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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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)
DELAWARE 86-0498599
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
17911 VON KARMAN AVENUE 92614 (714) 622-5000
IRVINE, CALIFORNIA (ZIP CODE) (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE INCLUDING AREA CODE)
OFFICES)
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, $.0001 par value New York Stock Exchange
Liquid Yield Option Notes, due 2009,
zero coupon, convertible subordinated New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 25, 1997, 13,921,556 shares of Common Stock ($.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 $125,516,000. 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 57.
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, 1996, 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...................... 10
PART II
Item 5 Market for Registrant's Common Stock and Related Stockholder Matters..... 11
Item 6 Selected Financial Data.................................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 15
Item 8 Financial Statements and Supplementary Data.............................. 25
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure............................................................... 57
PART III
Item 10 Directors and Executive Officers of the Registrant....................... 57
Item 11 Executive Compensation................................................... 57
Item 12 Security Ownership of Certain Beneficial Owners and Management........... 57
Item 13 Certain Relationships and Related Transactions........................... 57
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 57
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PART I
ITEM 1. BUSINESS
Fidelity National Financial, Inc., through its principal subsidiaries
(collectively, the "Company"), 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 information and technology services, trustee sale guarantees, foreclosure
publishing and posting services and exchange intermediary services in connection
with real estate transactions. Title insurance services are provided through the
Company's direct operations and otherwise through independent title insurance
agents who issue title policies on behalf of the underwriting 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.
The Company's principal subsidiaries consist of Fidelity National Title
Insurance Company ("Fidelity Title"), which, in turn, is the parent company of
Fidelity National Title Insurance Company of California ("Fidelity California"),
Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee")
and Nations Title Insurance Company ("Nations Title"); Fidelity National Title
Insurance Company of Pennsylvania ("Fidelity Pennsylvania"), which, in turn, was
the parent company of American Title Insurance Company ("ATIC"), which was
merged into Fidelity Pennsylvania as of November 21, 1996; Fidelity National
Title Insurance Company of New York ("Fidelity New York"), which, in turn, is
the parent company of Nations Title Insurance of New York Inc. ("Nations New
York") and National Title Insurance of New York Inc. ("National") (collectively,
the "Insurance Subsidiaries"); and its wholly-owned underwritten title companies
(collectively, the "UTCs").
Nations Title Insurance Company, Nations Title Insurance of New York Inc.
and National Title Insurance of New York Inc. were acquired, along with Nations
Title Inc. ("NTI," collectively, "Nations Title Inc.") in a transaction which
closed on April 1, 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments" and Note B of Notes
to Consolidated Financial Statements.
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
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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.
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. It is impossible to predict in what
future direction interest rates and the real estate market may move or
fluctuate.
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, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina,
Oregon, Pennsylvania, Tennessee, Texas and Washington. Direct operations are
divided into approximately 80 branches consisting of more than 330 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.
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The Company also transacts title insurance business through a network of
approximately 2,000 agents, primarily in those areas in which agents are the
more accepted title insurance provider.
The following table sets forth for the years 1996, 1995 and 1994,
respectively, the approximate dollars and percentages of title insurance premium
revenue by state according to records maintained by the Company:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California................ $183,108 38.5% $124,407 43.6% $139,946 37.9%
New York.................. 45,938 9.7 17,436 6.1 26,683 7.2
Texas..................... 42,122 8.9 28,761 10.1 39,368 10.7
Florida................... 25,444 5.3 16,141 5.7 24,786 6.7
Pennsylvania.............. 25,441 5.3 13,751 4.8 20,326 5.5
Arizona................... 23,865 5.0 15,462 5.4 17,125 4.6
All others................ 130,043 27.3 69,594 24.3 101,041 27.4
-------- ----- -------- ----- -------- -----
Totals.......... $475,961 100.0% $285,552 100.0% $369,275 100.0%
======== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 72.0% of
title premiums written in the United States in 1995. California represented the
single largest state with 17.8%. The Company is licensed and has operations in
all 12 of these states.
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 personnel to develop new business
relationships with persons in the real estate community, such as real estate
sales agents and brokers, financial institutions, independent escrow companies
and title agents, real estate developers, mortgage brokers and attorneys. 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 quality and
timeliness in the delivery of services.
Direct and 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
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 and
Recent Developments."
Prior to the acquisition of the Nations group of companies, which was
completed on April 1, 1996, the Company generated the majority of its revenue
from its network of direct operations as opposed to 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 and Recent
Developments." 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 information
and technology fees, trustee sale guarantee fees, foreclosure publishing and
posting fees and exchange intermediary fees.
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In 1996, 49.8% of the Company's title insurance premiums were generated by
direct operations. In 1995 and 1994, 62.1% and 53.2%, respectively, of title
insurance premiums were generated by direct operations. The percentage of title
insurance premiums generated by agency operations was 50.2%, 37.9% and 46.8% in
1996, 1995 and 1994, respectively. The average percentage of premiums generated
by agents and retained by the Company was 21.3%, 23.7% and 23.2% in 1996, 1995,
and 1994, respectively. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Overview,
Revenue and 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 or retain 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 April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its wholly-owned subsidiaries Nations Title
Insurance Company, Nations Title Insurance of New York Inc. and National Title
Insurance of New York Inc., from Nations Holding Group for an adjusted purchase
price of $19.3 million plus 193,600 shares, $2.1 million, of Fidelity National
Financial, Inc.'s Common Stock. The acquisition positioned the Company as the
nation's fourth largest title insurance underwriter. The Company believes that
the combination of its direct operations and Nations Title Inc.'s strong agency
network provides a balance to the Company's title premium revenue between direct
and agency, as well as a hedge against future market downturns. The acquisition
of Nations Title Inc. has also increased the Company's revenue and positively
impacted its balance sheet and margins due to the operating economies of the
combined companies. The acquisition has also increased market share in areas
where the Company has had 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 -- Overview, Revenue and 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
information and technology 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, 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 as 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 continued 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 $37.3 million, $26.2 million and $23.3 million in 1996, 1995 and
1994, respectively, representing 7.8%, 9.2% and 6.3% of title insurance premium
revenue during such periods. 1996 net claims paid include Nations Title Inc.
