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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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, SUITE 300 (949) 622-4333
IRVINE, CALIFORNIA 92614 (REGISTRANT'S TELEPHONE NUMBER,
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING AREA CODE)
INCLUDING ZIP CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
As of March 16, 2001, 78,207,911 shares of Common Stock ($.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 $2,226,326,392.
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, 2000, to be filed within 120 days after the close of the fiscal
year that is the subject of this Report.
The index to exhibits is contained in Part IV herein on Page 67.
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TABLE OF CONTENTS
FORM 10-K
PAGE
NUMBER
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 14
Item 3. Legal Proceedings........................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......... 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 16
Item 6. Selected Financial Data..................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 7A. Quantitative and Qualitative Disclosure about the Market
Risk of Financial Instruments............................... 26
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 66
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 66
Item 11. Executive Compensation...................................... 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 66
Item 13. Certain Relationships and Related Transactions.............. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 66
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PART I
ITEM 1. BUSINESS
We are the largest title insurance and diversified real estate related
services company in the United States. Our title insurance
underwriters -- Fidelity National Title, Chicago Title, Ticor Title, Security
Union Title and Alamo Title -- together issued approximately 30% of all title
insurance policies issued nationally during 1999. We provide title insurance in
49 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin
Islands, and in Canada and Mexico.
In addition, we provide a broad array of escrow and other title related
services, as well as real estate related services, including:
- collection and trust activities
- trustee's sales guarantees
- recordings
- reconveyances
- property appraisal services
- credit reporting
- exchange intermediary services in connection with real estate
transactions
- real estate tax services
- home warranty insurance
- foreclosure posting and publishing services
- loan portfolio services
- flood certification
- field services
All dollars presented in this document are in thousands, except per share
amounts and unless indicated otherwise.
MARKET FOR TITLE INSURANCE
The market for title insurance in the United States is large and growing.
According to Corporate Development Services, Inc., total revenues for the entire
U.S. title insurance industry grew from $6.0 billion in 1997 to $8.7 billion in
1999, which represented a compound annual growth rate of 20%. Growth in the
industry is closely tied to various macroeconomic factors, including, but not
limited to, growth in the gross national product, inflation, interest rates and
sales of new and existing homes as well as the refinancing of previously issued
mortgages.
Virtually every real estate transaction consummated in the U.S. requires
the use of title insurance by a lending institution before a transaction can be
finalized. Generally, revenues from title insurance policies are directly
correlated with the value of the property underlying the title policy, and
appreciation in the overall value of the real estate market drives growth in
total industry revenues. Industry revenues are also driven by swings in interest
rates, which affect demand for new mortgage loans and refinancing transactions.
The U.S. title insurance industry is concentrated among a handful of
industry participants. According to Corporate Development Services, the top five
title insurance companies accounted for 89% of net premiums collected in 1999.
Over 40 independent title insurance companies accounted for the remaining 11% of
net premiums collected in 1999. Over the last few years, the title insurance
industry has been consolidating, beginning with the merger of Lawyers Title
Insurance and Commonwealth Land Title Insurance in 1998 to
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create LandAmerica Financial Group, Inc., followed by our acquisition of Chicago
Title in March 2000. Consolidation has created opportunities for increased
financial and operating efficiencies for the industry's largest participants and
should continue to drive profitability and market share in the industry.
STRATEGY
Our strategy is to maximize operating profits by increasing our market
share in the title insurance business and by aggressively and effectively
managing operating expenses throughout the real estate business cycle. In
addition, we plan to broaden our market penetration by focusing on our real
estate related services. To accomplish our goals, we intend to:
- Operate each of our five title brands independently. We believe that in
order to maintain and strengthen our title insurance revenue base, we
must leave the Fidelity Title, Chicago Title, Ticor Title, Security Union
Title and Alamo Title brands intact and operate them independently.
Entrepreneurship and close customer relationships are an integral part of
the culture at each of our title brands. We believe that this culture of
independence aids in employee retention, which is critical to the
operating success of each brand.
- Consistently deliver high quality products with superior customer
service. We believe customer service and consistent product delivery are
the most important factors in attracting and retaining customers. We
continue to focus our marketing efforts and distribution network to serve
our customers in the residential, institutional and commercial market
sectors.
- Implement our disciplined operating philosophy throughout the Chicago
Title brands. We have introduced our key standard operating metrics at
Chicago Title, Ticor Title and Security Union Title. We monitor opened
and closed orders per employee and revenue per employee on a weekly basis
at all of our brands. While we aggressively monitor personnel costs with
revenues, we have not sacrificed and will not sacrifice our level of
customer service to increase these metrics.
- Employ our industry-leading technology to enhance efficiency and simplify
the title insurance research process. Through our majority owned
information technology services subsidiary, Micro General Corporation, a
full-service enterprise solutions enabler offering a complete range of
information technology services, we are preparing for the beta launch of
our Net Global Solutions system in 2001. This browser-based real estate
documentation system, when implemented in 2001, will provide us with the
necessary platform to begin to make meaningful progress in increasing the
efficiencies of the title insurance research and issuance process. Our
Next Generation System will allow data retrieval and file access from
remote locations, thereby allowing complete workflow mobility among all
of our title insurance brands as well as our real estate related
subsidiaries. We also plan to offer the use of this system to our agents.
- Continue to expand the scope and breadth of the real estate related
products and services we offer. We plan to maximize the value of the
Fidelity brand through the penetration of our real estate related
products and services into our large, diverse customer base. We have
consolidated most of the real estate related products and services we
offer, which include property appraisal, credit reporting, flood
certification, real estate tax services, home warranty insurance,
foreclosure posting and publishing, exchange intermediary services, loan
portfolio services and field services, under the Fidelity brand. We are
also developing a national real estate information database, which we
believe will allow us to improve the value and content of our existing
information products, to market customized real property information
products directly to real estate brokers and their customers and reduce
expenditures to, and reliance upon, third party data vendors.
RECENT DEVELOPMENTS
On March 20, 2000, we merged with Chicago Title Corporation pursuant to an
Agreement and Plan of Merger dated August 1, 1999 and amended on October 13,
1999. Prior to the merger, Chicago Title was one of the nation's largest
providers of title insurance and real estate related services for residential
and
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commercial real estate transactions. For the year ended December 31, 1999,
Chicago Title had revenues of $2.0 billion and net earnings of $105.8 million.
As of December 31, 1999, Chicago Title had total assets of $1.9 billion. At the
time of the merger, Chicago Title had more than 340 full service offices and
approximately 4,100 policy-issuing agents in 49 states, Puerto Rico, the U.S.
Virgin Islands, Guam and Canada, which are now part of our operations.
On January 3, 2001, we acquired International Data Management Corporation,
or "IDM," a leading provider of real estate information services. IDM's real
estate information databases contains over 100 million real property ownership
and sales records from the continental United States. The databases are updated
daily to reflect new sales, mortgage information and other changes in real
property ownership. Our acquisition of IDM contributes to our strategy of
expanding the scope and breadth of the real estate related products and services
we offer.
On January 24, 2001, we issued 8,050,000 shares of our common stock at a
public offering price of $33.50 per share. Proceeds from this offering, net of
underwriting discounts and commissions and other related expenses were $256.2
million. Net proceeds of $249.5 million were used to pay down indebtedness. The
remainder of the cash proceeds are available for general corporate purposes.
INDUSTRY OVERVIEW
Title Insurance Policies. Generally, real estate buyers and mortgage
lenders purchase title insurance to insure good and marketable title to real
estate. Today, virtually all real property mortgage lenders require their
borrowers to obtain a title insurance policy at the time a mortgage loan is
made. Title insurance premiums are based upon either the purchase price of the
property insured or the amount of the mortgage loan. Title insurance premiums
are due in full at the closing of the real estate transaction, and the policy
generally terminates upon the resale or refinancing of the property.
Prior to issuing policies, underwriters can reduce or eliminate future
claim losses by accurately performing searches and examinations. A title
company's predominant expense relates to such searches and examinations, the
preparation of preliminary title reports, policies or commitments and the
maintenance of title "plants," which are indexed compilations of public records,
maps and other relevant historical documents. Claim losses generally result from
errors or mistakes made in the title search and examination process and from
hidden defects such as fraud, forgery, incapacity, missing heirs or refinancing
of the property.
Commercial real estate title insurance policies insure title to commercial
real property, and generally involve higher coverage amounts and yield higher
premiums, thereby generating greater profit margins than title policies for
residential real estate transactions. Prior to the Chicago Title merger, we
issued primarily residential real property title insurance policies. In the
Chicago Title merger, we acquired Chicago Title's National Commercial &
Industrial business group, which specializes in meeting the needs of clients
involved in large commercial transactions. As discussed later under the heading
"Economic Factors Affecting Industry," the volume of commercial real estate
transactions is affected primarily by fluctuations in local supply and demand
conditions for office space, while residential real estate transaction volume is
primarily affected by macroeconomic and seasonal factors. Thus, we believe the
addition of Chicago Title's commercial real estate title insurance base will
help in maintaining uniform revenue levels throughout the seasons.
Losses and Reserves. While most other forms of insurance provide for the
assumption of risk of loss arising out of unforeseen events, title insurance
serves to protect the policyholder from risk of loss from events that predate
the issuance of the policy. As a result, claim losses associated with issuing
title policies are less expensive when compared to other insurance underwriters.
