
including issuance of
restricted stock |
|
|
600 |
|
|
|
|
|
|
|
15,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,465 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,203 |
|
|
|
(33,159 |
) |
|
|
(33,159 |
) |
Cash dividends ($0.60 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127,929 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(127,929 |
) |
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2008 |
|
|
224,329 |
|
|
$ |
22 |
|
|
$ |
3,259,590 |
|
|
$ |
119,344 |
|
|
$ |
(46,863 |
) |
|
|
12,235 |
|
|
$ |
(222,432 |
) |
|
$ |
3,109,661 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Condensed Consolidated Financial Statements
6
FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
34,170 |
|
|
$ |
168,234 |
|
Reconciliation of net earnings to net cash from operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
71,611 |
|
|
|
60,546 |
|
Minority interest |
|
|
(2,286 |
) |
|
|
(745 |
) |
Equity in losses (income) of unconsolidated affiliates |
|
|
4,668 |
|
|
|
(1,859 |
) |
Gain on sales of assets |
|
|
(26,268 |
) |
|
|
(10,281 |
) |
Stock-based compensation cost |
|
|
15,465 |
|
|
|
15,665 |
|
Tax benefit associated with the exercise of stock options |
|
|
(2,681 |
) |
|
|
(5,378 |
) |
Change in assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
Net (decrease) increase in reserve for claim losses |
|
|
(24,989 |
) |
|
|
8,468 |
|
Net decrease in secured trust deposits |
|
|
5,081 |
|
|
|
8,414 |
|
Net (increase) decrease in trade receivables |
|
|
(3,462 |
) |
|
|
6,258 |
|
Net increase in prepaid expenses and other assets |
|
|
(87,462 |
) |
|
|
(25,961 |
) |
Net decrease in accounts payable, accrued liabilities |
|
|
(61,108 |
) |
|
|
(51,763 |
) |
Net increase in income taxes |
|
|
15,223 |
|
|
|
56,251 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(62,038 |
) |
|
|
227,849 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of investment securities available for sale |
|
|
560,100 |
|
|
|
3,053,922 |
|
Proceeds from maturities of investment securities available for sale |
|
|
164,410 |
|
|
|
216,870 |
|
Proceeds from sale of assets |
|
|
927 |
|
|
|
1,072 |
|
Cash (paid) received as collateral on loaned securities, net |
|
|
(1,855 |
) |
|
|
426 |
|
Collections of notes receivable |
|
|
3,536 |
|
|
|
3,845 |
|
Additions to title plants |
|
|
(2,981 |
) |
|
|
(7,016 |
) |
Additions to property and equipment |
|
|
(31,176 |
) |
|
|
(50,587 |
) |
Additions to capitalized software |
|
|
(13,803 |
) |
|
|
(16,175 |
) |
Purchases of investment securities available for sale |
|
|
(482,031 |
) |
|
|
(3,608,838 |
) |
Net (purchases of) proceeds from short-term investment activities |
|
|
(165,775 |
) |
|
|
406,954 |
|
Issuance of notes receivable |
|
|
(435 |
) |
|
|
(95 |
) |
Proceeds from sale of partial interest in Sedgwick CMS |
|
|
53,872 |
|
|
|
|
|
Acquisitions of businesses, net of cash acquired |
|
|
(1,082 |
) |
|
|
(51,675 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
83,707 |
|
|
|
(51,297 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings |
|
|
90,115 |
|
|
|
15,243 |
|
Debt service payments |
|
|
(61,089 |
) |
|
|
(1,322 |
) |
Dividends paid |
|
|
(127,929 |
) |
|
|
(132,010 |
) |
Subsidiary dividends paid to minority interest shareholders |
|
|
(2,209 |
) |
|
|
|
|
Stock options exercised |
|
|
4,578 |
|
|
|
6,737 |
|
Tax benefit associated with the exercise of stock options |
|
|
2,681 |
|
|
|
5,378 |
|
Purchases of treasury stock |
|
|
(33,159 |
) |
|
|
(35,159 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(127,012 |
) |
|
|
(141,133 |
) |
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents, excluding pledged
cash related to secured trust deposits |
|
|
(105,343 |
) |
|
|
35,419 |
|
Cash and cash equivalents, excluding pledged cash related to secured
trust deposits at beginning of period |
|
|
376,078 |
|
|
|
447,986 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, excluding pledged cash related to secured
trust deposits at end of period |
|
$ |
270,735 |
|
|
$ |
483,405 |
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
3,879 |
|
|
$ |
29,992 |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
34,829 |
|
|
$ |
24,060 |
|
|
|
|
|
|
|
|
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, 2007.
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 other previously
reported annual periods.
Certain other reclassifications have been made in the 2007 Condensed Consolidated Financial
Statements to conform to classifications used in 2008.
Description of Business
Fidelity National Financial, Inc. is a holding company that is a provider, through its
subsidiaries, of title insurance, specialty insurance, claims management services, and information
services. FNF is one of the nations largest title insurance companies through its title insurance
underwriters Fidelity National Title, Chicago Title, Ticor Title, Security Union Title, and
Alamo Title which issued approximately 26.7% of all title insurance policies issued nationally
during 2007. FNF also provides flood insurance, personal lines insurance, and home warranty
insurance through its specialty insurance subsidiaries. FNF is also a leading provider of
outsourced claims management services to large corporate and public sector entities through its
minority-owned affiliate, Sedgwick CMS (Sedgwick). FNF is also a provider of information services
in the human resources, retail, and transportation markets through another minority-owned
affiliate, Ceridian Corporation (Ceridian).
The Company recently announced that its Board of Directors has authorized management to
investigate strategic alternatives for certain of its specialty insurance businesses. The assets to
be evaluated include the flood insurance and personal lines insurance businesses, but not the home
warranty business.
Transactions with Related Parties
The Company has historically conducted business with Fidelity National Information Services, Inc.
and its subsidiaries (FIS). A number of these business activities were agreements with entities
which have been a part of FISs lender processing services segment. On July 2, 2008, FIS completed
the spin-off of its lender processing services segment into a separate publicly traded company,
referred to as Lender Processing Services, Inc. (LPS) As part of the spin-off of LPS, a number of
these agreements have been amended and renegotiated to reflect the revised relationships between
the Company and FIS and the new relationships between the Company and LPS. A summary of the
agreements that were in effect with FIS and LPS through June 30, 2008 is as follows:
|
|
Agreements allowing FIS to provide title agency services. These agreements allow FIS to
provide services to existing customers through loan facilitation transactions, primarily with
large national lenders. The arrangement involves FIS providing title agency services which
result in the issuance of title policies on behalf of title insurance underwriters owned by
the Company. Subject to certain early termination provisions for cause, each of these
agreements may be terminated upon five years prior written notice, which notice may not be
given until after the fifth anniversary of the effective date of each agreement, which ranges
from July 2004 through September 2006 (thus effectively resulting in a minimum ten-year term
and a rolling one- |
8
|
|
year term thereafter). Under these agreements, FIS retains commissions which, in aggregate,
are equal to approximately 89% of the total title premium from title policies that FIS places
with the Companys subsidiaries. FIS also performs similar functions in connection with
trustee sale guarantees, a form of title insurance that the Companys subsidiaries issue as
part of the foreclosure process on a defaulted loan. These agreements primarily relate to
FISs lender processing services segment and will be between FNF and LPS subsequent to the
spin-off. |
|
|
Agreement for IT, data processing services and software development services. This agreement
governs the expenses paid by the Company to FIS for providing IT support services and software
development, primarily infrastructure support and data center management. Subject to certain
early termination provisions (including the payment of minimum monthly service and termination
fees), this agreement has an initial term of five years from February 2006 with an option to
renew for one or two additional years. In connection with the spin-off, this agreement will be
amended so that certain of the services, primarily those related to infrastructure support and
data center management, will be provided by FIS on revised terms and conditions. In addition,
in connection with the spin-off, the Company will enter into a new agreement with LPS for the
provision of certain of the services that were previously provided under the existing
agreement with FIS, primarily those related to software application development services and
other IT-related services for the Company. |
|
|
Agreements to provide administrative corporate support services to and from FIS. Since
November 9, 2006, the Company has provided certain administrative corporate support services
to FIS, and FIS has provided similar support services to the Company, relating to general
management, statutory accounting, claims administration, corporate aviation and other
administrative support services. The pricing of these services is at cost. In connection with
the spin-off, the agreements will be amended in connection with services to be provided to or
from FIS and LPS, respectively, and will remain on a cost basis. |
|
|
Arrangements for other real estate, tax, and title support related services. Under these
arrangements, the Company pays FIS for providing other real estate related services to the
Company, which consist primarily of real estate and title related data services required by
the Companys title insurance operations and flood zone determination and reporting services
used by the Companys title insurers in connection with properties that may be located in
special flood hazard areas. These arrangements primarily related to FISs lender processing
services segment and will be between FNF and LPS subsequent to the spin-off. |
|
|
Agreements for title plant access and title production services. Under these agreements, the
Companys title insurers provide FIS with title plant access for real property located in
various states, including online database access, physical access to title records, use of
space, image system use, and use of special software, as well as other title production
services. For the title plant access, FIS pays monthly fees (subject to certain minimum
charges) based on the number of title reports or products ordered and other services received.
For the title production services, FIS pays for services based on the number of properties
searched, subject to certain minimum use. The title plant access agreement has a term of 3
years beginning in November 2006 and is automatically renewable for successive 3 year terms
unless either party gives 30 days prior written notice. The title production services
agreement can be terminated by either party upon 30 days prior written notice. These
agreements primarily related to FISs lender processing services segment and will be between
FNF and LPS subsequent to the spin-off. |
|
|
Real estate management, real estate lease and equipment lease agreements. Included in the
Companys revenues are amounts received related to leases of certain equipment to FIS and the
sublease of certain office space, furniture and furnishings to FIS. In addition, the Companys
expenses include expenses for a lease of office space and equipment from FIS for the Companys
corporate headquarters and business operations as well as expenses for property management
services by FIS for the Companys corporate headquarters building. In connection with the
spin-off and the transfer of certain real property from FIS to LPS, the Company will terminate
its real estate lease with FIS and enter into a new lease with LPS on similar terms as the
existing FIS lease. In addition, the Company will amend its sublease with FIS to take into
account a reduction in the office space leased by FIS, and will enter into a new sublease with
LPS for its sublease of office space in the Companys headquarters building. The Company
will also enter into a new property management agreement with LPS since LPS will replace FIS
as the principal owner and manager of the Jacksonville headquarters campus. |
9
|
|
Licensing, cost sharing, business processing and other agreements. These agreements provide
for the reimbursement of certain amounts from the Company related to various licensing and
cost sharing agreements, as well as the payment of certain amounts by FIS to the Company in
connection with the use of certain intellectual property, including software and business
processes, and other assets of or services. The software licenses have various terms, but
generally may be terminated on 90 days prior notice. The business processing license and
services agreement has a 10-year term, but in connection with the spin-off, its term will be
amended to expire on July 2, 2009. Most of these agreements primarily related to FISs lender
processing services segment and will be between FNF and LPS subsequent to the spin-off. |
On August 31, 2007, the Company completed the acquisition of Property Insight, LLC (Property
Insight), a former FIS subsidiary, from FIS for $95 million in cash. Property Insight is a leading
provider of title plant services for the Company, as well as various national and regional
underwriters. Property Insight primarily manages, maintains and updates the title plants that are
owned by the Company. Additionally, Property Insight manages potential title plant construction for
the Company. Prior to August 31, 2007, the title plant assets of several of FNFs title insurance
subsidiaries were managed or maintained by Property Insight, as a subsidiary of FIS. The underlying
title plant information and software were owned by each of the Companys title insurance
underwriters, but Property Insight managed and updated the information in return for either (i) a
cash management fee or (ii) the right to sell that information to title insurers, including title
insurance underwriters that the Company owns and other third party customers. In most cases,
Property Insight was responsible for keeping the title plant assets current and fully functioning,
for which the Company paid a fee to Property Insight based on the Companys use of, or access to,
the title plant. In addition, each applicable title insurance underwriter owned by the Company in
turn received a royalty on sales of access to its title plant assets. The Company is also a party
to agreements with FIS that permit 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. These agreements primarily related to FISs lender processing services segment and will be
between FNF and LPS subsequent to the spin-off.
