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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
/ / 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 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE 92714 (714) 622-5000
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.0001 par value New York Stock Exchange
Liquid Yield Option Notes, due 2009, New York Stock Exchange
zero coupon, convertible subordinated
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. / /
As of March 18, 1996, 12,450,019 shares of Common Stock ($.0001 par value)
were outstanding, and the aggregate market value of the shares of the Common
Stock held by non-affiliates of the registrant was $139,236,010. The aggregate
market value was computed with reference to the closing price on the New York
Stock Exchange on such date.
LOCATION OF EXHIBIT INDEX: The index to exhibits is contained in Part IV
herein on page number 62.
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, 1995, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
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TABLE OF CONTENTS
FORM 10-K
PAGE NO.
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PART I
Item 1 Business......................................................... 1
Item 2 Properties....................................................... 10
Item 3 Legal Proceedings................................................ 10
Item 4 Submission of Matters to a Vote of Security Holders.............. 11
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder
Matters.......................................................... 11
Item 6 Selected Financial Data.......................................... 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 16
Item 8 Financial Statements and Supplementary Data...................... 28
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................. 62
PART III
Item 10 Directors and Executive Officers of the Registrant............... 62
Item 11 Executive Compensation........................................... 62
Item 12 Security Ownership of Certain Beneficial Owners and Management... 62
Item 13 Certain Relationships and Related Transactions................... 62
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K.............................................................. 62
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PART I
ITEM 1. BUSINESS
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), Fidelity National Title Insurance Company
("Fidelity Title"), which, in turn, is the parent company of Fidelity National
Title Insurance Company of California ("Fidelity California") and Fidelity
National Title Insurance Company of Tennessee ("Fidelity Tennessee"); Fidelity
National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania"),
which, in turn, is the parent company of American Title Insurance Company
("ATIC"); Fidelity National Title Insurance Company of New York ("Fidelity New
York") and Fidelity National Title Insurance Company of Texas ("Fidelity
Texas"), which was merged into Fidelity Title in December 1993, (collectively,
the "Insurance Subsidiaries"); and its wholly owned underwritten title companies
(collectively, the "UTCs"), including Fidelity National Title Company ("FNTC")
and Fidelity National Title Company of California ("FNCAL"), is one of the
largest national underwriters engaged in the business of issuing title insurance
policies and performing other title related services such as escrow, collection
and trust activities, real estate tax information services, trustee sale
guarantees, foreclosure publishing and posting services and exchange
intermediary services in connection with real estate transactions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments." Title insurance services are provided
primarily through the Company's direct operations and otherwise through
independent title insurance agents who issue title policies on behalf of the
Insurance Subsidiaries. Title insurance is generally accepted as the most
efficient means of determining title to, and the priority of interests in, real
estate in nearly all parts of the United States. Today, virtually all real
property mortgage lenders require their borrowers to obtain a title insurance
policy at the time a mortgage loan is made or to allow the sale of loans in the
secondary market.
INDUSTRY OVERVIEW
Title Policies. Title insurance policies state the terms and conditions
upon which a title underwriter will insure title to real estate. The
beneficiaries of title insurance policies are generally buyers of real property
or mortgage lenders. Most mortgage lenders require title insurance as a
condition to making loans secured by real estate.
Title insurance is different from other types of insurance because it
relates to past events which affect title to property at the time of closing and
not unforeseen future events. Prior to issuing policies, underwriters can reduce
or eliminate future losses by accurately performing searches and examinations.
Title insurance policies are issued on the basis of a preliminary title report
or commitment. These reports are prepared after a search of public records, maps
and other relevant documents to ascertain title ownership and the existence of
easements, restrictions, rights of way, conditions, encumbrances or other
matters affecting the title to, or use of, real property. A visual inspection or
survey of the property may also be made prior to the issuance of certain title
insurance policies. To facilitate the preparation of preliminary reports without
the necessity of manually searching public records, copies of public records,
maps and other relevant historical documents are compiled and indexed in a
"title plant." Each title plant relates to a particular county and is kept
current on a daily or other periodic basis by the continual addition of copies
of recorded documents which affect real property in the particular county. Title
companies often subscribe to independent title information services to assist in
the updating of their title plants and the maintenance of title records.
The major expense of a title company is the search and examination function
in preparing preliminary title reports, commitments and title policies; and not
from claim losses associated with the issuance of said policies. The premium for
title insurance is due in full at the closing of the real estate transaction and
is based upon the purchase price of the property insured or the amount of the
mortgage loan. Coverage under the policy generally terminates upon resale or
refinance of the property. The terms of coverage have become relatively
standardized in accordance with forms approved by state or national trade
associations.
DIRECT VS. AGENCY OPERATIONS. Preliminary title reports and commitments to
issue policies are prepared by title underwriters or wholly owned underwritten
title companies (direct operations) or by independent agents on behalf of the
underwriters (agency operations). The terms and conditions upon which the real
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property will be insured are determined in accordance with the underwriting
standards, policies and procedures of the title underwriter. In direct
operations, the title underwriter issues the title insurance policy and retains
the entire premium paid in connection with the transaction. In agency
operations, the search and examination function is performed by an independent
agent. The majority of the title premium collected is retained by the agent with
the balance remitted to the title underwriter. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Expenses."
THE TITLE POLICY PROCESS. A brief description of the process of issuing a
title insurance policy, which usually occurs over a thirty to ninety day period,
is as follows:
(i) The customer, typically a real estate salesperson or broker,
escrow agent or lender, places an order for a title policy.
(ii) Sales personnel note the specifics of the order and place a
request with the title department for a preliminary report (a commitment in
the eastern United States).
(iii) After the relevant historical data on the property is
compiled, the title officer prepares a preliminary title report which
documents (a) the current status of title and conditions affecting the
property, (b) any exclusions, exceptions and/or limitations which the title
underwriter might include in the policy and (c) specific issues which need
to be addressed and resolved by the parties to the transaction before the
title policy will be issued. The preliminary report is circulated to all
the parties for satisfaction of any specific issues.
(iv) After the specific issues identified in the preliminary report
are satisfied, an escrow agent closes the transaction in accordance with
the instructions of the parties and the title underwriter's conditions.
(v) Once the transaction is closed and all monies have been released,
the title underwriter issues the policies (a) to the owner and the lender,
on a new home sale or resale transaction or (b) to the lender only, on a
refinance transaction.
LOSSES AND RESERVES. 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. The reserve for claim
losses is based upon known claims, as well as losses the insurer expects to
incur based on historical experience and other factors, including industry
averages, claim loss history, legal environment, geographic considerations,
expected recoupments and the types of policies written. The title underwriter
establishes a reserve for each known claim based on a review and evaluation of
potential liability.
ECONOMIC FACTORS AFFECTING INDUSTRY. Title insurance revenue is closely
related to the level of real estate activity and the average price of real
estate sales. Real estate sales are directly affected by the availability of
funds to finance purchases. Other factors affecting real estate activity include
demand, mortgage interest rates, family income levels and general economic
conditions. While the level of sales activity was relatively depressed in
certain geographical areas during the period 1991 through mid-1993, lower
mortgage interest rates beginning in the latter part of 1991 triggered an
increase in refinancing activity which continued at record levels through 1993
and into the first quarter of 1994. During 1994 and early 1995, steady interest
rate increases caused by actions taken by the Federal Reserve Board, resulted in
a significant decline in refinancing transactions and a stagnation in
residential resales and new home sales. Since late 1995, decreases in mortgage
interest rates and the resulting improvement in the real estate market have had
a favorable effect on the level of real estate activity, including refinancing
transactions, new home sales and resales. Although it is impossible to predict
in what future direction interest rates and the real estate market may move or
fluctuate, the Company believes that the current interest rate environment may
positively impact the title insurance industry during 1996.
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TITLE INSURANCE OPERATIONS
The Insurance Subsidiaries are currently licensed to issue title insurance
policies through direct operations and independent agents in all states (with
the exception of Iowa) and the District of Columbia, the Bahamas, the Virgin
Islands and Puerto Rico.
The Company maintains direct operations in Arizona, California, Florida,
Hawaii, Michigan, Missouri, Nevada, New Jersey, New Mexico, New York, North
Carolina, Oregon, Pennsylvania, Tennessee, Texas and Washington. "See
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments." Direct operations are divided into
approximately 75 branches consisting of more than 325 offices. Each branch
processes title insurance transactions within its geographical area, which is
usually a county boundary. Each branch is operated as a separate profit center.
The Company also transacts title insurance business through a network of
approximately 1,100 agents, primarily in those areas in which agents are the
more accepted title insurance provider.
The following table sets forth for the years 1995, 1994 and 1993,
respectively, the approximate dollars and percentages of title insurance premium
revenue by state according to records maintained by the Company for operating
purposes:
YEARS ENDED DECEMBER 31,
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1994 1993 1994
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AMOUNT % AMOUNT % AMOUNT %
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(DOLLARS IN THOUSANDS)
California................ $124,407 43.6% $139,946 37.9% $195,532 45.5%
Texas..................... 28,761 10.1 39,368 10.7 38,522 9.0
Pennsylvania.............. 13,751 4.8 20,326 5.5 28,432 6.6
Florida................... 16,141 5.7 24,786 6.7 27,142 6.3
New York.................. 17,436 6.1 26,683 7.2 22,669 5.3
Arizona................... 15,462 5.4 17,125 4.6 19,591 4.5
All others................ 69,594 24.3 101,041 27.4 97,884 22.8
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Totals.......... $285,552 100.0% $369,275 100.0% $429,772 100.0%
======== ===== ======== ===== ======== =====
For the entire title insurance industry, 15 states accounted for 77.8% of
title premiums written in the United States in 1994. California represented the
single largest state with 18.5%. The Company is licensed and has operations in
all 15 of these states. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments."