claims paid since April 1, 1996, totalling $9.3 million. Fluctuations 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,
1996, the amount of these interests was $10.2 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. 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, including underwriters,
underwritten title companies and independent agents, are subject to extensive
regulation under applicable state laws. Each insurance underwriter is usually
subject to a holding company act in its state of domicile which regulates, among
other
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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 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, ultimately resulting in two Insurance Subsidiaries
as opposed to the current eight. ATIC was merged into Fidelity Pennsylvania
effective November 21, 1996 and Fidelity Title was redomesticated to California
effective December 31, 1996.
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,
1996, the combined statutory unearned premium reserve required and reported for
the Insurance Subsidiaries was $173.5 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 are currently in progress for Fidelity
Pennsylvania (1995), Fidelity Tennessee (1995), ATIC (1994) and Nations Title
(1995 and 1996). Examinations have been completed for Fidelity Title and
Fidelity California as of and for the three-year period ended December 31, 1993.
The Department of Commerce and Insurance of the State of Tennessee has
completed the field portion of their triennial examination of Fidelity Tennessee
as of and for the three-year period ended December 31, 1995. The Company has
recently received a preliminary report of examination. The preliminary report,
as forwarded to the Company by the Department of Commerce and Insurance of the
State of Tennessee, indicates that the examiners are proposing certain
immaterial adjustments. These adjustments have previously been included in the
1995 Fidelity Tennessee Statutory Annual Statement as amended and filed with
insurance regulatory authorities.
The Department of Insurance of the State of Florida has completed the field
portion of their triennial examination of ATIC, which was merged into Fidelity
Pennsylvania as of November 21, 1996, as of and for the three-year period ended
December 31, 1994. The Company has 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, ultimately Fidelity Pennsylvania. Certain of these adjustments have not
been included in the 1996 Fidelity Pennsylvania Statutory Annual Statement as
filed with insurance regulatory authorities as the Company does not agree with
these findings and has requested support for the examination report. These same
adjustments have not been considered in the calculation of dividend capability,
statutory surplus and statutory income (loss) reported below.
The Kansas Department of Insurance has completed a triennial examination of
Nations Title as of and for the two-year period ended December 31, 1995 and is
currently performing an examination as of and for the year ended December 31,
1996. The Company received a report of examination as of and for the two-year
period ended December 31, 1995. The report, as forwarded to the Company by the
Kansas Department of Insurance, indicates that the examiners are proposing
adjustments that materially impact the statutory capital and surplus of Nations
Title. These adjustments have been included in the 1996 Statutory Annual
Statement as filed with insurance regulatory authorities and have been
considered in the calculation of dividend capability, statutory surplus and
statutory income (loss) reported below. Further, Nations Title has recently
entered into a voluntary consent order with the Kansas Department of Insurance
agreeing to cease writing all new insurance business and to certain other
conditions and restrictions. This is consistent with the Company's
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intent in acquiring Nations Title, which was to have all policies which formerly
would have been issued by Nations Title issued by one of the Fidelity National
Insurance Subsidiaries.
Statutorily calculated net worth determines the maximum insurable amount
under any single title insurance policy. As of January 1, 1997, the statutory
single policy maximum insurable amounts for Fidelity Title, Fidelity
Pennsylvania and Fidelity New York were $25.3 million, $30.5 million and $28.6
million, respectively. There are no statutory single risk limits prescribed for
Fidelity California or Fidelity Tennessee. The statutory single risk limits for
Nations Title, Nations New York and National are $2.4 million, $28.6 million and
$7.3 million, respectively. Upon acquisition, the Company took action to have
Nations Title business, as well as certain Nations New York and National
business, written by Fidelity National Insurance Subsidiaries.
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 Department of
Insurance of their respective states of domicile. In the case of Fidelity Title
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
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, 1997,
Fidelity Title could pay dividends or make other distributions to the Company of
$5,621,000. Fidelity Pennsylvania and Fidelity New York do not have any dividend
paying capability as of January 1, 1997.
The combined statutory capital and surplus of the Insurance Subsidiaries
was $77,125,000, $67,525,000 and $90,153,000 as of December 31, 1996, 1995 and
1994, respectively. The December 31, 1996, combined capital and surplus includes
$11,189,000 of restricted surplus resulting from the aggregate excess of loss
reinsurance transaction entered effective December 31, 1996. The Company has
submitted the aggregate excess of loss reinsurance contract to the appropriate
Departments of Insurance for approval. See Note A of Notes to Consolidated
Financial Statements. The combined statutory income (loss) of the Insurance
Subsidiaries was $17,451,000, $(1,533,000) and $6,664,000 for the years ended
December 31, 1996, 1995 and 1994, respectively. Combined statutory income for
the year ended December 31, 1996, also includes a reinsurance gain of
$11,189,000 related to the aggregate excess of loss reinsurance transaction.
