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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
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For the Fiscal Year Ended December 31, 2004 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) |
Commission File No. 1-9396
Fidelity National Financial,
Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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86-0498599 |
(State or other jurisdiction
of incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
601 Riverside Avenue
Jacksonville, Florida 32204
(Address of principal executive offices, including zip
code) |
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(904) 854-8100
(Registrant’s telephone number,
including area code) |
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange on which registered |
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Common Stock, $.0001 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K, or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
The aggregate market value of the shares of the Common Stock
held by non-affiliates of the registrant as of June 30,
2004 was $6,205,211,279.
The information in Part III hereof is incorporated herein
by reference to the registrant’s Proxy Statement on
Schedule 14A for the fiscal year ended December 31,
2004, to be filed within 120 days after the close of the
fiscal year that is the subject of this Report.
TABLE OF CONTENTS
FORM 10-K
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PART I
We are the largest title insurance company in the United States.
Our title insurance underwriters — Fidelity National
Title, Chicago Title, Ticor Title, Security Union Title and
Alamo Title — together issued approximately 31.4%
of all title insurance policies issued nationally during 2003,
including the 2003 results of American Pioneer Title Insurance
Company, which we acquired in March 2004 (see “Recent
Developments”). We are also a leading provider of
technology solutions, processing services, and information
services to the financial services and real estate industries.
Over 2,800 financial institutions use our services, including 45
of the 50 largest banks in the U.S. Our software
applications process over 50% of all U.S. residential
mortgage loans by dollar volume with balances exceeding
$3.6 trillion, and over 235 million deposit accounts
and non-mortgage consumer loans and leases are processed on our
core bank processing platform. We also provide customized
business process outsourcing related to aspects of the
origination and management of mortgage loans to national lenders
and loan servicers. Our information services, including our
property data and real estate-related services, are used by
mortgage lenders, mortgage investors and real estate
professionals to complete residential real estate transactions
throughout the U.S. We provide information services that
span the entire home purchase and ownership life cycle, from
contact through closing, refinancing and resale.
We have six reporting segments:
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Title Insurance. The title insurance segment
consists of our title insurance underwriters and our
wholly-owned title insurance agencies. The title segment
provides core title insurance and escrow and other title related
services including collection and trust activities,
trustee’s sales guarantees, recordings and reconveyances. |
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Specialty Insurance. The specialty insurance segment,
consisting of our various non-title insurance subsidiaries,
issues flood, home warranty, homeowners, automobile and certain
niche personal lines insurance policies. |
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Financial Institution Software and Services. The
financial institution software and services segment consists
primarily of the operations of Fidelity Information Services,
Inc. (“FI”), which was acquired on April 1, 2003
and subsequent acquisitions of WebTone, Aurum, Sanchez and
InterCept. This segment focuses on two primary markets:
financial institution processing and mortgage loan processing. |
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Lender Outsourcing Solutions. The lender outsourcing
solutions segment includes our loan facilitation services, which
consist of centralized, customized title agency and closing
services, which we offer to first mortgage, refinance, home
equity and sub-prime lenders, and our default management
services, which include foreclosure posting and publishing
services, loan portfolio services, field services and property
management. These services allow our customers to outsource the
business processes necessary to take a loan and the underlying
real estate securing the loan though the default and foreclosure
process. |
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Information Services. The information services segment
offers real estate related information services. Included in the
information services we provide are property appraisal and
valuation services, property records information, real estate
tax services, borrower credit and flood zone information and
certification and multiple listing software and services. |
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Corporate and Other. The corporate and other segment
consists of the operations of the parent holding company;
certain other unallocated corporate overhead expenses, the
operations of our wholly-owned equipment-leasing subsidiary and
other small operations. |
Our title insurance and specialty insurance segments make up our
insurance underwriting businesses, while our financial
institution software and services, lender outsourcing solutions
and information services segments make up the technology
solutions, processing and information-based services businesses
of our subsidiary Fidelity National Information Services, Inc.
(“FIS”).
Strategy
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Title and Specialty Insurance |
Our strategy in the title insurance business is to maximize
operating profits by increasing our market share by aggressively
and effectively managing operating expenses throughout the real
estate business cycle. To accomplish our goals, we intend to:
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Continue to operate each of our five title brands
independently. We believe that in order to maintain and
strengthen our title insurance revenue base, we must leave the
Fidelity Title, Chicago Title, Ticor Title, Security Union Title
and Alamo Title brands intact and operate them independently.
Entrepreneurship and close customer relationships are an
integral part of the culture at each of our title brands. We
believe this culture of independence aids in employee retention,
which is critical to the operating success of each brand. |
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Consistently deliver superior customer service. We
believe customer service and consistent product delivery are the
most important factors in attracting and retaining customers. |
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Effectively manage personnel and cost levels based on
economic factors. We believe that effectively managing
personnel levels and costs are important to delivering value to
shareholders regardless of which stage of the business cycle we
may be in. |
Our strategy in the specialty insurance business is to provide
the most efficient and effective direct and independent agency
property policy delivery mechanism in the market place. We are
positioned to be one of the lowest expense providers in the
marketplace, while strictly adhering to pricing and underwriting
discipline to maintain underwriting profitability.