A detail of related party items included in revenues and expenses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
Six months ended |
|
|
Six months ended |
|
|
|
June 30, 2008 |
|
|
June 30, 2007 |
|
|
June 30, 2008 |
|
|
June 30, 2007 |
|
|
|
|
|
|
|
(in millions) |
|
|
|
|
|
Agency title premiums earned |
|
$ |
38.7 |
|
|
$ |
40.7 |
|
|
$ |
75.5 |
|
|
$ |
77.3 |
|
Rental revenue |
|
|
6.3 |
|
|
|
|
|
|
|
12.3 |
|
|
|
|
|
Title plant revenue |
|
|
2.1 |
|
|
|
|
|
|
|
4.7 |
|
|
|
|
|
Interest revenue |
|
|
|
|
|
|
0 .2 |
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
47.1 |
|
|
|
40.9 |
|
|
|
92.5 |
|
|
|
77.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency title commissions |
|
|
34.3 |
|
|
|
36.1 |
|
|
|
66.8 |
|
|
|
68.3 |
|
Data processing costs |
|
|
11.4 |
|
|
|
14.1 |
|
|
|
22.6 |
|
|
|
26.1 |
|
Corporate services allocated |
|
|
(0.4 |
) |
|
|
(0.6 |
) |
|
|
(0.8 |
) |
|
|
(1.5 |
) |
Title insurance information expense |
|
|
|
|
|
|
4.7 |
|
|
|
|
|
|
|
10.9 |
|
Other real-estate related information |
|
|
3.6 |
|
|
|
4.0 |
|
|
|
7.1 |
|
|
|
7.3 |
|
Software development and services
expense |
|
|
14.3 |
|
|
|
12.9 |
|
|
|
27.2 |
|
|
|
25.0 |
|
Rental expense |
|
|
|
|
|
|
(1.2 |
) |
|
|
(0.5 |
) |
|
|
(1.4 |
) |
License and cost sharing agreements |
|
|
7.6 |
|
|
|
4.6 |
|
|
|
9.8 |
|
|
|
6.9 |
|
Interest expense |
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
70.9 |
|
|
$ |
74.6 |
|
|
$ |
132.3 |
|
|
$ |
141.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys payments to FIS for management and maintenance of title plant assets by Property
Insight were $5.2 million and $11.9 million for the three and six month periods ended June 30,
2007, respectively. The Companys revenues from title plant royalties were $0.5 million and $1.0
million for the three and six month periods ended June 30, 2007, respectively.
The Company believes the amounts earned by the Company or charged to it under each of the
foregoing arrangements are fair and reasonable. The Company believes the 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
10
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 FNF earned or was charged under these arrangements were not
negotiated at arms-length, and may not represent the terms that the Company might have obtained
from an unrelated third party.
Amounts due to FIS were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2008 |
|
2007 |
|
|
(In millions) |
Note payable to FIS |
|
$ |
6.7 |
|
|
$ |
7.1 |
|
Due to FIS |
|
|
5.2 |
|
|
|
13.9 |
|
Prior to September 30, 2007, FNF had a note receivable balance of $12.5 million due from a
subsidiary of FIS. The Company earned interest revenue of $0.2 million and $0.4 million on this
note for the three and six month periods ended June 30, 2007, respectively. On September 30, 2007,
the Company acquired certain leasing assets from FIS for $15 million. As part of this acquisition,
the Company assumed $134.9 million in non-recourse notes payable, the $12.5 million note due to a
subsidiary of FIS was forgiven, and the Company entered into an unsecured note payable to FIS in
the amount of $7.3 million. The balance on this note at June 30, 2008 is $6.7 million and the
companys related interest expense was $0.1 million for each of the three and six month periods
ended June 30, 2008. Also, as of June 30, 2008, and December 31, 2007, the Company owed $5.2
million and $13.9 million, respectively, to FIS as a result of related party transactions.
Through August 31, 2007, the Company paid amounts to Property Insight for capitalized software
development and for title plant construction. For the three and six month periods ended June 30,
2007, these amounts included capitalized software development costs of $2.2 million and $3.8
million, respectively, and amounts paid for capitalized title plant construction costs of $4.1
million and $9.7 million, respectively. During the six months ended June 30, 2008, the Company paid
FIS $0.8 million for capitalized software development costs, none of which was paid in the three
months ended June 30, 2008.
Recent Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles in the
United States. The FASB has concluded that the generally accepted accounting principles hierarchy
should reside in the accounting literature established by the FASB and issued SFAS 162 to achieve
that result. SFAS 162 is effective 60 days following the Securities and Exchange Commissions
approval of the Public Company Accounting Oversight Boards amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. Management
has determined that the adoption of SFAS 162 will not materially affect the Companys statements of
financial condition or operations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160), requiring noncontrolling
interests (sometimes called minority interests) to be presented as a component of equity on the
balance sheet. SFAS 160 also requires that the amount of net income attributable to the parent and
to the noncontrolling interests be clearly identified and presented on the face of the consolidated
statement of income. This statement eliminates the need to apply purchase accounting when a parent
company acquires a noncontrolling ownership interest in a subsidiary and requires that, upon
deconsolidation of a subsidiary, a parent company recognize a gain or loss in net income after
which any retained noncontrolling interest will be reported at fair value. SFAS 160 requires
expanded disclosures in the consolidated financial statements that identify and distinguish between
the interests of the parents owners and the
11
interest of the noncontrolling owners of subsidiaries. SFAS 160 is effective for periods
beginning on or after December 15, 2008 and will be applied prospectively except for the
presentation and disclosure requirements, which will be applied retrospectively for all periods
presented. Management is currently evaluating the impact of this statement on the Companys
statements of financial position and operations, but has determined that a reclassification of its
minority interest liabilities will be required.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
141(R)), requiring an acquirer in a business combination to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at their fair values at the
acquisition date, with limited exceptions. The costs of the acquisition and any related
restructuring costs will be expensed. Assets and liabilities arising from contingencies in a
business combination are to be recognized at their fair value at the acquisition date and adjusted
prospectively as new information becomes available. When the fair value of assets acquired exceeds
the fair value of consideration transferred plus any noncontrolling interest in the acquiree, the
excess will be recognized as a gain. Under SFAS 141(R), all business combinations will be accounted
for by prospectively applying the acquisition method, including combinations among mutual entities
and combinations by contract alone. SFAS 141(R) is effective for periods beginning on or after
December 15, 2008 and will apply to business combinations occurring after the effective date.
In February 2007, the FASB issued 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 January 1, 2008 for calendar year entities and the Company has adopted SFAS 159 as
of that date with no material effects on the Companys statements of operations or financial
condition.
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. Based on
the Companys valuation, any differences between the fair value of the identifiable assets and
liabilities and the purchase price paid are recorded as goodwill. There were no individually
significant acquisitions during the six months ended June 30, 2008.
Acquisition of Equity Interest in Ceridian
On November 9, 2007, FNF and Thomas H. Lee Partners (THL), along with certain co-investors,
completed the acquisition of Ceridian for $36 in cash per share of common stock, or approximately
$5.3 billion. The Company contributed approximately $526.8 million of the total $1.6 billion equity
funding for the acquisition of Ceridian and also received $36 million in fees associated with the
syndication of investors in the acquisition, of which $12.3 million was recorded as income and
$23.7 million was recorded as a reduction in the investment balance. This resulted in an investment
balance of $503.1 million and a 33% ownership interest in Ceridian, which the Company accounts for
using the equity method of accounting for financial statement purposes. Ceridian is an information
services company servicing the human resources, transportation, and retail industries.
Specifically, Ceridian offers a range of human resources outsourcing solutions and is a payment
processor and issuer of credit, debit, and stored-value cards.
Property Insight, LLC
On August 31, 2007, the Company completed the acquisition of Property Insight, a former FIS
subsidiary, from FIS for $95 million in cash. Property Insight is a leading provider of title plant
services for the Company, as well as various national and regional underwriters. Property Insight
primarily manages, maintains, and updates the title plants that are owned by the Company.
Additionally, Property Insight manages title plant construction activities for the Company.
12
ATM Holdings, Inc.
On August 13, 2007, the Company completed the acquisition of ATM Holdings, Inc. (ATM), a
provider of nationwide mortgage vendor management services to the loan origination industry, for
$100 million in cash. ATMs primary subsidiary is a licensed title insurance agency which provides
centralized valuation and appraisal services, as well as title and closing services, to residential
mortgage originators, banks and institutional mortgage lenders throughout the United States.
Equity Interest in Remy International, Inc. (Remy)
The Company held an investment in Remys Senior Subordinated Notes (the Notes) with a total
fair value of $139.9 million until December 6, 2007, at which time Remy implemented a pre-packaged
plan of bankruptcy under Chapter 11 of the Bankruptcy Code. Pursuant to the plan of bankruptcy, the
Notes were converted into 4,935,065 shares of Remy common stock and rights to buy 19,909 shares of
Remy Series B preferred stock. Upon execution of the plan of bankruptcy, the Company purchased the
19,909 shares of the preferred stock for $1,000 per share, or a total of $19.9 million, and
simultaneously sold 1,000 of those shares on the same terms and conditions to William P. Foley, II,
the Companys chairman of the board, for $1,000 per share, or a total of $1.0 million. The Company
now holds a 47% ownership interest in Remy, made up of 4,935,065 shares of Remy common stock with a
cost basis of $64.3 million and 18,909 shares of purchased Remy Series B preferred stock with a
cost basis of $19.5 million, and accounts for this investment using the equity method. During 2007,
as a result of the exchange of the Notes for the shares of common and preferred stock, the Company
reversed the unrealized gain of $75.0 million that had previously been recorded in accumulated
other comprehensive earnings in relation to the Notes. During the first quarter of 2008, an
external valuation of Remy was completed which indicated a higher value for Remy than the Company
had initially anticipated. As a result, a $5.3 million gain was recorded in the first quarter of
2008. Remy, headquartered in Anderson, Indiana, is a leading manufacturer, remanufacturer and
distributor of Delco Remy brand heavy-duty systems and Remy brand starters and alternators,
locomotive products and hybrid power technology.
Note C Earnings Per Share
Basic earnings per share is computed by dividing net earnings available to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted earnings per
share is calculated by dividing net earnings available to common stockholders by the weighted
average number of common shares outstanding plus the impact of assumed conversions of potentially
dilutive securities. The Company has granted certain options, warrants, and shares of 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 |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except |
|
|
(In thousands, except |
|
|
|
per share amounts) |
|
|
per share amounts) |
|
Net earnings, basic and diluted |
|
$ |
6,925 |
|
|
$ |
84,835 |
|
|
$ |
34,170 |
|
|
$ |
168,234 |
|
Weighted average shares
outstanding during the period,
basic |
|
|
210,814 |
|
|
|
218,707 |
|
|
|
210,962 |
|
|
|
218,860 |
|
Plus: Common stock equivalent
shares assumed from conversion
of options |
|
|
2,293 |
|
|
|
4,261 |
|
|
|
2,356 |
|
|
|
4,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding during the period,
diluted |
|
|
213,107 |
|
|
|
222,968 |
|
|
|
213,318 |
|
|
|
222,940 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.03 |
|
|
$ |
0.39 |
|
|
$ |
0.16 |
|
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.03 |
|
|
$ |
0.38 |
|
|
$ |
0.16 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase shares of the Companys common stock that are antidilutive are excluded
from the computation of diluted earnings per share. Antidilutive options totaled 7,367,725 shares
and 2,034,742 shares for the three month periods ended June 30, 2008 and 2007, respectively, and
7,481,464 shares and 3,178,771 shares for the six month periods ended June 30, 2008 and 2007,
respectively.