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.
Pursuant to statutory requirements of the various states in which the
Insurance Subsidiaries are domiciled, they must maintain certain levels of
minimum capital and surplus. Each of the Company's title underwriters have
complied with the minimum statutory requirements as of December 31, 1996. See
Note K of Notes to Consolidated Financial Statements.
In April 1996, the National Association of Insurance Commissioners ("NAIC")
published 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. Certain provisions of the Act will be phased in over a
multi-year period. The Company has not determined the impact, if any, of the Act
on the financial condition or operations of the Insurance Subsidiaries.
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
Fidelity National Title Company ("FNTC") and Fidelity National Title Company of
California
7
10
("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 through 1998. See Note B of
Notes to Consolidated Financial Statements.
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 1996, 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 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, 1996 and 1995, the carrying amount, which is equal to
the fair value, of total investments was $227.7 million and $180.1 million,
respectively.
It is the practice of the Company to purchase investment grade fixed
maturity securities, selected non-investment grade fixed maturity securities and
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, 1996 and 1995:
DECEMBER 31,
-------------------------------------------------------------------------------------
1996 1995
----------------------------------------- -----------------------------------------
AMORTIZED % FAIR % AMORTIZED % FAIR %
RATINGS(1) COST OF TOTAL VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
--------------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
AAA............ $110,718 66.0% $109,956 66.1% $ 86,604 68.1% $ 87,577 67.8%
AA............. 10,485 6.3 10,572 6.3 7,753 6.1 7,963 6.1
A.............. 40,587 24.2 40,007 24.1 30,849 24.2 31,623 24.5
Other.......... 5,822 3.5 5,794 3.5 2,058 1.6 2,073 1.6
-------- ----- -------- ----- -------- ----- -------- -----
Total... $167,612 100.0% $166,329 100.0% $127,264 100.0% $129,236 100.0%
======== ===== ======== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation
The following table sets forth certain information regarding the Company's
fixed maturity securities at December 31, 1996. Expected maturities may differ
from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties. Fixed maturity
8
11
securities with an amortized cost of $41,495,000 and a fair value of $41,280,000
were callable at December 31, 1996:
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
------------------------------------------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
One year or less........................... $ 2,255 1.3% $ 2,263 1.3%
After one year through five years.......... 79,731 47.6 79,434 47.8
After five years through ten years......... 59,821 35.7 59,186 35.6
After ten years............................ 25,805 15.4 25,446 15.3
-------- ----- -------- -----
Total............................ $167,612 100.0% $166,329 100.0%
======== ===== ======== =====
Equity securities at December 31, 1996 and 1995 consist of investments in
various industry groups as follows:
1996 1995
------------------- -------------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies........ $ 800 $ 863 $12,038 $13,071
Industrial, miscellaneous and all other..... 20,589 42,715 12,430 18,341
------- ------- ------- -------
Total............................. $21,389 $43,578 $24,468 $31,412
======= ======= ======= =======
The Company's investment results for the years ended December 31, 1996,
1995, and 1994 were as follows:
DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)........................ $ 15,742 $ 15,014 $ 20,269
Average invested assets(1)......................... 266,480 233,831 303,615
Effective return on average invested assets(1)..... 5.9% 6.4% 6.7%
- ---------------
(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 realized capital gains and losses on the sale of
investments. Realized capital gains (losses) totalled $2,625,000, $5,213,000
and $(3,086,000) in 1996, 1995 and 1994, 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, E and N 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, 1996.
EMPLOYEES
As of December 31, 1996, the Company had approximately 4,500 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, 1996, the Company leased office and storage spaces as
follows:
NUMBER OF
LOCATIONS
---------
California................................................................ 196
Florida................................................................... 35
Arizona................................................................... 31
Texas..................................................................... 27
Oregon.................................................................... 16
New York and New Jersey................................................... 8
New Mexico and Pennsylvania............................................... 6
Michigan, North Carolina, Nevada and Washington........................... 5
Connecticut, Hawaii and Tennessee......................................... 2
One each in: Colorado, Georgia, Indiana, Massachusetts, Maryland,
Minnesota, Missouri, Ohio, Kansas, Rhode Island, Utah, Virginia and
Wisconsin
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 mechanic's 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. In
April 1996, the U.S. District Court ruled in favor of Fidelity California on all
counts. Thereafter, NatWest filed an appeal to the Ninth Circuit Court of
Appeals. Appellate briefs are in the process of preparation and filing. No
ruling has been received from the appellate court. Management believes that the
ruling will not have a material adverse effect on Fidelity National Title
Insurance Company of California or the Company.
Management believes that no other actions depart from customary litigation
incidental to the 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 1996.
10
13
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, 1996
First quarter............................................ $16 9/64 $13 1/64 $.064
Second quarter........................................... 14 13/64 11 23/64 .064
Third quarter............................................ 14 21/32 12 25/64 .064
Fourth quarter........................................... 15 3/8 13 55/64 .070
Year ended December 31, 1995
First quarter............................................ 9 7/16 8 19/64 .058
Second quarter........................................... 12 25/64 8 13/32 .058
Third quarter............................................ 12 17/64 9 57/64 .058
Fourth quarter........................................... 15 11/32 10 51/64 .064
On March 25, 1997, the last reported sale price of the Common Stock on the
New York Stock Exchange Composite Tape was $12.125 per share. As of March 25,
1997, the Company had approximately 900 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 25, 1997, the Company's Board of Directors declared a cash
dividend of $.07 per share which will be payable on May 2, 1997 to stockholders
of record on April 11, 1997. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Regulation."