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We offer our National Flood Insurance Program (“NFIP”)
through two of our property and casualty companies. Fidelity
Property and Casualty Insurance Company provides flood insurance
in all 50 states. Fidelity National Insurance Company
underwrites flood insurance in 30 states and is seeking to
expand into additional states. We are the largest provider of
NFIP flood insurance in the U.S. through our independent
agent network. Our delivery and service is consistently graded
the highest in the industry. Our success has been recognized by
the National Flood Insurance Program, which has given us its
Administrator’s Club Award and the Administrator’s
Quill Award for our outstanding growth. |
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We provide an efficient methodology for obtaining insurance on
newly acquired homes, whether new construction or upon resale.
We have an easy to use fully integrated website, which our
agents use as a completely paperless and fully automated quoting
and policy delivery system. This system is in use for all of our
property products, including flood insurance. |
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Our underwriting practice is conservative. Catastrophe modeling
is closely managed on a real time basis. We also buy reinsurance
to assist in maintaining our profitability and growing our
surplus. |
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Financial Institution Software and Services, Lender
Outsourcing Solutions and Information Services |
Our strategy to achieve continued growth in these businesses
includes:
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Expand our technology leadership. We intend to continue
to build on the reputation, reliability and functionality of our
software applications. To accomplish this, our strategies are to
maintain high-quality functionality for our software
applications, in part through developing software applications
that feature enhanced capabilities such as straight-through
processing and real-time processing; to provide superior
application and technology migration support; and to ensure that
our software applications are able to integrate with existing
and new add-on product used by our customers. Because of our
scale, we are uniquely positioned to efficiently accomplish
these objectives by spreading the capital and resource |
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commitment required to maintain and improve our applications
over a larger revenue base as compared to the revenue base of
our competitors with less market share. |
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Take advantage of our cross-selling opportunities. We
coordinate our sales efforts through a part of our organization
called our Office of the Enterprise to take advantage of
information we obtain about the needs of our financial
institution customers in order to cross-sell our products and
services. We are taking advantage of the significant customer
relationships of our multifaceted businesses to cross-sell our
other products and services. |
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Expand our leadership position in information products and
services. We are one of the leading providers of information
products and services to the real estate industry. We believe
that our technological capabilities and market leadership have
provided us with a competitive advantage in terms of our product
offerings and our ability to meet the needs of our customers. We
intend to maintain and expand this market position, allowing us
to continue to strengthen our relationships with our existing
customers and expand our customer base. We also intend to
continue integrating our property data and real estate-related
information products and services into our other businesses. |
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Broaden our product portfolio and market opportunities
through acquisitions. While we will continue to invest in
developing and enhancing our existing business solutions, we
also intend to continue to acquire technologies and products
that will allow us to further broaden our product offerings and
continue to enhance the functionality of our business solutions.
We may also consider acquisitions that would expand our existing
customer base for a product or service, or acquiring businesses
that have a product or customer base in markets in which we do
not currently compete, particularly if these acquisitions would
allow us to obtain revenue growth through leveraging our
existing capabilities or scale. We will continue to utilize our
ability to integrate newly acquired businesses and we will
continue to be disciplined and strategic in making acquisitions. |
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Grow our international business. We believe that we are
well-positioned to leverage our financial institution software
and services into international markets. In the past, we have
provided products and services to international customers when
such opportunities presented themselves through our existing
customer relationships. With the international customers and
presence we obtained through our recent acquisitions of Sanchez
and Kordoba (see “Recent Developments”), we believe we
are approaching a size and market presence in several
international markets that will allow us to effectively compete
in what we believe will be a growing market for our products and
services. Our international strategy will include focusing on
those products, services and customers that will allow us to
leverage our existing scale and expertise. |
Recent Developments
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Recapitalization of FIS and Minority Interest Sale |
The recapitalization of FIS was accomplished through
$2.8 billion in borrowings under new senior credit
facilities consisting of an $800.0 million Term Loan A
facility, a $2.0 billion Term Loan B facility
(collectively, the “Term Loan Facilities”) and a
$400.0 million revolving credit facility
(“Revolver”). FIS fully drew upon the entire
$2.8 billion in Term Loan Facilities to consummate the
recapitalization while the Revolver remained undrawn at the
closing of the recapitalization. The interest rate on both the
Term Loan Facilities and the Revolver is LIBOR plus 1.75%.
Bank of America, JP Morgan Chase, Wachovia Bank, Deutsche
Bank and Bear Stearns lead a consortium of lenders providing the
new senior credit facilities.
The minority equity interest sale was accomplished through FIS
selling an approximately 25 percent minority equity
interest in the common stock of FIS to an investment group led
by Thomas H. Lee Partners (“THL”) and Texas Pacific
Group (“TPG”). FIS issued a total of approximately
50 million shares of the common stock of FIS to the
investment group for a total purchase price of approximately
$500.0 million. A new Board of Directors has been created
at FIS, with William P. Foley, II, current Chairman and
Chief Executive Officer of FNF, serving as Chairman and Chief
Executive Officer of FIS. FNF has appointed four additional
members to the FIS Board of Directors, while each of THL and TPG
have appointed two new directors.