13
Note D Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements by establishing a fair value hierarchy based on the quality of inputs
used to measure fair value. SFAS 157 does not require any new fair value measurements, but applies
under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is
effective for financial statements for fiscal years beginning after November 15, 2007. The Company
adopted SFAS 157 as of January 1, 2008. FASB Staff Position SFAS No. 157-2, Effective Date of FASB
Statement No. 157, delays the effective date of SFAS 157 with respect to nonfinancial assets and
nonfinancial liabilities that are not remeasured at fair value on a recurring basis until fiscal
years beginning after November 15, 2008. Accordingly, the Company has not yet applied the
disclosure requirements of SFAS 157 to certain such nonfinancial assets for which fair value
measurements are determined on a non-recurring basis only when there is an indication of potential
impairment.
The fair value hierarchy established by SFAS 157 includes three levels which are based on the
priority of the inputs to the valuation technique. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial
instruments fall within different levels of the hierarchy, the categorization is based on the
lowest level input that is significant to the fair value measurement of the instrument. The Company
has no financial instruments categorized as Level 3. In accordance with SFAS No. 157, the Companys
financial assets and liabilities that are recorded on the Condensed Consolidated Balance Sheets are
categorized as Level 1 or 2 based on the inputs to the valuation techniques as follows:
Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices
for identical assets or liabilities in an active market that FNF has the ability to access.
Level 2. Financial assets and liabilities whose values are based on quoted prices in markets
that are not active or model inputs that are observable either directly or indirectly for
substantially the full term of the asset or liability.
The following table presents the Companys fair value hierarchy for those assets and
liabilities measured at fair value on a recurring basis as of June 30, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
Fixed maturities available for sale |
|
$ |
|
|
|
$ |
2,517,347 |
|
|
$ |
2,517,347 |
|
Equity securities |
|
|
38,174 |
|
|
|
|
|
|
|
38,174 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,174 |
|
|
$ |
2,517,347 |
|
|
$ |
2,555,521 |
|
|
|
|
|
|
|
|
|
|
|
Note E Investments
The Company lends fixed maturity 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 June 30, 2008 and December
31, 2007, the Company had security loans outstanding with fair values of $173.7 million and $264.2
million, respectively, and held cash of $179.4 million and $271.8 million, respectively, as
collateral related to these security loans which has been included in cash and in accounts payable
and accrued liabilities.
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 June 30, 2008 were as follows:
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
1,654 |
|
|
$ |
(21 |
) |
|
$ |
8,776 |
|
|
$ |
(185 |
) |
|
$ |
10,430 |
|
|
$ |
(206 |
) |
States and
political
subdivisions |
|
|
107,154 |
|
|
|
(1,566 |
) |
|
|
240,513 |
|
|
|
(2,580 |
) |
|
|
347,667 |
|
|
|
(4,146 |
) |
Corporate securities |
|
|
148,564 |
|
|
|
(6,152 |
) |
|
|
344,751 |
|
|
|
(13,678 |
) |
|
|
493,315 |
|
|
|
(19,830 |
) |
Equity securities |
|
|
23,545 |
|
|
|
(10,388 |
) |
|
|
314 |
|
|
|
(844 |
) |
|
|
23,859 |
|
|
|
(11,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
280,917 |
|
|
$ |
(18,127 |
) |
|
$ |
594,354 |
|
|
$ |
(17,287 |
) |
|
$ |
875,271 |
|
|
$ |
(35,414 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A substantial portion of the Companys unrealized losses relate to debt securities. These
unrealized losses were primarily caused by interest rate increases and market changes that the
Company considers to be temporary. Because the Company has the intent and ability to hold these
securities, the Company does not consider these investments to be other-than-temporarily impaired.
The unrealized losses relating to equity securities were caused by market changes that the Company
considers to be temporary and thus the Company does not consider these investments
other-than-temporarily impaired. During the three months ended June 30, 2008, the Company recorded
impairment charges totaling $7.6 million related to two of its fixed maturity securities and $2.0
million related to one of its equity securities that were deemed other than temporarily impaired.
In addition to those charges, during the six months ended June 30, 2008, the Company recorded an
impairment charge in the amount of $1.5 million related to one of its equity securities that was
deemed other than temporarily impaired.
Gross realized gains on investments were $30.0 million and $16.1 million for the three month
periods ended June 30, 2008 and 2007, respectively, and $40.9 million and $30.6 million for the six
month periods ended June 30, 2008 and 2007, respectively. Gross realized losses on investments were
$12.0 million and $12.2 million for the three month periods ended June 30, 2008 and 2007,
respectively, and $16.1 million and $22.0 million for the six month periods ended June 30, 2008 and
2007, respectively.
Investments in unconsolidated affiliates are recorded using the equity method of accounting
and, as of June 30, 2008 and December 31, 2007, consist of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Ceridian |
|
|
33 |
% |
|
$ |
480,885 |
|
|
$ |
503,118 |
|
Sedgwick |
|
|
(a |
) |
|
|
109,895 |
|
|
|
131,160 |
|
Remy |
|
|
47 |
% |
|
|
78,496 |
|
|
|
79,958 |
|
Other |
|
various |
|
|
25,417 |
|
|
|
24,120 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
694,693 |
|
|
$ |
738,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
As of June 30, 2008 and December 31, 2007, the Companys ownership percentage in Sedgwick was
32% and 40%, respectively. |
On June 5, 2008, the Company sold 20% of its 40% interest in Sedgwick for proceeds of $53.9
million, resulting in a pre-tax gain of $24.8 million. Subsequent to this sale, the Company owns
32% of Sedgwick.
Summarized financial information for Ceridian is presented below for the time period
subsequent to November 9, 2007, the date of acquisition. The Company accounts for its equity in
Ceridians earnings on a three-month lag. Accordingly, FNFs net earnings for the three month
period ended June 30, 2008 include the Companys equity in Ceridians earnings for the three months
ended March 31, 2008, and net earnings for the six month period ended June 30, 2008 includes the
Companys equity in Ceridians earnings for the period from November 10, 2007 through March 31,
2008.
15
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
(in millions) |
|
Total current assets |
|
$ |
1,101.8 |
|
Goodwill and other intangible assets, net |
|
|
4,902.0 |
|
Other assets |
|
|
4,441.3 |
|
|
|
|
|
Total assets |
|
$ |
10,445.1 |
|
|
|
|
|
Current liabilities |
|
$ |
782.2 |
|
Long-term obligations, less current portion |
|
|
3,527.0 |
|
Other long-term liabilities |
|
|
4,661.8 |
|
|
|
|
|
Total liabilities |
|
|
8,971.0 |
|
Equity |
|
|
1,474.1 |
|
|
|
|
|
Total liabilities and equity |
|
$ |
10,445.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from |
|
|
Three Months Ended |
|
November 10, 2007, |
|
|
March 31, 2008 |
|
through March 31, 2008 |
|
|
( in millions) |
Total revenues |
|
$ |
406.5 |
|
|
$ |
643.5 |
|
Loss before income taxes |
|
|
(29.2 |
) |
|
|
(48.4 |
) |
Net loss |
|
|
(22.1 |
) |
|
|
(34.5 |
) |
During the three month periods ended June 30, 2008 and 2007, the Company recorded an aggregate
of $(6.3) million and $(0.3) million, respectively, in equity in losses of unconsolidated
affiliates. During the six month periods ended June 30, 2008 and 2007, the Company recorded an
aggregate of $(4.7) million and $1.9 million in equity in (losses) earnings of unconsolidated
affiliates.
Note F Stock-Based Compensation Plans
During the first three months of 2008, the Company granted 600,000 shares of restricted stock
with a weighted average grant date fair value of $17.07 per share. There were no grants of
stock-based compensation awards during the three months ended June 30, 2008. During the six months
ended June 30, 2007, the Company granted 10,000 shares of restricted stock with a weighted average
grant date fair value of $25.13 per share.
Net income reflects stock based compensation expense of $8.5 million and $8.2 million for the
three month periods ended June 30, 2008 and 2007, respectively, and $15.5 million and $15.7 million
for the six month periods ended June 30, 2008 and 2007, respectively, which is included in
personnel costs in the reported financial results.
16
Note G Segment Information
Summarized financial information concerning the Companys reportable segments is shown in the
following table.