MARKETING. The Company attempts to increase the volume of its title
insurance business primarily through customer solicitation by sales personnel.
The Company actively encourages its branch personnel to develop new business
relationships with persons in the real estate community, such as real estate
sales agents and brokers, financial institutions, independent escrow companies,
real estate developers, mortgage brokers and attorneys. The Company's marketing
efforts are also assisted by general advertising. The Company believes customer
service is the most important factor in attracting and retaining customers, and
measures customer service in terms of timeliness and accuracy in the delivery of
services.
DIRECT AND AGENCY OPERATIONS. The Company generates the majority of its
revenue from its network of direct operations as opposed to relying on agency
relationships, the latter being more common in the title industry. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview." The Company's direct operations generate higher margins
than agency operations because the Company retains the entire premium from each
transaction instead of paying commissions to agents and claim losses are less
than in agency based operations because the Company controls the issuance of the
title policy. Direct operations also provide additional sources of income, such
as escrow, document preparation fees, reconveyance fees, real estate tax
information fees, trustee sale guarantee fees, foreclosure publishing and
posting fees and exchange intermediary fees.
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In 1995, 62.1% of the Company's title insurance premiums were generated by
direct operations. In 1994 and 1993, 53.2% and 56.4%, respectively, of title
insurance premiums were generated by direct operations. The percentage of title
insurance premiums generated by agency operations was 37.9%, 46.8% and 43.6% in
1995, 1994 and 1993, respectively. The average percentage of premiums generated
by agents and retained by the Company has increased to 23.7% in 1995 from 23.2%
in 1994 and 21.4% in 1993. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Expenses."
The relationship between the Company and each agent is governed by an
agency agreement which states the conditions under which the agent is authorized
to issue a title insurance policy on behalf of the Company. The agency agreement
also prescribes the circumstances under which the agent may be liable to the
Company if a policy loss is attributable to errors made by the agent. The agency
agreement typically is terminable upon 30 days' notice or immediately for cause.
In determining whether to engage an independent agent, the Company considers the
agent's experience, financial condition and loss history. Loss history is an
important consideration in the Company's decision to initiate or continue agency
relationships. The Company maintains financial and loss experience records for
each agent and conducts periodic audits of its agents.
On September 14, 1995, the Company announced that it had executed a
definitive agreement with Nations Holding Group to acquire one hundred percent
of Nations Title Inc. and its wholly owned subsidiaries Nations Title Insurance
Company, Nations Title Insurance Company of New York and National Title
Insurance Company of New York (collectively, "Nations Title Inc."), which is the
eighth largest title insurer in the United States based on 1994 reported
revenues of $297.0 million. Nations Title Inc. recorded revenues of $231.4
million in 1995. The acquisition of Nations Title Inc. is expected to close in
the first quarter of 1996, following the final determination of the purchase
price. The Company believes that the combination of its direct operations and
Nations' strong agency network will provide a balance to Fidelity's title
premium revenue between direct and agency, as well as hedge against future
market downturns. The Company also believes that the acquisition of Nations
Title Inc. should increase the Company's revenue and positively impact its
balance sheet and margins due to the operating economies of the combined
companies. The acquisition will also increase market share in areas where the
Company has a limited presence, particularly in those areas where business is
primarily agent driven, as well as in states where the Company has a strong
market position. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments."
ESCROW, TRUST AND OTHER TITLE RELATED SERVICES. The Company holds funds and
documents in real estate transactions for delivery upon closing pursuant to the
instructions of the respective parties to an escrow. The Company derives revenue
from other ancillary services generated from direct operations, such as document
preparation fees, reconveyance fees, recording fees, real estate tax information
service fees, trustee sale guarantee fees, foreclosure publishing and posting
fees and other title related fees. In a few cases, the Company leases its title
plants to independent agents for their examination of title records for a rental
or usage fee.
TITLE LOSSES AND RESERVES. The Company believes that the level of risk
undertaken pursuant to its underwriting standards is consistent with that of the
industry. 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. The Company's reserve for claim losses includes
known claims as well as losses the Company expects to incur, net of recoupments.
Each known claim is reserved for on the basis of a review by the Company as to
the estimated amount of the claim and the costs required to settle the claim.
Reserves for claims which are incurred but not reported are provided for at the
time premium revenue is recognized based on historical loss experience and other
factors, including industry averages, claim loss history, current legal
environment, geographic considerations and types of policies written. Claims
greater than $500,000 ("major claims") are reserved for as they become known
because the unique circumstances surrounding most major claims make it
inherently impractical to predict the incidence and amount of such claims. The
occurrence of a significant major claim in any given period could have a
material adverse effect on the Company's financial condition and results of
operations for such period. See "Reinsurance." Escrow losses are expensed when
they become known.
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If a loss is related to a policy issued by an independent agent, the
Company may proceed against the independent agent pursuant to the terms of the
agency agreement. In any event, the Company may proceed against third parties
who are responsible for any loss sustained under the title insurance policy,
under rights of subrogation.
The Company believes that its quality controls and focus on residential
resale and refinance transactions have helped minimize the net title claims paid
as a percentage of title insurance premiums ("net claims paid ratio"). The
Company further reduces its losses by following aggressive recoupment procedures
under rights of subrogation or warranties and by carefully reviewing all claims.
The Company paid title claims, net of recoupments, of approximately $26.2
million, $23.3 million and $18.1 million in 1995, 1994 and 1993, respectively,
representing 9.2%, 6.3% and 4.2% of title insurance premium revenue during such
periods. The increase in the net claims paid ratio can be attributed to the
development of claims and related payments over time. As payments related to
prior years are made, particularly prior years in which premium volume was at
higher levels than those generated in the current market, the net claims paid
ratio increases as a simple percentage. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Expenses." There can be no assurance that the Company's current
paid loss experience will continue at these levels.
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
the Company has not experienced damage awards materially in excess of policy
limits, the possibility of such bad faith damage awards may cause the Company to
experience increased costs and difficulty in settling title claims.
The Company generally pays losses in cash. In some instances claims are
settled by purchasing the interest of the insured in the real property or the
interest of the adverse claimant. Such interests are generally recorded as an
asset on the Company's books at the lower of cost or fair value less selling
costs and any related indebtedness is carried as a liability. At December 31,
1995, the amount of these interests was $7.4 million.
REINSURANCE. In the ordinary course of business, the Company reinsures
certain risks with other title insurers for the purpose of limiting its maximum
loss exposure and also assumes reinsurance for certain risks of other title
insurers for the purpose of earning additional income. The Company cedes or
assumes a portion of certain policy liabilities under agent fidelity, excess of
loss and case-by-case reinsurance agreements. Reinsurance agreements provide
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. Reinsurance activity is not significant. See Note A of
Notes to Consolidated Financial Statements.
COMPETITION. The title insurance industry is highly competitive. The number
and size of competing companies varies in the different geographic areas in
which the Company conducts its business. In the Company's principal markets,
competitors include other major title underwriters such as Chicago Title
Insurance Company, Commonwealth Land Title Insurance Company, First American
Title Insurance Company, Lawyers Title Insurance Corporation, Old Republic Title
Insurance Company and Stewart Title Guaranty Company, as well as numerous
independent agency operations at the local level.
Competition is based primarily on the quality and timeliness of service,
since the parties to a real estate transaction are usually concerned with time
schedules and costs associated with delays in closing the transaction. In those
states where prices are not established by regulatory authorities the price of
the title insurance policy is also a competitive factor. The Company believes
that its competitive position is enhanced by its quality customer service and
pricing.
REGULATION. Title insurance companies are subject to extensive regulation
under applicable state laws. Each insurance company is usually subject to a
holding company act in its state of domicile which regulates, among other
matters, the ability to pay dividends and investment policies. The laws of most
states in which the Company transacts business establish supervisory agencies
with broad administrative powers relating to
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issuing and revoking licenses to transact business, regulating trade practices,
licensing agents, approving policy forms, accounting principles, financial
practices, establishing reserve and capital and surplus requirements, defining
suitable investments for reserves, capital and surplus and approving rate
schedules. The Company has analyzed its current Insurance Subsidiary structure
and the regulatory environments of the various states of domicile of the
Insurance Subsidiaries. Based on this analysis the Company has implemented a
program to merge certain of its Insurance Subsidiaries, resulting in two or
three Insurance Subsidiaries as opposed to the current six. The Company is also
reviewing the potential redomestication of certain Insurance Subsidiaries.
Pursuant to statutory accounting requirements of the various states in
which the Insurance Subsidiaries are qualified, they must defer a portion of
premiums earned as an unearned premium reserve for the protection of
policyholders and must maintain qualified assets in an amount equal to the
statutory requirements. The level of unearned premium reserve required to be
maintained at any time is determined on a quarterly basis by statutory formula
based upon either the age and dollar amount of policy liabilities underwritten
or the age and dollar amount of statutory premiums written. As of December 31,
1995, the combined statutory unearned premium reserve required and reported for
the Insurance Subsidiaries was $121.5 million.
The Insurance Subsidiaries are regulated by the insurance commissioners of
their respective states of domicile. Regulatory examinations usually occur at
three year intervals. Examinations have been completed for Fidelity Title and
Fidelity California as of and for the three year period ended December 31, 1993.
A preliminary report of examination has been received for Fidelity Title.
