We have our corporate headquarters on our campus in Jacksonville, Florida. The majority of our branch offices are leased from third parties (see note L to Notes to Consolidated Financial Statements). Our subsidiaries conduct their business operations primarily in leased office space in 43 states, Washington, DC, Puerto Rico, Canada, India and Mexico.
Acquisitions among entities under common control such as Old FNF’s 2006 contribution of assets to us in connection with the 2006 Distribution are not considered business combinations and are accounted for at historical cost in accordance with generally
accepted accounting principles on exchanges of ownership interests between enterprises under common control. Furthermore, the substance of that asset contribution, the 2006 Distribution and the Old FNF-FIS merger is effectively a reverse spin-off of FIS by Old FNF in accordance with the FASB’s guidance on accounting for reverse spinoffs. Accordingly, the historical financial statements of Old FNF became those of FNF. As a result, the data shown below for periods or dates prior to October 24, 2006, the date the 2006 Distribution was completed, are the data of Old FNF, including the results of both FIS and us as subsidiaries of Old FNF. Following completion of the 2006 Distribution, however, the criteria to account for FIS as discontinued operations as prescribed by the FASB’s guidance on accounting for the impairment or disposal of long-lived assets were not met. This is primarily due to our continuing involvement with and significant influence over FIS subsequent to the merger of Old FNF and FIS through common board members, common senior management and continuing business relationships. As a result, for periods prior to October 24, 2006, FIS continues to be included in our consolidated financial statements.
Our financial results for the year ended December 31, 2009, include a decrease to our provision for claim losses of $74.4 million ($47.1 million net of income taxes) as a result of favorable claim loss development on prior policy years, offset by an increase to the provision for claim losses of $63.2 million ($40.0 million net of income taxes) as a result of unfavorable developments in the third quarter on a previously recorded insurance receivable.
Our financial results for the year ended December 31, 2007, include charges to our provision for claim losses totaling $217.2 million ($159.5 million net of income taxes) which we recorded as a result of adverse claim loss development on prior policy years.
Weighted average shares outstanding as of December 31, 2009 includes 18,170,000 shares that were issued as part of an equity offering by the Company on April 20, 2009.
Investments as of December 31, 2010, 2009, 2008, 2007, and 2006, include securities pledged to secure trust deposits of $252.1 million, $288.7 million, $382.6 million, $513.8 million, and $696.8 million, respectively. Investments as of December 31, 2010, 2009, 2008, 2007, and 2006 include securities pledged relating to our securities lending program of $9.1 million, $25.6 million, $103.6 million, $264.2 million and $305.3 million, respectively.
Cash and cash equivalents as of December 31, 2010, 2009, 2008, 2007, and 2006 include cash pledged to secure trust deposits of $146.2 million, $96.8 million, $109.6 million, $193.5 million, and $228.5 million, respectively. Cash and cash equivalents as of December 31, 2010, 2009, 2008, 2007 and 2006 include cash pledged relating to our securities lending program of $9.4 million, $26.5 million, $107.6 million, $271.8 million, and $316.0 million, respectively.
Includes a reduction of the loss provision of $74.4 million ($47.1 million net of income taxes) and a loss provision charge of $63.2 million ($40.0 million net of income taxes) in 2009.
Fidelity National Title Group. This segment consists of the operations of our title insurance underwriters and related businesses. This segment provides core title insurance and escrow and other title-related services including collection and trust activities, trustee’s sales guarantees, recordings and reconveyances.
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 experienced declines in many parts of the country over the past several years, 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 over the past five years from 2005 and prior levels, resulting in reduction of revenues in some of our businesses.
when the United States economy is weak, including high unemployment levels.
Because these factors can change dramatically, revenue levels in the title insurance industry can also change dramatically. For example, from January 2001 through June 2004, the Federal Reserve decreased interest rates by a total of 550 basis points, bringing interest rates down to a low level and increasing the volume of residential real estate purchases and refinance activity. From June 2004 through September 2007, the Federal Reserve increased interest rates by a total of 425 basis points. In 2007, as interest rates on adjustable rate mortgages reset to higher rates, foreclosures on subprime mortgage loans increased to record levels. This resulted in a significant decrease in levels of available mortgage funding as investors became wary of the risk associated with investing in subprime mortgage loans. In addition, tighter lending standards and a bearish outlook on the real estate environment caused potential home buyers to become reluctant to purchase homes. In 2008, the increase in foreclosure activity, which had previously been limited to the subprime mortgage market, became more widespread as borrowers encountered difficulties in attempting to refinance their adjustable rate mortgages. In the last three years, the high mortgage delinquency and default rates caused negative operating results at a number of banks and financial institutions and, as a result, significantly reduced the level of lending activity. Multiple banks have failed over the past three years and others may fail in the future, further reducing the capacity of the mortgage industry to make loans. As a result of these factors, our title insurance order counts and revenues have decreased substantially over the past four years, as compared to levels prior to 2007.
According to the MBA, U.S. mortgage originations (including refinancings) were approximately $1.5 trillion, $2.0 trillion and $1.5 trillion in 2010, 2009 and 2008, respectively. The MBA’s Mortgage Finance Forecast currently estimates an approximately $1.0 trillion mortgage origination market for 2011, which would be a decrease of 33.3% from 2010. The MBA forecasts that the 33.3% decrease will result almost entirely from decreased refinance activity with a slight offset by increased purchase activity.