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The following steps were undertaken to consummate the FIS
recapitalization plan and the minority equity interest sale in
FIS. On March 8, 2005, FIS issued a $2.7 billion note
to FNF as payment of the dividend. On March 9, 2005, FIS
borrowed $2.8 billion under its new senior credit
facilities. FIS then paid FNF $2.7 billion, plus interest,
to repay the $2.7 billion note issued on March 8,
2005. FNF used $400 million of these funds to repay the
outstanding balance of its credit agreement. The remainder will
be used to fund the $10 per share dividend and for general
corporate purposes at FNF, which may include acquisitions. The
minority equity interest sale in FIS was then closed through the
payment of $500.0 million from the investment group led by
THL and TPG to FIS. FIS then repaid approximately
$410.0 million outstanding under its former credit
facility. Finally, FIS paid all expenses related to the
transactions amounting to $80.4 million. All remaining
proceeds will be utilized for other general corporate purposes
at FIS.
On March, 9, 2005, we also announced that our Board of
Directors formally declared a $10 per share special cash
dividend that is payable on March 28, 2005 to stockholders
of record as of March 21, 2005. Because of the magnitude of
the special cash dividend, the New York Stock Exchange has
determined that the ex-dividend date will be March 29,
2005, the business day following the payable date for the
special cash dividend.
Acquisitions
Strategic acquisitions have been an important part of our growth
strategy. We made a number of acquisitions in 2004 and 2003, to
strengthen and expand our service offerings and customer base in
our FIS businesses. Our 2004 acquisitions and more significant
2003 acquisitions are described below.
On December 13, 2004, we acquired ClearParSM, LLC
(“ClearPar”), a provider of a web-based commercial
loan settlement system servicing the primary syndication and
secondary loan trading markets. The acquisition price was
$24.5 million in cash.
On November 8, 2004, we acquired all of the outstanding
stock of InterCept, Inc. (“InterCept”) for
$18.90 per share. The total purchase price was
$419.4 million, primarily in cash. InterCept provides both
outsourced and in-house, fully integrated core banking solutions
for approximately 425 community banks, including loan and
deposit processing and general ledger and financial accounting
operations. InterCept also operates significant item processing
and check imaging operations, providing imaging for customer
statements, clearing and settlement, reconciliation and
automated exception processing in both outsourced and in-house
relationships for approximately 720 customers.
On September 30, 2004, we acquired a 74.9% interest in
KORDOBA Gesellschaft fur Bankensoftware mbH & Co. KG,
Munich, (“Kordoba”), a provider of core processing
software and outsourcing solutions to the German banking market,
from Siemens Business Services GmbH & Co. OHG. The
acquisition price was $123.6 million in cash.
On September 15, 2004, we acquired 11 million shares
of common stock and four million warrants to purchase common
stock of Covansys Corporation (“Covansys”), a
U.S.-based provider of application management and offshore
outsourcing services with India based operations for
$121.0 million in cash. We own approximately 29% of the
common stock of Covansys. We also entered into a 5-year master
services agreement with Covansys under which we are required to
purchase a minimum of $150.0 million in services through
June 2009.
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On July 2, 2004, we acquired 100% of Geotrac, Inc.
(“Geotrac”), a flood zone monitoring services provider
for $40.0 million in cash.
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Sanchez Computer Associates, Inc. |
On April 14, 2004, we acquired Sanchez Computer Associates,
Inc. (“Sanchez”) for $183.7 million, composed of
approximately $88.1 million in cash and the issuance of
2,267,290 shares of our common stock. Sanchez develops and
markets scalable and integrated software and services that
provide banking, customer integration, outsourcing and wealth
management solutions to financial institutions in several
countries. Sanchez’ primary product offering is Sanchez
Profile TM, a real-time, multi-currency, strategic core banking
deposit and loan processing system that can be utilized on both
an outsourced and in-house basis.
On April 7, 2004, we acquired Bankware, a provider of check
imaging solutions for financial institutions for
$47.7 million in cash.
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American Pioneer Title Insurance Company |
On March 22, 2004, we acquired American Pioneer
Title Insurance Company (“APTIC”) for
$115.2 million in cash. APTIC is a 45-state licensed title
insurance underwriter with significant agency operations and
computerized title plant assets in the state of Florida. APTIC
operates under the Company’s Ticor Title brand.
On March 11, 2004, we acquired Aurum Technology, Inc.
(“Aurum”) for $306.4 million, composed of
$185.0 million in cash and the issuance of
3,144,390 shares of our common stock. Aurum is a provider
of outsourced and in-house information technology solutions for
the community bank and credit union markets.
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Hansen Quality Loan Services, LLC |
On February 27, 2004, we acquired an additional 44%
interest in Hansen Quality Loan Services, LLC
(“Hansen”) that we did not already own for
$33.7 million, consisting of $25.2 million in cash and
$8.5 million of our common stock. The stock portion of the
purchase price resulted in the issuance of 220,396 shares
of our common stock. Hansen provides collateral risk assessment
and valuation services for real estate mortgage financing. On
March 26, 2004, we acquired the remaining 1% interest in
Hansen for $0.3 million in cash.
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Fidelity National Information Solutions, Inc. |
On September 30, 2003, we acquired the outstanding minority
interest of Fidelity National Information Solutions, Inc.
(“FNIS”), our majority-owned real estate information
services public subsidiary, whereby FNIS became our wholly-owned
subsidiary. In the acquisition, each share of FNIS common stock
(other than FNIS common stock we already owned) was exchanged
for 0.83 shares of our common stock. We issued
14,292,858 shares of our common stock to FNIS stockholders
in the acquisition.