As of and for the three months ended June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
Title premiums |
|
$ |
744,955 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
744,955 |
|
Other revenues |
|
|
268,118 |
|
|
|
94,161 |
|
|
|
24,720 |
|
|
|
386,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
1,013,073 |
|
|
|
94,161 |
|
|
|
24,720 |
|
|
|
1,131,954 |
|
Interest and investment income, including realized
gains and (losses) |
|
|
23,983 |
|
|
|
2,973 |
|
|
|
20,888 |
|
|
|
47,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,037,056 |
|
|
$ |
97,134 |
|
|
$ |
45,608 |
|
|
$ |
1,179,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
30,058 |
|
|
|
1,508 |
|
|
|
3,150 |
|
|
|
34,716 |
|
Interest expense |
|
|
1,345 |
|
|
|
155 |
|
|
|
14,718 |
|
|
|
16,218 |
|
Earnings (loss) before income taxes, equity in income
(losses) of unconsolidated affiliates, and minority
interest |
|
|
5,071 |
|
|
|
13,227 |
|
|
|
(4,771 |
) |
|
|
13,527 |
|
Income tax expense |
|
|
284 |
|
|
|
4,685 |
|
|
|
(3,802 |
) |
|
|
1,167 |
|
Equity in income (losses) of unconsolidated affiliates |
|
|
471 |
|
|
|
|
|
|
|
(6,820 |
) |
|
|
(6,349 |
) |
Minority interest |
|
|
320 |
|
|
|
|
|
|
|
(1,234 |
) |
|
|
(914 |
) |
Net earnings (loss) |
|
$ |
4,938 |
|
|
$ |
8,542 |
|
|
$ |
(6,555 |
) |
|
$ |
6,925 |
|
Assets |
|
$ |
5,461,838 |
|
|
$ |
441,018 |
|
|
$ |
1,345,280 |
|
|
$ |
7,248,136 |
|
Goodwill |
|
|
1,246,708 |
|
|
|
23,842 |
|
|
|
67,724 |
|
|
|
1,338,274 |
|
As of and for the three months ended June 30, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
Title premiums |
|
$ |
1,046,366 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,046,366 |
|
Other revenues |
|
|
274,395 |
|
|
|
99,731 |
|
|
|
25,081 |
|
|
|
399,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
1,320,761 |
|
|
|
99,731 |
|
|
|
25,081 |
|
|
|
1,445,573 |
|
Interest and investment income, including realized
gains and (losses) |
|
|
41,532 |
|
|
|
4,074 |
|
|
|
3,821 |
|
|
|
49,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,362,293 |
|
|
$ |
103,805 |
|
|
$ |
28,902 |
|
|
$ |
1,495,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
28,172 |
|
|
|
1,512 |
|
|
|
1,508 |
|
|
|
31,192 |
|
Interest expense |
|
|
3,723 |
|
|
|
449 |
|
|
|
8,263 |
|
|
|
12,435 |
|
Earnings (loss) before income taxes, equity in income
(losses) of unconsolidated affiliates, and minority
interest |
|
|
130,037 |
|
|
|
13,860 |
|
|
|
(17,456 |
) |
|
|
126,441 |
|
Income tax expense |
|
|
42,362 |
|
|
|
5,340 |
|
|
|
(7,231 |
) |
|
|
40,471 |
|
Equity in income (losses) of unconsolidated affiliates |
|
|
1,064 |
|
|
|
|
|
|
|
(1,387 |
) |
|
|
(323 |
) |
Minority interest |
|
|
1,003 |
|
|
|
|
|
|
|
(191 |
) |
|
|
812 |
|
Net earnings (loss) |
|
$ |
87,736 |
|
|
$ |
8,520 |
|
|
$ |
(11,421 |
) |
|
$ |
84,835 |
|
Assets |
|
$ |
5,991,572 |
|
|
$ |
496,412 |
|
|
$ |
877,936 |
|
|
$ |
7,365,920 |
|
Goodwill |
|
|
1,084,048 |
|
|
|
44,856 |
|
|
|
66,229 |
|
|
|
1,195,133 |
|
17
As of and for the six months ended June 30, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
Title premiums |
|
$ |
1,473,170 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,473,170 |
|
Other revenues |
|
|
510,620 |
|
|
|
178,988 |
|
|
|
55,839 |
|
|
|
745,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
1,983,790 |
|
|
|
178,988 |
|
|
|
55,839 |
|
|
|
2,218,617 |
|
Interest and investment income, including realized
gains and (losses) |
|
|
63,864 |
|
|
|
6,645 |
|
|
|
27,832 |
|
|
|
98,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,047,654 |
|
|
$ |
185,633 |
|
|
$ |
83,671 |
|
|
$ |
2,316,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
60,147 |
|
|
|
3,018 |
|
|
|
8,446 |
|
|
|
71,611 |
|
Interest expense |
|
|
3,755 |
|
|
|
339 |
|
|
|
30,760 |
|
|
|
34,854 |
|
Earnings (loss) before income taxes, equity in income
(losses) of unconsolidated affiliates, and minority
interest |
|
|
58,152 |
|
|
|
22,646 |
|
|
|
(30,904 |
) |
|
|
49,894 |
|
Income tax expense |
|
|
17,578 |
|
|
|
7,446 |
|
|
|
(11,682 |
) |
|
|
13,342 |
|
Equity in income (losses) of unconsolidated affiliates |
|
|
1,435 |
|
|
|
|
|
|
|
(6,103 |
) |
|
|
(4,668 |
) |
Minority interest |
|
|
400 |
|
|
|
|
|
|
|
(2,686 |
) |
|
|
(2,286 |
) |
Net earnings (loss) |
|
$ |
41,609 |
|
|
$ |
15,200 |
|
|
$ |
(22,639 |
) |
|
$ |
34,170 |
|
Assets |
|
$ |
5,461,838 |
|
|
$ |
441,018 |
|
|
$ |
1,345,280 |
|
|
$ |
7,248,136 |
|
Goodwill |
|
|
1,246,708 |
|
|
|
23,842 |
|
|
|
67,724 |
|
|
|
1,338,274 |
|
As of and for the six months ended June 30, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity National |
|
|
Specialty |
|
|
Corporate |
|
|
|
|
|
|
Title Group |
|
|
Insurance |
|
|
and Other |
|
|
Total |
|
Title premiums |
|
$ |
2,007,109 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,007,109 |
|
Other revenues |
|
|
514,568 |
|
|
|
194,729 |
|
|
|
41,888 |
|
|
|
751,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
|
2,521,677 |
|
|
|
194,729 |
|
|
|
41,888 |
|
|
|
2,758,294 |
|
Interest and investment income, including
realized gains and (losses) |
|
|
86,067 |
|
|
|
8,046 |
|
|
|
9,473 |
|
|
|
103,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,607,744 |
|
|
$ |
202,775 |
|
|
$ |
51,361 |
|
|
$ |
2,861,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
55,089 |
|
|
|
3,070 |
|
|
|
2,387 |
|
|
|
60,546 |
|
Interest expense |
|
|
7,032 |
|
|
|
854 |
|
|
|
16,526 |
|
|
|
24,412 |
|
Earnings (loss) before income taxes, equity
in income of unconsolidated affiliates, and
minority interest |
|
|
244,174 |
|
|
|
39,286 |
|
|
|
(32,314 |
) |
|
|
251,146 |
|
Equity in income of unconsolidated affiliates |
|
|
1,699 |
|
|
|
|
|
|
|
160 |
|
|
|
1,859 |
|
Income tax expense |
|
|
83,105 |
|
|
|
14,909 |
|
|
|
(12,498 |
) |
|
|
85,516 |
|
Minority interest |
|
|
932 |
|
|
|
|
|
|
|
(1,677 |
) |
|
|
(745 |
) |
Net earnings (loss) |
|
$ |
161,836 |
|
|
$ |
24,377 |
|
|
$ |
(17,979 |
) |
|
$ |
168,234 |
|
Assets |
|
$ |
5,991,572 |
|
|
$ |
496,412 |
|
|
$ |
877,936 |
|
|
$ |
7,365,920 |
|
Goodwill |
|
|
1,084,048 |
|
|
|
44,856 |
|
|
|
66,229 |
|
|
|
1,195,133 |
|
The activities of the reportable segments include the following:
Fidelity National Title Group
This segment consists of the operations of FNFs title insurance underwriters and related
businesses. This segment provides core title insurance and escrow and other title related services
including collection and trust activities, trustees sales guarantees, recordings and
reconveyances.
Specialty Insurance
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, the operations of Fidelity National Real Estate
Solutions, LLC
18
(FNRES), other smaller operations, and the Companys share in the operations of
certain equity investments, including Sedgwick, Ceridian, and Remy. In the first six months of
2008, the Company recorded a $2.7 million impairment charge to an intangible asset in the corporate
and other segment.
Note H Dividends
On July 23, 2008, the Companys Board of Directors declared a cash dividend of $0.30 per
share, payable on September 30, 2008, to stockholders of record as of September 16, 2008. On April
23, 2008, the Companys Board of Directors declared a cash dividend of $0.30 per share, which was
paid on June 30, 2008, to stockholders of record as of June 13, 2008.
Note I Pension and Postretirement Benefits
The following details the Companys periodic expense (income) for pension and postretirement
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
(In thousands, except per share amounts) |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
2,252 |
|
|
|
2,219 |
|
|
|
234 |
|
|
|
107 |
|
Expected return on assets |
|
|
(2,895 |
) |
|
|
(2,660 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
Amortization of actuarial loss |
|
|
1,604 |
|
|
|
2,149 |
|
|
|
126 |
|
|
|
(316 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic expense (income) |
|
$ |
961 |
|
|
$ |
1,708 |
|
|
$ |
360 |
|
|
$ |
(207 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
(In thousands, except per share amounts) |
|
Service cost |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest cost |
|
|
4,504 |
|
|
|
4,438 |
|
|
|
468 |
|
|
|
379 |
|
Expected return on assets |
|
|
(5,790 |
) |
|
|
(5,320 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11 |
) |
Amortization of actuarial loss |
|
|
3,208 |
|
|
|
4,298 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic expense |
|
$ |
1,922 |
|
|
$ |
3,416 |
|
|
$ |
720 |
|
|
$ |
368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There have been no material changes to the Companys projected benefit payments under these
plans since December 31, 2007 as disclosed in the Companys Form 10-K filed on February 29, 2008.
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 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 |
19
|
|
|
relief sought is not available because plaintiffs have not requested more specific
relief in their court pleadings. In addition, the dollar amount of damages sought is
frequently not stated with specificity. In those cases where plaintiffs have made a statement
with regard to monetary damages, they often specify damages either just above or below a
jurisdictional limit regardless of the facts of the case. These limits represent either the
jurisdictional threshold for bringing a case in federal court or the maximum they can seek
without risking removal from state court to federal court. In the Companys experience,
monetary demands in plaintiffs court pleadings bear little relation to the ultimate loss, if
any, that the Company may experience. None of the cases described below includes a statement
as to the dollar amount of damages demanded. Instead, each of the cases includes a demand in
an amount to be proved at trial. |
|
|
|
For the reasons specified above, it is not possible to make meaningful estimates of the
amount or range of loss that could result from these matters at this time. The Company
reviews these matters on an ongoing basis and follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies when making
accrual and disclosure decisions. When assessing reasonably possible and probable outcomes,
management bases its decision on its assessment of the ultimate outcome following all
appeals. |
|
|
|
|
The Company intends to vigorously defend each of these matters. In the opinion of the
Companys management, while some of these matters may be material to the Companys
operating results for any particular period if an unfavorable outcome results, none will
have a material adverse effect on its overall financial condition. |
There are class actions pending against several title insurance companies, including Security
Union Title Insurance Company, Fidelity National Title Insurance Company, Chicago Title Insurance
Company, Ticor Title Insurance Company of Florida and Ticor Title Insurance Company, alleging
improper premiums were charged for title insurance. These cases allege that the named defendant
companies failed to provide notice of premium discounts to consumers refinancing their mortgages,
and failed to give discounts in refinancing transactions in violation of the filed rates.
An amended complaint was filed in Illinois (Independent Trust v. Fidelity National Title
Insurance Company of New York, filed on June 26, 2006 in the United States District Court for the
Northern District of Illinois, Eastern Division) related to the litigation spawned by the
defalcation of Intercounty Title Company of Illinois (Intercounty), a Fidelity agent in Chicago,
IL. The plaintiff alleges the Company wrongfully used its funds to pay monies owed by the Company
to customers of Intercounty. The plaintiff demands compensatory damages (which the plaintiff
alleges are believed to be in excess of $20 million), punitive damages and other relief. The
Company moved to dismiss, but the motion was denied. The Company subsequently moved for summary
judgment, and that motion has been fully briefed and submitted.
In February 2008, thirteen putative class actions were commenced against several title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, Security Union Title Insurance Company and Ticor Title Insurance Company (collectively,
the Fidelity Affiliates). The complaints also name Fidelity National Financial, Inc. (together
with the Fidelity Affiliates, the Fidelity Defendants) as a defendant based on its ownership of
the Fidelity Affiliates. The complaints, which are brought on behalf of a putative class of
consumers who purchased title insurance in New York, allege that the defendants conspired to
inflate rates for title insurance through the Title Insurance Rate Service Association, Inc.
(TIRSA), a New York State-approved rate service organization which is also named as a defendant.
Each of the complaints asserts a cause of action under the Sherman Act and several of the
complaints include claims under the Real Estate Settlement Procedures Act as well as New York State
statutory and common law claims. The complaints seek monetary damages, including treble damages, as
well as injunctive relief. Subsequently, similar complaints were filed in many federal courts.
There are now approximately 63 complaints pending alleging that the Fidelity Defendants conspired
with their competitors to unlawfully inflate rates for title insurance in every major market in the
United States. A motion was filed before the Multidistrict Litigation Panel to consolidate and or
coordinate these actions in the United States District Court in the Southern District of New York.
However, that motion was denied. The cases are generally being consolidated before one district
court judge in each state and scheduled for the filing of consolidated complaints and motion
practice.