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.
A number of lenders imposed freezes on foreclosures in some or all states as they reviewed their foreclosure practices. We do not believe, however, that these foreclosure moratoria have had or will have a material adverse impact on our business. Further, we do not believe that we are exposed to significant losses resulting from faulty foreclosure practices, to the extent that they exist. Our title insurance underwriters issue title policies on real estate owned properties to new purchasers and lenders to those purchasers. We believe that these policies will not result in additional claims exposure to us because the new owners and their lenders would have the rights of good faith purchasers which should not be affected by potential defects in documentation. Additionally, even if a court sets aside a foreclosure due to a defect in documentation, the foreclosing lender would be required to return to our insureds all funds obtained from them, resulting in no loss under the title insurance policy. Further, we believe that under current law and the rights we have under our policies, we would have the right to seek recovery from the foreclosing lender in the event of a failure to comply with state laws or local practices in connection with a foreclosure.
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 are not dependent on the industry cycles discussed above. However, from 2007 to 2009 we experienced a significant decrease in our average commercial fee per file, which we believe was due, in part, to a decrease in the number of closings of larger deals due to difficulties or delays in obtaining financing. During 2010, we again saw an increase in fee per file on commercial transactions, which may indicate an improvement in availability of financing in the commercial markets.
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 third calendar quarter has been typically the strongest in terms of revenue primarily due to a higher volume of home sales in the summer months and the fourth quarter is usually also strong due to commercial entities desiring to complete transactions by year-end. In the past four years, we have seen a divergence from these historical trends with orders being negatively affected by a reduction in the availability of financing, rising default levels, and falling home values causing an overall downward trend in home sales. In addition we have noted short term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates and the implementation and subsequent expiration of government programs designed to stimulate the real estate market.
The accounting estimates described below are those we consider critical in preparing our Consolidated Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. See note A of Notes to the Consolidated Financial Statements for a more detailed description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
Reserve for Claim Losses. Title companies issue two types of policies, owner's and lender's policies, since both the new owner and the lender in real estate transactions want to know that their interest in the property is insured against certain title defects outlined in the policy. An owner's policy insures the buyer against such defects for as long as he or she owns the property (as well as against warranty claims arising out of the sale of the property by such owner). A lender's policy insures the priority of the lender's security interest over the claims that other parties may have in the property. The maximum amount of liability under a title insurance policy is generally the face amount of the policy plus the cost of defending the insured's title against an adverse claim; however, from time to time, we do incur losses in excess of policy limits. While most non-title forms of insurance, including property and casualty, provide for the assumption of risk of loss arising out of unforeseen future events, title insurance serves to protect the policyholder from risk of loss from events that predate the issuance of the policy.
Our reserve for claim losses includes reserves for known claims (“PLR”) as well as for losses that have been incurred but not yet reported to us (“IBNR”), net of recoupments. We reserve for each known claim based on our review of the estimated amount of the claim and the costs required to settle the claim. Reserves for IBNR claims are estimates that are established at the time the premium revenue is recognized and are based upon historical experience and other factors, including industry trends, claim loss history, legal environment, geographic considerations, and the types of policies written. We also reserve for losses arising from escrow, closing and disbursement functions due to fraud or operational error.
Although most claims against title insurance policies are reported relatively soon after the policy has been issued, claims may be reported many years later. Historically, approximately 60% of claims are paid within 5 years of the policy being written. By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions, as well as the legal environment existing at the time of settlement of the claims. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors.
Due to the uncertainty inherent in the process and to the judgment used by both management and our actuary, our ultimate liability may be greater or less than our carried reserves. If the recorded amount is within the actuarial range but not at the central
estimate, we assess the position within the actuarial range by analysis of other factors in order to determine that the recorded amount is our best estimate. These factors, which are more qualitative than quantitative, can change from period to period, and include items such as current trends in the real estate industry (which we can assess, but for which there is a time lag in the development of the data used by our actuary), any adjustments from the actuarial estimates needed for the effects of unusually large or small claims, improvements in our claims management processes, and other cost saving measures. If the recorded amount is not within a reasonable range of our actuary's central estimate, we would record a charge or credit and reassess the loss provision rate on a go forward basis. We will continue to reassess the provision to be recorded in future periods consistent with this methodology.
Increased foreclosures in 2009 and 2010 resulting in higher litigation costs and acceleration in reporting of claims
In addition, during the beginning of 2009 we were integrating the claims processing function of the LFG Underwriters which involved closing and consolidation of claims centers and subsequent integration into our existing operations.
During 2008, we recorded a charge of $261.6 million in addition to our loss provision rate of 8.5%. The significant development that resulted in the recording of a charge was due to changes in our actuarial model resulting, in part, from adverse claim loss development on prior policy years. Because of continued adverse reported and paid claim trends over the previous six quarters, our actuarial model in the third quarter of 2008 was modified to more heavily weight the 2005 - 2007 years' data on loss experience and to incorporate that data into the assumptions and factors that determine ultimate expected loss experience for all prior calendar years. As of December 31, 2008, our recorded reserve of $2.7 billion (including the LFG Underwriters reserves discussed below) was $16.1 million higher than our actuary's central estimate, which we determined was reasonable and represented our best estimate.