The acquisition of the minority interest of FNIS on
September 30, 2003 allowed us to further capitalize on the
significant technology resources of FI, which we acquired on
April 1, 2003, by combining all technology resources within
one integrated organization. The Company’s data center
activities have historically been managed by FNIS. However, with
the acquisition of the minority interest of FNIS, we have
migrated substantially all of our data center activities from
FNIS to the existing FI platforms as of September 30, 2003.
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WebTone Technologies, Inc. |
On September 2, 2003, we acquired WebTone Technologies,
Inc. (“WebTone”) for $88.7 million in cash.
WebTone is the developer of the TouchPoint® suite of
customer interactive management solutions for financial services
organizations.
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ALLTEL Information Services, Inc. |
On January 28, 2003, we entered into a stock purchase
agreement with ALLTEL Corporation, Inc., a Delaware corporation
(“ALLTEL”), to acquire from ALLTEL its financial
services division, ALLTEL Information Services, Inc.
(“AIS”). On April 1, 2003, we closed the
acquisition and subsequently renamed the division Fidelity
Information Services, Inc. (“FI”). FI is one of the
largest providers of information-based technology solutions and
processing services to the mortgage and financial services
industries.
We acquired FI for approximately $1,069.6 million
(including the payment for certain working capital adjustments
and estimated transaction costs), consisting of
$794.6 million in cash and $275.0 million of our
common stock. We funded the cash portion of the purchase price
through the issuance of $250.0 million aggregate principal
amount of 5.25% notes due March 15, 2013, and
$544.6 million in available cash. The stock portion of the
purchase price resulted in the issuance of
11,206,692 shares of our common stock to ALLTEL.
As the foregoing discussion illustrates, a significant portion
of our historical growth has resulted from acquisitions. With
assistance from our advisors, on an ongoing basis we actively
evaluate possible strategic transactions, such as acquisitions
and dispositions of business units and operating assets and
business combination transactions, as well as possible
alternative means of financing the growth and operations of our
business units. There can be no assurance, however, that any
suitable opportunities will arise or that any particular
transaction will be effected.
Title Insurance
Market for title insurance. The title insurance market in
the United States is large and has grown in the last
10 years. According to Demotech, Inc., total operating
income for the entire U.S. title insurance industry grew
from $4.8 billion in 1995 to $16.7 billion in 2003.
Growth in the industry is closely tied to various macroeconomic
factors, including, but not limited to, growth in the gross
national product, inflation, interest rates and sales of new and
existing homes, as well as the refinancing of previously issued
mortgages.
Virtually every real estate transaction consummated in the
U.S. requires the use of title insurance by a lending
institution before a transaction can be finalized. Generally,
revenues from title insurance policies are directly correlated
with the value of the property underlying the title policy, and
appreciation in the overall value of the real estate market
drives growth in total industry revenues. Industry revenues are
also driven by swings in interest rates, which affect demand for
new mortgage loans and refinancing transactions.
The U.S. title insurance industry is concentrated among a
handful of industry participants. According to Demotech, Inc.,
the top five title insurance companies accounted for 90.5% of
net premiums collected in 2003. Over 40 independent title
insurance companies accounted for the remaining 9.5% of net
premiums collected in 2003. Over the years, the title insurance
industry has been consolidating, beginning with the merger of
Lawyers Title Insurance and Commonwealth Land
Title Insurance in 1998 to create LandAmerica Financial
Group, Inc., followed by our acquisition of Chicago Title in
March 2000. Consolidation has created opportunities for
increased financial and operating efficiencies for the
industry’s largest participants and should continue to
drive profitability and market share in the industry.
Title Insurance Policies. Generally, real estate
buyers and mortgage lenders purchase title insurance to insure
good and marketable title to real estate. Today, virtually all
real property mortgage lenders require their borrowers to obtain
a title insurance policy at the time a mortgage loan is made.
Title insurance premiums are based upon either the purchase
price of the property insured or the amount of the mortgage
loan. Title
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insurance premiums are due in full at the closing of the real
estate transaction, and the policy generally terminates upon the
resale or refinancing of the property.
Prior to issuing policies, underwriters can reduce or eliminate
future claim losses by accurately performing searches and
examinations. A title company’s predominant expense relates
to such searches and examinations, the preparation of
preliminary title reports, policies or commitments and the
maintenance of title “plants,” which are indexed
compilations of public records, maps and other relevant
historical documents. Claim losses generally result from errors
or mistakes made in the title search and examination process and
from hidden defects such as fraud, forgery, incapacity, missing
heirs or refinancing of the property.
Commercial real estate title insurance policies insure title to
commercial real property, and generally involve higher coverage
amounts and yield higher premiums. Prior to the Chicago Title
merger, we issued primarily residential real property title
insurance policies. In the Chicago Title merger, we acquired
Chicago Title’s National Commercial & Industrial
business group, which specializes in meeting the needs of
clients involved in large commercial transactions. As discussed
later under the heading “Economic Factors Affecting
Title Industry,” the volume of commercial real estate
transactions is affected primarily by fluctuations in local
supply and demand conditions for space, while residential real
estate transaction volume is primarily affected by macroeconomic
and seasonal factors. Thus, we believe the addition of Chicago
Title’s commercial real estate title insurance base helps
in maintaining more uniform revenue levels throughout the
seasons.