Contractual Restrictions on Dividend Payments. The Company's ability to
pay dividends on its Common Stock and make certain payments is restricted by
provisions contained in the Company's Credit Agreement dated as of September 21,
1995, as amended. The maximum amount available to pay dividends and make such
payments is $15,640,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources." See
Note G of Notes to Consolidated Financial Statements.
11
14
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 the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have been
audited by KPMG Peat Marwick LLP, independent certified public accountants.
Audited Consolidated Balance Sheets at December 31, 1996 and 1995 and
Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the
years ended December 31, 1996, 1995, and 1994, 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,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------- -------- -------- ----------
(1)(2)(3)(6)(7) (1)(2)(3) (1)(2)(3) (1)(2)(3) (1)(3)
--------------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
(RESTATED)
OPERATING RESULTS DATA:
Revenue:
Title insurance premiums.................................. $ 475,961 $285,552 $369,275 $429,772 $288,646
Escrow fees............................................... 66,927 49,723 52,260 69,982 56,038
Other fees and revenue.................................... 76,333 56,954 59,351 60,958 43,285
Interest and investment income, including realized gains
(losses)................................................ 17,692 17,616 11,918 14,671 4,308
-------- -------- -------- -------- --------
636,913 409,845 492,804 575,383 392,277
-------- -------- -------- -------- --------
Expenses:
Personnel costs........................................... 211,668 165,514 181,953 196,470 146,609
Other operating expenses.................................. 154,043 123,888 129,367 135,925 103,809
Agent commissions......................................... 187,901 82,713 132,713 147,427 82,217
Provision for claim losses................................ 33,302 19,031 27,838 39,220 31,894
Interest expense.......................................... 9,446 9,239 8,594 2,587 1,458
Minority interest expense................................. -- -- -- 1,200 629
-------- -------- -------- -------- --------
596,360 400,385 480,465 522,829 366,616
-------- -------- -------- -------- --------
Earnings before income taxes and extraordinary item......... 40,553 9,460 12,339 52,554 25,661
Income tax expense.......................................... 16,216 1,828 2,594 16,259 8,367
-------- -------- -------- -------- --------
Earnings before extraordinary item.......................... 24,337 7,632 9,745 36,295 17,294
Extraordinary item, net of income taxes(4)(5)............... -- (813) 2,400 -- --
-------- -------- -------- -------- --------
Net earnings.......................................... $ 24,337 $ 6,819 $ 12,145 $ 36,295 $ 17,294
======== ======== ======== ======== ========
PER SHARE DATA:
Earnings per share before extraordinary item................ $ 1.71 $ .53 $ .54 $ 1.96 $ 1.07
Extraordinary gain (loss), net of income taxes.............. -- (.05) .13 -- --
-------- -------- -------- -------- --------
Net earnings per share, primary basis................. $ 1.71 $ .48 $ .67 $ 1.96 $ 1.07
======== ======== ======== ======== ========
Dividends per share......................................... $ .26 $ .23 $ .23 $ .20 $ .15
Weighted average shares outstanding, primary basis (000s)... 14,265 14,267 18,124 18,514 16,089
OTHER DATA:
Direct operations market share(8)........................... 21.0% 20.3% 20.6% 18.3% 16.8%
Orders closed by direct operations.......................... 394,000 302,000 335,000 464,000 349,000
Average fee per file(9)..................................... $ 806 $ 790 $ 750 $ 710 $ 740
Provision for claim losses to title insurance premiums...... 7.0% 6.7% 7.5% 9.1% 11.0%
Net claims paid ratio(10)................................... 7.8% 9.2% 6.3% 4.2% 7.2%
Title-related revenue:
Percentage direct operations.............................. 60.0% 71.1% 62.6% 65.3% 72.6%
Percentage agency operations.............................. 40.0% 28.9% 37.4% 34.7% 27.4%
Employees at year end....................................... 4,500 4,100 3,500 4,700 4,000
Number of licensed states at year end....................... 49 49 49 48 48
Return on average equity before extraordinary
item(4)(5)(11)............................................ 25.9% 10.0% 10.3% 40.3% 33.2%
Return on average equity including extraordinary
item(4)(5)(11)............................................ 25.9% 9.0% 12.9% 40.3% 33.2%
BALANCE SHEET DATA:
Investments................................................. $ 227,674 $180,082 $217,648 $236,533 $107,215
Cash and cash equivalents................................... 63,971 47,431 34,689 42,731 48,375
Total assets................................................ 509,296 405,063 418,119 396,279 252,441
Notes payable............................................... 148,922 136,047 142,129 52,769 26,266
Reserve for claim losses.................................... 187,245 146,094 153,306 142,512 104,528
Minority interest........................................... 1,287 393 616 22,424 21,199
Stockholders' equity........................................ 110,251 77,947 73,954 114,926 65,277
12
15
- ---------------
(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, 1996, 1995, 1994, 1993, 1992
and the results of their operations for the years ended December 31, 1996,
1995, 1994, 1993 and for the six months ended December 31, 1992.