In connection with the acquisition of the LFG Underwriters on December 22, 2008, we recorded a reserve for claim losses of $1.1 billion. The acquired reserves were calculated by performing an actuarial analysis which utilized a process similar to FNF’s process described above and then applying an adjustment to the actuarial balance to record the acquired reserves at their estimated fair value as of December 31, 2008. The fair value adjustments were calculated by taking the estimated payment stream of the actuarial reserves and discounting them utilizing the U.S. Treasury Yield Curve. We then applied a discounted risk and profit load to the discounted reserves to estimate the fair value of the claim loss reserves at December 31, 2008. During 2009 we completed our evaluation of the fair value of this claims reserve as of the acquisition date and reduced the balance by $3.1 million to reflect our best estimate of the fair value of the liability.
For our specialty insurance businesses, we had claims reserves of $61.8 million and $52.6 million as of December 31, 2010 and 2009.
Valuation of Investments. We regularly review our investment portfolio for factors that may indicate that a decline in fair value of an investment is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: (i) our intent and need to sell the investment prior to a period of time sufficient to allow for a recovery in value; (ii) the duration and extent to which the fair value has been less than cost; and (iii) the financial condition and prospects of the issuer. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss. Investments are selected for analysis whenever an unrealized loss is greater than a certain threshold that we determine based on the size of our portfolio. Fixed maturity investments that have unrealized losses caused by interest rate movements are not at risk as we do not anticipate having the need or intent to sell prior to maturity. Unrealized losses on investments in equity securities and fixed maturity instruments that are susceptible to credit related declines are evaluated based on the aforementioned factors. Currently available market data is considered and estimates are made as to the duration and prospects for recovery, and the ability to retain the investment until such recovery takes place. These estimates are revisited quarterly and any material degradation in the prospect for recovery will be considered in the other-than-temporary impairment analysis. We believe that our monitoring and analysis has allowed for the proper recognition of other-than-temporary impairments over the past three-year period. Any change in estimate in this area will have an impact on the results of operations of the period in which a
Goodwill. We have made acquisitions in the past that have resulted in a significant amount of goodwill. As of December 31, 2010 and 2009, goodwill aggregated $1,470.7 million and $1,455.2 million, respectively. The majority of our goodwill as of December 31, 2010 and 2009 relates to goodwill recorded in connection with the Chicago Title merger in 2000. The process of determining whether or not an asset, such as goodwill, is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Future cash flow estimates are based partly on projections of market conditions such as the volume and mix of refinance and purchase transactions and interest rates, which are beyond our control and are likely to fluctuate. While we believe that our estimates of future cash flows are reasonable, these estimates are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ from what is assumed in our impairment tests. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test based on an analysis of the discounted future cash flows generated by the underlying assets. We have completed our annual goodwill impairment tests in each of the past three years and as a result, no impairment charges were recorded to goodwill in 2010, 2009, or 2008. As of December 31, 2010, we have determined that we have a fair value which substantially exceeds our carrying value. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in fair value and determination of the recoverability of goodwill, which may result in charges against earnings and a reduction in the carrying value of our goodwill in the future.
$88.1 million at December 31, 2010 and 2009, respectively, which represents agency premiums of approximately $546.0 million and $425.4 million at December 31, 2010 and 2009, respectively, and agent commissions of $433.9 million and $337.3 million at December 31, 2010 and 2009, respectively. We may have changes in our accrual for agency revenue in the future if additional relevant information becomes available.
Accounting for Income Taxes. As part of the process of preparing the consolidated financial statements, we are required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as an expense within income tax expense in the Consolidated Statement of Operations. Determination of the income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period. We believe that our tax positions comply with applicable tax law and that we adequately provide for any known tax contingencies. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. However, final determination of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The outcome of these final determinations could have a material effect on our income tax provision, net income or cash flows in the period that determination is made.
Year ended December 31, 2009. For the year ending December 31, 2009, our Consolidated Statement of Operations includes the results of the LFG Underwriters, acquired December 22, 2008 (see note B of the Notes to Consolidated Financial Statements). As a result of favorable claim loss development on our prior policy years, we released excess reserves of $74.4 million, or $47.1 million net of income taxes, to our provision for claim losses. In addition, we recorded an average 7.3% provision for claims losses. Also, as a result of certain court rulings, we reversed an insurance receivable by $63.2 million, or $40.0 million net of income taxes, as an increase to our provision for claim losses.
Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income was $144.5 million, $154.5 million, and $134.0 million for the years ended December 31, 2010, 2009, and 2008, respectively. Average invested assets were $3,928.7 million, $3,972.1 million, and $3,095.5 million for the years ended December 31, 2010, 2009, and 2008, respectively. Effective return on average invested assets, excluding realized gains and losses, was 4.3%, 4.7%, and 4.9% for the years ended December 31, 2010, 2009, and 2008, respectively.