Losses and Reserves. While most other forms of insurance
provide for the assumption of risk of loss arising out of
unforeseen events, title insurance serves to protect the
policyholder from risk of loss from events that predate the
issuance of the policy. As a result, claim losses associated
with issuing title policies are less expensive when compared to
other insurance underwriters. The maximum amount of liability
under a title insurance policy is usually the face amount of the
policy plus the cost of defending the insured’s title
against an adverse claim.
Reserves for claim losses are established based upon known
claims, as well as losses we expect to incur based upon
historical experience and other factors, including industry
trends, claim loss history, legal environment, geographic
considerations, expected recoupments and the types of policies
written. We also reserve for losses arising from escrow, closing
and disbursement functions due to fraud or operational error.
A title insurance company can minimize its losses by having
strict quality control systems and underwriting standards in
place. These controls increase the likelihood that the
appropriate level of diligence is conducted in completing a
title search so that the possibility of potential claims is
significantly mitigated. In the case of independent agents, who
conduct their own title searches, the agency agreement between
the agent and the title insurance underwriter gives the
underwriter the ability to proceed against the agent when a loss
arises from a flawed title search.
Courts and juries sometimes award damages against insurance
companies, including title insurance companies, in excess of
policy limits. Such awards are typically based on allegations of
fraud, misrepresentation, deceptive trade practices or other
wrongful acts commonly referred to as “bad faith.”
Although we have not experienced damage awards materially in
excess of policy limits, the possibility of such bad faith
damage awards may cause us to experience increased costs and
difficulty in settling title claims.
The maximum insurable amount under any single title insurance
policy is determined by statutorily calculated net worth. The
highest self-imposed single policy maximum insurable amount for
any of our title insurance subsidiaries is $375.0 million.
Direct and Agency Operations. We provide title insurance
services through our direct operations and wholly-owned
underwritten title companies, and additionally through
independent title insurance agents who issue title policies on
behalf of title underwriters. Title underwriters determine the
terms and conditions upon which they will insure title to the
real property according to their underwriting standards,
policies and procedures. In our direct operations, the title
underwriter issues the title insurance policy and retains the
entire premium paid in connection with the transaction. In our
agency operations, the search and examination function is
performed by an independent agent. The agent thus retains the
majority of the title premium collected, with the balance
remitted to the title underwriter for bearing the risk of loss
in the event that a claim
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is made under the title insurance policy. Independent agents may
select among several title underwriters based upon the amount of
the premium “split” offered by the underwriter, the
overall terms and conditions of the agency agreement and the
scope of services offered to the agent. Premium splits vary by
geographic region.
Our direct operations provide the following benefits:
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higher margins because we retain the entire premium from each
transaction instead of paying a commission to an agent; |
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continuity of service levels to a broad range of
customers; and |
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additional sources of income through escrow and other real
estate information services, such as collection and trust
activities, trustee’s sales guarantees, recordings and
reconveyances, property appraisal services, credit reporting,
flood certification and monitoring, real estate tax services,
exchange intermediary services in connection with real estate
transactions, property data and disclosure services, relocation
services, multiple listing services and mortgage loan
fulfillment services. |
Title Insurance Operations. Our direct operations
are divided into approximately 200 profit centers consisting of
more than 1,500 direct offices. Each profit center processes
title insurance transactions within its geographical area, which
is usually identified by a county, a group of counties forming a
region, or a state, depending on the management structure in
that part of the country. We also transact title insurance
business through a network of approximately 9,500 agents,
primarily in those areas in which agents are the more prevalent
title insurance provider.
The following table sets forth the approximate dollars and
percentages of our title insurance premium revenue by state.
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Year Ended December 31, | |
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2004 | |
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2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
California
|
|
$ |
1,056,672 |
|
|
|
22.3 |
% |
|
$ |
1,184,722 |
|
|
|
25.0 |
% |
|
$ |
895,698 |
|
|
|
25.2 |
% |
|
Texas
|
|
|
514,417 |
|
|
|
10.9 |
|
|
|
527,583 |
|
|
|
11.1 |
|
|
|
429,740 |
|
|
|
12.1 |
|
|
Florida
|
|
|
490,823 |
|
|
|
10.4 |
|
|
|
324,468 |
|
|
|
6.8 |
|
|
|
215,367 |
|
|
|
6.1 |
|
|
New York
|
|
|
407,481 |
|
|
|
8.6 |
|
|
|
392,680 |
|
|
|
8.3 |
|
|
|
295,636 |
|
|
|
8.3 |
|
|
Illinois
|
|
|
202,277 |
|
|
|
4.3 |
|
|
|
222,534 |
|
|
|
4.7 |
|
|
|
173,671 |
|
|
|
4.9 |
|
|
All others
|
|
|
2,067,658 |
|
|
|
43.5 |
|
|
|
2,086,264 |
|
|
|
44.1 |
|
|
|
1,537,617 |
|
|
|
43.4 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Totals
|
|
$ |
4,739,328 |
|
|
|
100.0 |
% |
|
$ |
4,738,251 |
|
|
|
100.0 |
% |
|
$ |
3,547,729 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the entire title insurance industry, 13 states
accounted for approximately 74.0% of title premiums written in
the United States in 2003. California represented the single
largest state with 21.3%.