The preliminary report, as forwarded to the Company by the State of Arizona
Department of Insurance, indicates that the Arizona examiners are proposing
adjustments that would impact Fidelity Title's statutory capital and surplus, as
well as its amount available for dividends, if recorded. The Company is involved
in ongoing discussions with the Arizona examiners and has reached a preliminary
agreement with the Arizona examiners regarding these issues. The agreed upon
adjustments have been considered in the calculation of dividend capability,
statutory surplus and statutory income reported below.
A final report of examination for Fidelity California as filed by the State
of California Department of Insurance has been received by the Company. The
report indicated that the examiners had adjustments which impacted the statutory
capital and surplus of Fidelity California. In addition, these adjustments
affected the Fidelity California amount available for dividends. Adjustments
required as a result of the examination of Fidelity California have been
considered in the calculation of dividend capability, statutory surplus and
statutory income (loss) reported below.
The Department of Insurance of the State of Florida has recently completed
a triennial examination of ATIC as of and for the three year period ended
December 31, 1994. The Company recently received a preliminary report of
examination. The preliminary report, as forwarded to the Company by the
Department of Insurance of the State of Florida, indicates that the examiners
are proposing adjustments that could materially impact the statutory capital and
surplus of ATIC. These adjustments have not been included in the 1995 Statutory
Annual Statement as filed with insurance regulatory authorities. Certain of
these proposed adjustments have been considered in the calculation of dividend
capability, statutory surplus and statutory income (loss) reported below. In
addition, since early 1995, the Company has effectively discontinued issuing
ATIC insurance policies. Further, ATIC has recently entered into a voluntary
consent order with the Department of Insurance of the State of Florida agreeing
voluntarily to cease writing all new insurance business and to certain other
conditions and restrictions. Policies issued through ATIC operations are
underwritten by Fidelity Title.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1996, the statutory
single policy maximum insurable amounts for Fidelity Title, Fidelity
Pennsylvania, ATIC and Fidelity New York were $25.2 million, $30.0 million, $2.9
million and $25.0 million, respectively. There are no statutory single risk
limits prescribed for Fidelity California or Fidelity Tennessee.
The Insurance Subsidiaries are subject to regulations that restrict their
ability to pay dividends or make other distributions of cash or property to
their immediate parent company without prior approval from the
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Department of Insurance of their respective states of domicile. In the case of
Fidelity Title, the total amount of dividends or distributions made in any
twelve month period may not exceed the lesser of 10% of the surplus as regards
policyholders as of the last day of the preceding year or the net investment
income for the twelve month period ending the last day of the preceding year. In
the case of Fidelity California, Fidelity Tennessee and Fidelity Pennsylvania,
the total amount of dividends made in any twelve month period may not exceed the
greater of 10% of the surplus as regards policyholders as of the last day of the
preceding year or net income for the twelve month period ending the last day of
the preceding year. In the case of ATIC, the total amount of dividends or
distributions made in any twelve month period may not exceed 10% of the total of
statutory unassigned funds plus the preceding year's statutory net income. In
the case of Fidelity New York, the total amount of dividends and distributions
is limited to surplus as regards policyholders, excluding capital stock, less
fifty percent of statutory premium reserve as of the last day of the preceding
year and capital contributions received in the latest five year period. As of
January 1, 1996, Fidelity Title could pay dividends or make other distributions
to the Company of $3,016,000. As of January 1, 1996, Fidelity California and
Fidelity Tennessee could pay dividends or make distributions to Fidelity Title
of $1,072,000 and $623,000, respectively. As of January 1, 1996, Fidelity
Pennsylvania could pay dividends or make other distributions to the Company of
$2,193,000. ATIC and Fidelity New York do not have any dividend capability as of
January 1, 1996.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $71,052,000, $85,553,000 and $92,548,000 as of December 31, 1995, 1994 and
1993, respectively. The combined statutory income (loss) of the Insurance
Subsidiaries was $(699,000), $5,288,000 and $31,350,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. These amounts do not include
certain of the proposed ATIC examination adjustments previously discussed.
As a condition to continued authority to underwrite policies in the states
in which the Insurance Subsidiaries conduct their business, the Insurance
Subsidiaries are required to pay certain fees and file information regarding
their officers, directors and financial condition. In addition, the Company's
escrow and trust business is subject to regulation by various state banking
authorities.
Under Arizona law, minimum statutory requirements are $500,000 for capital
and $250,000 for surplus. Under California law, the minimum statutory
requirement is $500,000 for paid-in capital represented by shares of stock.
Under Tennessee law, minimum statutory requirements are $100,000 for capital,
and $500,000 for capital and surplus combined. Under Pennsylvania law, the
minimum statutory requirements are capital of not less than $250,000, and paid
in initial surplus at least equal to fifty percent of capital. Under Florida
law, the minimum statutory requirement is surplus as to policyholders of not
less than the greater of $1,500,000 or 10% of total liabilities. Under New York
law, the minimum statutory requirement is $250,000 for capital and initial
surplus. Each of the Company's title underwriters have complied with the minimum
statutory requirements as of December 31, 1995, with the exception of ATIC,
after considering the proposed examination adjustments previously discussed.
In November 1995, the National Association of Insurance Commissioners
("NAIC") distributed the latest draft of the Title Insurers Model Act (the
"Act"). The purpose of the Act is to provide guidance to the state insurance
regulatory agencies relative to the effective regulation and supervision of the
title insurance industry and title insurers. The Act addresses aspects of the
title insurance industry from corporate structure and financial and accounting
information to market conduct and legal standards. The effective date of the Act
has not been specified in the draft of the Act. Certain provisions of the Act
will be phased in over a multi-year period.
The UTCs are also subject to certain regulation by insurance regulatory or
banking authorities, primarily relating to minimum net worth and dividend
capability. Minimum net worth of $7.5 million and $2.5 million is required for
FNTC and FNCAL, respectively. In addition, the Company has agreed to notify the
State of California Department of Insurance of dividend payments by FNTC and
FNCAL greater than 30% of earnings before income taxes for a period of three
years. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments."
7
10
RATINGS
The Insurance Subsidiaries are regularly assigned ratings by independent
agencies designed to indicate their financial condition and/or claims paying
ability. Financial data and other information is supplied to the rating agencies
and subjected to quantitative and qualitative analyses from which the ratings
were derived. Ratings of the Company's principal Insurance Subsidiaries, as
assigned by Demotech, Inc. during 1995, are listed below.
DEMOTECH, INC.
(FINANCIAL STABILITY RATING)
----------------------------
Fidelity Title........................................ A = Exceptional
Fidelity Pennsylvania................................. A = Exceptional
Fidelity New York..................................... A = Exceptional
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
The Company's investment policy is designed to maintain a high quality
portfolio, maximize current income, minimize interest rate risk and match the
duration of the portfolio to the Company's liabilities. Most of the Company's
investment assets qualify as "admitted assets" and for purposes of capital and
surplus and unearned premium reserves as prescribed by various state insurance
regulations. These investments are restricted by the state insurance regulations
of their domiciliary states and are limited primarily to cash and cash
equivalents, federal and municipal governmental securities, mortgage loans,
certain investment grade debt securities, equity securities and real estate. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
As of December 31, 1995 and 1994, the carrying amounts and fair value of
total investments were $180.1 million and $180.1 million, $217.6 million and
$216.0 million, respectively.
It is the practice of the Company to purchase investment grade fixed
maturity securities, as well as selected equity securities. The securities in
the Company's portfolio are subject to economic conditions and normal market
risks and uncertainties.
The following table sets forth certain information regarding the investment
ratings of the Company's fixed maturity portfolio at December 31, 1995 and 1994.
DECEMBER 31,
---------------------------------------------------------------------------------------
1995 1994
------------------------------------------ ------------------------------------------
AMORTIZED % FAIR % AMORTIZED % FAIR %
RATINGS(1) COST OF TOTAL VALUE OF TOTAL COST OF TOTAL VALUE OF TOTAL
--------- -------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AAA.................... $ 86,604 68.1% $ 87,577 67.8% $ 112,522 60.2% $104,088 59.8%
AA..................... 7,753 6.1 7,963 6.1 46,079 24.7 43,646 25.1
A...................... 30,849 24.2 31,623 24.5 25,991 13.9 24,257 13.9
Other.................. 2,058 1.6 2,073 1.6 2,236 1.2 2,173 1.2
-------- ----- -------- ----- -------- ----- -------- -----
Total............. $ 127,264 100.0% $129,236 100.0% $ 186,828 100.0% $174,164 100.0%
======== ===== ======== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation
The following table sets forth certain information regarding the maturities
of the Company's fixed maturity securities at December 31, 1995. Expected
maturities may differ from contractual maturities because certain borrowers have
the right to call or prepay obligations with or without call or prepayment
penalties.
8
11
Fixed maturity securities with an amortized cost of $46,956,000 and a fair value
of $47,244,000 were callable at December 31, 1995.