The maximum amount of liability under a title insurance policy is usually the
face amount of the policy plus the cost of defending the insured's title against
an adverse claim.
Reserves for claim losses are based upon known claims, as well as losses we
expect to incur based upon historical experience and other factors, including
industry averages, claim loss history, legal environment, geographic
considerations, expected recoupments and the types of policies written. We also
accrue reserves for losses arising from escrow, closing and disbursement
functions due to fraud or operational error.
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A title insurance company can minimize its losses by having strict quality
control systems and underwriting standards in place. These controls increase the
likelihood that the appropriate level of diligence is conducted in completing a
title search so that the possibility of potential claims is significantly
mitigated. In the case of independent agents, who conduct their own title
searches, the agency agreement between the agent and the title insurance
underwriter gives the underwriter the ability to proceed against the agent when
a loss arises from a flawed title search.
Courts and juries sometimes award damages against insurance companies,
including title insurance companies, in excess of policy limits. Such awards are
typically based on allegations of fraud, misrepresentation, deceptive trade
practices or other wrongful acts commonly referred to as "bad faith." Although
we have not experienced damage awards materially in excess of policy limits, the
possibility of such bad faith damage awards may cause us to experience increased
costs and difficulty in settling title claims.
The maximum insurable amount under any single title insurance policy is
determined by statutorily calculated net worth. The highest self-imposed single
policy maximum insurable amounts for any of our title insurance subsidiaries is
$100.0 million.
Direct and Agency Operations. We provide title insurance services through
our direct operations and wholly owned underwritten title companies, and
additionally through independent title insurance agents who issue title policies
on behalf of title underwriters. Title underwriters determine the terms and
conditions upon which they will insure title to the real property according to
their underwriting standards, policies and procedures. In our direct operations,
the title underwriter issues the title insurance policy and retains the entire
premium paid in connection with the transaction. In our agency operations, the
search and examination function is performed by an independent agent. The agent
thus retains the majority of the title premium collected, with the balance
remitted to the title underwriter for bearing the risk of loss in the event that
a claim is made under the title insurance policy. Independent agents may select
among several title underwriters based upon the amount of the premium "split"
offered by the underwriter, the overall terms and conditions of the agency
agreement and the scope of services offered to the agent. Premium splits vary by
geographic region.
Our direct operations provide the following benefits:
- higher margins because we retain the entire premium from each transaction
instead of paying a commission to an agent;
- continuity of service levels to a broad range of customers; and
- additional sources of income through escrow and other real estate related
services, such as property appraisal services, collection and trust
activities, real estate information and technology services, trustee's
sales guarantees, credit reporting, flood certification, real estate tax
services, reconveyances, recordings, foreclosure publishing and posting
services and exchange intermediary services in connection with real
estate transactions.
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 -- i.e., mortgage interest rates. Other factors
affecting real estate activity include, but are not limited to, demand for
housing, employment levels, family income levels and general economic
conditions. We have found that residential real estate activity decreases in the
following situations:
- when mortgage interest rates are high;
- when the mortgage funding supply is limited; and
- when the United States economy is weak.
Because commercial real estate transactions tend to be driven more by
supply and demand for commercial space and occupancy rates in a particular area
rather than by macroeconomic events, our commercial real estate title insurance
business can generate revenues which offset the industry cycles discussed above.
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Historically, real estate transactions have produced seasonal revenue
levels for title insurers. The first calendar quarter is typically the weakest
quarter in terms of revenue due to the generally low volume of home sales during
January and February. The fourth calendar quarter is typically the strongest in
terms of revenue due to commercial entities desiring to complete transactions by
year-end. Significant changes in interest rates may alter these traditional
seasonal patterns due to the effect the cost of financing has on the volume of
real estate transactions.
TITLE INSURANCE OPERATIONS
Our direct operations are divided into approximately 200 profit centers
consisting of more than 1,000 offices. Each profit center processes title
insurance transactions within its geographical area, which is usually identified
by a county, a group of counties forming a region, or a state, depending on the
management structure in that part of the country. We also transact title
insurance business through a network of over 7,000 agents, primarily in those
areas in which agents are the more accepted title insurance provider.
The following table sets forth the approximate dollars and percentages of
title insurance premium revenue by state. The year ended December 31, 2000,
includes title insurance premium revenue by state, both in dollars and as a
percentage of the total, on a pro forma basis, assuming the Chicago Title merger
had been consummated on January 1, 2000.
YEAR ENDED DECEMBER 31,
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2000 1999 1998
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AMOUNT % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
California...................... $ 444,012 21.4% $289,285 30.8% $301,406 33.1%
Texas........................... 321,740 15.5 179,490 19.1 178,407 19.6
New York........................ 184,263 8.9 92,280 9.8 88,899 9.8
Florida......................... 139,532 6.7 48,596 5.2 44,860 4.9
New Jersey...................... 84,226 4.0 28,371 3.0 23,085 2.5
Michigan........................ 80,688 3.9 24,324 2.6 23,233 2.6
All others...................... 824,650 39.6 277,106 29.5 250,388 27.5
---------- ----- -------- ----- -------- -----
Totals................ $2,079,111 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
For the entire title insurance industry, 12 states accounted for 71.8% of
title premiums written in the United States in 1999. California represented the
single largest state with 18.0%.
We also analyze our business by examining the level of premiums generated
by direct and agency operations. The following table presents the percentages of
title insurance premiums generated by direct and agency operations:
YEAR ENDED DECEMBER 31,
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2000 1999 1998
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AMOUNTS % AMOUNTS % AMOUNTS %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Direct.................................. $ 811,621 41.7% $407,769 43.4% $425,551 46.7%
Agency.................................. 1,134,538 58.3 531,683 56.6 484,727 53.3
---------- ----- -------- ----- -------- -----
Total title insurance
premiums.................... $1,946,159 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
Our relationship with 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 our behalf. The agency agreement also prescribes the
circumstances under which the agent may be liable to us if a policy loss is
attributable to the agent's errors. The agency agreement is usually terminable
without cause upon 30 days' notice or immediately for cause. In determining
whether to engage or retain an independent agent, we consider the agent's
experience, financial condition, and loss history. For each agent with whom we
enter into an agency agreement, we maintain financial and loss experience
records. We also conduct periodic audits of our agents.
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Escrow and Other Title Related Fees. In addition to fees for underwriting
title insurance policies, we derive a significant amount of our revenues from
escrow and other title related fees. The role generally taken by a title
insurance company in a real estate transaction is that of an intermediary
completing all the necessary documentation and services required for the
completion of the real estate transaction.
In a typical residential transaction, a title insurance order is received
from a realtor, lawyer, developer or mortgage lender. When a title order is
received by the title insurance company or agent, the title search begins and
the title order is now "open." Once documentation has been prepared and signed,
mortgage lender payoff demands are in hand and documents have been ordered, the
title order is considered "closed." A lawyer, an escrow company or a title
insurance company or agent performs the closing function, most commonly referred
to as an "escrow" in the western United States. The entity providing the closing
function (the "closer") holds the seller's deed of trust and the buyer's
mortgage until all issues relating to the transaction have been settled. After
these issues have been cleared, the closer delivers the transaction documents,
records the appropriate title documents in the county recorder's office and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued. The lender's policy insures
the lender against any defect affecting the priority of the mortgage, in an
amount equal to the outstanding balance of the related mortgage loan. The
buyer's policy insures the buyer against defects in title, in an amount equal to
the purchase price.
The combination of title insurance premiums and these escrow and other
title related services allows us to generate a significant source of revenue.
Reinsurance. In the ordinary course of business, we reinsure certain risks
with other title insurers for the purpose of limiting our maximum loss exposure.
We also assume reinsurance for certain risks of other title insurers for the
purpose of earning additional income. In addition, we cede a portion of certain
policy and other liabilities under agent fidelity, excess of loss and
case-by-case reinsurance agreements. Reinsurance agreements provide generally
that the reinsurer is liable for loss and loss adjustment expense payments
exceeding the amount retained by the ceding company. However, the ceding company
remains primarily liable in the event the reinsurer does not meet its
contractual obligations. We have a $30.9 million reinsurance recoverable from
Lloyds of London on claim loss expense recoverables as of December 31, 2000.
REAL ESTATE RELATED SERVICES
We also provide many of the specialized products and services required to
execute and close real estate transactions that are not offered by our title
insurance subsidiaries. The real estate related services we provide allow us to
diversify from our core title business and yield higher profit margins than if
we did not provide these services. These services include the following:
- Property appraisal services. We offer property appraisal services through
a network of state-licensed contract appraisers. In addition, we provide
detailed real estate property evaluation services to lending institutions
utilizing artificial intelligence software, detailed real estate
statistical analysis and physical property inspections.
- Credit reporting. We provide credit information reports to mortgage
lenders nationwide, as well as a variety of related products to meet the
ever-changing needs of the mortgage industry.
- Flood certification. Federal legislation passed in 1994 requires most
mortgage lenders to obtain a property's flood zone status at the time a
loan is originated. We provide these required flood zone determination
reports to mortgage lenders nationwide.