Our operating expenses consist primarily of personnel costs and other operating expenses, which in our title insurance business are incurred as orders are received and processed, and agent commissions, which are incurred as revenue is recognized. Title insurance premiums, escrow and title-related fees are generally recognized as income at the time the underlying transaction closes. As a result, direct title operations revenue lags approximately 45-60 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 streams. However, a short time lag exists in reducing variable costs and certain fixed costs are incurred regardless of revenue levels.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs totaled $1,610.1 million, $1,649.8 million, and $1,322.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. Personnel costs as a percentage of total revenues were 28.0%, 28.3%, and 31.1% for the years ended December 31, 2010, 2009, and 2008, respectively. The decrease in personnel costs in 2010 is due mainly to decreases in the title segment resulting from decreases in title premiums from direct operations and decreases in opened and closed order counts. The increase in personnel costs in 2009 was primarily due to the acquisition of the LFG Underwriters and an increase in order volumes. The increase included a $23.9 million synergy bonus earned in 2009 by certain executives upon realizing the Company’s synergy goals with respect to the acquisition of the LFG Underwriters. Included in personnel costs is stock-based compensation expense of $25.1 million, $33.7 million, and $32.7 million for the years ended December 31, 2010, 2009, and 2008, respectively.
Net margin from agency title insurance premiums we retain as a percentage of total agency premiums increased from 20.4% in 2009 to 21.4% in 2010. The increase in 2010 is due primarily to a significant decrease in business from our largest agent in 2010 as compared to 2009 for which our retained premium was lower than that of our other agency contracts. Also contributing to the increase in the net margin in 2010 was the cancellation of numerous agency relationships and modifications of agency agreements associated with the acquisition of the LFG Underwriters, for which our retained premium was lower than that of legacy FNF agency relationships. The decrease in 2009 was primarily due to the acquisition of the agency relationships associated with the LFG Underwriters, for which the agent retained commission was consistently higher than that of legacy FNF agency relationships.
The provision for claim losses includes an estimate of anticipated title and title-related claims, escrow losses and claims relating to our specialty insurance segment. We monitor our claims loss experience on a continual basis and adjust the provision for claim losses accordingly as new information becomes known, new loss patterns emerge, or as other contributing factors are considered and incorporated into the analysis of the reserve for claim losses. The provision for claim loss for the years ended December 31, 2010, 2009, and 2008, was comprised of $248.9 million, $264.7 million, and $491.0 million, respectively, from the Fidelity National Title Group segment and $154.0 million, $127.9 million, and $139.5 million, respectively, from the specialty insurance segment. The provision for claim losses is discussed in further detail at the segment level below.
Interest expense for the years ended December 31, 2010, 2009, and 2008 was $46.2 million, $36.7 million, and $58.6 million, respectively. The increase in 2010 is primarily due to the additional interest expense incurred on the 6.60% notes issued in May 2010 partially offset by decreases in the amount drawn on our floating rate debt and retirement of a portion of our public debt in the prior year. The decrease in 2009 was primarily due to a decrease in interest rates on our floating rate debt and repurchase of several bonds during the year.
Equity in losses of unconsolidated affiliates was $(1.2) million, $(11.7) million, and $(13.4) million for the years ended December 31, 2010, 2009, and 2008, and primarily consisted of our equity in the net losses and earnings of Ceridian, Remy, and our former investment in Sedgwick.
Total revenues in 2010 decreased $257.4 million or 4.8% compared to 2009. Total revenues in 2009 increased $1,594.2 million or 41.8% compared to 2008. For an analysis of this segment’s revenues, see the analysis of direct and agency title insurance premiums and escrow and other title-related fees under “Consolidated Results of Operations.”
Net realized gains and losses for the years ended December 31, 2010, 2009, and 2008 were $110.7 million, $27.0 million, and $(32.9) million, respectively. Net realized gains and losses for the year ended December 31, 2010, included a $21.7 million gain on the sale of FIS stock as part of a tender offer, $11.4 million in gains resulting from an increase in value of our structured notes and $61.0 million in gains from the sale of various fixed maturity securities. Net realized gains and losses recorded in the year ended December 31, 2009, included impairment charges of $6.9 million, net realized gains on investments of $24.6 million, and net gains from sales of other assets of $2.4 million. Net realized gains and losses recorded in the year ended December 31, 2008, included impairment charges of $48.8 million on fixed maturity and equity securities and other investments that were deemed other-than-temporarily impaired, net realized gains on investments of $15.0 million, and net gains from sales of other assets of $0.9 million. The impairment charges relating to the fixed maturity securities primarily related to our conclusion that the credit risk relating to the holdings was high and thus the assets are likely permanently impaired. The impairment charges relating to the equity securities were based on the duration of the unrealized loss and inability to predict the time to recover if the investment continued to be held.
Personnel costs include base salaries, commissions, benefits and bonuses paid to employees, and are one of our most significant operating expenses. Personnel costs totaled $1,527.1 million, $1,573.7 million, and $1,253.6 million for the years ended December 31, 2010, 2009, and 2008, respectively. The decrease in 2010 is due mainly to decreases in title premiums from direct operations and decreases in opened and closed order counts. Also affecting the comparison was $23.9 million in synergy bonuses that were earned in 2009 by certain executives upon realizing our synergy goals with respect to the acquisition of the LFG
Underwriters. The increase in 2009 from 2008 resulted from the acquisition of the LFG Underwriters and an increase in order volumes. Personnel costs, as a percentage of direct title insurance premiums and escrow, title-related and other fees, were 57.1% in 2010, 56.4% in 2009, and 57.6% in 2008. Average employee count decreased to 16,747 in 2010 from 17,411 in 2009 and increased in 2009 from 13,957 in 2008 due to the addition of the LFG Underwriters.