20
On September 24, 2007 a third party complaint was filed in the In Re Ameriquest Mortgage
Lending Practices Litigation in the United States District Court for the Northern District of
Illinois by Ameriquest Mortgage Company (Ameriquest) and Argent Mortgage Company (Argent)
against numerous title insurers and agents including Chicago Title Company, Fidelity National Title
Company, Fidelity National Title Insurance Company, American Pioneer Title Insurance Company (now
known as Ticor Title Insurance Company of Florida), Chicago Title of Michigan, Fidelity National
Title Insurance Company of New York, and Ticor Title Insurance Company (collectively, the Fidelity
Affiliates). The third party complaint alleges that Ameriquest and Argent have been sued by a
class of borrowers alleging that they violated the Truth in Lending Act (TILA) by failing to
comply with the notice of right to cancel provisions and making misrepresentations in lending to
the borrowers, who now seek money damages. Ameriquest and Argent allege that the Fidelity
Affiliates contracted and warranted to close these loans in conformity with the lenders
instructions which correctly followed the requirements of TILA and contained no misrepresentations;
therefore, if Ameriquest and Argent are liable to the class, then the Fidelity Affiliates are
liable to them for failing to close the lending transactions as agreed. Ameriquest and Argent seek
to recover the cost of resolving the class action against them including their attorneys fees and
costs in the action. The title defendants are organizing to form a defense group and, as requested
by the court, are exploring the possibility of filing a single collective response.
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.
The Company receives inquiries and requests for information from state insurance departments,
attorneys general and other regulatory agencies from time to time about various matters relating to
its business. Sometimes these take the form of civil investigative subpoenas. The Company attempts
to cooperate with all such inquiries. From time to time, the Company is assessed fines for
violations of regulations or other matters or enters into settlements with such authorities which
require the Company to pay money or take other actions.
In January 2007, the State of California adopted regulations that would have significant
effects on the title insurance industry in California. The Company, as well as others, has been
engaged in discussions with the California Department of Insurance (the CDI) regarding possible
industry reforms that may result in the CDIs decision to modify or repeal the regulations prior to
their implementation. On June 17, 2008, the CDI filed with the Office of Administrative Law revised
title insurance regulations containing substantial changes to the existing regulations. The
hearings on the revised regulations are scheduled for the week of August 11, 2008, in San
Francisco.
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
21
results of operations for any other previously reported annual periods.
The following discussion should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2007.
Overview
We are a holding company that is a provider, through our subsidiaries, of title insurance,
specialty insurance, claims management services, and information services. We are one of the
nations largest title insurance companies through our title insurance underwriters Fidelity
National Title, Chicago Title, Ticor Title, Security Union Title, and Alamo Title which issued
approximately 26.7% of all title insurance policies issued nationally during 2007. We also provide
flood insurance, personal lines insurance, and home warranty insurance through our specialty
insurance subsidiaries. We are also a leading provider of outsourced claims management services to
large corporate and public sector entities through our minority-owned affiliate, Sedgwick CMS
(Sedgwick) and a provider of information services in the human resources, retail and
transportation markets through another minority-owned affiliate, Ceridian Corporation (Ceridian).
We currently have three reporting segments as follows:
|
|
|
Fidelity National Title Group. This segment consists of the operations of our title
insurance underwriters and related businesses. This segment provides core title insurance
and escrow and other title related services including collection and trust activities,
trustees sales guarantees, recordings and reconveyances. |
|
|
|
|
Specialty Insurance. The specialty insurance segment consists of certain subsidiaries
that issue flood, home warranty, homeowners, automobile and other personal lines insurance
policies. We recently announced that our Board of Directors has authorized us to
investigate strategic alternatives for certain of our specialty insurance businesses. The
assets to be evaluated include the flood insurance and personal lines insurance businesses,
but not the home warranty business. However, there can be no assurance that any transaction
will be completed. |
|
|
|
|
Corporate and Other. The corporate and other segment consists of the operations of the
parent holding company, certain other unallocated corporate overhead expenses, the
operations of Fidelity National Real Estate Solutions (FNRES), other smaller operations,
and our share in the operations of certain equity investments, including Sedgwick,
Ceridian, and Remy International (Remy). |
We are focused on evaluating our non-core assets and investments as potential vehicles for
creating liquidity. We anticipate maintaining our $0.30 quarterly cash dividend through 2008 and we
will continue to analyze the benefits of the current dividend level as we plan for 2009. However,
we do continually assess our capital allocation strategy and weigh the benefit of continuing to pay
the dividend at its current level versus reducing debt, repurchasing our stock, or conserving cash.
Transactions with Related Parties
Our financial statements reflect transactions with Fidelity National Information Services
(FIS), which is a related party. Please see Note A of Notes to Condensed Consolidated Financial
Statements.
22
Results of Operations
Consolidated Results of Operations
Net Earnings. The following table presents certain financial data for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands, |
|
|
(Dollars in thousands, |
|
|
|
except per share data) |
|
|
except per share data) |
|
Total revenue |
|
$ |
1,179,798 |
|
|
$ |
1,495,000 |
|
|
$ |
2,316,958 |
|
|
$ |
2,861,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,166,271 |
|
|
|
1,368,559 |
|
|
|
2,267,064 |
|
|
|
2,610,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
6,925 |
|
|
|
84,835 |
|
|
|
34,170 |
|
|
|
168,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue. The following table presents the components of our revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Direct title insurance premiums |
|
$ |
321,040 |
|
|
$ |
448,504 |
|
|
$ |
625,819 |
|
|
$ |
867,101 |
|
Agency title insurance premiums |
|
|
423,915 |
|
|
|
597,862 |
|
|
|
847,351 |
|
|
|
1,140,008 |
|
Escrow, title-related and other fees |
|
|
292,838 |
|
|
|
299,476 |
|
|
|
566,459 |
|
|
|
556,456 |
|
Specialty insurance |
|
|
94,161 |
|
|
|
99,731 |
|
|
|
178,988 |
|
|
|
194,729 |
|
Interest and investment income |
|
|
30,053 |
|
|
|
45,528 |
|
|
|
72,073 |
|
|
|
93,305 |
|
Realized gains and losses, net |
|
|
17,791 |
|
|
|
3,899 |
|
|
|
26,268 |
|
|
|
10,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,179,798 |
|
|
$ |
1,495,000 |
|
|
$ |
2,316,958 |
|
|
$ |
2,861,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Orders opened by direct title operations |
|
|
462,600 |
|
|
|
622,100 |
|
|
|
1,024,800 |
|
|
|
1,274,500 |
|
Orders closed by direct title operations |
|
|
307,500 |
|
|
|
408,700 |
|
|
|
615,300 |
|
|
|
799,100 |
|
Total consolidated revenues decreased $315.2 million to $1,179.8 million in the three months
ended June 30, 2008, compared to the 2007 period, consisting of decreases of $325.2 million in
title related revenues and $6.7 million in specialty insurance revenues, partially offset by an
increase of $16.7 million in the corporate and other segment. Total consolidated revenues decreased
$544.9 million to $2,317.0 million in the first six months of 2008 compared to the 2007 period,
consisting of decreases of $560.1 million in title related revenues and $17.1 million in specialty
insurance revenues, partially offset by an increase of $32.3 million in the corporate and other
segment.
Consolidated title insurance premiums for the three and six-month periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
Title premiums from
direct operations |
|
$ |
321,040 |
|
|
|
43.1 |
% |
|
$ |
448,504 |
|
|
|
42.9 |
% |
|
$ |
625,819 |
|
|
|
42.5 |
% |
|
$ |
867,101 |
|
|
|
43.2 |
% |
Title premiums from
agency operations |
|
|
423,915 |
|
|
|
56.9 |
% |
|
|
597,862 |
|
|
|
57.1 |
% |
|
|
847,351 |
|
|
|
57.5 |
% |
|
|
1,140,008 |
|
|
|
56.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
744,955 |
|
|
|
100.0 |
% |
|
$ |
1,046,366 |
|
|
|
100.0 |
% |
|
$ |
1,473,170 |
|
|
|
100.0 |
% |
|
$ |
2,007,109 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Title insurance premiums decreased 28.8% to $745.0 million in the three months ended June 30,
2008, as compared to 2007. The decrease was made up of a $127.5 million, or 28.4%, decrease in
direct premiums and a $173.9 million, or 29.1%, decrease in premiums from agency operations. Title
insurance premiums decreased 26.6% to $1,473.2 million in the first six months of 2008 as compared
to 2007. The decrease was made up of a $241.3 million, or 27.8%, decrease in direct premiums and a
$292.7 million, or 25.7%, decrease in premiums from agency operations.
Title premiums from direct operations decreased $127.5 million, or 28.4%, in the three months
ended June 30, 2008, and $241.3 million, or 27.8%, in the first six months of 2008 compared to the
corresponding 2007 periods. In each period, the decrease was due to decreases in closed order
volume and fee per file. Closed order volumes decreased to 307,500 in the three months ended June
30, 2008, from 408,700 in the three months ended June 30, 2007, and to 615,300 in the first six
months of 2008 from 799,100 in the first six months of 2007, in each case reflecting declines in
the purchase and refinance markets. The mortgage market continues to lack liquidity. Average
mortgage interest rates in the first six months of 2008 have remained consistent with rates in the
first six months of 2007 but have shown a slight increase in the second quarter of 2008. During the
first six months of 2008, the Federal Reserve Bank continued to decrease the federal funds rate by
a total of 225 basis points. The federal funds rate is now 2% compared to 5.25% in August 2007. As
a result of the 2008 reductions in the rate, refinance order volumes increased temporarily in the
first quarter. However, while a majority of these opened orders were ultimately closed, the
increased level of order volumes was not sustained. The average fee per file in our direct
operations was $1,484 in the three months ended June 30, 2008 compared to $1,627 in the three
months ended June 30, 2007, and $1,466 in the first six months of 2008 compared to $1,593 in the
first six months of 2007, with the decreases reflecting a decline in home values and a slowing
commercial market.
The decrease in agency premiums is primarily the result of a decrease in remitted and accrued
agency premiums that is consistent with the decrease in direct title premiums.
Escrow, title-related and other fees decreased $6.6 million, or 2.2%, to $292.8 million in the
second quarter of 2008 compared to $299.5 million in the second quarter of 2007 and increased $10.0
million to $566.5 million in the first six months of 2008 from $556.5 million in the first six
months of 2007. Trends in escrow and title related fees are to some extent related to title
insurance activity generated by our direct operations. At Fidelity National Title Group, escrow
fees, which are more directly related to our direct operations, decreased 26.4% and 26.6% in the
three and six months periods ended June 30, 2008, respectively, compared to 2007. These decreases
were generally consistent with the fluctuations in direct title insurance premiums and order
counts. Other fees, excluding escrow fees, increased $33.7 million and $73.3 million at Fidelity
National Title Group in the three and six months ended June 30, 2008, respectively, compared to
2007. These increases were primarily due to recent acquisitions, including Property Insight, LLC,
and ATM Holding, Inc., and to growth in foreclosure related operations. Other fees decreased $0.4
million, or 1.4%, in the corporate and other segment in the three months ended June 30, 2008,
compared to 2007. Other fees increased $14.0 million in the corporate and other segment in the
first six months of 2008 compared to 2007, primarily due to a transaction relating to our
timberland holdings and revenues relating to the purchase of certain leasing assets from FIS.
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 $30.1
million and $45.5 million in the three month periods ended June 30, 2008 and 2007, respectively,
and $72.1 million and $93.3 million in the first six months of 2008 and 2007, respectively, with
the 2008 decreases due to decreases in cash and invested assets and decreases in short-term
interest rates.