- Real estate tax services. We advise lending and mortgage related
institutions throughout the United States of the status of property tax
payments that are due on properties securing their loans over the entire
life of the loan. We protect lenders against losses from failing to
monitor delinquent taxes.
- Home warranty insurance. We issue one-year, renewable insurance policies
that protect homeowners against defects in household systems and
appliances.
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- Foreclosure posting and publishing. We offer posting and publication of
foreclosure and auction notices to the real estate foreclosure industry.
- Exchange intermediary services. We provide customers with qualified
exchanges under Section 1031 of the Internal Revenue Code, which allows
customers to defer the payment of capital gain taxes on the sale of their
investment property.
- Loan portfolio services. We provide a comprehensive line of document
preparation and recording services on a national basis, including
computerized tracking services, mortgage assignment and release
preparation and due diligence and research services designed to resolve
and retrieve missing or defective documents and obtain certified copies
of documents and chain-of-title verification.
- Field services. We provide property inspection, preservation and
maintenance services to mortgage lenders nationwide.
OTHER INCOME
Other income represents externally generated revenue by Micro General, FNF
Capital and Express Network, which was sold in the second quarter of 2000.
Micro General has used its core system development transactional expertise
to launch two new entities, escrow.com and TXMNet, Inc. escrow.com provides a
service transaction environment for internet commerce, as well as online
auctions and business-to-business exchanges, and TXMNet, Inc. provides automated
decision-based products that manage real estate transactions over the internet.
MARKETING
We market and distribute our products and services to customers in the
residential, institutional lender, and commercial market sectors of the real
estate industry through customer solicitation by sales personnel. We actively
encourage our sales 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. While the focus of the
smaller, local client remains important, large customers, such as national
residential mortgage lenders, real estate investment trusts and developers are
becoming increasingly important. The buying criteria of locally based clients
differ from those of large, geographically diverse customers in that the former
tend to emphasize personal relationships and ease of transaction execution,
while the latter generally places more emphasis on consistent product delivery
and ability of service providers to meet their information systems requirements
for electronic product delivery. We believe customer service and consistent
product delivery are the most important factors in attracting and retaining
customers, and we measure customer service in terms of quality, consistency and
timeliness in the delivery of services.
COMPETITION
The title insurance industry is highly competitive. According to Corporate
Development Services, the top five title insurance companies accounted for 89%
of net premiums collected in 1999. Over 40 independent title insurance companies
accounted for the remaining 11% of the market. The number and size of competing
companies varies in the different geographic areas in which we conduct our
business. In our principal markets, competitors include other major title
underwriters such as First American Corporation, LandAmerica Financial Group,
Inc., Old Republic International Corporation and Stewart Information Services
Corporation, as well as numerous independent agency operations at the regional
and local level. These smaller companies may expand into other markets in which
we compete. Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new competitors may
include diversified financial services companies that have greater financial
resources than we do and possess other competitive advantages. Competition among
the major title insurance companies, expansion by smaller regional companies and
any new entrants could affect our business operations and financial condition.
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We believe competition in the title insurance industry is based primarily
on expertise, quality and timeliness of service, and price of products and
services. In addition, the financial strength of the insurer has become an
increasingly important factor in decisions relating to the purchase of title
insurance, particularly in multi-state transactions and in situations involving
real estate related investment vehicles such as real estate investment trusts
and real estate mortgage investment conduits.
Our real estate related service subsidiaries face significant competition
from other similar service providers. In addition, these customers may choose to
produce these services internally rather than purchase them from outside
vendors.
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
matters, the ability to pay dividends and investment policies. The laws of most
states in which we transact 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 practices, financial practices, establishing reserve and capital and
surplus as regards policyholders ("capital and surplus") requirements, defining
suitable investments for reserves and capital and surplus and approving rate
schedules. In 1998, the National Association of Insurance Commissioners approved
codified accounting practices that changed the definition of what constitutes
prescribed statutory accounting practices. This codification will result in
changes to the accounting policies that insurance enterprises use to prepare
their statutory financial statements commencing in 2001. We have evaluated the
effects of these rules and believe that they will not have a material effect on
the statutory capital and surplus of our insurance subsidiaries.
Pursuant to statutory accounting requirements of the various states in
which our title insurance subsidiaries are licensed, those subsidiaries 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, number of policies, and dollar
amount of policy liabilities underwritten, or the age and dollar amount of
statutory premiums written. As of December 31, 2000, the combined statutory
unearned premium reserve required and reported for our title insurance
subsidiaries was $698.7 million.
The insurance commissioners of their respective states of domicile regulate
our title insurance subsidiaries. Regulatory examinations usually occur at
three-year intervals, and certain of these examinations are currently ongoing.
The Auditor Division of the Controller of the State of California is currently
conducting an examination of the funds due the State of California under various
escheatment regulations for the years ended on and prior to December 31, 1998.
We have received a preliminary copy of the report and are continuing discussions
with the Auditor Division of the Controller of the State of California to
quantify amounts due, if any. We do not believe that the examinations performed
by the insurance regulators or the Auditor Division of the Controller of the
State of California will have a material impact on our financial position, our
results of operations, or our combined capital and surplus.
Our title 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. During 2001, our title
insurance subsidiaries could pay dividends or make other distributions to us of
$107.5 million.
The combined statutory capital and surplus of our title insurance
subsidiaries was $463.1 million, $163.5 million and $164.3 million as of
December 31, 2000, 1999 and 1998, respectively. The combined statutory earnings
of our title insurance subsidiaries were $88.9 million, $43.6 million and $37.8
million for the years ended December 31, 2000, 1999 and 1998, respectively.
8
11
As a condition to continued authority to underwrite policies in the states
in which our title insurance subsidiaries conduct their business, they are
required to pay certain fees and file information regarding their officers,
directors and financial condition. In addition, our escrow and trust business is
subject to regulation by various state banking authorities.
Pursuant to statutory requirements of the various states in which our title
insurance subsidiaries are domiciled, they must maintain certain levels of
minimum capital and surplus. Each of our title underwriters has complied with
the minimum statutory requirements as of December 31, 2000.
Our underwritten title companies are also subject to certain regulation by
insurance regulatory or banking authorities, primarily relating to minimum net
worth. Minimum net worth of $7.5 million, $2.5 million and $3.0 million is
required for Fidelity National Title Company, Fidelity National Title Company of
California and Chicago Title Company, respectively. All of our companies are in
compliance with their respective minimum net worth requirements at December 31,
2000.
RATINGS
Our title insurance subsidiaries are regularly assigned ratings by
independent agencies designed to indicate their financial condition and/or
claims paying ability. The ratings agencies determine ratings by quantitatively
and qualitatively analyzing financial data and other information. Our
subsidiaries include Fidelity National Title, Chicago Title, Ticor Title,
Security Union Title and Alamo Title. Ratings of our principal title insurance
subsidiaries assigned during 2000, individually and collectively, are listed
below:
Standard and Poor's (Financial Strength Rating)
FNF Family.................................................. A-
Moody's (Financial Strength Rating)
FNF Family.................................................. Baa1
Fitch (Claims Paying Ability Rating)
FNF Family.................................................. A-
Demotech, Inc. (Financial Stability Rating)
Fidelity Title.............................................. A'
Fidelity Title New York..................................... A'
Chicago Title............................................... A"
Ticor Title................................................. A'
Security Union Title........................................ A'
Alamo Title................................................. A'
INVESTMENT POLICIES AND INVESTMENT PORTFOLIO
Our investment policy is designed to maintain a high quality portfolio,
maximize income, minimize interest rate risk and match the duration of our
portfolio to our liabilities. We also make investments in certain equity
securities in order to take advantage of perceived value and for strategic
purposes. Various states regulate what types of assets qualify for purposes of
capital and surplus and unearned premium reserves. Our subsidiaries' 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.
As of December 31, 2000 and 1999, the carrying amount, which approximates
the fair value, of total investments was $1,685.3 million and $506.9 million,
respectively.
We purchase investment grade fixed maturity securities, selected
non-investment grade fixed maturity securities and equity securities. The
securities in our portfolio are subject to economic conditions and normal market
risks and uncertainties.
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The following table presents certain information regarding the investment
ratings of our fixed maturity portfolio at December 31, 2000 and 1999.
DECEMBER 31,
------------------------------------------------------------------------------
2000 1999
--------------------------------------- ------------------------------------
AMORTIZED % OF FAIR % OF AMORTIZED % OF FAIR % OF
RATING(1) COST TOTAL VALUE TOTAL COST TOTAL VALUE TOTAL
--------- ---------- ----- ---------- ----- --------- ----- -------- -----
(DOLLARS IN THOUSANDS)
AAA.................. $ 785,636 67.3% $ 803,682 67.6% $163,831 46.3% $160,280 46.2%
AA................... 180,585 15.5 184,365 15.5 79,271 22.4 78,280 22.6
A.................... 110,220 9.5 109,688 9.2 85,139 24.1 83,418 24.0
BBB.................. 43,368 3.7 43,706 3.7 20,340 5.7 19,875 5.7
Other................ 46,502 4.0 47,240 4.0 5,244 1.5 5,198 1.5
---------- ----- ---------- ----- -------- ----- -------- -----
$1,166,311 100.0% $1,188,681 100.0% $353,825 100.0% $347,051 100.0%
========== ===== ========== ===== ======== ===== ======== =====
- ---------------
(1) Ratings as assigned by Standard & Poor's Ratings Group and Moody's Investors
Service.