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, professional services, travel expenses, general insurance, and trade and notes receivable allowances. Other operating expenses totaled $1,043.6 million, $1,145.7 million, and $964.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. Other operating expenses as a percentage of direct title insurance premiums and escrow, title-related and other fees were 39.0% in 2010 , 41.0% in 2009, and 44.3% in 2008. Other operating expenses for the years ended December 31, 2010, 2009 and 2008, included $11.7 million, $7.4 million and $23.4 million, respectively, in abandoned lease charges relating to office closures. The decrease in other operating expenses in 2010 is due to declines in business levels. The increase in other operating expenses in 2009 is primarily the result of the acquisition of the LFG Underwriters. As a result of holding customers’ assets in escrow, we have ongoing programs for realizing economic benefits. Those economic benefits related to escrow balances decreased in 2010 and 2009 due to decreases in escrow balances and decreases in short-term interest rates.
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. See the analysis of agent commissions under “Consolidated Results of Operations” for further discussion.
For the year ended December 31, 2008, an additional charge of $261.6 million was recorded due to a change in our actuarial model which resulted, in part, from adverse claim loss development on prior policy years. See “Critical Accounting Estimates” for further discussion relating to our reserve for claim losses and the related charges.
Flood revenues increased $8.4 million, or 5.3%, in 2010 compared to 2009, due to higher pricing and volume in 2010. Flood revenues decreased $2.8 million, or 1.8%, in 2009 compared to 2008, due to the inclusion of claims processing revenue related to the more active hurricane season in 2008.
Other operating expenses in the specialty insurance segment were $170.7 million, $158.3 million, and $158.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. Other operating expenses were 42.2%, 41.6% and 41.3% of specialty revenue for the years ended December 31, 2010, 2009, and 2008, respectively.
The provision for claim loss expense was $154.0 million, $127.9 million, and $139.5 million for the years ended December 31, 2010, 2009, and 2008, respectively. The increase in 2010 relates to losses in the first quarter because of flooding in the Northeast and soot and smoke damage from California fires, as well as $10 million in losses incurred in the fourth quarter due to a severe October hailstorm in Phoenix, Arizona. The decrease in 2009 reflects the decreased homeowners’ and automobile insurance business. As a percentage of premiums earned, the claim loss provision was 67.6% in 2010, 60.7% in 2009 and 64.8% in 2008.
Our two significant sources of internally generated funds are dividends and other payments 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 paid 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 distributions. As of December 31, 2010, $2,825.9 million of our net assets were restricted from dividend payments without prior approval from the relevant departments of insurance. During 2011, our first tier title insurance subsidiaries can pay or make distributions to us of approximately $76.1 million without prior regulatory approval. Our underwritten title companies and non-title insurance subsidiaries collect revenue and pay operating expenses. However, they are not regulated to the same extent as our insurance subsidiaries.
We are focused on evaluating our non-core assets and investments as potential vehicles for creating liquidity. Our intent is to use that liquidity for general corporate purposes, including payment of dividends as declared by the Board of Directors and potentially reducing debt, repurchasing shares of our stock, and/or conserving cash. During 2010, we were able to create additional liquidity through the sale of our 32% interest in Sedgwick, which generated approximately $193.6 million in proceeds in 2010.
Our cash flows provided by operations for the years ended December 31, 2010, 2009, and 2008 were $182.5 million, $380.3 million, and $4.6 million, respectively. The decrease in cash provided by operations of $197.8 million from 2009 to 2010 included an increase in claims paid of approximately $148.1 million and an increase in income taxes paid of $36.3 million resulting from net income tax payments of $33.8 million in 2010 compared with tax refunds of $2.5 million in 2009. The remainder of the decrease was due to the 2010 net income including a higher proportion of income relating to investing activities as compared to 2009. The increase in cash provided by operations of $375.7 million from 2009 to 2008 was primarily due to overall higher income in 2009 versus 2008.
Capital Expenditures. Total capital expenditures for property and equipment were $44.4 million, $50.8 million, and $84.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. For the years ended December 31, 2009 and 2008, capital expenditures included $21.0 million and $60.6 million, respectively, for the purchase of assets leased to others, including FIS. The decrease from 2008 to 2009 is due to the sale of FN Capital in 2009, to which the majority of these asset purchases leased to others were related. Total capital expenditures for software were $9.5 million, $7.1 million, and $17.1 million in 2010, 2009, and 2008, respectively.