Net realized gains totaled $17.8 million in the three months ended June 30, 2008, and included
a gain of $24.8 million on the sale of 20% of our interest in Sedgwick, $2.6 million in additional
net realized gains, and impairment losses totaling $9.6 million on fixed maturity and equity
investments that were deemed to be other than temporarily impaired. Net realized gains were $26.3
million in the first six months of 2008 and, in addition to the second quarter 2008 activity noted
above, included an impairment loss of $1.5 million on an equity investment that was deemed to be
other than temporarily impaired. Net realized gains were $3.9 million and $10.3 million in the
three and six month periods ended June 30, 2007, each made up of a number of gains and losses on
various transactions, none of which were individually significant.
24
Expenses. The following table presents the components of our expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Personnel costs |
|
$ |
366,254 |
|
|
$ |
452,752 |
|
|
$ |
728,132 |
|
|
$ |
888,012 |
|
Other operating expenses |
|
|
319,856 |
|
|
|
296,221 |
|
|
|
587,726 |
|
|
|
530,662 |
|
Agent commissions |
|
|
328,800 |
|
|
|
462,876 |
|
|
|
656,809 |
|
|
|
883,033 |
|
Depreciation and amortization |
|
|
34,716 |
|
|
|
31,192 |
|
|
|
71,611 |
|
|
|
60,546 |
|
Provision for claim losses |
|
|
100,427 |
|
|
|
113,083 |
|
|
|
187,932 |
|
|
|
224,069 |
|
Interest expense |
|
|
16,218 |
|
|
|
12,435 |
|
|
|
34,854 |
|
|
|
24,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
1,166,271 |
|
|
$ |
1,368,559 |
|
|
$ |
2,267,064 |
|
|
$ |
2,610,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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
decreased $86.5 million, or 19.1%, in the three months ended June 30, 2008, compared to 2007, with
the decrease in all three business segments. Personnel costs decreased $159.9 million, or 18.0%, in
the first six months of 2008 compared to 2007, with decreases at Fidelity National Title Group and
the specialty insurance segment partially offset by a small increase in the corporate and other
segment. Personnel costs as a percentage of total revenue were 31.0% and 30.3% for the three month
periods ended June 30, 2008 and 2007, respectively, and 31.4% and 31.0% for the first six months of
2008 and 2007, respectively.
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 increased $23.6 million to $319.9 million in the three months ended June 30,
2008, from $296.2 million in the three months ended June 30, 2007, reflecting an increase at
Fidelity National Title Group, partially offset by decreases in the specialty insurance and
corporate and other segments. Other operating expenses increased $57.1 million to $587.7 million in
the first six months of 2008 from $530.7 million in the first six months of 2007, reflecting
increases in all three business segments. Increases at Fidelity National Title Group and the
specialty insurance segment are discussed below at the segment level. The increase of $8.5 million
in the corporate and other segment was primarily related to growth in operations not directly
related to title insurance, including our timberland holdings.
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 June 30, |
|
|
Six months ended June 30, |
|
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
2008 |
|
|
% |
|
|
2007 |
|
|
% |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Agent premiums |
|
$ |
423,915 |
|
|
|
100.0 |
% |
|
$ |
597,862 |
|
|
|
100.0 |
% |
|
$ |
847,351 |
|
|
|
100.0 |
% |
|
$ |
1,140,008 |
|
|
|
100.0 |
% |
Agent commissions |
|
|
328,800 |
|
|
|
77.6 |
% |
|
|
462,876 |
|
|
|
77.4 |
% |
|
|
656,809 |
|
|
|
77.5 |
% |
|
|
883,033 |
|
|
|
77.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
95,115 |
|
|
|
22.4 |
% |
|
$ |
134,986 |
|
|
|
22.6 |
% |
|
$ |
190,542 |
|
|
|
22.5 |
% |
|
$ |
256,975 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net margin from agency title insurance premiums as a percentage of total agency premiums
remained relatively
25
consistent in the three and six month periods ended June 30, 2008, compared with the three and
six month periods ended June 30, 2007.
Depreciation and amortization increased $3.5 million to $34.7 million in the three months
ended June 30, 2008, compared to $31.2 million in the three months ended June 30, 2007, and
included an increase of $1.9 million at Fidelity National Title Group and a $1.6 million increase
in the corporate and other segment that was primarily due to a recent acquisition. Depreciation and
amortization increased $11.1 million to $71.6 million in the first six months of 2008 compared to
$60.5 million in the first six months of 2007, and included an increase of $5.1 million at Fidelity
National Title Group and a $6.1 million increase in the corporate and other segment that was due to
a $2.7 million impairment charge to an intangible asset in the corporate and other segment and
increases resulting from recent acquisitions.
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 $70.6 million in the three months ended June 30, 2008 as compared
to $78.5 million in the three months ended June 30, 2007, and $125.2 million in the first six
months of 2008 as compared to $150.5 million in the first six months of 2007. During the three
months ended June 30, 2008, we increased our claim loss provision rate from 7.5% to 8.5% of total
title premiums retroactive to January 1, 2008. As a result, our claim loss provision as a
percentage of total title premiums was 9.5% and 8.5% in the three and six month periods ended June
30, 2008 as compared to 7.5% in each of the 2007 periods. The claim loss provision for our
specialty insurance businesses was $29.8 million and $34.6 million in the three months ended June
30, 2008 and 2007, respectively, and $62.7 million and $73.5 million in the first six months of
2008 and 2007, respectively, with the decreases resulting primarily from lower volumes of
homeowners insurance business as we have undergone efforts to tighten our underwriting standards
and eliminate unprofitable agents and territories.
Interest expense increased $3.8 million to $16.2 million in the three months ended June 30,
2008, from $12.4 million in the three months ended June 30, 2007, and increased $10.4 million from
$24.4 million in the first six months of 2007 to $34.9 million in the first six months of 2008. In
each period, the increase was due to an increase in average borrowings resulting from the
investment in Ceridian during the fourth quarter of 2007, partially offset by decreases in interest
expense associated with the securities lending program and a decrease in interest rates.
Income tax expense as a percentage of earnings before income taxes was 8.6% and 32.0% for the
second quarter of 2008 and 2007, respectively, and 26.7% and 34.1% for the first six months of 2008
and 2007, respectively. The fluctuation in 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, such as the weighting of operating income versus investment
income. The decrease in income tax expense as a percentage of earnings before income taxes was
primarily due to an increase in the proportion of tax-exempt interest income to pre-tax earnings
and a decrease in non-deductible expenses.
Minority interest was $(0.9) million and $0.8 million in the three months ended June 30, 2008
and 2007, respectively, and $(2.3) million and $(0.7) million in the first six months of 2008 and
2007, respectively. Minority interest primarily consisted of losses attributable to the minority
interest in FNRES for each period.
Net earnings decreased $77.9 million and $134.1 million in the three and six month periods
ended June 30, 2008, respectively, compared to the same periods in 2007.
26
Fidelity National Title Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Unaudited) |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct title insurance premiums |
|
$ |
321,040 |
|
|
$ |
448,504 |
|
|
$ |
625,819 |
|
|
$ |
867,101 |
|
Agency title insurance premiums |
|
|
423,915 |
|
|
|
597,862 |
|
|
|
847,351 |
|
|
|
1,140,008 |
|
Escrow, title related and other fees |
|
|
268,118 |
|
|
|
274,395 |
|
|
|
510,620 |
|
|
|
514,568 |
|
Interest and investment income |
|
|
26,397 |
|
|
|
41,395 |
|
|
|
63,825 |
|
|
|
82,769 |
|
Realized gains and losses, net |
|
|
(2,414 |
) |
|
|
137 |
|
|
|
39 |
|
|
|
3,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
1,037,056 |
|
|
|
1,362,293 |
|
|
|
2,047,654 |
|
|
|
2,607,744 |
|
EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
340,521 |
|
|
|
425,707 |
|
|
|
674,842 |
|
|
|
836,280 |
|
Other operating expenses |
|
|
260,656 |
|
|
|
233,324 |
|
|
|
468,731 |
|
|
|
431,732 |
|
Agent commissions |
|
|
328,800 |
|
|
|
462,852 |
|
|
|
656,809 |
|
|
|
882,903 |
|
Depreciation and amortization |
|
|
30,058 |
|
|
|
28,172 |
|
|
|
60,147 |
|
|
|
55,089 |
|
Provision for claim losses |
|
|
70,605 |
|
|
|
78,478 |
|
|
|
125,218 |
|
|
|
150,534 |
|
Interest expense |
|
|
1,345 |
|
|
|
3,723 |
|
|
|
3,755 |
|
|
|
7,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
1,031,985 |
|
|
|
1,232,256 |
|
|
|
1,989,502 |
|
|
|
2,363,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes, equity
in earnings of unconsolidated
affiliates, and minority interest |
|
$ |
5,071 |
|
|
$ |
130,037 |
|
|
$ |
58,152 |
|
|
$ |
244,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues for the Fidelity National Title Group decreased $325.2 million, or 23.9%, to
$1,037.1 million in the three months ended June 30, 2008, from $1,362.3 million in the three months
ended June 30, 2007. Total revenues for the Fidelity National Title Group decreased $560.1 million,
or 21.5%, to $2,047.7 million in the first six months of 2008 from $2,607.7 million in the first
six months of 2007. For an analysis of this segments revenues, please see the analysis of direct
and agency title insurance premiums and escrow, title-related and other 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 decreased $85.2 million, or 20.0%, to $340.5 million in the three months ended June 30, 2008,
from $425.7 million in the three months ended June 30, 2007 and decreased $161.4 million, or 19.3%,
to $674.8 million in the first six months of 2008 from $836.3 million in the first six months of
2007. Personnel costs decreased in the three and six month periods of 2008 due to decreases in both
the number of personnel and the average annualized personnel cost per employee. Average employee
count decreased to 8,996 and 9,002 in the three and six month periods ended June 30, 2008,
respectively, from 12,001 and 12,115 in the three and six month periods ended June 30, 2007,
respectively. Personnel costs as a percentage of total revenues from direct title premiums and
escrow, title-related and other fees decreased to 57.8% in the three months ended June 30, 2008
from 58.9% in the three months ended June 30, 2007, and to 59.4% in the six months ended June 30,
2008, from 60.5% in the six months ended June 30, 2007.
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 increased $27.3 million to $260.7 million in the three months ended June 30,
2008, from $233.3 million in the three months ended June 30, 2007, and increased $37.0 million to
$468.7 million in the first six months of 2008 from $431.7 million in the first six months of 2007.
These increases included a $9.7 million abandoned lease charge in the second quarter of 2008
resulting from the acceleration of the present value of remaining lease obligations and the
write-off of leasehold improvements related to offices that were closed during the three months
ended June 30, 2008. The increases also reflected growth and recent acquisitions at our Service
Link, LP, subsidiary, including ATM Holdings, Inc. and a decrease in benefits related to our escrow
balances, which are reflected as an offset to other operating expenses. These increases were
partially offset by operating expense cuts in our core title operations as we continue to cut costs
in response to the decrease in title insurance and other title-related activity.
Agent commissions represent the portion of premiums retained by agents pursuant to the terms
of their
27
respective agency contracts. Net margin from agency title insurance premiums as a percentage
of total agency premiums remained generally consistent in the three and six month periods ended
June 30, 2008, compared with the three and six month periods ended June 30, 2007. 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 increased $1.9 million to $30.1 million in the three months
ended June 30, 2008, compared to $28.2 million in the three months ended June 30, 2007, and
increased $5.1 million to $60.1 million in the first six months of 2008 from $55.1 million in the
first six months of 2007, in each case primarily due to increased amortization related to recent
acquisitions.