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 securities with an amortized cost of $81.4
million and a fair value of $81.8 million were callable at December 31, 2000.
The following table presents certain information regarding our fixed
maturity securities at December 31, 2000:
DECEMBER 31, 2000
---------------------------------------------
AMORTIZED % FAIR %
MATURITY COST OF TOTAL VALUE OF TOTAL
-------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
One year or less.............................. $ 102,891 8.8% $ 102,988 8.7%
After one year through five years............. 545,397 46.8 551,720 46.4
After five years through ten years............ 247,638 21.2 254,617 21.4
After ten years............................... 73,723 6.3 77,076 6.5
---------- ----------
969,649 986,401
Mortgage-backed securities.................... 196,662 16.9 202,280 17.0
---------- ----- ---------- -----
$1,166,311 100.0% $1,188,681 100.0%
========== ===== ========== =====
Our equity securities at December 31, 2000 and 1999 consisted of
investments in various industry groups as follows:
DECEMBER 31,
-------------------------------------
2000 1999
----------------- -----------------
FAIR FAIR
COST VALUE COST VALUE
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Banks, trust and insurance companies.............. $ 1,726 $ 2,037 $ 1,559 $ 1,628
Industrial, miscellaneous and all other........... 51,224 37,922 38,180 37,253
------- ------- ------- -------
$52,950 $39,959 $39,739 $38,881
======= ======= ======= =======
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Our investment results for the years ended December 31, 2000, 1999 and 1998
were as follows:
DECEMBER 31,
--------------------------------
2000 1999 1998
---------- -------- --------
(DOLLARS IN THOUSANDS)
Net investment income(1)(2)........................... $ 100,193 $ 33,914 $ 26,665
Average invested assets(1)............................ $1,649,951 $547,413 $482,530
Effective return on average invested assets(1)........ 6.1% 6.2% 5.5%
- ---------------
(1) Excludes investments in real estate. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(2) Net investment income as reported in our Consolidated Statements of Earnings
has been adjusted in the presentation above to provide the tax equivalent
yield on tax exempt investments and to exclude net realized capital gains
(losses) on the sale of investments and other assets. Net realized capital
gains (losses) totaled ($201), ($76) and $17.2 million in 2000, 1999 and
1998, respectively.
EMPLOYEES
As of December 31, 2000, we had approximately 16,000 full-time equivalent
employees. We believe that our relations with employees are generally good.
RISK FACTORS
The risk factors listed in this section and other factors noted herein or
incorporated by reference could cause our actual results to differ materially
from those contained in any forward-looking statements.
OUR REVENUES MAY DECLINE DURING PERIODS WHEN THE DEMAND FOR OUR PRODUCTS
DECREASES.
In the title insurance industry, revenues are directly affected by the
level of real estate activity and the average price of real estate sales on both
a national and local basis. Real estate sales are directly affected by changes
in the cost of financing purchases of real estate -- i.e., mortgage interest
rates. Other macroeconomic factors affecting real estate activity include, but
are not limited to, demand for housing, employment levels, family income levels
and general economic conditions. Because these factors can change dramatically,
revenue levels in the title insurance industry can also change dramatically. For
example, beginning in late 1995 and into 1998, the level of real estate activity
increased, including refinancing transactions, new home sales and resales, due
in part to decreases in mortgage interest rates. Stable mortgage interest rates
and strength in the real estate market, especially in California and throughout
the West Coast, contributed to very positive conditions for the title insurance
industry throughout 1997 and 1998. However, during the second half of 1999 and
through 2000, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions. As a result, the market shifted from a refinance-driven market in
1998 to a more traditional market driven by new home purchases and resales in
1999 and 2000. The favorable industry conditions that existed in 1998
represented an unusual mixture of macroeconomic factors that may not occur again
in the foreseeable future.
Historically, real estate transactions have produced seasonal revenue
levels for title insurers. The first calendar quarter is typically the weakest
quarter in terms of revenue due to the generally low volume of home sales during
January and February. The fourth calendar quarter is typically the strongest in
terms of revenue due to commercial entities desiring to complete transactions by
year-end. Significant changes in interest rates may alter these traditional
seasonal patterns due to the effect the cost of financing has on the volume of
real estate transactions.
Our revenues in future periods will continue to be subject to these and
other factors which are beyond our control and, as a result, are likely to
fluctuate.
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AS A HOLDING COMPANY, WE DEPEND ON DISTRIBUTIONS FROM OUR SUBSIDIARIES, AND IF
DISTRIBUTIONS FROM OUR SUBSIDIARIES ARE MATERIALLY IMPAIRED, OUR ABILITY TO
DECLARE AND PAY DIVIDENDS MAY BE ADVERSELY AFFECTED.
We are a holding company whose primary assets are the securities of our
operating subsidiaries. Our ability to pay dividends is dependent on the ability
of our subsidiaries to pay dividends or repay funds to us. If our operating
subsidiaries are not able to pay dividends or repay funds to us, we may not be
able to declare and pay dividends to you.
Our title insurance and home warranty subsidiaries must comply with state
and federal laws which require them to maintain minimum amounts of working
capital surplus and reserves, and place restrictions on the amount of dividends
that they can distribute to us. During 2000, approximately 91.3% of our
year-to-date revenues was derived from subsidiaries engaged in these regulated
businesses. Compliance with these laws will limit the amounts our regulated
subsidiaries can dividend to us. During 2001, our title insurance subsidiaries
could pay dividends or make other distributions to us of $107.5 million.
OUR ENTERING INTO NEW BUSINESS LINES SUBJECTS US TO ASSOCIATED RISKS, SUCH AS
THE DIVERSION OF MANAGEMENT ATTENTION, DIFFICULTY INTEGRATING OPERATIONS AND
LACK OF EXPERIENCE IN OPERATING SUCH BUSINESSES.
We have acquired, and may in the future acquire, businesses in industries
with which management is less familiar than we are with the title insurance
industry. For example, in February 1998, we acquired FNF Capital, Inc., whose
primary business is financing equipment leases. Also, in the last three years,
we have expanded the range and amount of real estate related services we
provide, began underwriting home warranty policies, invested in restaurant
businesses, expanded our commercial title insurance business and considered
acquiring underwriters of other lines of insurance products. These activities
involve risks that could adversely affect our operating results, such as
diversion of management's attention, integration of the operations, systems and
personnel of the new businesses and lack of substantial experience in operating
such businesses.
DIFFICULTIES WE MAY ENCOUNTER MANAGING OUR GROWTH COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS.
We have historically achieved growth through a combination of developing
new products, increasing our market share for existing products, and
acquisitions. Part of our strategy is to pursue opportunities to diversify and
expand our operations by acquiring or making investments in other companies. The
success of each acquisition will depend upon:
- our ability to integrate the acquired business' operations, products and
personnel;
- our ability to retain key personnel of the acquired businesses; and
- our ability to expand our financial and management controls and reporting
systems and procedures.
OUR SUBSIDIARIES THAT ENGAGE IN INSURANCE RELATED BUSINESSES MUST COMPLY WITH
ADDITIONAL REGULATIONS. THESE REGULATIONS MAY IMPEDE, OR IMPOSE BURDENSOME
CONDITIONS ON, OUR RATE INCREASES OR OTHER ACTIONS THAT WE MIGHT WANT TO TAKE TO
INCREASE THE REVENUES OF OUR SUBSIDIARIES.
Our title insurance business is subject to extensive regulation by state
insurance authorities in each state in which we operate. These agencies have
broad administrative and supervisory power relating to the following, among
other matters:
- licensing requirements;
- trade and marketing practices;
- accounting and financing practices;
- capital and surplus requirements;
- the amount of dividends and other payments made by insurance
subsidiaries;
- investment practices;
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- rate schedules;
- deposits of securities for the benefit of policyholders;
- establishing reserves; and
- regulation of reinsurance.
Most states also regulate insurance holding companies like us with respect
to acquisitions, changes of control and the terms of transactions with our
affiliates. These regulations may impede or impose burdensome conditions on our
rate increases or other actions that we may want to take to enhance our
operating results, and could affect our ability to pay dividends on our common
stock. In addition, we may incur significant costs in the course of complying
with regulatory requirements. We cannot assure you that future legislative or
regulatory changes will not adversely affect our business operations.
WE FACE COMPETITION IN OUR INDUSTRY FROM TRADITIONAL TITLE INSURERS AND FROM NEW
ENTRANTS.
The title insurance industry is highly competitive. According to Corporate
Development Services, the top five title insurance companies accounted for 89%
of net premiums collected in 1999. Over 40 independent title insurance companies
accounted for the remaining 11% of the market. The number and size of competing
companies varies in the different geographic areas in which we conduct our
business. In our principal markets, competitors include other major title
underwriters such as First American Corporation, LandAmerica Financial Group,
Inc., Old Republic International Corporation and Stewart Information Services
Corporation, as well as numerous independent agency operations at the regional
and local level. These smaller companies may expand into other markets in which
we compete. Also, the removal of regulatory barriers might result in new
competitors entering the title insurance business, and those new competitors may
include diversified financial services companies that have greater financial
resources than we do and possess other competitive advantages. Competition among
the major title insurance companies, expansion by smaller regional companies and
any new entrants could affect our business operations and financial condition.
