Title insurance revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. The levels of real estate activity are primarily affected by the average price of real estate sales, the availability of funds to finance purchases and mortgage interest rates. Both the volume and the average price of residential real estate transactions have recently experienced declines in many parts of the country, and these trends appear likely to continue. Declines in the level of real estate activity or the average price of real estate sales are likely to adversely affect our title insurance revenues. The volume of refinancing transactions in particular and mortgage originations in general declined in the 2006 through 2008 period from 2005 and prior levels, resulting in reduction of revenues in some of our businesses.
million, and $1,114.0 million in 2008, 2007, and 2006, respectively. At Fidelity National Title Group, escrow and other title-related fees, which are more directly related to our direct operations, fluctuated in a pattern generally consistent with the fluctuation in direct title insurance premiums and order counts during the three years ended December 31, 2008. They were also impacted in 2007 by an increase in the proportionate share of direct title premiums provided by commercial activity, for which escrow fees as a percentage of premiums are lower, and by reduced escrow rates in the western part of the country. Offsetting the decline in escrow and title-related fees, other fees increased $113.6 million, or 22.4%, and $61.0 million, or 13.7%, at Fidelity National Title Group for the years ended December 31, 2008 and 2007, respectively. The increase in 2008 included the impact of recent acquisitions, including the recently acquired Colorado title insurance operations, Property Insight, LLC, and ATM Holdings, Inc. The increases in 2008 and 2007 were also partly due to increases of $75.7 million and $19.6 million, respectively, in revenues associated with a division of our business that manages real estate owned by financial institutions. Other fees increased $16.4 million and $93.1 million in the corporate and other segment for the years ended December 31, 2008 and 2007, respectively, reflecting increases in revenues relating to recent acquisitions, including the purchase of certain leasing assets from FIS in 2007. Other fees in the corporate and other segment also reflected a gain of $0.4 million relating to our timberland holdings in 2008 and income of $12.3 million in fees associated with the syndication of investors in the acquisition of Ceridian in 2007.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. Excluding personnel costs related to FIS of $1,357.4 million in 2006, personnel costs totaled $1,355.8 million, $1,700.9 million, and $1,867.9 million for the years ended December 31, 2008, 2007 and 2006, respectively. Excluding FIS operations, personnel costs as a percentage of total revenues were 31.3%, 30.8%, and 30.4% for the years ended December 31, 2008, 2007, and 2006, respectively. The decrease in personnel costs in 2008 was primarily due to employee reductions in the Fidelity National Title Group and corporate and other business segments, partially offset by an increase in the specialty insurance segment. The decrease in 2007 was primarily due to a decrease in the Fidelity National Title Group segment, partially offset by an increase in the corporate and other segment. On a consolidated basis, we reduced our full-time equivalent employees by about 2,100 during 2008 and 3,100 during 2007. The increases in the corporate and other segment are primarily the result of acquisitions. Included in personnel costs is stock-based compensation expense of $32.7 million, $29.9 million, and $65.0 million for the years ended December 31, 2008, 2007, and 2006, respectively. Excluding stock-based compensation related to FIS, stock based compensation costs were $29.9 million for the year ended December 31, 2006.
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than facility and equipment leasing arrangements. On June 29, 2004, Old FNF entered into an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”). The owner/lessor in this arrangement acquired land and various real property improvements associated with new construction of an office building in Jacksonville, Florida that is part of our corporate campus and headquarters. The lease expires on June 28, 2011, with renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of December 31, 2008, the full $75.0 million had been drawn on the facility to finance land costs and related fees and expenses and the outstanding balance was $70.1 million. The lease includes guarantees by us of up to 86.7% of the outstanding lease balance, and options to purchase the facilities at the outstanding lease balance. The guarantee becomes effective if we decline to purchase the facilities at
We have audited Fidelity National Financial, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Fidelity National Financial, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
As discussed in Note J to the Consolidated Financial Statements, effective January 1, 2007, the Company adopted the recognition and disclosure provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.”
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Fidelity National Financial, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 2, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Fidelity National Information Services, Inc. In this segment, the Company earned revenues from processing services, software licensing and software related services and data and information services.
Through August 31, 2007, the Company paid amounts to Property Insight for capitalized software development and for title plant construction. These amounts included capitalized software development costs of $5.4 million for the period from January 1 through August 31, 2007, and $1.9 million for the period from October 24 through December 31, 2006, and amounts paid for capitalized title plant construction costs of $10.3 million for the period from January 1 through August 31, 2007, and $2.7 million for the period from October 24 through December 31, 2006. During the year ended December 31, 2008, the Company paid FIS $0.8 million for capitalized software development costs.
During 2006, the Company purchased equity interests in Cascade Timberlands LLC (“Cascade Timberlands”) totaling 71% of Cascade Timberlands. As of December 31, 2008, the Company owned approximately 70% of the outstanding interests of Cascade Timberlands which was purchased for $88.5 million. The primary assets of Cascade Timberlands are approximately 266,909 acres of productive timberlands located on the eastern side of the Cascade mountain range extending from Bend, Oregon south on State Highway 20 toward the California border. Cascade Timberlands was created by the secured creditors of Crown Pacific LP upon the conclusion of the bankruptcy case of Crown Pacific LP in December 2004.
During the years ended December 31, 2008, 2007, and 2006, the Company recorded an aggregate of $(13.4) million, $0.8 million, and $1.7 million, respectively, in equity in (losses) earnings of unconsolidated affiliates.
As of December 31, 2008 and 2007, FNF had approximately $5.8 million and $5.5 million (including interest of $0.6 million and $0.3 million), respectively, of total gross unrecognized tax benefits that, if recognized, would favorably affect the Company’s income tax rate. These amounts are reported on a gross basis and do not reflect a federal tax benefit on state income taxes. The Company records interest and penalties related to income taxes as a component of income tax expense.
During the three-year period ended December 31, 2008, eligible employees of the Company and its subsidiaries could voluntarily participate in employee stock purchase plans (“ESPPs”) sponsored by the Company and its subsidiaries. Pursuant to the ESPPs, employees may contribute an amount between 3% and 15% of their base salary and certain commissions. The Company and its subsidiaries contribute varying amounts as specified in the ESPPs.
The Company’s funding policy is to contribute annually at least the minimum required contribution under the Employee Retirement Income Security Act (ERISA). Contributions are intended to provide not only for benefits accrued to date, but also for those expected to be earned in the future. In 2008, 2007 and 2006, the Company made contributions of $3.8 million, $17.1 million, and $12.1 million, respectively.
Pursuant to SFAS 158, the Company’s measurement date is December 31.
In January 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.” (“FSP EITF 99-20-1”) FSP EITF 99-20-1 provides guidance in determining whether or not certain beneficial interests in securitized financial assets are other-than-temporarily impaired and allows an entity to use reasonable management judgment in its evaluation of potential impairment of such assets. FSP EITF 99-20-1 is effective for interim and annual reporting periods ending after December 15, 2008. The Company has adopted this standard with no material impact on its financial position or results of operations.