(2) The Company acquired Fidelity New York on March 17, 1993. The selected
financial data above includes the balance sheet accounts of Fidelity New
York at December 31, 1996, 1995, 1994, 1993 and the results of its
operations for the years ended December 31, 1996, 1995, 1994 and for 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. The selected financial
data above includes the balance sheet accounts of ASAP at December 31,
1996, 1995, 1994, 1993, and 1992, 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 an $813,000 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) The Company acquired NTI and its wholly-owned subsidiaries Nations Title,
Nations New York and National on April 1, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
balance sheet accounts of NTI and subsidiaries at December 31, 1996 and the
results of its operations for the nine-month period ended December 31,
1996.
(7) The Company acquired CRM, Inc. ("CRM") on November 1, 1996. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" and Note B of Notes to Consolidated
Financial Statements. The selected financial data above includes the
balance sheet accounts of CRM at December 31, 1996 and the results of its
operations for the two-month period ended December 31, 1996.
(8) 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.
(9) 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.
(10) The net claims paid ratio is the percentage resulting from total title
claims paid, net of recoupments, divided by title insurance premiums.
(11) 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.
13
16
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)
1996
Revenue................................. $126,398 $171,628 $ 166,692 $172,195
Earnings before income taxes............ 8,300 11,757 10,623 9,873
Net earnings............................ 5,145 6,946 6,317 5,929
Primary earnings per share.............. 0.36 0.49 0.44 0.41
Fully diluted earnings per share........ 0.32 0.41 0.38 0.36
Dividends paid per share................ 0.06 0.06 0.06 0.06
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................... (.17) .07 .42 .22
Extraordinary item, net of income
taxes................................ (.05) -- -- --
Primary earnings (loss) per share....... (.22) .07 .42 .22
Fully diluted earnings (loss) per
share................................ (.22) .07 .36 .21
Dividends paid per share................ .06 .06 .06 .06
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................... .35 .19 .13 (.18)
Extraordinary item, net of income
taxes................................ -- .03 -- .11
Primary earnings (loss) per share....... .35 .22 .13 (.07)
Fully diluted earnings (loss) per
share................................ .33 .22 .13 (.07)
Dividends paid per share................ .06 .06 .06 .06
14
17
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,
----------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Total revenue...................................... $636,913 $409,845 $492,804
======== ======== ========
Total expenses..................................... $596,360 $400,385 $480,465
======== ======== ========
Earnings before extraordinary item................. $ 24,337 $ 7,632 $ 9,745
Extraordinary item -- gain (loss) on early
retirement of debt, net of income taxes.......... -- (813) 2,400
-------- -------- --------
Net earnings............................. $ 24,337 $ 6,819 $ 12,145
======== ======== ========
Net claims paid ratio (1).......................... 7.8% 9.2% 6.3%
Return on average equity before extraordinary item
(2).............................................. 25.9% 10.0% 10.3%
Return on average equity including extraordinary
item (2)......................................... 25.9% 9.0% 12.9%
- ---------------
(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. It is impossible to predict in what future direction interest rates and
the real estate market may move or fluctuate.
15
18
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,
-------------------------------------------------------------------
% % %
1996 OF TOTAL 1995 OF TOTAL 1994 OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenue from direct
operations:
Title insurance premiums.... $237,244 39.8% $177,202 47.3% $196,376 42.5%
Escrow fees................. 66,927 11.2 49,723 13.3 52,260 11.3
Other title-related fees and
revenue.................. 53,543 9.0 39,117 10.5 40,534 8.8
-------- ----- -------- ----- -------- -----
Total............... 357,714 60.0 266,042 71.1 289,170 62.6
Revenue from agency
operations:
Title insurance premiums.... 238,717 40.0 108,350 28.9 172,899 37.4
-------- ----- -------- ----- -------- -----
Total title-related
revenue........... $596,431 100.0% $374,392 100.0% $462,069 100.0%
======== ===== ======== ===== ======== =====
On April 1, 1996, the Company completed its acquisition of the Nations
Title Inc. group of companies. See "Recent Developments." The acquisition
positioned Fidelity National Financial, Inc. as the nation's fourth largest
title insurance underwriter. Nations Title Inc. and its three wholly-owned
underwriting subsidiaries, Nations Title Insurance Company, Nations Title
Insurance of New York Inc. and National Title Insurance of New York Inc.,
expanded the Company's national agency network and increased its market share in
the more traditional agency driven states. The Nations Title Inc. acquisition
resulted in additional agency business and a shift in the mix of business from
direct to agency during 1996. The revenue and expense information presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes Nations Title Inc.'s results of operations for the
nine-month period ended December 31, 1996. In 1996, the total title-related
revenue (excluding interest and investment income and non-title-related other
fees and revenue) generated by agency operations increased to 40.0% from 28.9%
in 1995.
During 1995 and 1994, 71.1% and 62.6%, respectively, of total title-related
revenue was generated from direct operations. The Company traditionally focused
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 agent
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.
The Company's strategy of expanding into selected markets continued during
the last three years. The Company's strategy includes the restructuring of
acquired operations, expansion into the commercial market while maintaining its
level of focus on the residential resale and refinance markets, enhancing sales
and marketing efforts, minimizing net claim payments through stringent quality
controls and effectively managing overhead costs.