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
The information contained in this Form 10-K contains forward looking
statements that involve a number of risks and uncertainties. Statements that are
not historical facts, including statements about our beliefs and expectations,
are forward-looking statements. Forward-looking statements are based on
management's beliefs as well as assumptions made by, and information currently
available to, management. Because such statements are based on expectations as
to future economic performance and are not statements of fact, actual results
may differ materially from those projected. We undertake no obligation to update
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Important factors that may affect these projections or expectations
include, but are not limited to:
- general economic and business conditions, including interest rate
fluctuations and general volatility in the capital markets;
- changes in the performance of the real estate markets;
- the impact of competitive products and pricing;
- success of operating initiatives;
- our ability to integrate the business operations we acquired in our
merger with Chicago Title Corporation and our ability to implement
cost-saving synergies associated with that acquisition;
- availability of qualified personnel;
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- employee benefits costs; and
- changes in, or the failure to comply with, government regulations and
other risks detailed in our filings with the Securities and Exchange
Commission.
All of these factors are difficult to predict and many are beyond our
control. Accordingly, while we believe these forward-looking statements to be
reasonable, there can be no assurance that they will approximate actual
experience or that expectations derived from them will be realized. When used in
our documents or oral presentations, the words "anticipate," "believe,"
"estimate," "objective," "projection," "forecast," "goal," or similar words are
intended to identify forward-looking statements.
ITEM 2. PROPERTIES
The majority of the branch offices are leased from third parties. We own
the remaining branch offices. See Note J to Notes to Consolidated Financial
Statements.
As of December 31, 2000, we leased office and storage space as follows:
NUMBER OF
LOCATIONS(1)
------------
California.................................................. 435
Texas....................................................... 131
Arizona..................................................... 122
Illinois.................................................... 91
Florida..................................................... 62
Washington.................................................. 57
Oregon...................................................... 53
Indiana..................................................... 29
New York and Ohio........................................... 26
Nevada...................................................... 20
North Carolina and Maryland................................. 18
New Jersey and Pennsylvania................................. 17
Tennessee................................................... 14
Colorado and Virginia....................................... 13
Minnesota................................................... 11
Kansas...................................................... 9
Georgia..................................................... 8
Missouri and Michigan....................................... 7
New Mexico, Massachusetts and Connecticut................... 6
Louisiana and Hawaii........................................ 5
Montana..................................................... 4
South Carolina.............................................. 3
Wisconsin, Washington D.C., Rhode Island, Delaware, Alabama
and Kentucky.............................................. 2
Utah, New Hampshire, Idaho and Canada....................... 1
- ---------------
(1) Represents the number of locations in each state listed.
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ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in various pending and
threatened litigation matters related to our operations, some of which include
claims for punitive or exemplary damages. We believe that no actions, other than
those listed below, depart from customary litigation incidental to our business
and that the resolution of all such litigation will not have a material adverse
effect on us.
As previously disclosed in our prior Securities and Exchange Commission
filings, we have been named as a defendant in five class action lawsuits
alleging irregularities and violations of title and escrow practices. One of
these suits was filed by the Attorney General of the State of California on
behalf of the California Controller and the California Department of Insurance
against the entire title and escrow industry in California. The other four were
filed by private law firms in State and Federal courts in San Francisco and Los
Angeles. In February 2000, we reached a settlement of the lawsuit filed by the
California Department of Insurance. The settlement does not require us to pay
any fine or penalty. We are vigorously defending the remaining lawsuits. We do
not believe that the resolution of these lawsuits will have a material impact on
us.
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 2000.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the New York Stock Exchange under the symbol
"FNF." The following table shows, for the periods indicated, the high and low
sales prices of our common stock, as reported by the New York Stock Exchange,
and the amounts of dividends per share declared on our common stock.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
Year ended December 31, 2000
First quarter......................................... $18.25 $11.62 $.10
Second quarter........................................ 20.06 12.50 .10
Third quarter......................................... 24.94 16.88 .10
Fourth quarter........................................ 39.38 19.75 .10
Year ended December 31, 1999
First quarter......................................... $30.75 $14.56 $.07
Second quarter........................................ 21.00 14.50 .07
Third quarter......................................... 21.06 13.44 .07
Fourth quarter........................................ 16.00 13.81 .10
On March 16, 2001, the last reported sale price of our common stock on the
New York Stock Exchange was $30.01 per share. As of March 16, 2001, the Company
had approximately 1,897 stockholders of record.
Our Board of Directors declared a cash dividend of $0.10 per share in each
of the four quarters of 2000. Our current dividend policy anticipates the
payment of quarterly dividends in the future. The declaration and payment of
dividends will be in the discretion of our Board of Directors and will be
dependent upon our future earnings, financial condition and capital
requirements. Our ability to declare and pay dividends is also subject to our
compliance with the financial covenants contained in our existing $800 million
syndicated credit agreement and further described below.
Since we are a holding company, our ability to pay dividends will depend
largely on the ability of our subsidiaries to pay dividends to us, and the
ability of our title insurance subsidiaries to do so is subject to, among other
factors, their compliance with applicable insurance regulations. During 2001,
our title insurance subsidiaries could pay dividends or make other distributions
to us of $107.5 million. In addition to regulatory restrictions, our ability to
declare dividends is subject to restrictions under our existing syndicated
credit agreement. We do not believe the restrictions contained in our credit
agreement will, in the foreseeable future, adversely affect our ability to pay
cash dividends at the current dividend rate.
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ITEM 6. SELECTED FINANCIAL DATA
The information set forth below should be read in conjunction with the
consolidated financial statements and related notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Form 10-K. Per share data has been retroactively adjusted for
stock dividends and splits since our inception. Certain reclassifications have
been made to the prior year amounts to conform with the 2000 presentation.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
(1)(2)(3) (2)(3) (2)(3) (2)(4) (2)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
OPERATING DATA:
Revenue:
Title insurance premiums........... $1,946,159 $ 939,452 $ 910,278 $616,074 $552,799
Escrow and other title related
fees............................. 459,121 206,570 215,254 152,464 131,572
Real estate related services....... 166,718 67,844 69,970 38,129 24,708
Interest and investment income,
including realized gains and
losses........................... 87,191 32,045 44,502 36,740 18,894
Other income....................... 82,805 109,943 53,376 20,586 6,489
---------- ---------- ---------- -------- --------
2,741,994 1,355,854 1,293,380 863,993 734,462
---------- ---------- ---------- -------- --------
Expenses:
Personnel costs.................... 845,349 407,078 394,284 273,221 240,232
Other operating expenses........... 626,308 332,296 258,866 189,141 175,828
Agent commissions.................. 884,498 423,675 385,649 261,182 221,948
Provision for claim losses......... 97,322 52,713 59,294 41,558 36,275
Interest expense................... 59,374 15,626 17,024 12,269 11,590
---------- ---------- ---------- -------- --------
2,512,851 1,231,388 1,115,117 777,371 685,873
---------- ---------- ---------- -------- --------
Earnings before amortization of cost
in excess of net assets acquired,
income taxes and extraordinary
item............................... 229,143 124,466 178,263 86,622 48,589
Amortization of cost in excess of net
assets acquired.................... 35,003 6,638 3,129 1,019 363
---------- ---------- ---------- -------- --------
Earnings before income taxes and
extraordinary item................. 194,140 117,828 175,134 85,603 48,226
Income tax expense.................... 85,825 46,975 69,442 36,595 18,985
---------- ---------- ---------- -------- --------
Earnings before extraordinary
item............................. 108,315 70,853 105,692 49,008 29,241
Extraordinary item, net of income
taxes.............................. -- -- -- (1,700) --
---------- ---------- ---------- -------- --------
Net earnings....................... $ 108,315 $ 70,853 $ 105,692 $ 47,308 $ 29,241
========== ========== ========== ======== ========
PER SHARE DATA:
Basic earnings per share before
extraordinary item................. $ 1.84 $ 2.38 $ 3.79 $ 2.10 $ 1.43
Extraordinary item, net of income
taxes, basic basis................. -- -- -- (0.07) --
---------- ---------- ---------- -------- --------
Basic earnings per share........... $ 1.84 $ 2.38 $ 3.79 $ 2.03 $ 1.43
========== ========== ========== ======== ========
Weighted average shares outstanding,
basic basis........................ 58,821 29,811 27,921 23,355 20,426
Diluted earnings per share before
extraordinary item................. $ 1.78 $ 2.27 $ 3.23 $ 1.76 $ 1.23
Extraordinary item, net of income
taxes, diluted basis............... -- -- -- (.06) --
---------- ---------- ---------- -------- --------
Diluted earnings per share......... $ 1.78 $ 2.27 $ 3.23 $ 1.70 $ 1.23
========== ========== ========== ======== ========
Weighted average shares outstanding,
diluted basis...................... 60,937 31,336 33,474 29,599 26,431
Dividends declared per share.......... $ .40 $ .31 $ .26 $ .24 $ .22
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YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998 1997 1996
(1)(2)(3) (2)(3) (2)(3) (2)(4) (2)
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
BALANCE SHEET DATA:
Investments(5)........................ $1,685,331 $ 506,916 $ 519,332 $376,285 $270,134
Cash and cash equivalents(6).......... 262,955 38,569 42,492 54,975 65,551
Total assets.......................... 3,833,985 1,042,546 969,470 747,695 609,658
Notes payable......................... 791,430 226,359 214,624 163,015 179,508
Reserve for claim losses.............. 907,482 239,962 224,534 201,674 196,527
Minority interests.................... 5,592 4,613 1,532 3,614 1,287
Stockholders' equity.................. 1,106,737 432,494 396,740 274,050 162,645
OTHER DATA:
Orders opened by direct operations.... 1,352,000 743,000 987,000 621,000 575,000
Orders closed by direct operations.... 971,000 551,000 670,000 436,000 430,000
Provision for claim losses to title
insurance premiums................. 5.0% 5.6% 6.5% 6.7% 6.6%
Title related revenue(7):
Percentage direct operations....... 52.8% 53.6% 56.9% 57.1% 59.0%
Percentage agency operations....... 47.2% 46.4% 43.1% 42.9% 41.0%
Diluted earnings per share before
amortization of cost in excess of
net assets acquired................ $ 2.56 $ 2.48 $ 3.32 $ 1.74 $ 1.24
- ---------------
(1) Our financial results for the year ended December 31, 2000 include the
operations of Chicago Title for the period from March 20, 2000, the merger
date, through December 31, 2000. In the first quarter of 2000, we recorded
certain non-recurring charges totaling $13.4 million, after applicable
taxes.