We also analyze our business by examining the level of premiums
generated by direct and agency operations. The following table
presents the percentages of title insurance premiums generated
by direct and agency operations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
|
Amount | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
(Dollars in thousands) | |
|
|
|
|
|
Direct
|
|
$ |
2,128,902 |
|
|
|
44.9 |
% |
|
$ |
2,400,870 |
|
|
|
50.7 |
% |
|
$ |
1,610,792 |
|
|
|
45.4 |
% |
|
Agency
|
|
|
2,610,426 |
|
|
|
55.1 |
% |
|
|
2,337,381 |
|
|
|
49.3 |
|
|
|
1,936,937 |
|
|
|
54.6 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total title insurance premiums
|
|
$ |
4,739,328 |
|
|
|
100.0 |
% |
|
$ |
4,738,251 |
|
|
|
100.0 |
% |
|
$ |
3,547,729 |
|
|
|
100.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Our relationship with each agent is governed by an agency
agreement defining how the agent issues a title insurance policy
on our behalf. The agency agreement also prescribes how the
agent may be liable to us for policy losses attributable to the
agent’s errors. The agency agreement is usually terminable
without cause upon 30 days’ notice or immediately for
cause. In determining whether to engage or retain an independent
agent, we consider the agent’s experience, financial
condition, and loss history. For each agent with whom we enter
into an agency agreement, we maintain financial and loss
experience records. We also conduct periodic audits of our
agents.
Escrow and Other Title Related Fees. In addition to
fees for underwriting title insurance policies, we derive a
significant amount of our revenues from escrow and other title
related fees. A title insurance company in a real estate
transaction generally acts as an intermediary completing all the
necessary documentation and services required for closing the
real estate transaction.
In a typical residential transaction, a title insurance order is
received from a realtor, lawyer, developer, mortgage lender or
independent escrow or closing company. When a title order is
received by the title insurance company or agent, the title
search begins and the title order is considered
“open.” Once documentation has been prepared and
signed, mortgage lender payoff demands are in hand and documents
have been ordered and the transaction has been recorded, the
title order is considered “closed.” A lawyer, an
escrow company or a title insurance company or agent performs
the closing function, most commonly referred to as an
“escrow” in the western United States. The entity
providing the closing function (the “closer”) holds
the seller’s deed of trust and the buyer’s mortgage
until all issues relating to the transaction have been settled.
After these issues have been cleared, the closer delivers the
transaction documents, records the appropriate title documents
in the county recorder’s office and arranges the transfer
of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued. The
lender’s policy insures the lender against any defect
affecting the priority of the mortgage in an amount equal to the
outstanding balance of the related mortgage loan. The
buyer’s policy insures the buyer against defects in title
in an amount equal to the purchase price.
Reinsurance. In the ordinary course of business, we limit
our maximum loss exposure by reinsuring certain risks with other
title insurers. We also earn additional income by assuming
reinsurance for certain risks of other title insurers. In
addition, we cede a portion of certain policy and other
liabilities under agent fidelity, excess of loss and
case-by-case reinsurance agreements. Reinsurance agreements
provide generally that the reinsurer is liable for loss and loss
adjustment expense payments exceeding the amount retained by the
ceding company. However, the ceding company remains primarily
liable in the event the reinsurer does not meet its contractual
obligations.
Specialty Insurance
We issue various insurance policies, which include the following:
|
|
|
| |
• |
Home warranty insurance. We issue one-year, renewable
insurance policies that protect homeowners against defects in
household systems and appliances. |
| |
| |
• |
Flood insurance. We issue new and renewal flood insurance
policies in conjunction with the NFIP. |
| |
| |
• |
Personal lines insurance. We offer and underwrite
homeowners insurance in all 50 states. Automobile insurance
is currently underwritten in 23 states expanding to the
balance of the U.S. in 2005. In addition, we underwrite
personal umbrella, inland marine (boat and recreational
watercraft), and other personal lines niche products in selected
markets. |
Financial Institution Software and Services
The applications and services in our financial institution
software and services segment focus on two primary markets,
financial institution processing and mortgage loan processing.
Our primary applications are software applications that function
as the underlying infrastructure of a financial
institution’s processing environment. These applications
include core bank processing software,
9
which banks use to maintain the primary records of their
customer accounts, and core mortgage processing software, which
banks use to process and service mortgage loans. We also provide
a number of complementary applications and services that
interact directly with the core processing applications,
including applications that facilitate interactions between our
financial institution customers and their clients.
While many of our customers obtain all or a majority of their
key applications from us, the modular design of many of our
applications allows our customers to start with one application,
such as a lending application, and gradually add applications or
services as needed. We provide our customers with additional
flexibility by offering our applications through a range of
delivery and service models, including on-site outsourcing and
remote processing arrangements, as well as on a stand-alone,
in-house, licensed software basis for installation on
customer-owned systems. Because of our ability to integrate and
customize the applications and services we provide to our
customers, we often refer to our applications and services as
“business solutions”.