The provision for claim losses includes an estimate of anticipated title and title related
claims and escrow losses. The estimate of anticipated title and title related claims is accrued as
a percentage of title premium revenue based on our historical loss experience and other relevant
factors. We monitor our claims loss experience on a continual basis and adjust the provision for
claim losses accordingly as new information becomes known, new loss patterns emerge, or as other
contributing factors are considered and incorporated into the analysis of the reserve for claim
losses. During the three months ended June 30, 2008, in response to adverse development in prior
policy years and trends in current year claims, we increased our claim loss provision rate from
7.5% to 8.5% of total title premiums retroactive to January 1, 2008. As a result, our claim loss
provision as a percentage of total title premiums was 9.5% and 8.5% in the three and six month
periods ended June 30, 2008, respectively, as compared to 7.5% in each of the 2007 periods.
Interest expense was $1.3 million and $3.7 million in the three month periods ended June 30,
2008 and 2007, respectively, and $3.8 million and $7.0 million in the first six months of 2008 and
2007, respectively. The decreases of $2.4 million and $3.2 million for the three and six month
periods, respectively, were primarily due to decreases in interest expense related to the
securities lending program.
Specialty Insurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(Dollars in thousands) |
|
|
(Dollars in thousands) |
|
Revenues |
|
$ |
97,134 |
|
|
$ |
103,805 |
|
|
$ |
185,633 |
|
|
$ |
202,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel costs |
|
|
11,347 |
|
|
|
11,814 |
|
|
|
22,687 |
|
|
|
23,413 |
|
Other operating expenses |
|
|
41,075 |
|
|
|
41,565 |
|
|
|
74,229 |
|
|
|
62,617 |
|
Depreciation and amortization |
|
|
1,508 |
|
|
|
1,512 |
|
|
|
3,018 |
|
|
|
3,070 |
|
Provision for claim losses |
|
|
29,822 |
|
|
|
34,605 |
|
|
|
62,714 |
|
|
|
73,535 |
|
Interest expense |
|
|
155 |
|
|
|
449 |
|
|
|
339 |
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
83,907 |
|
|
|
89,945 |
|
|
|
162,987 |
|
|
|
163,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and minority interest |
|
$ |
13,227 |
|
|
$ |
13,860 |
|
|
$ |
22,646 |
|
|
$ |
39,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $6.7 million to $97.1 million in the three months ended June 30, 2008,
from $103.8 million in the three months ended June 30, 2007, and decreased $17.1 million to $185.6
million in the first six months of 2008 from $202.8 million in the first six months of 2007.
Homeowners insurance revenues decreased $5.1 million, or 15.5%, and $9.8 million, or 14.8%, in the
three and six months ended June 30, 2008, respectively, compared to 2007, primarily as a result of
a decrease in the volume as we have undergone efforts to tighten our underwriting standards and
eliminate unprofitable agents and territories. Flood revenues increased $2.0 million, or 5.3% in
the three months ended June 30, 2008, compared to 2007, primarily due to organic growth and rate
increases. Flood revenues decreased $2.1 million, or 2.9%, in the first six months of 2008 compared
to 2007 as increases in rates and in the number of policies written were more than offset by a
decrease in the annual bonus received from FEMA. Home warranty revenues decreased $1.9 million and
$3.9 million in the three and six month periods ended June 30, 2008, respectively, compared to
2007, a 10.7% decrease in each period, primarily due to the decrease in real estate transaction
volumes.
28
Personnel costs were $11.3 million and $11.8 million in the three month periods ended June 30,
2008 and 2007, respectively, and $22.7 million and $23.4 million in the first six months of 2008
and 2007, respectively. As a percentage of revenues, personnel costs were 11.7% and 11.4% in the
three month periods ended June 30, 2008 and 2007, respectively, and 12.2% and 11.5% in the first
six months of 2008 and 2007, respectively.
Other operating expenses in the specialty insurance segment were $41.1 million and $41.6
million in the three months ended June 30, 2008 and 2007, respectively, and $74.2 million and $62.6
million in the first six months of 2008 and 2007, respectively. Our expenses in the first six
months of 2007 benefited from the results of an internal review of our treatment of certain costs
relating to insurance policies issued by our specialty insurance segment. In the course of this
review, we determined that certain costs should be deferred and amortized over the life of the
policy consistent with the recognition of the premiums. We recorded an adjustment as of March 31,
2007, increasing prepaid and other assets and reducing other operating expenses by $12.2 million,
representing amounts that should have been deferred as of March 31, 2007 on policies issued over
the prior twelve months. This adjustment is not material to the Companys financial position or
results of operations for any previously reported annual periods. Excluding this adjustment, other
operating expenses as a percentage of revenues were 42.3% and 40.0% in the three month periods
ended June 30, 2008 and 2007, respectively, and 40.0% and 36.9% in the first six months of 2008 and
2007, respectively.
The provision for claim losses was $29.8 million and $34.6 million in the three months ended
June 30, 2008 and 2007, respectively, and $62.7 million and $73.5 million in the first six months
of 2008 and 2007, respectively. The decreases were primarily related to lower volumes in the
homeowners insurance business resulting from tighter underwriting standards.
Corporate and Other Segment
The corporate and other segment is primarily comprised of the operations of our parent holding
company and smaller entities not included in our operating segments. It generated pretax losses of
$4.8 million and $17.5 million in the three month periods ended June 30, 2008 and 2007,
respectively, and $30.9 and $32.3 million in the first six months of 2008 and 2007, respectively.
In the second quarter of 2008, we sold 20% of our 40% interest in Sedgwick for proceeds of $53.9
million, resulting in a gain of $24.8 million in the corporate and other segment. Interest expense
in this segment increased $6.5 million and $14.2 million in the three and six month periods ended
June 30, 2008, respectively, compared to the same periods in 2007, primarily due to increased
borrowings resulting from our investment in Ceridian during the fourth quarter of 2007.
Additionally, in the first quarter of 2008, we recorded a $2.7 million impairment charge to an
intangible asset in the corporate and other segment.
Liquidity and Capital Resources
Cash Requirements. Our current cash requirements include operating expenses, taxes, payments
of interest and principal on our debt, capital expenditures, dividends on our common stock, and the
repurchase of shares of our common stock. We anticipate maintaining our annual dividend of $1.20
per share on our common stock through December 31, 2008, payable quarterly, or an aggregate of
approximately $256.7 million per year, although the declaration of any future dividends is at the
discretion of our board of directors. We do, however, continually assess our capital allocation
strategy and weigh the benefits of continuing to pay the dividend at its current level versus
reducing debt, repurchasing our stock, or conserving cash. We believe that all anticipated cash
requirements for current operations will be met from internally generated funds, through cash
dividends from subsidiaries, cash generated by investment securities, potential sales of
non-strategic assets, 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.
29
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. As of December 31, 2007, $1.8 billion
of our net assets were restricted from dividend payments without prior approval from the relevant
departments of insurance. During the remainder of 2008, our first tier title subsidiaries can pay
or make distributions to us of approximately $180.7 million without prior regulatory approval. Our
underwritten title companies and non-title insurance subsidiaries collect revenue and pay operating
expenses. However, they are not regulated to the same extent as our insurance subsidiaries.
We recently announced that our Board of Directors has authorized us to investigate strategic
alternatives for certain of our specialty insurance businesses. The assets to be evaluated include
the flood insurance and personal lines insurance businesses, but not the home warranty business. We
are focused on evaluating our non-core assets and investments as potential vehicles for creating
liquidity. Our intent is to use that liquidity for general corporate purposes, including the
payment of dividends as declared by the board of directors and potentially reducing debt,
repurchasing shares of our stock, and/or conserving cash.
Our cash flows used in operations for the first six months of 2008 totaled $62.0 million
compared to cash provided by operations of $227.8 million in the first six months of 2007. Cash
used in operations in the first six months of 2008 included payments totaling $52.9 million to
settle a group of related claims for third party losses. We believe that these payments and certain
previous payments on these related claims are recoverable under various insurance policies and, as
of June 30, 2008, we had a receivable in the amount of $79.4 million in respect of these payments.
We do not expect negative cash flows from operations going forward.
Capital Expenditures. Total capital expenditures for property and equipment were $31.2 million
and $50.6 million for the first six months of 2008 and 2007, respectively, and include $13.1
million and $21.8 million, respectively, in each period for the purchase of assets leased to
others, including FIS. Total capital expenditures for software were $13.8 million and $16.2 million
for the first six months of 2008 and 2007, respectively.
Financing. Effective October 24, 2006, we entered into a credit agreement (the Credit
Agreement) with Bank of America, N.A. as Administrative Agent and Swing Line Lender, and the other
financial institutions party thereto. Effective October 11, 2007, we exercised an option to
increase the size of the credit facility by an additional $300 million. The Credit Agreement, which
replaced our previous credit agreement, provides for a $1.1 billion unsecured revolving credit
facility, including the $300 million increase, maturing on the fifth anniversary of the closing
date. Amounts under the revolving credit facility may be borrowed, repaid and reborrowed by the
borrower thereunder from time to time until the maturity of the revolving credit facility.
Voluntary prepayment of the revolving credit facility under the Credit Agreement is permitted at
any time without fee upon proper notice and subject to a minimum dollar requirement. Revolving
loans under the credit facility bear interest at a variable rate based on either (i) the higher of
(a) a rate per annum equal to one-half of one percent in excess of the Federal Reserves Federal
Funds rate, or (b) Bank of Americas prime rate or (ii) a rate per annum equal to the British
Bankers Association London Interbank Offered Rate (LIBOR) plus a margin of between 0.23%-0.675%,
depending on our then current senior unsecured long-term debt rating from the rating agencies. In
addition, we pay a commitment fee between 0.07%-0.175% on the entire facility, also depending on
our senior unsecured long-term debt rating. As of June 30, 2008, we had borrowed $535 million under
the Credit Agreement, currently bearing interest at 2.82 percent.
The Credit Agreement contains affirmative, negative and financial covenants customary for
financings of this type, including, among other things, limits on the creation of liens, sales of
assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and
certain amendments. The Credit Agreement prohibits us from paying dividends to our stockholders if
an event of default has occurred and is continuing or would result therefrom. The Credit Agreement
requires us to maintain certain financial ratios and levels of capitalization. The Credit Agreement
includes customary events of default for facilities of this type (with customary grace periods, as
applicable). These events of default include a cross-default provision that, subject to limited
exceptions, permits the lenders to declare the Credit Agreement in default if: (i) (A) we fail to
make any payment after the applicable grace period under any indebtedness with a principal amount
(including undrawn committed amounts) in excess of 3% of
30
our net worth, as defined in the Credit Agreement, or (B) we fail to perform any other term
under any such indebtedness, or any other event occurs, as a result of which the holders thereof
may cause it to become due and payable prior to its maturity; or (ii) certain termination events
occur under significant interest rate, equity or other swap contracts. The Credit Agreement
provides that, upon the occurrence of an event of default, the interest rate on all outstanding
obligations will be increased and payments of all outstanding loans may be accelerated and/or the
lenders commitments may be terminated. In addition, upon the occurrence of certain insolvency or
bankruptcy related events of default, all amounts payable under the Credit Agreement shall
automatically become immediately due and payable, and the lenders commitments will automatically
terminate.
In connection with the purchase of certain leasing assets from FIS, we assumed certain
liabilities associated with those assets. These liabilities include various bank promissory notes,
which are non-recourse obligations and are secured by interests in certain leases and underlying
equipment. These promissory notes, with a balance of $152.9 million at June 30, 2008, bear interest
at various fixed rates and mature at various dates. In addition, we also assumed a $20 million
revolving credit facility. This facility is also secured by interests in certain leases and
underlying equipment, bears interest at Prime-0.5%, and is due August 2008. As of June 30, 2008,
$8.0 million was unused. On September 30, 2007, also in connection with the acquisition of certain
leasing assets from FIS, we entered into an unsecured note due to FIS in the amount of $7.3
million. The note bears interest at LIBOR+0.45%, includes principal amortization of $0.2 million
per quarter, is due October, 2012, and has a balance of $6.7 million at June 30, 2008.