(2) During 1997 and 1996, we acquired certain real estate related service
companies in various transactions. The selected consolidated financial data
above includes the balance sheet accounts of the acquired companies as of
December 31 of the year acquired and all subsequent years presented; and the
results of their operations for the periods from the date of acquisition
through December 31 of the acquisition year and for the years ended December
31 for all subsequent years presented.
(3) We completed the merger of our wholly owned subsidiary, ACS Systems, Inc.,
with and into Micro General on May 14, 1998. This transaction was accounted
for as a reverse merger of Micro General into ACS, with Micro General as the
surviving legal entity. The selected consolidated financial data above
includes the balance sheet accounts of Micro General at December 31, 2000,
1999 and 1998 and the results of its operations for the years ended December
31, 2000 and 1999 and for the period from May 14, 1998 through December 31,
1998. As of December 31, 2000, we owned 65.7% of Micro General.
(4) During 1997, we recognized an extraordinary loss of $1.7 million, net of
income taxes of $1.2 million, related to the early retirement of $45.0
million maturity value of our Liquid Yield Option Notes.
(5) Investments as of December 31, 2000, include securities pledged to secure
trust deposits of $459.4 million.
(6) Cash and cash equivalents as of December 31, 2000 includes cash pledged to
secure trust deposits of $132.1 million.
(7) Includes title insurance premiums and escrow and other title related fees.
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SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data is as follows:
QUARTER ENDED
---------------------------------------------------------
MARCH 31,(2) JUNE 30, SEPTEMBER 30, DECEMBER 31,
------------ -------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2000(1)
Revenue................................... $377,657 $757,642 $790,103 $816,592
Earnings before income taxes.............. 7,661 59,234 63,677 63,568
Net earnings.............................. 1,869 31,371 37,570 37,505
Basic earnings per share.................. .06 .47 .56 .55
Diluted earnings per share................ .06 .46 .54 .53
Dividends paid per share.................. .10 .10 .10 .10
1999
Revenue................................... $345,096 $358,743 $343,686 $308,329
Earnings before income taxes.............. 33,504 40,238 30,216 13,870
Net earnings.............................. 19,767 23,741 18,607 8,738
Basic earnings per share.................. .64 .78 .62 .31
Diluted earnings per share................ .60 .75 .60 .30
Dividends paid per share.................. .07 .07 .07 .07
- ---------------
(1) Our financial results for the year ended December 31, 2000 include the
operations of Chicago Title for the period from March 20, 2000, the merger
date, through December 31, 2000.
(2) In the first quarter of 2000, we recorded certain non-recurring charges
totaling $13.4 million, after applicable income taxes.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and Selected Financial
Data included elsewhere in this Form 10-K.
Factors Affecting Comparability. Our Condensed Consolidated Statements of
Earnings include the results of operations of Chicago Title for the period from
March 20, 2000, the merger date, through December 31, 2000. As a result, year
over year comparisons may not be meaningful. Excluding the effect of the Chicago
Title merger, our title insurance premiums for the year ended December 31, 2000
were $834.7 million. We have also reviewed our existing non-title operations in
connection with the merger and related transition and integration. As a result,
during the first quarter of 2000 we recorded certain non-recurring charges
totaling $13.4 million, after applicable taxes. These charges primarily relate
to the revaluation of non-title assets, including our investment in Express
Network, Inc., which was sold in the second quarter of 2000, and existing
goodwill associated with Express Network and the write-off of obsolete software.
Overview. The following table presents certain financial data for the years
indicated:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Total revenue.................................. $2,741,994 $1,355,854 $1,293,380
========== ========== ==========
Total expenses................................. $2,547,854 $1,238,026 $1,118,246
========== ========== ==========
Net earnings................................... $ 108,315 $ 70,853 $ 105,692
========== ========== ==========
Net earnings for year ended December 31, 2000 were $108.3 million, or $1.78
per diluted share. Excluding the non-recurring, non-title related charges we
recorded in the first quarter of 2000 of $13.4 million, or $0.22 per diluted
share, net earnings for year ended December 31, 2000, were $121.7 million, or
$2.00 per
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diluted share, as compared with net earnings for the corresponding periods in
1999 and 1998 of $70.9 million, or $2.27 per diluted share and $105.7 million,
or $3.23 per diluted share.
The following table presents the calculation of earnings before
amortization of cost in excess of net assets acquired and non-recurring charges.
We believe that earnings before amortization of cost in excess of net assets
acquired and non-recurring charges better reflects the operational performance
of our business.
YEAR ENDED DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- --------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net earnings -- diluted............................. $108,315 $71,116 $108,155
Amortization of cost in excess of net assets
acquired.......................................... 35,003 6,638 3,129
Tax effect of amortization of cost in excess of net
assets acquired................................... (838) -- --
Non-recurring charges, net of tax................... 13,371 -- --
-------- ------- --------
Earnings before amortization of cost in excess of
net assets acquired and non-recurring charges..... $155,851 $77,754 $111,284
======== ======= ========
Diluted earnings per share before amortization of
cost in excess of net assets acquired and
non-recurring charges............................. $ 2.56 $ 2.48 $ 3.32
======== ======= ========
Diluted weighted average shares outstanding......... 60,937 31,336 33,474
======== ======= ========
Revenue. The following table presents the components of our revenue:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Title insurance premiums....................... $1,946,159 $ 939,452 $ 910,278
Escrow and other title related fees............ 459,121 206,570 215,254
Real estate related services................... 166,718 67,844 69,970
Interest and investment income, including
realized gains and losses.................... 87,191 32,045 44,502
Other income................................... 82,805 109,943 53,376
---------- ---------- ----------
Total revenue........................ $2,741,994 $1,355,854 $1,293,380
========== ========== ==========
Orders opened by direct operations............. 1,352,000 743,000 987,000
Orders closed by direct operations............. 971,000 551,000 670,000
Title insurance revenue is closely related to the level of real estate
activity and the average price of real estate sales on both a national and local
basis. Real estate sales are directly affected by changes in the cost of
financing purchases of real estate -- i.e., mortgage interest rates. Other
macroeconomic factors affecting real estate activity include, but are not
limited to, demand for housing, employment levels, family income levels and
general economic conditions. Because these factors can change dramatically,
revenue levels in the title insurance industry can also change dramatically. For
example, beginning in late 1995 and into 1998, the level of real estate activity
increased, including refinancing transactions, new home sales and resales, due
in part to decreases in mortgage interest rates. Stable mortgage interest rates
and strength in the real estate market, especially in California and throughout
the West Coast, contributed to very positive conditions for the title insurance
industry throughout 1997 and 1998. However, during the second half of 1999 and
through 2000, steady interest rate increases caused by actions taken by the
Federal Reserve Board resulted in a significant decline in refinancing
transactions, which shifted the real estate market from a refinance-driven
market to a more traditional market driven by new home purchases and resales. As
a result of the shift in mix of business along with the steady increases in
interest rates, total title premiums, on a pro forma basis (assuming the Chicago
Title merger occurred on January 1, 1999) have decreased in 2000 as compared
with pro forma 1999 title insurance premiums.
Total revenue in 2000 more than doubled to $2,742.0 million from $1,355.9
million in 1999. Total revenue in 1999 of $1,355.9 million reflects a 4.8%
increase from 1998 revenue of $1,293.4 million. The
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increase in total revenue from 1999 to 2000 is primarily the result of the
merger of Chicago Title on March 20, 2000. The increase in total revenue from
1998 to 1999 is primarily the result of continued strength in our core title and
real estate related service operations, which were positively impacted by
favorable market conditions leading to an increase in real estate activity. The
increased real estate activity combined with acquisitions of real estate related
service companies and the integration of those real estate related service
operations into our core businesses, also contributed to increased revenue.