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
--------- -------- -------- --------
(DOLLARS IN THOUSANDS)
One year or less................................... $ 843 0.7% $ 844 0.7%
After one year through five years.................. 39,887 31.3 40,288 31.2
After five years through ten years................. 65,925 51.8 67,102 51.9
After ten years.................................... 20,609 16.2 21,002 16.2
-------- ----- -------- -----
Total......................................... $ 127,264 100.0% $129,236 100.0%
======== ===== ======== =====
Equity securities at December 31, 1995 and 1994 consist of investments in
various industry groups as follows:
1995 1994
------------------- -------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies................ $12,038 $13,071 $13,196 $10,374
Industrial, miscellaneous and all other............. 12,430 18,341 4,711 5,108
------- ------- ------- -------
Total.......................................... $24,468 $31,412 $17,907 $15,482
======= ======= ======= =======
The Company's investment results for the years ended December 31, 1995,
1994, and 1993 were as follows:
DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)................................ $ 15,014 $ 20,269 $ 14,160
Average invested assets(1)................................. 233,831 303,615 214,995
Effective return on average invested assets(1)............. 6.4% 6.7% 6.6%
- ---------------
(1) Excludes investments in real estate.
(2) Net investment income as reported in the Consolidated Statements of Earnings
has been adjusted to provide the tax equivalent yield on tax exempt
investments and to exclude gains and losses on the sale of investments.
Realized capital gains (losses) totalled $5,213,000, $(3,086,000) and
$4,246,000 in 1995, 1994 and 1993, respectively.
REAL ESTATE AND PROPERTY MANAGEMENT OPERATIONS
The Company, principally through Manchester Development Corporation
("Manchester"), currently doing business as Orion Realty Group, a wholly-owned
subsidiary, previously invested in various real estate projects directly and
through partnerships. Some of these partnerships involve related parties. See
Notes D and E of Notes to Consolidated Financial Statements. Manchester
currently assists in the identification and leasing of space for operating
purposes and manages property owned by the Company. The Company's investments in
real estate and partnerships represented approximately 2.1% of the Company's
assets at December 31, 1995.
EMPLOYEES
As of December 31, 1995, the Company had approximately 4,100 full-time
equivalent employees. The Company believes that its relations with employees are
generally good.
9
12
ITEM 2. PROPERTIES
During 1994, a subsidiary of the Company completed the purchase of a
corporate home office building in Irvine, California, which houses the Company's
corporate departments and various subsidiaries. The majority of the branch
offices of the Company are leased from third parties. The remainder are owned by
the Company, leased from partnerships in which the Company has an interest or
leased from affiliates. As of December 31, 1995, the Company leased office and
storage spaces in 192 locations in California, 35 in Texas, 31 in Florida, 26 in
Arizona, 12 in Oregon, 9 in Pennsylvania, 8 in Nevada, 6 each in New York and
North Carolina, 5 each in Michigan and New Mexico, 4 each in New Jersey and
Washington, 2 each in Connecticut and Massachusetts, and one each in Georgia,
Hawaii, Missouri, Tennessee and Virginia. See Note J of Notes to Consolidated
Financial Statements.
ITEM 3. 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.
In October 1992, Fidelity California filed an action for declaratory relief
in U.S. District Court (Eastern District-Fresno, California) to determine its
obligations and liabilities, if any, under a certain title insurance policy
issued to National Westminster Bank U.S.A. ("NatWest") (Fidelity National Title
Insurance Company of California v. National Westminster Bank U.S.A. and related
counterclaim). NatWest filed a counterclaim for damages and certain equitable
relief seeking compensatory damages of approximately $7,732,000, punitive
damages in an unspecified amount, attorneys' fees, interest and costs. The
Company has a reinsurance agreement in place that will reimburse the Company for
all amounts paid in excess of $2.0 million. Fidelity California previously
recorded a claim loss reserve related to this matter in the Consolidated
Financial Statements. The primary issues concern whether Fidelity California's
policy insured the priority of NatWest's deed of trust over certain mechanics'
lien claims and whether Fidelity California had an obligation to defend and
indemnify NatWest against an action by a mechanics' lien claimant to enforce its
claim of lien. As part of a counterclaim lawsuit, NatWest has added allegations
of breach of the covenant of good faith and fair dealing. Fidelity California
believes that the policy and endorsements issued to the insured exclude coverage
for mechanics' liens. In September 1994, a three week trial was concluded. The
court had asked for post trial briefing, which was provided by the parties and
the case was submitted for decision in September 1994. No ruling has been
received from the court. Management believes that the ruling will not have a
material adverse effect on Fidelity National Title Insurance Company of
California or the Company.
In August 1994, CommerceBank filed a lawsuit (the "Lawsuit") against Tustin
Retail (a real estate partnership), Manchester (a general partner in Tustin
Retail) and two officers of the Company (also general partners in Tustin
Retail). The Lawsuit is essentially a judicial foreclosure under a deed of trust
securing a $4,350,000 note dated February 18, 1992, to CommerceBank from Tustin
Retail (the "Note"). In December 1995, the Federal Deposit Insurance
Corporation, which took control of CommerceBank, submitted a bid at the property
foreclosure auction and acquired the property for $2.9 million. A fair value
hearing is scheduled for June 1996, in order to determine the remaining amount
due under the Note, if any. The defendants believe that the value of the real
property subject to the deed of trust securing the Note is sufficient to satisfy
any amounts due under the Note, based on an independent appraisal of the
property substantiating such value. The defendants intend to vigorously defend
the Lawsuit if it cannot be settled. Management believes that the Lawsuit will
not have a material adverse effect on Manchester or the Company.
In December 1995, Giant Group, Ltd. ("Giant") instituted an action in the
United States District Court for the Central District of California against the
Company, the Company's Chief Executive Officer and others. Giant alleges that
defendants have engaged in various unlawful activities, including trading on
non-public confidential and/or inside information, misappropriating confidential
and proprietary information from Giant and its affiliate Rally's Hamburgers,
Inc. and violating the disclosure requirements of Section 13(d) of the
Securities Exchange Act of 1934. On January 3, 1996, Giant filed a First Amended
Complaint to its Federal action which adds to Giants' prior allegations. Among
other things, Giant alleges that the defendants plan to gain control of Rally's
assets by forcing Rally's into bankruptcy. On January 16, 1996, Fidelity and Mr.
Foley
10
13
answered the First Amended Complaint and filed counterclaims against Giant and
all of its directors. Fidelity and Mr. Foley deny that they engaged in any
unlawful activities, including, among other things, trading on non-public
confidential and proprietary information from Giant or Rally's, or violating the
disclosure requirements of Section 13(d) of the Securities Exchange Act of 1934.
In their counterclaims Fidelity and Mr. Foley seek declaratory relief,
injunctive relief and monetary damages with respect to certain of the
counterclaims. On February 16, 1996, Fidelity and Mr. Foley filed a First
Amended Counterclaim against Giant and each of its directors. The Company
believes that Giant's allegations are totally without merit and intends to
defend the action and pursue their counterclaims vigorously. The Company has
made an offer to purchase Giant and already owns 14.8% of Giant's outstanding
common stock. Giant declined the offer and Fidelity has announced that it
intends to offer a slate of directors at Giant's next annual meeting.
Management believes that no other actions depart from customary litigation
incidental to the insurance business of the Company and that resolution of all
such litigation will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders in the
fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The following table sets forth the range of high and low closing prices for
the Common Stock on the New York Stock Exchange. The high and low closing prices
and the amount of dividends declared for the periods indicated have been
retroactively adjusted for stock dividends and splits declared since the
Company's inception.
DIVIDENDS
HIGH LOW DECLARED
--- --- ---------
Year ended December 31, 1995
First quarter.................................................. $10 3/8 $9 1/8 $.064
Second quarter................................................. 13 5/8 9 1/4 .064
Third quarter.................................................. 13 1/2 10 7/8 .064
Fourth quarter................................................. 16 7/8 11 7/8 .070
Year ended December 31, 1994
First quarter.................................................. 23 1/4 15 7/8 .064
Second quarter................................................. 16 3/8 11 1/2 .064
Third quarter.................................................. 12 10 1/8 .064
Fourth quarter................................................. 11 1/4 9 1/8 .064
On March 18, 1996, the last reported sale price of the Common Stock on the
New York Stock Exchange Composite Tape was $15.25 per share. As of March 18,
1996, the Company had approximately 975 stockholders of record.
Dividend Policy and Restrictions On Dividend Payments. Since the last
quarter of 1987, the Company has consistently paid cash dividends on a quarterly
basis, which payments have been made at the discretion of the Company's Board of
Directors. On March 6, 1996, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 3, 1996 to stockholders
of record on April 15, 1996. The continued payment of dividends will depend upon
operating results, business requirements, contractual restrictions, regulatory
considerations and other factors. The Company anticipates the continued payment
of dividends if and when declared. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business -- Regulation."
11
14
Contractual Restrictions on Dividend Payments. The Company's ability to pay
dividends on its Common Stock is restricted by provisions contained in the
Fidelity National Financial, Inc. Credit Agreement dated as of September 21,
1995. Based upon information derived from the December 31, 1995 Consolidated
Financial Statements, the maximum amount available to pay dividends is
$6,955,000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources and Recent
Developments." See Note G of Notes to Consolidated Financial Statements.
12
15
ITEM 6. SELECTED FINANCIAL DATA
The historical operating results data, per share data and balance sheet
data set forth below are derived from the Consolidated Financial Statements of
the Company. Per share data has been retroactively adjusted for stock dividends
and splits since the Company's inception. The Consolidated Financial Statements
for years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been audited
by KPMG Peat Marwick LLP, independent certified public accountants. Audited
Consolidated Balance Sheets at December 31, 1995 and 1994 and Consolidated
Statements of Earnings, Stockholders' Equity and Cash Flows for the years ended
December 31, 1995, 1994, and 1993, and Notes thereto are included elsewhere
herein and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein.