Effective March 5, 2010, we entered into an agreement to amend and extend our credit agreement dated September 12, 2006 (the “Credit Agreement”) with Bank of America, N.A. as administrative agent and swing line lender (the “Administrative Agent”), and the other financial institutions party thereto, and an agreement to change the aggregate size of the credit facility under the Credit Agreement. These agreements reduced the total size of the credit facility from $1.1 billion to $951.2 million, with an option to increase the size of the credit facility to $1.1 billion, and created a new tranche, representing $925.0 million of the total credit facility, with an extended maturity date of March 5, 2013. Pricing for the new tranche is based on an applicable margin between 110 basis points to 190 basis points over LIBOR, depending on the senior debt ratings of FNF, and is at 150 basis points over LIBOR as of December 31, 2010. The Credit Agreement remains subject to affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, sales of assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and certain amendments. The Credit Agreement prohibits us from paying dividends to our stockholders if an event of default has occurred and is continuing or would result therefrom. The Credit Agreement requires us to maintain certain financial ratios and levels of capitalization. The Credit Agreement includes customary events of default for facilities of this type (with customary grace periods, as applicable). These events of default include a cross-default provision that, subject to limited exceptions, permits the lenders to declare the Credit Agreement in default if: (i) (A) we fail to make any payment after the applicable grace period under any indebtedness with a principal amount (including undrawn committed amounts) in excess of 3% of our net worth, as defined in the Credit Agreement, or (B) we fail to perform any other term under any such indebtedness, or any other event occurs, as a result of which the holders thereof may cause it to become due and payable prior to its maturity; or (ii) certain termination events occur under significant interest rate, equity or other swap contracts. The Credit Agreement provides that, upon the occurrence of an event of default, the interest rate on all outstanding obligations will be increased and payments of all outstanding loans may be accelerated and/or the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the Credit Agreement shall automatically become immediately due and payable, and the lenders’ commitments will
The indenture governing the 7.30% notes and the 5.25% notes also contains customary events of default. These events of default include a cross default provision, with respect to any other debt of the Company in an aggregate amount exceeding $20 million for all such debt, arising from (i) failure to make a principal payment when due or (ii) the occurrence of an event which results in such debt being due and payable prior to its scheduled maturity.
Contractual Obligations. Our long term contractual obligations generally include our loss reserves, our credit agreements and other debt facilities and operating lease payments on certain of our premises and equipment. As of December 31, 2010, our required annual payments relating to these contractual obligations were as follows:
As of December 31, 2010, we had title insurance reserves of $2,210.9 million. The amounts and timing of these obligations are estimated and are not set contractually. While we believe that historical loss payments are a reasonable source for projecting future claim payments, there is significant inherent uncertainty in this payment pattern estimate because of the potential impact of changes in:
events such as fraud, defalcation, multiple property title defects, foreclosure rates and individual large loss events that can substantially and unexpectedly cause increases in both the amount and timing of estimated title insurance loss payments; and
Based on historical title insurance claim experience, we anticipate the above payment patterns. The estimated payment stream excludes unallocated loss adjustment expense (ULAE) and other adjustments which are included in our claim loss provision. ULAE is composed of administrative claims handling expenses, including determination of coverage.
On October 25, 2006, the Board of Directors approved a three-year stock repurchase program under which we can repurchase up to 25 million shares of our common stock. We may make repurchases from time to time in the open market, in block purchases or in privately negotiated transactions, depending on market conditions and other factors. Since the original commencement of the plan adopted in October 2006, and through September 2009, we repurchased a total of 17,161,120 shares for $286.2 million, or an average of $16.68 per share. This includes 4,320,750 shares repurchased in 2009 for $57.1 million, or an average of $13.21 per share and 3,165,470 shares repurchased in 2008 for $46.0 million, or $14.53 per share. On July 21, 2009, the Board of Directors approved a three-year stock repurchase program under which we can repurchase up to 15 million shares through July 31, 2012. We began repurchasing shares under this program in October 2009, and we repurchased a total of 1,294,400 shares for $17.9 million, or an average of $13.83 per share in 2009 and 8,664,262 shares for $117.6 million, or an average of $13.57 per share in 2010, including 859,866 shares purchased on January 4, 2010 for $11.6 million from the administrator of two of our former subsidiaries’ employee benefit plans. Because we were actively repurchasing shares of our stock on the open market as part of the stock repurchase plan, we agreed to purchase the shares from the administrator at a price of $13.46 per share, the market price at the time of purchase. Subsequent to year-end we repurchased a total of 560,150 shares for $7.8 million or an average of $13.92 per share through market close on February 22, 2011. Since the original commencement of the plan adopted July 21, 2009, we have repurchased a total of 10,518,812 shares for $143.3 million, or an average of $13.62 per share. On January 27, 2011, our Board of Directors approved an increase in the number of shares that may be repurchased under the program, resulting in 10,000,000 shares in the aggregate remaining that may be purchased under the plan.
In conducting our operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in the Consolidated Balance Sheets. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no investments or loans outstanding as of December 31, 2010 related to these arrangements.
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2010, 2009, and 2008
We have audited Fidelity National Financial, Inc.’s internal control over financial reporting as of December 31, 2010, 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.
We have audited the accompanying Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related Consolidated Statements of Operations, Comprehensive Earnings, Equity and Cash Flows for each of the years in the three-year period ended December 31, 2010. These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.
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, 2010, 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 February 23, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
The following describes the significant accounting policies of Fidelity National Financial, Inc. and its subsidiaries (collectively, “We,” “Us,” “Our,” or “FNF”) which have been followed in preparing the accompanying Consolidated Financial Statements.
We are a holding company that through our subsidiaries provides title insurance, mortgage services, specialty insurance and information services. We are the nation's largest title insurance company through our title insurance underwriters - Fidelity National Title, Chicago Title, Commonwealth Land Title, and Alamo Title - which collectively issued more title insurance policies in 2009 than any other title company in the United States. We also provide flood insurance, personal lines insurance, and home warranty insurance through our specialty insurance subsidiaries. We own a minority interest in Ceridian Corporation ("Ceridian"), a leading provider of global human resources, payroll, benefits and payment solutions. We also own a minority interest in Remy International, Inc. (“Remy”), a leading designer, manufacturer, remanufacturer, marketer and distributor of aftermarket and original equipment electrical components for automobiles, light trucks, heavy-duty trucks and other vehicles.