Title insurance premiums increased to $1,946.2 million in 2000 from $939.5
million in 1999. In 1999, title premiums increased 3.2% from $910.3 million in
1998. The premium increases from 1998 to 1999 were indicative of the favorable
market conditions existing during that period. In 1999, refinance transactions
declined from record levels in 1998 to levels consistent with historical norms
due to interest rate increases caused by actions taken by the Federal Reserve
Board. Increases in mortgage interest rates were partially offset by consumer
confidence in the overall economy, which resulted in record home sales in 1999.
As the volume of refinance transactions decreased, the market shifted, beginning
in the second half of 1999 and continuing through 2000, from a refinance-driven
market to a more traditional market driven by new home purchases and resales. In
2000, the decrease in real estate market activity was more than offset by the
addition of the Chicago Title operations and an increase in the average fee per
file. The increase in fee per file is consistent with a return to more
normalized levels of refinance activity and the continuing increase in home
prices, as well as increased commercial activity as we continue to grow our
National Commercial Division. The addition of the Chicago Tile operations during
2000 has also impacted the mix of business between our direct and agency
operations as compared with prior years.
The following table presents the percentages of title insurance premiums
generated by our direct and agency operations:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
AMOUNTS % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Direct................................ $ 811,621 41.7% $407,769 43.4% $425,551 46.7%
Agency................................ 1,134,538 58.3 531,683 56.6 484,727 53.3
---------- ----- -------- ----- -------- -----
Total title insurance
premiums.................. $1,946,159 100.0% $939,452 100.0% $910,278 100.0%
========== ===== ======== ===== ======== =====
Trends in escrow and other title related fees are primarily related to
title insurance activity generated by our direct operations. Escrow and other
title related fees during the three-year period ended December 31, 2000,
fluctuated in a pattern generally consistent with the fluctuation in direct
title insurance premiums and order counts. Escrow and other title related fees
were $459.1 million, $206.6 million and $215.3 million, respectively, during
2000, 1999 and 1998.
Revenues from real estate related services generally trend closely with the
level and mix of business, as well as the performance of our title related
subsidiaries. During 1996 and 1997, we acquired real estate related service
companies in various separate transactions. Our strategy in making the real
estate related service company acquisitions was to acquire previously existing
entities in businesses we believed to be complementary to our core title and
escrow businesses. Revenues from real estate related services in 2000, 1999 and
1998 were $166.7 million, $67.8 million and $70.0 million, respectively. The
increase in revenues from real estate related services in 2000 is primarily the
result of the acquisition of Chicago Title as well as increases in revenue from
our credit reporting, flood certification, home warranty insurance and tax
qualifying property exchange services.
Interest and investment income levels are primarily a function of
securities markets, interest rates and the amount of cash available for
investment. In 2000, interest and investment income was $87.2 million, compared
with $32.0 million in 1999. The increase in interest and investment income
earned during 2000 is primarily due to an increase in average invested assets,
excluding real estate, from $547.4 million in 1999 to $1,650.0 million in 2000,
primarily as a result of the Chicago Title acquisition. The tax equivalent yield
in 2000, excluding realized losses, was 6.1%. Included in interest and
investment income in 2000 is $201 of net
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realized losses. Interest and investment income in 1999 was $32.0 million,
compared with $44.5 million in 1998, a decrease of $12.5 million, or 28.0%.
Average invested assets, excluding real estate, increased 13.4% to $547.4
million, from $482.5 million in 1998. The tax equivalent yield in 1999,
excluding net realized losses, was 6.2%. The decrease in investment income in
1999 from 1998 is the result of net realized losses in 1999 of $76, compared
with net realized gains in 1998 of $17.2 million, offset by an increase in
interest and dividend income generated by the increased invested asset base and
interest rate increases during the year. Included in 1998 net realized gains is
a gain from the conversion of our investment in Data Tree Corporation of
approximately $9.7 million.
Other income represents revenue generated by Micro General, our
majority-owned information-services subsidiary, FNF Capital, our
equipment-leasing subsidiary and Express Network. Other income was $82.8 million
in 2000, $109.9 million in 1999 and $53.4 million in 1998. The decrease in other
income in 2000 is due to the sale of Express Network in the second quarter of
2000 as well as decreases in externally generated revenue by Micro General.
Other income increased in 1999 from 1998 as a result of including Micro General
in our results of operations beginning in May 1998 as well as increases in
externally generated revenue by Micro General in 1999 as compared with 1998.
Expenses. The following table presents the components of our expenses:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Personnel costs................................ $ 845,349 $ 407,078 $ 394,284
Other operating expenses....................... 626,308 332,296 258,866
Agent commissions.............................. 884,498 423,675 385,649
Provision for claim losses..................... 97,322 52,713 59,294
Interest expense............................... 59,374 15,626 17,024
Amortization of cost in excess of net assets
acquired..................................... 35,003 6,638 3,129
---------- ---------- ----------
Total expenses....................... $2,547,854 $1,238,026 $1,118,246
========== ========== ==========
Our operating expenses consist primarily of personnel costs, other
operating expenses and agent commissions, which are incurred as orders are
received and processed. Title insurance premiums, escrow and other title related
fees are generally recognized as income at the time the underlying transaction
closes. As a result, revenue lags approximately 60-90 days behind expenses and
therefore gross margins may fluctuate. The changes in the market environment,
mix of business between direct and agency operations and the contributions from
our various business units have impacted margins and net earnings. We have
implemented programs and have taken necessary actions to maintain expense levels
consistent with revenue. However, a short time lag does exist in reducing
variable costs and certain fixed costs are incurred regardless of revenue
levels.
Personnel costs include base salaries, commissions and bonuses paid to
employees, and are one of our most significant operating expenses. These costs
generally fluctuate with the level of orders opened and closed and with the mix
of revenue. Personnel costs totaled $845.3 million, $407.1 million and $394.3
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Personnel costs as a percentage of total revenue have remained relatively
consistent over the three-year period ended December 31, 2000. Those percentages
were 30.8% in 2000, 30.0% in 1999 and 30.5% in 1998. We have taken significant
measures to maintain appropriate personnel levels and costs relative to the
volume and mix of business while maintaining customer service standards and
quality controls. We will continue to monitor prevailing market conditions and
will adjust personnel costs in accordance with activity.
Other operating expenses consist primarily of facilities expenses, title
plant maintenance, premium taxes (which insurance underwriters are required to
pay on title premiums in lieu of franchise and other state taxes), postage and
courier services, computer services (including personnel costs associated with
information technology support), professional services, advertising expenses,
general insurance, depreciation and trade and notes receivable allowances. We
continue to be committed to cost control measures. In response to market
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conditions, we have implemented aggressive cost control programs in order to
maintain operating expenses at levels consistent with the levels of revenue.
However, certain fixed costs are incurred regardless of revenue levels,
resulting in period-over-period fluctuations. Our cost control programs are
designed to evaluate expenses, both current and budgeted, relative to existing
and projected market conditions. Other operating expenses decreased as a
percentage of total revenue to 22.8% in 2000 from 24.5% in 1999. The decrease in
other operating expenses in 2000 is attributable to the change in our cost
structure as a result of the addition of the Chicago Title operations, which are
primarily title and real estate related. Other operating expenses increased as a
percentage of total revenue to 24.5% in 1999 from 20.0% in 1998 as a result of
the impact of Micro General's business expansion, increased data processing and
information technology costs and normal year over year price increases including
rent escalations, travel and other general and administrative costs. Total other
operating expenses totaled $626.3 million, $332.3 million and $258.9 million in
2000, 1999 and 1998, respectively.
Agent commissions represent the portion of premiums retained by agents
pursuant to the terms of their respective agency contracts. Agent commissions
and the resulting percentage of agent premiums we retain vary according to
regional differences in real estate closing practices and state regulations.
The following table illustrates the relationship of agent premiums and
agent commissions:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
------------------ ---------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- ----- -------- ----- -------- -----
(DOLLARS IN THOUSANDS)
Agent premiums........................ $1,134,538 100.0% $531,683 100.0% $484,727 100.0%
Agent commissions..................... 884,498 78.0 423,675 79.7 385,649 79.6
---------- ----- -------- ----- -------- -----
Premiums we retain.................. $ 250,040 22.0% $108,008 20.3% $ 99,078 20.4%
========== ===== ======== ===== ======== =====
The provision for claim losses includes an estimate of anticipated title
claims. The estimate of anticipated title claims is accrued as a percentage of
title premium revenue based on our historical loss experience and other relevant
factors. We monitor our claims loss experience on a continual basis and adjust
the provision for claim losses accordingly. Based on our loss development
studies, we believe that as a result of our underwriting and claims handling
practices, as well as the refinancing business of prior years, we will maintain
the claim loss trends we have experienced over the past several years. As such,
our claim loss provision as a percentage of total title premiums was 5.0% in
2000, as compared with 5.6% in 1999 and 6.5% in 1998.