YEARS ENDED
----------------------------------------------------------------
DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
(1)(2)(3) (1)(2)(3) (1)(2)(3) (1)(3) (3)
-------- -------- -------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
(RESTATED) (RESTATED)
OPERATING RESULTS DATA:
Revenue:
Title insurance premiums................................... $285,552 $369,275 $429,772 $288,646 $162,847
Escrow fees................................................ 49,723 52,260 69,982 56,038 34,116
Other fees and revenue..................................... 56,954 59,351 60,958 43,285 27,096
Interest and investment income, including realized gains
(losses)................................................. 17,616 11,918 14,671 4,308 2,265
-------- -------- -------- -------- --------
409,845 492,804 575,383 392,277 226,324
-------- -------- -------- -------- --------
Expenses:
Personnel costs............................................ 165,514 181,953 196,470 146,609 95,665
Other operating expenses................................... 123,888 129,367 135,925 103,809 63,793
Agent commissions.......................................... 82,713 132,713 147,427 82,217 40,432
Provision for claim losses................................. 19,031 27,838 39,220 31,894 13,589
Interest expense........................................... 9,239 8,594 2,587 1,458 2,228
Minority interest expense.................................. -- -- 1,200 629 --
-------- -------- -------- -------- --------
400,385 480,465 522,829 366,616 215,707
-------- -------- -------- -------- --------
Earnings before income taxes and extraordinary item.......... 9,460 12,339 52,554 25,661 10,617
Income tax expense........................................... 1,828 2,594 16,259 8,367 3,999
-------- -------- -------- -------- --------
Earnings before extraordinary item........................... 7,632 9,745 36,295 17,294 6,618
Extraordinary item, net of income taxes(4)(5)................ (813) 2,400 -- -- --
-------- -------- -------- -------- --------
Net earnings............................................... $ 6,819 $ 12,145 $ 36,295 $ 17,294 $ 6,618
======== ======== ======== ======== ========
PER SHARE DATA:
Earnings per share before extraordinary item................. $ .59 $ .59 $ 2.16 $ 1.18 $ .54
Extraordinary gain (loss), net of income taxes............... (.06) .15 -- -- --
-------- -------- -------- -------- --------
Net earnings per share, primary basis...................... $ .53 $ .74 $ 2.16 $ 1.18 $ .54
======== ======== ======== ======== ========
Dividends per share.......................................... $ .25 $ .25 $ .22 .17 $ .14
Weighted average shares outstanding (000s)................... 12,970 16,476 16,831 14,626 12,360
OTHER DATA:
Direct operations market share(6)............................ 20.3% 20.6% 18.3% 16.8% 17.1%
Orders closed by direct operations........................... 302,000 335,000 464,000 349,000 210,000
Average fee per file(7)...................................... $ 790 $ 750 $ 710 $ 740 $ 760
Provision for claim losses to title insurance premiums....... 6.7% 7.5% 9.1% 11.0% 8.3%
Net claims paid ratio(8)..................................... 9.2% 6.3% 4.2% 7.2% 6.0%
Title related revenue:
Percentage direct operations............................... 71.1% 62.6% 65.3% 72.6% 77.6%
Percentage agency operations............................... 28.9% 37.4% 34.7% 27.4% 22.4%
Employees at year end...................................... 4,100 3,500 4,700 4,000 2,800
Number of licensed states at year end...................... 49 49 48 48 33
Return on average equity before extraordinary
item(4)(5)(9)............................................ 10.0% 10.3% 40.3% 33.2% 19.6%
Return on average equity including extraordinary
item(4)(5)(9)............................................ 9.0% 12.9% 40.3% 33.2% 19.6%
BALANCE SHEET DATA:
Cash and cash equivalents.................................... $ 47,431 $ 34,689 $ 42,731 $ 48,375 $ 21,075
Investments.................................................. 180,082 217,648 236,533 107,215 20,116
Total assets................................................. 405,063 418,119 396,279 252,441 126,637
Notes payable................................................ 136,047 142,129 52,769 26,266 30,483
Reserve for claim losses..................................... 146,094 153,306 142,512 104,528 41,595
Minority interest............................................ 393 616 22,424 21,199 541
Stockholders' equity......................................... 77,947 73,954 114,926 65,277 38,916
(Footnotes on following page)
13
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- ---------------
(1) The Company acquired Fidelity Pennsylvania and ATIC on June 30, 1992. The
selected financial data above includes the balance sheet accounts of
Fidelity Pennsylvania and ATIC at December 31, 1995, 1994, 1993 and 1992 and
the results of their operations for the years ended December 31, 1995, 1994
and 1993 and the six months ended December 31, 1992.
(2) The Company acquired Fidelity New York on March 17, 1993. See Note B of
Notes to Consolidated Financial Statements. The selected financial data
above includes the balance sheet accounts of Fidelity New York at December
31, 1995, 1994 and 1993 and the results of its operations for the years
ended December 31, 1995 and 1994 and the period from March 17, 1993 through
December 31, 1993.
(3) The Company acquired Agency Sales and Posting, Pente Enterprises, Inc. and
Arizona Sales and Posting, Inc. (collectively, "ASAP") on December 7, 1993.
This acquisition was accounted for as a pooling of interests, and certain
Selected Financial Data has therefore been restated. See Note A of Notes to
Consolidated Financial Statements. The Selected Financial Data above
includes the balance sheet accounts of ASAP at December 31, 1995, 1994,
1993, 1992 and 1991, respectively, and the results of ASAP operations for
the years then ended.
(4) During 1994, the Company recognized a $2.4 million extraordinary gain, net
of related income taxes of $1.3 million related to the early retirement of
$48 million maturity value of the Company's Liquid Yield Option Notes (the
"LYONs") issued in February 1994. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Extraordinary Item."
(5) During 1995, the Company recognized a $1.25 million extraordinary loss, net
of related income taxes of $437,000 related to the early retirement of its
Senior Secured Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Extraordinary Item."
(6) This estimate of direct operations market share is based upon the number of
title recordings by the Company in the counties where the Company maintains
direct operations and excludes title recordings by the Company's agents and
excludes title recordings in eastern and southeastern states because such
information is not available. The direct operations market share percentage
has been weighted to give effect to the Company's related direct revenue in
the applicable counties.
(7) Average fee per file is based upon title insurance premiums, escrow fees and
certain other title related fees from direct operations divided by orders
closed.
(8) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(9) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
14
17
QUARTERLY FINANCIAL DATA
Selected quarterly financial data is as follows:
QUARTERS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995
Revenue............................. $ 83,059 $ 95,494 $ 113,471 $117,821
Earnings (loss) before income taxes
and extraordinary item............ (4,737) 1,322 7,831 5,044
Earnings (loss) before extraordinary
item.............................. (2,447) 1,021 5,873 3,185
Extraordinary item, net of
income taxes...................... (813) -- -- --
Net earnings (loss)................. (3,260) 1,021 5,873 3,185
Earnings (loss) per share before
extraordinary item................ (.19) .08 .46 .25
Extraordinary item, net of
income taxes...................... (.06) -- -- --
Primary earnings (loss) per share... (.25) .08 .46 .25
Fully diluted earnings (loss) per
share............................. (.25) .08 .40 .24
Dividends per share................. .06 .06 .06 .07
1994
Revenue............................. $ 143,619 $129,429 $ 113,319 $106,437
Earnings (loss) before income taxes
and extraordinary item............ 9,934 5,186 2,897 (5,678)
Earnings (loss) before extraordinary
item.............................. 6,805 3,584 2,317 (2,961)
Extraordinary item, net of
income taxes...................... -- 579 -- 1,821
Net earnings (loss)................. 6,805 4,163 2,317 (1,140)
Earnings (loss) per share before
extraordinary item................ .39 .21 .15 (.20)
Extraordinary item, net of
income taxes...................... -- .03 -- .12
Primary earnings (loss) per share... .39 .24 .15 (.08)
Fully diluted earnings (loss) per
share............................. .36 .24 .15 (.08)
Dividends per share................. .06 .06 .06 .06
1993
Revenue............................. $ 110,353 $147,280 $ 154,245 $163,505
Earnings before income taxes........ 6,227 13,667 15,282 17,378
Net earnings........................ 4,304 9,451 10,461 12,079
Net earnings per share.............. .28 .57 .61 .69
Dividends per share................. .05 .05 .06 .06
15
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is intended to provide information to facilitate
the understanding and assessment of significant changes and trends related to
the financial condition and results of operations of the Company. This
discussion and analysis should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto appearing elsewhere
herein.
OVERVIEW
The following table sets forth certain financial and other data for the
years indicated:
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Total revenue.......................... $409,845 $492,804 $575,383
======== ======== ========
Total expenses......................... $400,385 $480,465 $522,829
======== ======== ========
Earnings before extraordinary item..... $ 7,632 $ 9,745 $ 36,295
Extraordinary item -- gain (loss) on
early retirement of debt, net of
income taxes......................... (813) 2,400 --
-------- -------- --------
Net earnings........................... $ 6,819 $ 12,145 $ 36,295
======== ======== ========
Net claims paid ratio(1)............... 9.2% 6.3% 4.2%
Return on average equity before
extraordinary item(2)................ 10.0% 10.3% 40.3%
Return on average equity including
extraordinary item(2)................ 9.0% 12.9% 40.3%
- ---------------
(1) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(2) Percentage return on average equity is net earnings for the period divided
by the simple average of total stockholders' equity as of the beginning and
end of each year presented.
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales. Real estate sales are
directly affected by the availability of funds to finance purchases. Other
factors affecting real estate activity include demand, mortgage interest rates,
family income levels and general economic conditions. While the level of sales
activity was relatively depressed in certain geographical areas during the
period 1991 through mid-1993, lower mortgage interest rates beginning in the
latter part of 1991 triggered an increase in refinancing activity which
continued at record levels through 1993 and into the first quarter of 1994.