16
19
RESULTS OF OPERATIONS
Revenue. The following table presents information regarding the components
of the Company's revenue:
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------- ---------- ---------
(DOLLARS IN THOUSANDS, OTHER THAN FEE
PER FILE)
Title insurance premiums....................... $ 475,961 $ 285,552 $ 369,275
Escrow fees.................................... 66,927 49,723 52,260
Other fees and revenue......................... 76,333 56,954 59,351
Interest and investment income, including 17,692 17,616 11,918
realized gains (losses)......................
-------- -------- --------
Total revenue........................ $ 636,913 $ 409,845 $ 492,804
======== ======== ========
Orders closed by direct operations............. 394,000 302,000 335,000
Average fee per file from direct operations.... $ 806 $ 790 $ 750
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 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 and the Company's acquisition
of Nations Title Inc., which was completed on April 1, 1996, have resulted in
title premiums of $476.0 million, $285.6 million and $369.3 million, for 1996,
1995 and 1994, respectively. The difference in title insurance premiums between
1996 and 1995 of $190.4 million represents an increase of 66.7%. Title insurance
premiums decreased $83.7 million, or 22.7%, in 1995 from 1994.
The average fee per file increased to $806 in 1996 from $790 in 1995, which
had previously increased from $750 in 1994. The increase in fee per file in 1996
over 1995 is the result of increased fee revenue attributable to higher fees
charged per policy due to appreciated property values, an overall rate increase
and an expansion in the commercial business sector offset by an increase in
refinancing transactions. The increase in 1995 over 1994 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 and technology
fees, foreclosure publishing and posting fees and exchange intermediary fees
received.
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 1996, 1995 and 1994 years in a pattern generally
consistent with the fluctuation in title insurance premiums. Escrow fees
increased $17.2 million to $66.9 million in 1996, a 34.6% increase from $49.7
million in 1995. The 1996 percentage increase in escrow fees is not as
significant as the percentage increase in title premiums due to the change in
the direct operation/agency business mix. See "Overview." Escrow fees decreased
$2.6 million, or 5.0%, in 1995 from 1994 to $49.7 million from $52.3 million.
The decrease in escrow fees in 1995 from 1994 is not as great as the decrease in
title insurance premiums due to the decrease 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.
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Other fees and revenue trend closely with the level and mix of business, as
well as the performance of certain of the Company's title-related subsidiaries.
In 1996, other fees and revenue increased $19.3 million, or 33.9%, to $76.3
million from $57.0 million in 1995. The increase is primarily attributable to
the increase in title premiums and escrow fees generated by the Company's direct
operations. Direct operations generate other fees and income. Additionally, the
Company's foreclosure publishing and posting business, exchange intermediary
service and appraisal service have significantly expanded their market presence
and revenue, which are included in other fees and income. 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. During 1995, other fees and revenue
decreased $2.4 million, or 4.0%, to $57.0 million from $59.4 million in 1994.
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 the 1995 and 1994 years is primarily
attributable to the nature of the revenue included and the title insurance
market environment which shifted from a refinance to a resale oriented market.
In a resale transaction, other fees and revenue are greater than in a
refinancing transaction. See "Overview."
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. During 1996, interest and investment income increased .6% to $17.7
million from $17.6 in 1995. As interest rates declined during 1996 from 1995,
which had previously declined from 1994 interest rates, the tax adjusted yield
decreased to 5.9% in 1996 compared to 6.4% in 1995. Average invested assets,
excluding real estate, increased $32.7 million, or 14.0%, to $266.5 million in
1996 from $233.8 million in 1995. The difference in investment results is
primarily attributable to increased interest income resulting from an increase
in average invested assets offset by a decrease in yield and in capital gains.
During 1996, the Company recognized $2.6 million of capital gains compared to
$5.2 million of capital gains recorded in 1995. In 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 1995 gain amount is a net $3.4
million gain realized upon the sale of the Company's common stock holdings in US
Facilities Corporation during the third quarter of 1995. 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 Liquid Yield Option Notes ("LYONs")
at favorable market prices. See "Extraordinary Item." 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
6.1 million shares of its Common Stock or a comparable amount of its LYONs which
are convertible into 23.204 shares of Common Stock per $1,000 maturity value of
LYONs. In accordance with this authorization, the Company purchased $48.0
million principal amount of LYONs at an average purchase price of $366.51 per
$1,000 maturity value 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 2.4 million shares of
Common Stock or the equivalent amount of LYONs increasing the total amount
authorized to 8.4 million shares or the equivalent amount of LYONs. See
"Liquidity and Capital Resources" and "Recent Developments."
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Expenses. The following table presents the components of the Company's
expenses:
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------- ---------- ---------
(DOLLARS IN THOUSANDS)
Personnel costs................................ $211,668 $165,514 $181,953
Other operating expenses....................... 154,043 123,888 129,367
Agent commissions.............................. 187,901 82,713 132,713
Provision for claim losses..................... 33,302 19,031 27,838
Interest expense............................... 9,446 9,239 8,594
-------- -------- --------
Total expenses....................... $596,360 $400,385 $480,465
======== ======== ========
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 (direct
operations) paid to employees and are the most significant operating expense
incurred by the Company. These costs generally fluctuate with the level of
orders opened and closed and with the mix of revenue between direct and agency
operations. Personnel costs totalled $211.7 million, $165.5 million and $182.0
million for the years ended December 31, 1996, 1995 and 1994, respectively. See
"Overview" and "Revenue." Personnel costs, as a percentage of total revenue,
have decreased to 33.2% in 1996 from 40.4% in 1995, which had previously
increased from 36.9% in 1994. These fluctuations in personnel costs as a
percentage of total revenue can be attributed to the varying market conditions
in the title insurance industry and the mix of agency versus direct business.