A summary of the reserve for claim losses follows:
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN THOUSANDS)
Beginning balance.............................. $239,962 $224,534 $201,674
Reserves assumed............................. 669,837(1) -- --
Reserves transferred......................... -- (4,310)(2) --
Claim loss provision related to:
Current year.............................. 108,985 57,321 59,294
Prior years............................... (11,663) (4,608) --
-------- -------- --------
Total claim loss provision........... 97,322 52,713 59,294
Claims paid, net of recoupments related to:
Current year.............................. (6,479) (1,229) (1,045)
Prior years............................... (93,160) (31,746) (35,389)
-------- -------- --------
Total claims paid, net of
recoupments........................ (99,639) (32,975) (36,434)
-------- -------- --------
Ending balance................................. $907,482 $239,962 $224,534
======== ======== ========
Provision for claim losses as a percentage of
title insurance premiums..................... 5.0% 5.6% 6.5%
======== ======== ========
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- ---------------
(1) In connection with the Chicago Title merger on March 20, 2000, we assumed
Chicago Title's then outstanding reserve for claim losses.
(2) On March 18, 1998, the Company announced that it had entered into an
agreement to sell National Title Insurance of New York Inc. ("National") to
American Title Company, a wholly-owned subsidiary of American National
Financial, Inc. ("ANFI"), for $3.25 million, subject to regulatory approval
and certain other conditions. The purchase price was structured at a premium
to book value. As of December 31, 2000, the Company holds a 28.3% interest
in ANFI. National was acquired in April 1996, as part of the Nations Title
Inc. acquisition, and has not been actively underwriting policies since that
time. This transaction received regulatory approval on May 27, 1999 and
closed on June 10, 1999. The Company recognized a gain of approximately $1.2
million prior to applicable income taxes, in connection with the sale of
National. This gain has been reflected in the Consolidated Statement of
Earnings for the year ended December 31, 1999.
The favorable development on prior year loss reserves during 2000 and 1999
was attributable to lower than expected payment levels on recent issue years
which included a high proportion of refinance business.
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
$59.4 million, $15.6 million and $17.0 million, respectively. The increase in
interest expense in 2000 as compared with 1999 is attributable to the increase
in outstanding notes payable, primarily related to the financing of the Chicago
Title merger, and an increase in certain indices on which our variable interest
rates are based. The decrease in interest expense in 1999 as compared with 1998
is primarily due to the redemption of our Liquid Yield Option Notes in 1999. In
addition, included in interest expense in 1998 is a $4.7 million interest charge
relating to the settlement of an Internal Revenue Service examination for the
tax years 1990 through 1994.
Amortization of cost in excess of net assets acquired was $35.0 million in
2000, $6.6 million in 1999 and $3.1 million in 1998. In connection with the
merger of Chicago Title, we recorded cost in excess of net assets acquired of
approximately $755.6 million. As a result, amortization of cost in excess of net
assets acquired has increased accordingly.
Income tax expense as a percentage of earnings before income taxes for
2000, 1999 and 1998 was 44.2%, 39.9% and 39.7%, respectively. The fluctuation in
income tax expense as a percentage of earnings before income taxes is
attributable to our estimate of ultimate income tax liability, the impact of the
non-recurring charges and the non-deductible goodwill recorded pursuant to the
Chicago Title merger and the characteristics of net earnings -- i.e., operating
income versus investment income.
LIQUIDITY AND CAPITAL RESOURCES
On March 20, 2000, we acquired Chicago Title. Pursuant to the terms of the
merger agreement, Chicago Title stockholders received aggregate merger
consideration valued at approximately $1.1 billion. The merger consideration was
paid in the form of 1.7673 shares of our common stock and $26.00 in cash for
each share of Chicago Title common stock, resulting in the issuance of
approximately 38.8 million shares of our common stock valued at an average price
during the applicable period of $13.1771 per share and the payment of
approximately $570.2 million in cash.
In connection with the Chicago Title merger, we entered into a syndicated
credit agreement. The credit agreement provides for three distinct credit
facilities:
- $100.0 million, 18 month revolving credit facility due September 30,
2001;
- $250.0 million, 6 year revolving credit facility due March 19, 2006; and
- $450.0 million term loan facility with a 6 year amortization period, due
March 19, 2006.
The credit agreement bears interest at a variable rate of interest based on
the debt ratings assigned to us by certain independent agencies, and is
unsecured. The current interest rate is LIBOR plus 1.125%. Amounts borrowed
under the credit agreement were used to pay the cash portion of the merger
consideration, to
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refinance previously existing indebtedness, to pay fees and expenses incurred in
connection with the merger and to fund other general corporate purposes.
The credit agreement and other debt facilities impose certain affirmative
and negative covenants on us relating to current debt ratings, certain financial
ratios related to liquidity, net worth, capitalization, investments,
acquisitions and restricted payments, and certain dividend restrictions. We are
in compliance with all of our debt covenants as of December 31, 2000.
On January 24, 2001, we issued 8,050,000 shares of our common stock at a
public offering price of $33.50 per share. Proceeds from this offering, net of
underwriting discounts and commissions and other related expenses, were $256.2
million. Net proceeds of $100.0 million were used to repay in full and terminate
the $100.0 million, 18 month revolving credit facility and net proceeds of
$149.5 million were used to pay down in full the $250.0 million, 6 year
revolving credit facility. The remainder of the cash proceeds are available for
general corporate purposes.
Our cash requirements include debt service, operating expenses, lease
fundings, lease securitizations, taxes and dividends on our common stock. We
believe that all anticipated cash requirements for current operations will be
met from internally generated funds, through cash dividends from subsidiaries,
cash generated by investment securities and bank borrowings through existing
credit facilities. Our short-and long-term liquidity requirements are monitored
regularly to match cash inflows with cash requirements. We forecast the daily
needs of all of our subsidiaries 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.
Our two significant sources of our funds are dividends and distributions
from our subsidiaries. As a holding company, we receive cash from our
subsidiaries in the form of dividends and as reimbursement for operating and
other administrative expenses we incur. The reimbursements are executed within
the guidelines of management agreements among us and our subsidiaries. Our
insurance subsidiaries are restricted by state regulation in their ability to
pay dividends and make distributions. Each state of domicile regulates the
extent to which our title underwriters can pay dividends or make other
distributions to us. Our underwritten title companies, real estate related
service companies, Micro General and FNF Capital, collect revenue and pay
operating expenses. However, they are not regulated to the same extent as our
insurance subsidiaries. Positive cash flow from these subsidiaries are invested
primarily in cash and cash equivalents.
Recent Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, contracts and hedging activities. SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value.
SFAS 133 was amended by Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral
of the Effective Date of FASB No. 133" ("SFAS 137"). SFAS 137 defers the
effective date to all fiscal quarters of fiscal years beginning after June 15,
2000. SFAS 133, as amended by SFAS 137 and Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities -- an amendment of SFAS 133." ("SFAS 138"), is effective for our
first quarter in the fiscal year ending December 31, 2001, and does not have a
material effect on our financial position or results of operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," ("SFAS
140"). SFAS 140 revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
SFAS 140 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. Adoption of SFAS
140 will not have a material effect on our financial statements.
Emerging Issues Task Force No. 99-20, "Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets", ("EITF 99-20") sets forth the rules for
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recognizing interest income on all credit-sensitive mortgage and asset-backed
securities and certain prepayment-sensitive securities including agency
Interest-only strips, whether purchased or retained in securitization, and
determining when these securities must be written down to fair value because of
impairment. EITF 99-20 is effective for all fiscal quarters beginning after
March 15, 2001. Early adoption is permitted. We have decided not to early adopt
EITF 99-20. Application of provisions of the EITF are to be adopted
prospectively. Adoption of EITF 99-20 will require impairments to the valuation
of residual interest in securitizations to be recorded as a reduction to the
carrying value of the residual interests through a charge to earnings. The
initial potential impact of adoption would be a charge to earnings of
approximately $3.2 million in 2001.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT THE MARKET RISK OF
FINANCIAL INSTRUMENTS
Our Consolidated Balance Sheet includes a substantial amount of assets and
liabilities whose fair values are subject to market risks. See
"Business -- Investment Policies and Investment Portfolio" and Notes C and G of
Notes to Consolidated Financial Statements. The following sections address the
significant market risks associated with our financial activities as of our year
ended December, 31, 2000.
Interest Rate Risk
Our fixed maturity investments and borrowings are subject to interest rate
risk. Increases and decreases in prevailing interest rates generally translate
into decreases and increases in fair values of those instruments. Additionally,
fair values of interest rate sensitive instruments may be affected by the
creditworthiness of the issuer, prepayment options, relative values of
alternative investments, the liquidity of the instrument and other general
market conditions.
Equity Price Risk
The carrying values of investments subject to equity price risks are based
on quoted market prices or management's estimates of fair value as of the
balance sheet date. Market prices are subject to fluctuation and, consequently,
the amount realized in the subsequent sale of an investment may significantly
differ from the reported market value. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
Caution should be used in evaluating our overall market risk from the
information below, since actual results could differ materially because the
information was developed using estimates and assumptions as described below,
and because our reserve for claim losses (representing 33.3% of total
liabilities) is not included in the hypothetical effects.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments would have been as follows as of December 31,
2000:
a. An approximate $43.1 million net increase (decrease) in the fair
value of fixed maturity securities would have occurred if interest rates
had (decreased) increased by 100 basis points. The change in fair values
was determined by estimating the present value of future cash f