|
|
|
Financial Institution Processing |
Customers. Over 2,800 financial institutions use our
applications and services, including banks, credit unions,
savings banks and auto finance companies. Revenues in 2004 and
2003 relating to financial institution processing were
$886.2 million and $452.3 million, respectively. The
processing needs of our customers in the financial institution
processing market vary significantly across the size and type of
institutions we serve. These institutions include:
|
|
|
| |
• |
Large Banks. We define the large bank market as banks and
other financial institutions in North America with assets in
excess of $5 billion. Of the 100 largest U.S. banks,
our customers include 26 banks that use our deposit-related core
processing applications, 32 banks that use our lending-related
core processing applications and 29 banks that use our various
retail delivery applications. Our customers in this market
include Harris Bank/ Bank of Montreal, Citizens Bank, and
BancWest. |
| |
| |
• |
Small to Mid-tier Banks. We provide our applications and
services in the small to mid-tier banking market to more than
2,500 customers consisting primarily of U.S. community
banks, credit unions and savings banks. Our customers in this
market typically seek a fully integrated and broad suite of
applications. As a result, our core processing applications sold
to this market have various add-on modules or applications that
integrate into our core processing applications, providing a
broad processing solution. Our customers in this market include
Hudson City Savings Bank, Sterling Bank and VyStar Credit Union. |
| |
| |
• |
International Banks. We offer applications and services
to financial institutions located outside of North America. Our
international business utilizes existing bank processing
applications and services and customizes them for the specific
business needs of our customers in targeted international
markets. Our customers include CitiBank Asia Pacific and CEEMEA,
ING Group and China Construction Bank. Revenues from our
international business were derived principally from 27
customers in the Asia-Pacific market, 31 customers in the
European-Middle East-Africa market and 12 customers in the
Mexico-Latin American market. |
| |
| |
• |
Automotive Finance Institutions. In our automotive
finance processing business, we offer loan and lease servicing
solutions for the automotive finance industry. In 2004, over
20 million automotive loans and leases were processed on
our automotive finance processing applications. Nine of the top
20 U.S. automotive finance companies utilize our
applications and services, including the finance companies of
Honda, Ford and DaimlerChrysler. |
| |
| |
• |
Commercial Lenders. We also provide business solutions
that allow clients to automate and manage their entire
commercial lending and loan trading businesses. Our customers
include more than 91 financial institutions, including 9 of the
top 10 and 27 of the top 50 as ranked by capital. Our customers
include Bank of America, JPMorgan Chase, Barclays Capital, Bank
of Scotland and Rabobank. |
10
Applications and Services. Our primary applications and
services include the following:
|
|
|
| |
• |
Core Processing Applications. Our core processing
software applications are designed to run critical banking
processes of our financial institution customers. These critical
banking processes include deposit and lending systems and most
other core banking systems that a bank must utilize to manage
the products it provides to its customers. |
| |
| |
• |
Retail Delivery Applications. While our core processing
applications support all aspects of a bank’s internal
recordkeeping and reconciliations, our retail delivery
applications facilitate direct interactions between a bank and
its customers through applications that allow for the delivery
of services to these customers. Our retail delivery applications
include TouchPoint, an application suite that supports call
centers, branch and teller environments, and retail and
commercial Internet channels. |
| |
| |
• |
Integration Applications. Our integration applications
access data on our own and third-party core processing systems
and transport information to our customers’ retail delivery
channels. Our integration applications provide transaction
routing and settlement. These applications facilitate tightly
integrated systems and efficient software delivery that reduces
technology costs for our customers. |
| |
| |
• |
Syndicated Loan Applications. Our syndicated loan
applications are designed to support wholesale and commercial
banking requirements necessary for all aspects of syndicated
commercial loan origination and management. |
| |
| |
• |
Automotive Finance Applications. Our primary applications
include an application suite that assists automotive finance
institutions in evaluating loan applications and credit risk,
and allows automotive finance institutions to manage their loan
and lease portfolios. |
| |
| |
• |
Item Processing and Imaging Services. Our item
processing and imaging services provide our customers with a
complete range of outsourcing services relating to the imaging
and processing of checks, statements and other transaction
records. These services are performed at one of our 29
processing centers located throughout the U.S. |
| |
| |
• |
eBanking and Electronic Payments Services. We provide a
full range of eBanking capabilities, including EFT processing
solutions, ranging from ATM and debit card services to card
production and distribution to stored-value gift cards and
payroll cards. We also offer electronic business solutions, such
as personal and business Internet services, web design and
development, web hosting, ISP services and eDelivery. Lastly we
provide telephone banking solutions that can help streamline
operations, improve service and reduce costs. |
Delivery of Applications. We have developed several
models of providing our customers with applications and
services. While we typically deliver the highest value to our
customers when we combine our software applications and deliver
them in one of several types of outsourcing arrangements, we
also are able to deliver individual applications through a
software licensing arrangement. The examples below represent the
typical delivery models that we utilize in providing our
applications:
|
|
|
| |
• |
Software Licensing. In this traditional license and
maintenance model, our customers purchase a license and
maintenance contract for our software. We may also provide these
customers with professional support services on either a time
and materials or fixed-price basis to assist them with the
implementation of, or conversion to, the licensed software, or
with other information technology (“IT”) projects. |
| |
| |
• |
Application Management. In this service deployment model,
we provide applications that are run by the customer at its
processing facility, with a dedicated staff of our application
programmers and business analysts assisting the customer in
managing day-to-day technology-related activities. Our support
staff may be located on-site at the customer’s facility,
off-site at one of our facilities, or at a combination of both
sites. In many cases, our staff supports the customer’s
third-party applications, as well as our own software
applications. |
11
|
|
|
| |
• |
Application Service Provider or ASP. In this
service model, we utilize one of our off-site technology
facilities to provide the user of ASP services with computing
and application management facilities and support. Our support
personnel are generally located off-site in one of our
technology facilities, which communicates through online data
transmission connections with remote devices on-site at the
customer’s location. The ASP customer generally uses a
suite of our applications and services in its business. Our
customers may arrange to utilize our facilities infrastructure
in a shared capacity with other customers, or they may contract
with us to have dedicated computing capacity available solely
for the operation of their applications, sometimes referred to
as remote outsourcing. |
| |
| |
• |
Facilities Management Processing or FM. In the FM
service model, we provide our customers with a computing and
application management function similar to that provided under
ASP services. However, in the case of FM services, our personnel
are located on-site at the location of the customer and act as
the customer’s on-site IT staff in connection with FM
services, generally also supporting the customer’s
third-party software applications. When we enter into one of
these arrangements, we generally hire the customer’s IT
staff, which we supplement with our own employees. |
We also have developed an additional service business, which we
refer to as managed operations, in which we use our
off-site technology and processing infrastructure to offer
computing facilities to customers, without providing any of our
software applications. Unlike our other service customers, our
managed operations customers often include customers that are
not financial institutions. We are able to profitably leverage
our computing capacity and technical expertise to compete in
this type of outsourcing business.