Our outstanding debt also includes $241.0 million aggregate principal amount of our 7.30%
notes due 2011 and $249.1 million aggregate principal amount of our 5.25% notes due 2013. These
notes contain customary covenants and events of default for investment grade public debt. They do
not include a cross-default provision.
We lend fixed maturity 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 June 30, 2008 and December 31, 2007, we had
security loans outstanding with fair values of $173.7 million and $264.2 million, respectively, and
held cash of $179.4 million and $271.8 million, respectively, as collateral related to these
security loans which has been included in cash and in accounts payable and accrued liabilities.
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. Recently, we have seen a divergence from
these historical trends as tighter lending standards, including a significant reduction in the
availability of subprime mortgage lending, combined with rising default levels and a bearish
outlook on the real estate environment have caused potential home buyers to be more reluctant to
buy homes and have suppressed refinance activity.
Contractual Obligations. Our long-term contractual obligations have not changed materially
since December 31, 2007.
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. There were no
repurchases of our common stock under this program in the first quarter of 2008. In the second
quarter of 2008, we repurchased a total of 2,201,870 shares of our common stock for $33.1 million,
or an average of $15.05 per share. From July 1, 2008 through August 7, 2008, we have repurchased an
additional 669,300 shares for $8.9 million, or an average of $13.33 per share. As of August 7,
2008, we have repurchased a total of 12,546,170 shares since the inception of the program and we
are authorized to purchase an additional 12,453,830 shares.
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than
facility and equipment leasing arrangements. We do have an off-balance sheet financing arrangement
(commonly referred to as
31
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 provided for amounts up to $75.0 million. As of
June 30, 2008, the full $75.0 million had been drawn on the facility to finance land costs and
related fees and expenses and the outstanding balance was $70.1 million. The lease includes
guarantees by us of up to 86.7% of the outstanding lease balance, and options to purchase the
facilities at the outstanding lease balance. The guarantee becomes effective if we decline to
purchase the facilities at 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 June 30, 2008 related to these arrangements.
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, 2007.
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, 2007 and our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2008.
Item 4. Controls and Procedures
As of the end of the period covered by this report, 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 such term is defined in Rule 13a-15(e) under the Exchange Act. 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.
32
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 its 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 the Companys business. As background to the disclosure below, please note
the following:
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These matters raise difficult and complicated factual and legal issues and are subject
to many uncertainties and complexities, including but not limited to the underlying facts
of each matter, novel legal issues, variations between jurisdictions in which matters are
being litigated, differences in applicable laws and judicial interpretations, the length of
time before many of these matters might be resolved by settlement or through litigation
and, in some cases, the timing of their resolutions relative to other similar cases brought
against other companies, the fact that many of these matters are putative class actions in
which a class has not been certified and in which the purported class may not be clearly
defined, the fact that many of these matters involve multi-state class actions in which the
applicable law for the claims at issue is in dispute and therefore unclear, and the current
challenging legal environment faced by large corporations and insurance companies. |
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In these matters, plaintiffs seek a variety of remedies including equitable relief in
the form of injunctive and other remedies and monetary relief in the form of compensatory
damages. In most cases, the monetary damages sought include punitive or treble damages.
Often more specific information beyond the type of relief sought is not available because
plaintiffs have not requested more specific relief in their court pleadings. In addition,
the dollar amount of damages sought is frequently not stated with specificity. In those
cases where plaintiffs have made a statement with regard to monetary damages, they often
specify damages either just above or below a jurisdictional limit regardless of the facts
of the case. These limits represent either the jurisdictional threshold for bringing a case
in federal court or the maximum they can seek without risking removal from state court to
federal court. In our experience, monetary demands in plaintiffs court pleadings bear
little relation to the ultimate loss, if any, that we may experience. None of the cases
described below includes a statement as to the dollar amount of damages demanded. Instead,
each of the cases includes a demand in an amount to be proved at trial. |
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For the reasons specified above, it is not possible to make meaningful estimates of the
amount or range of loss that could result from these matters at this time. We review these
matters on an ongoing basis and follow the provisions of Statement of Financial Accounting
Standards (SFAS) No. 5, Accounting for Contingencies when making accrual and disclosure
decisions. When assessing reasonably possible and probable outcomes, management bases its
decision on its assessment of the ultimate outcome following all appeals. |
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We intend to vigorously defend each of these matters. In our opinion, while some of
these matters may be material to our operating results for any particular period if an
unfavorable outcome results, none will have a material adverse effect on our overall
financial condition. |
Certain significant legal proceedings and matters have been previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2007. The following is an update of such
proceedings:
In connection with a complaint filed in Illinois (Independent Trust v. Fidelity National Title
Insurance Company of New York), the Company moved to dismiss, but the motion was denied. The
Company subsequently moved for summary judgment, and that motion has been fully briefed and
submitted.
In February 2008, thirteen putative class actions were commenced against several of our title
insurance companies, including Fidelity National Title Insurance Company, Chicago Title Insurance
Company, Security Union Title Insurance Company and Ticor Title Insurance Company (collectively,
the Fidelity Affiliates). The complaints also name Fidelity National Financial, Inc. (together
with the Fidelity Affiliates, the Fidelity
33
Defendants) as a defendant based on its ownership of the Fidelity Affiliates. The complaints,
which are brought on behalf of a putative class of consumers who purchased title insurance in New
York, allege that the defendants conspired to inflate rates for title insurance through the Title
Insurance Rate Service Association, Inc. (TIRSA), a New York State-approved rate service
organization which is also named as a defendant. Each of the complaints asserts a cause of action
under the Sherman Act and several of the complaints include claims under the Real Estate Settlement
Procedures Act as well as New York State statutory and common law claims. The complaints seek
monetary damages, including treble damages, as well as injunctive relief. Subsequently, similar
complaints were filed in many federal courts. There are now approximately 63 complaints pending
alleging that the Fidelity Defendants conspired with their competitors to unlawfully inflate rates
for title insurance in every major market in the United States. A motion was filed before the
Multidistrict Litigation Panel to consolidate and or coordinate these actions in the United States
District Court in the Southern District of New York. However, that motion was denied. The cases are
generally being consolidated before one district court judge in each state and scheduled for the
filing of consolidated complaints and motion practice.
On September 24, 2007 a third party complaint was filed in the In Re Ameriquest Mortgage
Lending Practices Litigation in the United States District Court for the Northern District of
Illinois by Ameriquest Mortgage Company (Ameriquest) and Argent Mortgage Company (Argent)
against numerous title insurers and agents including Chicago Title Company, Fidelity National Title
Company, Fidelity National Title Insurance Company, American Pioneer Title Insurance Company (now
known as Ticor Title Insurance Company of Florida), Chicago Title of Michigan, Fidelity National
Title Insurance Company of New York, and Ticor Title Insurance Company (collectively, the Fidelity
Affiliates). The third party complaint alleges that Ameriquest and Argent have been sued by a
class of borrowers alleging that they violated the Truth in Lending Act (TILA) by failing to
comply with the notice of right to cancel provisions and making misrepresentations in lending to
the borrowers who now seek money damages. Ameriquest and Argent allege that the Fidelity Affiliates
contracted and warranted to close these loans in conformity with the lenders instructions which
correctly followed the requirements of TILA and contained no misrepresentations; therefore, if
Ameriquest and Argent are liable to the class, then the Fidelity Affiliates are liable to them for
failing to close the lending transactions as agreed. Ameriquest and Argent seek to recover the cost
of resolving the class action against them including their attorneys fees and costs in the action.
The title defendants are organizing to form a defense group and, as requested by the court, are
exploring the possibility of filing a single collective response.
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.
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.
In January 2007, the State of California adopted regulations that would have significant
effects on the title insurance industry in California. We, as well as others, have been engaged in
discussions with the California Department of Insurance (the CDI) regarding possible industry
reforms that may result in the CDIs decision to modify or repeal the regulations prior to their
implementation. On June 17, 2008, the CDI filed with the Office of Administrative Law revised title
insurance regulations containing substantial changes to the existing regulations. The hearings on
the revised regulations are scheduled for the week of August 11, 2008, in San Francisco.
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, 2007.
34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table summarizes purchases of equity securities by the issuer during the quarter
ended June 30, 2008:
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(c) Total Number |
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of Shares |
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(d) Maximum Number |
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(a) Total |
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(b) |
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Purchased as Part |
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of Shares that May |
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Number |
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Average |
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of Publicly |
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Yet Be Purchased |
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of Shares |
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Price Paid |
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Announced Plans |
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Under the Plans or |
Period |
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Purchased |
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per Share |
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or Programs (1) |
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Programs (2) |
4/1/084/30/08 |
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100,000 |
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$ |
16.29 |
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100,000 |
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15,225,000 |
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5/1/085/31/08 |
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607,270 |
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16.70 |
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607,270 |
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14,617,730 |
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6/1/086/30/08 |
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1,494,600 |
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14.30 |
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1,494,600 |
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13,123,130 |
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Total |
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2,201,870 |
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$ |
15.05 |
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2,201,870 |
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13,123,130 |
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(1) |
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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. |
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(2) |
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As of the last day of the applicable month. |
Item 4. Submission of Matters to a Vote of Security Holders.
Our annual meeting of stockholders was held on May 29, 2008. Stockholders of record as of
March 31, 2008 were entitled to vote at the annual meeting. At the close of business on the record
date, there were 213,901,531 shares of our common stock outstanding and entitled to vote at the
meeting. There were 187,791,730 shares represented at the annual meeting of stockholders.
At the annual meeting, four Class III directors were elected, the appointment of KPMG LLP as
our independent registered public accounting firm for 2008 was ratified and the Amended and
Restated 2005 Omnibus Incentive Plan was approved.
Nominees for Class III directors were elected by the following vote:
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Shares Voted |
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Authority to Vote |
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For |
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Withheld |
William P. Foley, II |
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177,003,655 |
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10,788,074 |
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Douglas K. Ammerman |
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177,375,516 |
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10,416,214 |
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Thomas M. Hagerty |
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174,129,587 |
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13,662,143 |
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Peter O. Shea, Jr. |
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176,316,497 |
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11,475,232 |
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Directors, whose term of office as a director continued after the meeting, are as follows:
John F. Farrell, Jr., Frank P. Willey, Willie D. Davis, Philip G. Heasley, Daniel D. (Ron) Lane,
General William Lyon, Richard N. Massey, and Cary H. Thompson.
The proposal to approve the ratification of the appointment of KPMG LLP as our independent
registered public accounting firm for 2008 received the following votes:
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Votes |
Shares Voted For |
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176,425,397 |
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Shares Voted Against |
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1,718,722 |
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Shares Voted Abstain |
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9,647,610 |
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The proposal to approve the Amended and Restated 2005 Omnibus Incentive Plan received the
following votes:
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Votes |
Shares Voted For |
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120,016,087 |
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Shares Voted Against |
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29,735,062 |
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Shares Voted Abstain |
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11,093,079 |
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35
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. |
36
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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Date: August 8, 2008 |
FIDELITY NATIONAL FINANCIAL, INC.
(registrant)
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By: |
/s/ Anthony J. Park
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Anthony J. Park |
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Chief Financial Officer
(Principal Financial and Accounting Officer) |
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37
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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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. |
38