During 1994 and early 1995, steady interest rate increases caused by actions
taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Since late 1995, decreases in mortgage interest rates and the resulting
improvement in the real estate market have had a favorable effect on the level
of real estate activity, including refinancing transactions, new home sales and
resales.
16
19
The following table sets forth information regarding title related revenue
derived from direct operations and title related revenue derived from agency
operations:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
% % %
1995 OF TOTAL 1994 OF TOTAL 1993 OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenue from direct operations:
Title insurance premiums............ $177,202 47.3% $196,376 42.5% $242,194 44.8%
Escrow fees......................... 49,723 13.3 52,260 11.3 69,982 13.0
Other title related fees and
revenue.......................... 39,117 10.5 40,534 8.8 40,648 7.5
-------- ----- -------- ----- -------- -----
Total....................... 266,042 71.1 289,170 62.6 352,824 65.3
Revenue from agency operations:
Title insurance premiums............ 108,350 28.9 172,899 37.4 187,578 34.7
-------- ----- -------- ----- -------- -----
Total title related
revenue................... $374,392 100.0% $462,069 100.0% $540,402 100.0%
======== ===== ======== ===== ======== =====
During 1995, 1994 and 1993, 71.1%, 62.6% and 65.3%, respectively, of total
title related revenue (excluding interest and investment income and non-title
related other fees and revenue) was generated from direct operations. The
Company focuses on direct operations because it retains the entire premium from
each transaction and is able to generate additional sources of revenue by
providing other title related services. The fluctuation in the percentage of
revenue generated by direct operations versus the percentage of revenue
generated by agency operations between 1995 and 1994 is due to several factors.
During 1995, the Company terminated a number of agency relationships based on
the Company's agency retention criteria. The Company continually monitors agency
relationships for quality and productivity. Audits of agents are conducted on a
periodic basis, and agents which do not meet the Company's standards are not
retained. In addition, during 1995, the Company acquired certain former agents
which were converted to direct operations. See "Recent Developments." Finally,
in certain states where a significant amount of premium volume was generated,
the Company operates on a direct basis. During 1994 agency operations generated
a slightly larger percentage of total title related revenue as compared to 1993,
primarily as a result of the increased contributions made by Fidelity
Pennsylvania, ATIC and Fidelity New York.
The Company's strategy of expanding into selected geographic markets
through the acquisition of title insurance operations continued during the last
three years. The Company's acquisition strategy includes the restructuring of
acquired operations by focusing on direct operations in residential resale and
refinance markets, enhancing sales and marketing efforts, minimizing net claim
payments through stringent quality controls and effectively managing overhead
costs.
RESULTS OF OPERATIONS
REVENUE. The following table presents information regarding the components
of the Company's revenue:
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS, OTHER THAN FEE
PER FILE)
Title insurance premiums............................... $285,552 $369,275 $429,772
Escrow fees............................................ 49,723 52,260 69,982
Other fees and revenue................................. 56,954 59,351 60,958
Interest and investment income, including
realized gains (losses).............................. 17,616 11,918 14,671
-------- -------- --------
Total revenue..................................... $409,845 $492,804 $575,383
======== ======== ========
Orders closed by direct operations..................... 302,000 335,000 464,000
Average fee per file from direct operations............ $ 790 $ 750 $ 710
Favorable mortgage interest rates in the latter part of 1991 through early
1994 triggered refinancing activity at record levels. Beginning in early 1994
through mid-1995, steady interest rate increases caused by
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actions taken by the Federal Reserve Board resulted in a significant decline in
refinancing transactions and a stagnation in residential resales and new home
sales. Title orders and requests for title related services followed the market
trend as expected. Since late 1995, decreases in mortgage interest rates and the
resulting improvement in the real estate market have had a positive impact on
the level of real estate activity. These factors have resulted in title premiums
of $285.6 million, $369.3 million and $429.8 million, for 1995, 1994 and 1993,
respectively. The difference in title insurance premiums between 1995 and 1994
of $83.7 million represents a decrease of 22.7%. Title insurance premiums
decreased $60.5 million, or 14.1%, in 1994 from 1993.
The average fee per file increased to $790 in 1995 from $750 in 1994, which
had previously increased from $710 in 1993. The increase can be attributed to
the change in the mix of business from refinance to resale. As mortgage interest
rates increased due to the actions taken by the Federal Reserve Board, the
refinancing trend ended. Thus, title business that was generated was primarily
related to new home sale or resale transactions, which typically charge higher
fees than refinancing transactions. Fees generated from refinancing transactions
are generally less than fees generated from resale transactions because the base
rate charged on such a policy is usually lower. Furthermore, one policy is
issued to a lender in a refinance transaction and two policies are issued in a
resale transaction (buyer and lender).
The Company's direct operations generate escrow fees from holding funds and
documents in connection with the closing of real estate transactions, as well as
other fees and revenue. Other fees and revenue primarily include document
preparation fees, reconveyance fees, real estate information fees, foreclosure
publishing and posting fees, exchange intermediary fees and fees received by ACS
Systems, Inc. See Note B of Notes to Consolidated Financial Statements.
The trends in escrow fees are primarily related to the title insurance
activity generated by the Company's direct operations. Escrow fees have
fluctuated during the 1995, 1994 and 1993 years in a pattern generally
consistent with the fluctuation in title insurance premiums. Escrow fees have
decreased $2.6 million to $49.7 million in 1995, a 5.0% decrease from $52.3
million in 1994. The 1995 percentage decrease in escrow fees is not as
significant as the percentage decrease in title premiums due to the change in
the direct operation/agency business mix. See "Overview." Escrow fees decreased
$17.7 million, or 25.3%, in 1994 from 1993 to $52.3 million from $70.0 million.
The decrease in escrow fees in 1994 from 1993 is greater than the decrease in
title insurance premiums due to the increase in agency title insurance premiums
as a percentage of total title related revenue. Agency title insurance premiums
do not generate escrow fees for the Company.
Other fees and revenue remained relatively stable during the three year
period ended December 31, 1995. During 1995, other fees and revenue decreased
$2.4 million, or 4.0%, to $57.0 million from $59.4 million in 1994 and decreased
$1.6 million, or 2.6%, to $59.4 million from $61.0 million in 1993. Other fees
and revenue were generated at comparable levels in 1995 and 1994, primarily as a
result of the type of business in 1995, which was primarily resale business, and
the direct operation/agency business mix. See "Overview." Direct operations
generate other fees and income. Thus, even in a year when overall title revenue
may be down, the level of other fees and revenue can be maintained, depending on
the direct operation/agency business mix. The consistency between years is
primarily attributable to the nature of the revenues included and the current
title insurance market environment which has shifted from a refinance to a
resale oriented market. See "Recent Developments." In a resale transaction,
other fees and revenues are greater than in a refinancing transaction.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. During 1995, interest and investment income increased $5.7 million,
or 47.9%, to $17.6 million from $11.9 million in 1994. The tax adjusted yield
decreased slightly, to 6.4% in 1995 compared to 6.7% in 1994, while average
invested assets, excluding real estate, decreased 23.0%, or $69.8 million, to
$233.8 million in 1995 from $303.6 million in 1994. The difference in investment
results is primarily attributable to the net capital gains (losses) recorded in
1995 versus 1994. During 1995, the Company recognized $5.2 million in capital
gains compared to $3.1 million in capital losses recognized in 1994. Included in
the gain amount is a net $3.4 million gain realized upon the sale of the
Company's US Facilities Corporation common stock holdings during the third
quarter of 1995. See "Recent Developments."
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In 1994, interest and investment income decreased 19.0%, or $2.8 million, to
$11.9 million from $14.7 million in 1993. The tax adjusted yield increased only
slightly, to 6.7% in 1994 compared to 6.6% in 1993, while average invested
assets, excluding real estate, increased 41.2%, or $88.6 million, to $303.6
million in 1994 from $215.0 million in 1993. The difference in investment
results is attributable to the net capital gain (loss) activity between the
years. In 1994, the Company recognized $3.1 million of net capital losses.
Included in this amount is $2.6 million of capital losses recognized in December
1994. During December 1994, the Company sold certain investments, totalling
approximately $38.2 million, in order to reinvest the proceeds in higher
yielding investment instruments and to fund the early retirement of the
Company's LYONs at favorable market prices. See "Extraordinary Item." $4.2
million of capital gains realized on the sale of assets, primarily fixed
maturity and equity securities, are included in interest and investment income
for the 1993 year. See Note C of Notes to Consolidated Financial Statements.
EXTRAORDINARY ITEM. During 1994, due to favorable market prices and the
Company's belief that the Company's Common Stock and LYONs represent excellent
investments, the Board of Directors authorized the Company to repurchase up to
5.5 million shares of its Common Stock or a comparable amount of its LYONs which
are convertible into 21.095 shares of Common Stock per $1,000 maturity of LYONs.
In accordance with this authorization, the Company purchased $48 million
principal amount of LYONs at an average purchase price of $366.51 per $1,000
maturity of LYONs. As a result of the LYONs purchase transactions, the Company
recorded an extraordinary gain on the early retirement of debt of $2.4 million,
net of the related income tax effect. In March 1995, the board of directors
authorized the repurchase of an additional 2.2 million shares of Common Stock or
the equivalent amount of LYONs increasing the total amount authorized to 7.7
million shares or the equivalent amount of LYONs. See "Liquidity and Capital
Resources" and "Recent Developments."