Customers. Our mortgage loan processing customers include
6 of the top 10 and 25 of the top 50 mortgage loan originators
in the U.S. in terms of dollar volume, 19 of the top 30
loan servicers in the U.S., and 10 of the top 20 sub-prime loan
servicers in the U.S. Our mortgage loan processing
customers include Bank of America, National City Mortgage and
U.S. Bank Home Mortgage. Our customer relationships are
typically long-term relationships that generally provide
relatively consistent annual revenues based on the dollar volume
of mortgages processed on our applications. Our mortgage loan
servicing platforms, including our Mortgage Servicing Platform
(“MSP”), are used to process over 50% of all
residential mortgages by dollar volume in the U.S., representing
balances exceeding $3.6 trillion. Revenues in 2004 and 2003 for
mortgage loan processing were $292.7 million and
$280.0 million, respectively.
Applications and Services. We sell the most widely used
mortgage loan servicing system in the U.S. Our primary
applications and services include:
|
|
|
| |
• |
MSP. MSP is an application that automates all areas of
loan servicing, including loan setup and ongoing processing,
customer service, accounting and reporting to the secondary
mortgage market, and federal regulatory reporting. MSP processes
a wide range of loan products, including fixed-rate mortgages,
adjustable-rate mortgages, construction loans, equity lines of
credit and daily simple interest loans. |
| |
| |
• |
Empower! Empower! is a mortgage loan origination software
system used by banks, savings & loans, mortgage bankers
and sub-prime lenders. This application fully automates every
phase of making loans, providing seamless credit bureau access
and interfacing with automated underwriting systems used by
Freddie Mac and Fannie Mae, as well as with vendors providing
servicing, flood certifications, appraisals and title insurance. |
Delivery of Applications and Services. While our mortgage
servicing applications can be purchased on a stand-alone,
licensed basis, the substantial majority of our MSP customers by
both number of customers and loan volume choose to use us as
their processing partner and engage us to perform all data
processing functions in our technology center in Jacksonville,
Florida. Customers determine whether to process their loan
portfolio data under an ASP arrangement in which multiple
clients share the same computing and personnel resources or to
have their own dedicated resources within our facility.
12
Lender Outsourcing Solutions
Our lender outsourcing solutions segment offers customized
outsourced business process and information solutions to
national lenders and loan servicers. We provide loan
facilitation services, which allow our customers to outsource
their title and closing requirements in accordance with
pre-selected criteria, regardless of the geographic location of
the borrower or property. Depending on customer requirements, we
perform these services both in the traditional manner involving
many manual steps, and through more automated processes which
significantly reduce the time required to complete the task. We
also provide default management services, which allow our
customers to outsource the business processes necessary to take
a loan, and the underlying real estate securing the loan,
through the default and foreclosure process. We utilize our own
resources and networks we have established with independent
contractors to provide our outsourcing solutions. We frequently
offer our outsourcing solutions to lenders in combination with
services of our information services segment.
We work with our customers to set specific parameters regarding
the type and quality of services they require and provide a
single point of contact with us for these services no matter
where the property is located. As a result, our customers are
able to utilize our outsourcing services in a manner that we
believe provides a greater level of consistency in service,
pricing and quality than if these customers were to contract
separately for similar services.
|
|
|
Loan Facilitation Services |
Customers. Our customers are financial institutions
involved in the first mortgage, refinance, home equity and
sub-prime lending markets. Customers of our title agency and
closing services delivered under traditional outsourcing
arrangements are typically large, national institutions, and
include Wells Fargo, Washington Mutual, and Bank of America. Our
automated title process and ancillary services are targeted at
the top 20 U.S. mortgage lenders, although we believe that
the benefits provided by our automated services may be
attractive to other national lenders, as well as regional
lenders with significant lending operations. Customers of our
homebuilders’ services described below are
U.S. homebuilders, including Beazer Homes, Trend Homes and
Cambri