On May 28, 2010, we completed the sale of our 32% interest in Sedgwick, our minority-owned affiliate that provides claims management services to large corporate and public sector entities, to a group of private equity funds. See note D on investments for further discussion of the sale.
Fixed maturity securities are purchased to support our investment strategies, which are developed based on factors including rate of return, maturity, credit risk, duration, tax considerations and regulatory requirements. Fixed maturity securities which may be sold prior to maturity to support our investment strategies are carried at fair value and are classified as available for sale as of the balance sheet dates. Fair values for fixed maturity securities are principally a function of current market conditions and are based on quoted market prices. Discount or premium is recorded for the difference between the purchase price and the principal amount. The discount or premium is amortized or accreted using the interest method and is recorded as an adjustment to interest and investment income. The interest method results in the recognition of a constant rate of return on the investment equal to the prevailing rate at the time of purchase or at the time of subsequent adjustments of book value. Changes in prepayment assumptions are accounted for prospectively.
We completed annual goodwill impairment tests in the fourth quarter of each respective year using a September 30 measurement date and as a result no goodwill impairments have been recorded. For the years ended December 31, 2010 and 2009, we determined fair values substantially exceeded carrying values.
Capitalized software includes software acquired in business acquisitions, purchased software and internally developed capitalized software. Purchased software is recorded at cost and amortized using the straight-line method over a three-year period and software acquired in a business acquisition is recorded at its fair value upon acquisition and amortized using straight-line and accelerated methods over its estimated useful life. After the technological feasibility of software to be developed internally has been established, or at the beginning of application development, software development costs, which include salaries and related payroll costs and costs of independent contractors incurred during development, are capitalized. Research and development costs incurred prior to the establishment of technological feasibility, or prior to software development, are expensed as incurred. For internally developed software, software development costs are amortized on a product by product basis commencing on the date of general release of the products, generally the greater of (1) the straight-line method over its estimated useful life, which ranges from three to seven years or (2) the ratio of current revenues to total anticipated revenue over estimated useful life.
At December 31, 2010, capitalized software was $191.7 million, less accumulated amortization of $147.7 million. At December 31, 2009, capitalized software was $181.9 million, less accumulated amortization of $125.9 million.
Amortization expense relating to computer software was $24.4 million, $25.9 million, and $27.4 million for the years ended December 31, 2010, 2009, and 2008, respectively.
During 2008, we determined that the carrying value of certain of our intangible assets, software and license fees may not be recoverable and recorded impairment expense of $8.5 million, relating to the impairment of these assets. This expense amount was included in other operating expenses in the Consolidated Statement of Operations for the year ended December 31, 2008. We recorded no impairment expense in 2010 or 2009.
Title plants are recorded at the cost incurred to construct or obtain and organize historical title information to the point it can be used to perform title searches. Costs incurred to maintain, update and operate title plants are expensed as incurred. Title plants are not amortized as they are considered to have an indefinite life if maintained. Sales of title plants are reported at the amount received net of the adjusted costs of the title plant sold. Sales of title plant copies are reported at the amount received. No cost is allocated to the sale of copies of title plants unless the carrying value of the title plant is diminished or impaired. Title plants are reviewed for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable. We reviewed title plants for impairment and in the years ending December 31, 2010 and December 31, 2009 identified and recorded impairment expense of $4.3 million and $2.2 million, respectively.
In the state of Illinois, a trust company is permitted to commingle and invest customers’ assets with its own assets, pending completion of real estate transactions. Accordingly, our Consolidated Balance Sheets reflect a secured trust deposit liability of $388.4 million and $373.3 million at December 31, 2010 and 2009, respectively, representing customers’ assets held by us and corresponding assets including cash and investments pledged as security for those trust balances.
For the years ended December 31, 2010, 2009, and 2008, options to purchase 12.6 million shares, 10.2 million shares and 23.2 million shares, respectively, of our common stock were excluded from the computation of diluted earnings per share because they were anti-dilutive.
We have historically conducted business with FIS and its subsidiaries. On July 2, 2008, FIS completed the spin-off of its lender processing services segment into a separate publicly traded company, LPS. As part of the spin-off of LPS, a number of the agreements that were previously between FNF and FIS were amended and renegotiated to reflect the revised relationships between FNF and FIS and the new relationships between FNF and LPS. Effective March 15, 2009, William P. Foley, II, retired from his position as an officer and director of LPS. Prior to March 15, 2009, Mr. Foley was the Chairman of the Board of LPS. Also at that time, Daniel D. (Ron) Lane and Cary H. Thompson, retired from the LPS Board of Directors. As a result, as of March 15, 2009, LPS is no longer a related party and activity between FNF and LPS subsequent to that date is not included in our disclosures of transactions with related parties.
Technology (“IT”) and data processing services from FIS. These agreements govern IT support services provided to us by FIS, primarily consisting of infrastructure support and data center management. Subject to certain early termination provisions (including the payment of minimum monthly service and termination fees), the agreement expires on or about June 30, 2013 with an option to renew for one or two additional years.
Administrative corporate support and cost-sharing services to and from FIS. We have provided certain administrative corporate support services such as corporate aviation and other administrative support services to FIS.