The Company has taken significant measures to maintain appropriate personnel
levels and costs relative to the volume and mix of business and revenues. The
Company will not, however, compromise its customer service standards or quality
controls in responding to market conditions. The Company continues to monitor
the prevailing market conditions and will respond as necessary.
Other operating expenses 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 decreased as a percentage of total
revenue to 24.2% in 1996 from 30.2% in 1995, which had previously increased from
26.3% in 1994. In response to market conditions, the Company implemented
aggressive cost control programs in order to maintain operating expenses at
levels consistent with the levels of title-related revenue; however, certain
fixed costs are incurred regardless of revenue levels, resulting in the year
over year percentage fluctuations. The Company continues to be committed to
these cost control measures. Total other operating expenses totalled $154.0
million, $123.9 million and $129.4 million in 1996, 1995 and 1994, respectively.
See "Overview."
The period over period fluctuations in personnel costs and other operating
expenses are primarily the result of the fluctuations in total revenue, as well
as the changes in the direct operation and agency operation title premium mix.
The 1996 addition of Nations Title Inc. title premiums, which are primarily
agency related, has provided a balance between direct operation and agency
revenue. In previous periods the majority of title premiums and total revenue
were generated by direct operations, which resulted in higher personnel costs
and other operating expenses.
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Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. The following table
illustrates the relationship of agent premiums and agent commissions:
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---------------- ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums.................... $238,717 100.0% $108,350 100.0% $172,899 100.0%
Agent commissions................. 187,901 78.7 82,713 76.3 132,713 76.8
-------- ----- -------- ----- -------- -----
Premiums retained by the
Company...................... $ 50,816 21.3% $ 25,637 23.7% $ 40,186 23.2%
======== ===== ======== ===== ======== =====
Agent commissions and the resulting percentage of agent premiums retained
by the Company varies according to regional differences in real estate closing
practices and state regulations. The 1996 increase in agent commissions as a
percentage of agency premiums over 1995, resulting in a decrease in the
percentage of agency premiums retained by the Company, is attributable to the
fact that the average commissions paid to agents acquired in the Nations Title
Inc. acquisition exceed those paid to the former agent base. The combination of
higher agency commission rates and the significant agency revenue generated by
the Nations Title Inc. acquisition have resulted in higher overall commissions
in 1996. The percentage of agency premiums retained by the Company increased in
1995 over 1994 primarily due to the Company's expansion of operations outside of
California into states where underwriters' retained premiums are generally
greater.
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 1996, 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 7.0%, 6.7% and 7.5% in 1996, 1995 and 1994, respectively.
A summary of the reserve for claim losses follows:
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance...................................... $146,094 $153,306 $142,512
Reserves assumed with Nations Title Inc.............. 45,171 -- --
Reserves assumed with Fidelity Pennsylvania and
ATIC.............................................. -- -- 6,219
Title claim loss provision related to:
Current year...................................... 32,505 23,901 38,575
Prior years....................................... 797 (4,870) (10,737)
-------- -------- --------
Total title claim loss provision..................... 33,302 19,031 27,838
Title claims paid, net of recoupments related to:
Current year...................................... (2,430) (2,818) (1,742)
Prior years....................................... (34,892) (23,425) (21,521)
-------- -------- --------
Total title claims paid, net of recoupments.......... (37,322) (26,243) (23,263)
-------- -------- --------
Ending balance......................................... $187,245 $146,094 $153,306
======== ======== ========
Provision for title claim losses to title insurance
premiums............................................. 7.0% 6.7% 7.5%
Net claims paid ratio.................................. 7.8% 9.2% 6.3%
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Interest expense is incurred by the Company in financing its capital asset
purchases and certain 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 totalled $4.2 million, $4.3 million and $3.8
million for the years 1996, 1995, and 1994, respectively. The LYONs-related
component of interest expense amounted to $5.2 million, $4.9 million and $4.8
million for 1996, 1995 and 1994, respectively. Interest expense in 1996 was
comparable to that of 1995 primarily as a result of slightly more favorable
interest rates related to outstanding non-LYONs debt, offset by an increase in
the LYONs component of interest expense. 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 financing and increases in the prime interest
rate and LIBOR, to which certain of the interest rates paid by the Company are
indexed. See "Recent Developments."
Income tax expense for 1996, 1995 and 1994, as a percentage of earnings
before income taxes, including the extraordinary loss in 1995 and extraordinary
gain in 1994, was 40.0%, 16.9% and 24.2%, respectively. See "Extraordinary
Item." The fluctuations in income tax expense as a percentage of earnings before
income taxes, including the extraordinary item, are attributable to the effect
of state income taxes on the Company's wholly-owned underwritten title
companies; a change in the amount and characteristics of net income, operating
income versus investment income; and the tax treatment of certain items. 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, 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 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, 1996, the fair value of the
21
24
Company's total investment securities was $227.7 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."
On September 21, 1995, the Company obtained 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 was used to refinance higher rate indebtedness and for general
corporate purposes. $5 million of the $13 million revolving credit facility was
used to fund a portion of the Nations Title Inc. acquisition and the remainder
is available for general corporate purposes. See Note G of Notes to Consolidated
Financial Statements.