EXPENSES. The following table presents the components of the Company's
expenses:
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Personnel costs........................................ $165,514 $181,953 $196,470
Other operating expenses............................... 123,888 129,367 135,925
Agent commissions...................................... 82,713 132,713 147,427
Provision for claim losses............................. 19,031 27,838 39,220
Interest expense....................................... 9,239 8,594 2,587
Minority interest expense.............................. -- -- 1,200
-------- -------- --------
Total expenses............................... $400,385 $480,465 $522,829
======== ======== ========
The Company's operating expenses primarily consist of personnel costs and
other operating expenses which are incurred as title insurance orders are
received and processed. Direct title insurance premiums and escrow fee revenue
are recognized as income at the time the underlying real estate transaction
closes. As a result, revenue lags approximately 60-90 days behind expenses and
therefore gross margins may fluctuate.
Personnel costs include both base salaries and commissions paid to
employees and are the most significant operating expense incurred by the
Company. Personnel costs totalled $165.5 million, $182.0 million and $196.5
million for the years ended December 31, 1995, 1994 and 1993, respectively.
These costs generally fluctuate with the level of direct orders opened and
closed, and with the fluctuation in revenue between direct and agency
operations. See "Overview" and "Revenue." Personnel costs, as a percentage of
total revenue, have increased to 40.4% in 1995 from 36.9% in 1994, which had
previously increased from 34.1% in 1993. These increases in personnel costs as a
percentage of total title revenue can be attributed to the fluctuating market
conditions in the title insurance industry. The Company has taken significant
measures to maintain appropriate personnel levels and costs relative to the
volume of business and revenues, as indicated by the $16.5 million, or 9.1%
reduction in personnel costs between 1995 and 1994, and the $14.5 million, or
7.4%, reduction in personnel costs in 1994 as compared to 1993. The Company will
not, however, compromise its customer service standards or quality controls in
responding to market conditions. The Company continues to
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monitor the prevailing market conditions and will respond as necessary, while
positioning itself to take advantage of the real estate recovery as it occurs.
Other operating expenses primarily consist of facilities expenses, title
plant maintenance, premium taxes (which insurance underwriters are required to
pay on title premiums and title related revenue in lieu of franchise and other
state taxes), escrow losses, courier services, computer services, professional
services, general insurance, trade and notes receivable allowances and
depreciation. Other operating expenses increased as a percentage of total
revenue to 30.2% in 1995 from 26.3% in 1994, which had previously increased from
23.6% in 1993. In response to market conditions, the Company implemented
aggressive cost control programs in order to reduce operating expenses to levels
consistent with the levels of title related revenue, however, certain fixed
costs are incurred regardless of revenue levels, thus, resulting in the year
over year percentage increases. The Company continues to be committed to these
cost control measures. Total other operating expenses have decreased $5.5
million, or 4.3%, to $123.9 million in 1995 from $129.4 million in 1994. In 1994
operating expenses decreased $6.5 million, or 4.8%, from $135.9 million in 1993.
See "Overview."
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. Accordingly, this
expense increases as agent premiums increase.
The following table illustrates the relationship of agent premiums and
agent commissions:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums.................... $108,350 100.0% $172,899 100.0% $187,578 100.0%
Agent commissions................. 82,713 76.3 132,713 76.8 147,427 78.6
-------- ----- -------- ----- -------- -----
Premiums retained
by the Company............... $ 25,637 23.7% $ 40,186 23.2% $ 40,151 21.4%
======== ===== ======== ===== ======== =====
The percentage of agent premiums retained by the Company varies according
to regional differences in real estate closing practices and state regulations.
The percentage of agent premiums retained by the Company has increased in each
of the last three years primarily due to the Company's expansion of operations
outside of California into states where underwriters' retained premiums are
generally greater. As the Company continues to expand its operations in markets
outside California, the Company believes it may retain a larger percentage of
agent premiums.
The provision for claim losses includes an estimate of anticipated title
claims and major claims. The estimate of anticipated title claims is accrued as
a percentage of title premium revenue based on the Company's historical loss
experience and other relevant factors. The Company monitors its claims
experience on a continual basis and adjusts the provision for claim losses
accordingly. Based on Company loss development studies, the Company believes
that as a result of its underwriting and claims handling practices, as well as
the refinancing business of prior years, the Company will maintain the trend of
favorable claim loss experience. Based on this information, in 1995 and 1994 the
Company recorded a provision for claim losses of 7.0% of title insurance
premiums prior to major claim expense, net of recoupments and the impact of
premium rates and Company loss experience in the state of Texas. Premiums are
generally higher in Texas for similar coverage than in other states, while loss
experience is comparable. As a result, losses as a percentage of premiums are
lower. These factors resulted in a net provision for claim losses of 6.7% and
7.5% in 1995 and 1994, respectively. In 1993 the Company provided for claim
losses at 9.0% of title premiums prior to major claim expense, net of
recoupments and the impact of premium rates and Company loss experience in the
state of Texas. The net provision for claim losses was 9.1% in 1993.
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A summary of the reserve for claim losses follows:
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance...................................... $153,306 $142,512 $104,528
Title claim loss provision related to:
Current year...................................... 23,901 38,575 32,773
Prior years....................................... (4,870) (10,737) 6,447
-------- -------- --------
Total title claim loss provision............. 19,031 27,838 39,220
Title claims paid, net of recoupments related to:
Current year...................................... (2,818) (1,742) (1,074)
Prior years....................................... (23,425) (21,521) (17,046)
-------- -------- --------
Total title claims paid, net of
recoupments................................ (26,243) (23,263) (18,120)
Reserves assumed with Fidelity Pennsylvania and
ATIC(1)........................................... -- 6,219 --
Reserves assumed with Fidelity New York.............. -- -- 17,632
Income tax adjustment................................ -- -- (748)
-------- -------- --------
Ending balance......................................... $146,094 $153,306 $142,512
======== ======== ========
Provision for title claim losses to title insurance
premiums............................................. 6.7% 7.5% 9.1%
Net claims paid ratio.................................. 9.2% 6.3% 4.2%
- ---------------
(1) See Note A of Notes to Consolidated Financial Statements.
Interest expense is incurred by the Company in financing its capital asset
purchases and certain of its acquisitions. Interest expense consists of interest
related to the Company's outstanding debt and the amortization of original issue
discount and debt issuance costs related to the LYONs issued in February 1994.
Interest expense on "non-LYONs" debt totaled $4.3 million, $3.8 million and $2.6
million for the years 1995, 1994 and 1993, respectively. The LYONs related
component of interest expense amounted to $4.9 million and $4.8 million for 1995
and 1994, respectively. Interest expense increased in 1995 over 1994 primarily
as a result of an increase in the average outstanding balance of a certain
subsidiary's equipment outstanding debt and increases in the prime interest
rate, to which certain of the interest rates paid by the Company are indexed.
See "Recent Developments." Interest expense and amortization expense increased
in 1994 over 1993 as a result of the LYONs offering and due to the $22.5 million
of Senior Secured Notes issued in a private placement in March 1993, in
connection with the acquisition of Fidelity New York (formerly Security Title
and Guaranty Company) which were outstanding the entire period. See Note B of
Notes to Consolidated Financial Statements. Furthermore, an increase in the
average outstanding balance of a subsidiary's equipment line of credit and
increasing interest rates also resulted in increased interest expense in 1994
over 1993.
Minority interest expense in 1993 represents primarily accrued dividends
for the year on $20.0 million of ATIC's Redeemable Series A Preferred Stock
("ATIC Preferred Stock"), held by Fidelity Pennsylvania's former parent, at an
adjusted rate of 6.0% per annum. The ATIC Preferred Stock was purchased by the
Company in March 1994. See Note A of Notes to Consolidated Financial Statements.
Income tax expense for 1995, 1994 and 1993, as a percentage of earnings
before income taxes, including the extraordinary loss in 1995 and extraordinary
gain in 1994, was 16.9%, 24.2% and 30.9%, respectively. See "Extraordinary
Item." The decrease in income tax expense as a percentage of earnings before
income taxes, including the extraordinary item is attributable to a change in
the mix of net income. In 1995 and 1994, investment income, including net
capital gains (losses), represented the significant component of net income. In
1993, net income consisted of operating and investment income in relatively
equal proportions. Based on the characteristics of the investment income, which
includes a significant amount of tax exempt income, the
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effective income tax rate decreased. See Note H of Notes to Consolidated
Financial Statements for additional information regarding income taxes.
EXTRAORDINARY ITEM. In order to reduce interest expense incurred and
interest rates paid, the Company prepaid the Senior Secured Notes (the "Senior
Notes") issued in March 1993. Pursuant to the terms and conditions of the Senior
Note Agreement, the Company provided for the Make Whole Provision, as defined,
and related expenses in 1995. This amount, $1.25 million, before related income
taxes, has been reflected as an extraordinary item in the Consolidated
Statements of Earnings for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements include debt service, operating expenses,
taxes and dividends on its Common Stock. The Company believes that all
anticipated cash requirements for current operations will be met from internally
generated funds, through cash received from subsidiaries as well as cash
generated by investment securities and short term bank borrowings through
existing credit facilities.