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 general
corporate purposes, including the repurchase of treasury shares. See Note G of
Notes to Consolidated Financial Statements.
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 Notes J and N of Notes to Consolidated Financial
Statements.
Recent Accounting Pronouncements. 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 the
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 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 was effective for
financial statements issued for fiscal years beginning after December 15, 1995.
The adoption of Statement 121 did not have a material effect on the Consolidated
Financial Statements of the Company.
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
22
25
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 was effective for fiscal years beginning
after December 15, 1995. The Company has chosen to continue using the Opinion 25
method when accounting for stock based compensation in its basic financial
statements.
Recent Developments. On March 9, 1995, the Company announced that its
board of directors authorized the additional repurchase, in the open market or
in privately negotiated transactions, of up to 2.4 million shares of its Common
Stock, or comparable amount of the Company's LYONs. This was in addition to the
6.0 million shares or comparable amount of LYONs previously authorized for
repurchase by the board of directors -- 1.2 million shares on March 31, 1994,
1.2 million shares on June 15, 1994, and an additional 3.6 million shares on
August 11, 1994. Any shares repurchased are held by the Company. A limited
number of shares may be used for various stock-based employee benefit programs,
and the remainder will be used for other general corporate purposes. As of
December 31, 1996, the Company had repurchased 5,685,738 shares of its Common
Stock for an aggregate price of $56.3 million, or $9.90 per share, 193,600
shares, cost basis of $1.9 million, of which were reissued in connection with
the acquisition of Nations Title Inc. Additionally, as of December 31, 1996, the
Company had purchased $48.0 million in maturity amount of LYONs for an aggregate
price of $17.6 million, all of which were purchased in 1994. The purchase of the
LYONs resulted in an extraordinary gain of $2.4 million which is net of related
income taxes, unamortized debt issuance costs and amortized original issue
discount, and is reflected in the 1994 Consolidated Statement of Earnings.
On September 21, 1995, the Company obtained 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 was used to refinance higher rate indebtedness and for general
corporate purposes. $5 million of the $13 million revolving credit facility was
used to fund a portion of the Nations Title Inc. acquisition. See Note G of
Notes to Consolidated Financial Statements.
In February of 1996, the Company proposed a merger with Giant Group, Ltd.
("Giant"). The Company had purchased 705,489 shares (or 14.8%) of Giant's
outstanding common stock. The Company's intent in acquiring Giant was to utilize
its liquid assets to take advantage of investment opportunities in non-interest
rate sensitive businesses. On April 26, 1996, the parties reached a settlement
agreement pursuant to which Giant repurchased its shares from Fidelity. In
addition, as part of the settlement, Fidelity acquired 767,807 shares of Rally's
Hamburger, Inc. ("Rally's") stock from Giant for $.83 per share, as well as an
option to purchase additional shares of Rally's common stock.
On April 1, 1996, the Company completed its acquisition of one hundred
percent of Nations Title Inc. and its wholly-owned subsidiaries Nations Title
Insurance Company, Nations Title Insurance of New York Inc. and National Title
Insurance of New York Inc. from Nations Holding Group for an adjusted purchase
price of $19.3 million plus 193,600 shares, $2.1 million, of the Company's
Common Stock. The acquisition positioned Fidelity National Financial, Inc. as
the nation's fourth largest title insurance underwriter. The Company believes
that the combination of its direct operations and Nations Title Inc.'s strong
agency network provides a balance to the Company's title premium revenue between
direct and agency, as well as a hedge against future market downturns. The
acquisition of Nations Title Inc. has also increased the Company's revenue and
positively impacted its balance sheet and margins due to the operating economies
of the combined companies. The acquisition has also increased market share in
areas where the Company has had 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. This transaction has been accounted for as a
purchase. See Note B of Notes to Consolidated Financial Statements.
On April 4, 1996, the Company purchased 17% of the outstanding common stock
of National Alliance Marketing Group, Inc. ("National"), a California
corporation, for $566,667; together with a warrant to
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26
acquire an additional 14% of National common stock. In addition, the Company
loaned $1,200,000 to National at closing at a rate of prime plus one percent.
Subsequently, the Company agreed to increase the credit facility from $1,200,000
to $1,700,000. In consideration for the increase in the credit facility National
agreed to increase the warrant shares which the Company can purchase. If the
entire $1,700,000 is borrowed the Company may purchase an additional 34% of the
outstanding shares of National. After receiving approval of the transaction from
the California Department of Insurance, the transaction closed on July 12, 1996.
National is the parent company of Alliance Home Warranty Company, a California
insurance company. Alliance sells home warranty plans to buyers of resale homes,
primarily in the central and Southern California markets. A home warranty
contract generally promises the repair or replacement of major operating systems
and built-in appliances inside a home for a period of one year.
On May 16, 1996, the Company paid $3.1 million to acquire a first lien loan
of $3.4 million secured by a commercial office building owned by a real estate
partnership in which Manchester Development Corporation is the sole general
partner. During 1996, but prior to the Company's acquisition of the loan,
officers and directors of the Company assigned their ownership interests in the
real estate partnership to Manchester. The Company leases space in the
commercial office building.
On May 29, 1996, the Company acquired 19.8% of the outstanding common stock
of Smith/Norris Corporation ("Smith/Norris"), a California corporation, together
with a warrant to acquire an additional 20% of Smith/Norris common stock.
Smith/Norris is a privately hel