Two of the significant sources of the Company's funds are dividends and
distributions from its subsidiaries. As a holding company, the Company receives
cash from its subsidiaries in the form of dividends and as reimbursement for
operating and other administrative expenses it incurs. The reimbursements are
executed within the guidelines of various management agreements among the
Company and its subsidiaries. Fluctuations in operating cash flows are primarily
the result of increases or decreases in revenue. See "Overview." The Company's
Insurance Subsidiaries and UTCs collect premiums and pay claims and operating
expenses. The Insurance Subsidiaries also have cash flow sources derived from
investment income, repayments of principal and proceeds from sales and
maturities of investments and dividends from subsidiaries. Positive cash flow
from Insurance Subsidiaries is invested primarily in short term investments and
medium term bonds. Short term investments held by the Company's Insurance
Subsidiaries provide liquidity for projected claims and operating expenses. The
Insurance Subsidiaries are restricted by state regulations in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which the Company's six title underwriters can pay dividends or make
other distributions to the Company. The UTCs are also regulated by insurance
regulatory or banking authorities. Positive cash flow from the UTCs is invested
primarily in cash and cash equivalents.
The short and long term liquidity requirements of the Company, Insurance
Subsidiaries and UTCs are monitored regularly to match cash inflows with cash
requirements. The Company, Insurance Subsidiaries and UTCs forecast their daily
cash needs and periodically review their short and long term projected sources
and uses of funds, as well as the asset, liability, investment and cash flow
assumptions underlying these projections.
For purposes of satisfying insurance regulatory requirements, the Company
is required to maintain certain levels of readily marketable securities and
other liquid assets. At December 31, 1995, the fair value of the Company's total
investment securities was $180.1 million. These investments consist of
securities which the Company believes are readily marketable and could be
liquidated if necessary. See "Business -- Investment Policies and Investment
Portfolio."
In order to take advantage of investment market conditions, the Company's
tax status and the interest rate environment, during the third quarter of 1995
the Company converted certain investments in tax-exempt fixed maturities to cash
and cash equivalents. The Company is in the process of reinvesting these funds
in taxable instruments.
During September 1995, the Company reached agreement on the terms of a $35
million credit facility with a banking syndicate led by Chase Manhattan Bank
N.A. The facility includes a $22 million term loan and a $13 million revolving
credit facility. The $22 million term loan has been used to refinance higher
rate indebtedness and for general corporate purposes. The $13 million revolving
credit facility is available to fund a portion of the Nations Title Inc.
acquisition and for general corporate purposes. See "Recent Developments."
In February 1994, the Company issued zero coupon, convertible subordinated
Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a
principal amount at maturity of $235,750,000. Net proceeds to the Company were
approximately $101,000,000. The proceeds were used for investment and
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general corporate purposes, including the repurchase of treasury shares. See
Note G of Notes to Consolidated Financial Statements.
In March 1993, the Company issued $22.5 million in Series A and B Senior
Secured Notes due in April 1995, February 1998 and February 2000. The proceeds
of this debt offering were used to purchase Fidelity New York. See Notes B and G
of Notes to Consolidated Financial Statements for further details. In order to
reduce interest expense incurred and interest rates paid, the Senior Notes were
repaid during 1995. See "Results of Operations -- Extraordinary Item." In April
1993, the Company issued 1,402,000 shares of Common Stock, providing net
proceeds to the Company of $17.8 million. The proceeds were used for general
corporate purposes.
During 1993, the Company acquired from outside lenders substantially all of
Manchester's outstanding indebtedness. Additionally, Manchester had not been
released from its general partnership obligations under a separate debt
agreement of a real estate partnership in which it sold its interest in 1991.
The amount outstanding under this agreement totalled $931,000 at December 31,
1995. During 1994, the lender on this project agreed to release Manchester by
substituting the buyer as the obligor. No such release has yet been executed.
The Company does not believe that Manchester will require additional capital
contributions from the Company that will materially impact liquidity, nor will
Manchester's operations materially impact the Company's results of operations.
In the normal course of business certain of the Company's subsidiaries
enter into off-balance sheet credit risk associated with certain aspects of its
title insurance policies and Manchester's real estate activities. This credit
risk is in the form of standby letters of credit and general partnership
guarantees. The Company believes that this credit risk is adequately secured by
either legal remedies associated with settlement procedures or the underlying
real estate assets. See "Legal Proceedings" and Notes J and N of Notes to
Consolidated Financial Statements.
Recent Accounting Pronouncements. In May 1993, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 115
("Statement 115"), "Accounting for Certain Investments in Debt and Equity
Securities." Statement 115 requires that investments be classified as "held to
maturity," "available for sale" or "trading securities." Statement 115 defines
investments in securities as "held to maturity" based upon a positive intent and
ability to hold those securities to maturity. Investments held to maturity are
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling them in the near term are classified as
"trading securities" and reported at fair value, with unrealized gains and
losses included in operations. Debt and equity securities not classified as
"held to maturity" or "trading securities" are classified as "available for
sale" and recorded at fair value with unrealized gains and losses excluded from
operations and reported as a separate component of stockholders' equity, net of
related income tax effect. The Company adopted Statement 115 on January 1, 1994
and the impact on the results of operations and financial position was not
material. In November 1995, the Financial Accounting Standards Board Emerging
Issues Task Force granted all entities a one-time opportunity to reconsider
their ability and intent to hold securities accounted for under Statement 115 as
held to maturity. This allows entities to transfer securities from the held to
maturity category without "tainting" their remaining held to maturity
securities. The Board emphasized that this would be a one-time event. The
Company has reassessed the appropriateness of the classifications of securities
held and has chosen to reclassify its held to maturity portfolio to available
for sale in 1995, in order to provide additional investment portfolio management
flexibility. The fair value of the securities transferred from the held to
maturity portfolio to the available for sale portfolio totalled $25.5 million
and resulted in an unrealized gain of $459,000, before applicable income taxes.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Statement 121 provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both to
assets to be held and used and assets to be disposed of. Statement 121 requires
that under certain conditions entities perform separate calculations for assets
to be held and used to determine whether recognition of an impairment loss is
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required and, if so, to measure the impairment. If the sum of the expected
future cash flows, undiscounted and without interest charges, is less than the
asset's carrying amount, an impairment loss is considered; if the sum of the
expected future cash flows is more than the asset's carrying amount, an
impairment loss cannot be recognized. Measurement of an impairment loss is based
on the fair value of the asset. Statement 121 requires long-lived assets and
certain identifiable intangibles to be disposed of to be reported at the lower
of carrying amount or fair value less cost to sell, except for assets covered by
the provisions of Accounting Pronouncements Board Opinion No. 30. Statement 121
is effective for financial statements issued for fiscal years beginning after
December 15, 1995. The Company does not anticipate that the adoption of
Statement 121 will have a material effect on the Consolidated Financial
Statements.
Statement of Financial Accounting Standards No. 123 ("Statement 123"),
"Accounting for Stock-Based Compensation", was issued by the Financial
Accounting Standards Board in October 1995. Statement 123 applies to all
transactions in which an entity acquires goods or services by issuing
instruments or by incurring liabilities where the payment amounts are based on
the entity's common stock price, except for employee stock ownership plans
("ESOPs"). Statement 123 covers transactions with employees and non-employees
and is applicable to both public and non-public entities. Statement 123
establishes a new method of accounting for stock-based compensation arrangements
with employees. The new method is a fair value method rather than the intrinsic
value method that is contained in Accounting Pronouncements Board Opinion No. 25
("Opinion 25"). However, the Statement does not require an entity to adopt the
new fair value based method for purposes of preparing its basic financial
statements. Entities are allowed (1) to continue to use the Opinion 25 method or
(2) to adopt the Statement 123 fair value based method. Once the fair value
based method is adopted, an entity cannot change back to the Opinion 25 method.
Also, the selected method applies to all of an entity's compensation plans and
transactions. The Statement 123 fair value based method will result in higher
compensation cost than the Opinion 25 intrinsic value based method for fixed
stock option compensation plans and will result in a different compensation cost
for variable stock option compensation plans. Sometimes the amount will be
higher and sometimes the amount will be lower. Also, many employee stock
purchase plans that are considered noncompensatory under Opinion 25 will be
compensatory and result in the recognition of compensation costs under the fair
value based method. For entities not adopting the Statement 123 fair value based
method, the Statement creates a unique financial reporting situation. It
requires entities that retain the Opinion 25 method for preparing their basic
financial statements to display in the footnotes pro forma net income and
earnings per share information as if the fair value based method had been
adopted. Thus, these entities are required to account for employee compensation
arrangements by two different methods and must present two separate measures of
results of operations. Statement 123 is effective for fiscal years beginning
after December 15, 1995. The Company intends to continue using the Opinion 25
method when accounting for stock based compensation in its basic financial
statements upon adoption of Statement 123. The Company will choose the pro forma
disclosure method.
Statement of Position 94-6 ("SOP 94-6"), "Disclosure of Certain Significant
Risks and Uncertainties," was issued in December 1994. SOP 94-6 requires
disclosures about certain risks and uncertainties that could significantly
affect the amounts reported in an entity's financial statements in the near term
and relate to: the nature of operations, the necessary use of estimates in the
preparation of financial statements and significant concentrations in certain
aspects of the entity's operations. SOP 94-6 is applicable to financial
statements of both public and non-public companies, but does not cover
governmental entities. SOP 94-6 is effective for financial statements issued for
fiscal years ending after December 15, 1995. The Company has included SOP 94-6
related disclosures in its 1995 Consolidated Financial Statements.
RECENT DEVELOPMENTS. In February 1994, the Company issued zero coupon,
convertible subordinated Liquid Yield Option Notes due February 2009 with a
principal amount at maturity of $235,750,000 at an interest rate of 5.5%. Net
proceeds to the Company were approximately $101,000,000. The