We believe the amounts we earned or were charged under each of the foregoing arrangements are fair and reasonable. The information technology infrastructure support and data center management services provided to us are priced within the range of prices that FIS offers to its unaffiliated third party customers for the same types of services. However, the amounts FNF earned or was charged under these arrangements were not negotiated at arm’s-length, and may not represent the terms that we might have obtained from an unrelated third party. The net amounts due to FIS as a result of these agreements were $8.3 million and $6.9 million as of December 31, 2010 and 2009, respectively.
As noted above, prior to March 15, 2009, LPS was a related party to us. Agreements with LPS for title agency and other services were in effect at that time. As a result of related party transactions, as of December 31, 2008, we owed $3.1 million to LPS. A detail of related party revenues and expenses between FNF and LPS are as follows and include results of transactions prior to July 2, 2008, when LPS was a subsidiary of FIS. For the year ended December 31, 2008, we recorded agency title premiums of $212.3 million and $84.2 million for the period from January 1 through March 15, 2009. We recorded agency title commissions of $187.9 million for the year ended December 31, 2008 and $73.8 million for the period from January 1 through March 15, 2009. We recorded other revenue of $8.4 million for the year ended December 31, 2008 and $4.9 million for the period from January 1 through March 15, 2009. Other operating expenses relating to agreements with LPS were $66.5 million for the year ended December 31, 2008 and $18.9 million for the period from January 1 through March 15, 2009.
The results of operations and financial position of the entities acquired during any year are included in the Consolidated Financial Statements from and after the date of acquisition. Based on our valuation, any differences between the fair value of the identifiable assets and liabilities and the purchase price paid are recorded as goodwill. The only significant acquisitions in the three years ended December 31, 2010, were the acquisitions of certain underwriters from LandAmerica Financial Group, Inc. (“LFG”) in 2008. On December 22, 2008, we completed the acquisition of LFG's two principal title insurance underwriters, Commonwealth Land Title Insurance Company (“Commonwealth”) and Lawyers Title Insurance Corporation (“Lawyers”), as well as United Capital Title Insurance Company (“United”) (collectively, the “LFG Underwriters”). The total purchase price for the LFG Underwriters was $258.9 million, net of cash acquired of $5.9 million, and was comprised of $153.9 million paid by two of our title insurance underwriters, Fidelity National Title Insurance Company and Chicago Title Insurance Company, a $50.0 million subordinated note, which was paid in full during 2010, $50.0 million in FNF common stock (3,176,620 shares valued at $15.74 per share at the time of closing) and $5.0 million in transaction costs.
Mortgage-backed/asset-backed securities: These securities are comprised of commercial mortgage-backed securities, agency mortgage-backed securities, collaterized mortgage obligation, and asset-backed securities. They are valued based on available trade information, dealer quotes, cash flows, relevant indices and market data for similar assets in active markets.
The carrying amounts of accounts receivable and notes receivable approximate fair value due to their short-term nature. The fair value of our notes payable is included in Note I.
Additional information regarding the fair value of our investment portfolio is included in Note D.
The following table presents certain information regarding contractual maturities of our fixed maturity securities at December 31, 2010:
During the years ended December 31, 2010, 2009 and 2008, gross realized gains on sales of equity securities considered available for sale were $26.3 million, $5.3 million, and $5.9 million, respectively; gross realized losses were $21.5 million, and $4.9 million, in 2009 and 2008, respectively. There were no realized losses during the year ending December 31, 2010. Gross proceeds from the sale of equity securities amounted to $59.9 million, $60.0 million, and $79.4 million during the years ended December 31, 2010, 2009 and 2008, respectively.
Included in our other long-term investments are fixed-maturity structured notes purchased in the third quarter of 2009. The structured notes are carried at fair value (see note C) and changes in the fair value of these structured notes are recorded as realized gains and losses in the Statement of Operations. The carrying value of the structured notes was $90.1 million and $78.7 million as of December 31, 2010 and 2009, respectively, and we recorded a net gain of $11.4 million and $3.7 million related to the structured notes in the years ended December 31, 2010 and 2009, respectively.
A substantial portion of our unrealized losses relate to debt securities. These unrealized losses were primarily caused by widening credit spreads that we consider to be temporary rather than changes in credit quality. We expect to recover the entire amortized cost basis of our temporarily impaired fixed maturity securities as we do not intend to sell these securities and we do not believe that we will be required to sell the fixed maturity securities before recovery of the cost basis. The unrealized losses relating to equity securities were caused by market changes that we consider to be temporary and are not concentrated in a particular sector or an individual security. For these reasons, we do not consider these securities other-than-temporarily impaired at December 31, 2010. It is reasonably possible that declines in fair value below cost not considered other-than-temporary in the current period could be considered to be other-than-temporary in a future period and earnings would be reduced to the extent of the impairment.
Investments in unconsolidated affiliates are recorded using the equity method of accounting and, as of December 31, 2010 and 2009, consisted of (in millions):
On May 28, 2010, we completed the sale of our 32% interest in Sedgwick, our minority-owned affiliate that provides claims management services to large corporate and public sector entities, to a group of private equity funds. We received approximately $225.6 million in proceeds, of which $32.0 million was held in an indemnity escrow for our ownership interest, resulting in a pre-tax gain of approximately $98.4 million.
During the years ended December 31, 2010, 2009, and 2008, we recorded an aggregate of $1.2 million, $11.7 million, and $13.4 million, respectively, in equity in losses of unconsolidated affiliates. We account for our equity in Ceridian and Remy on a
Depreciation expense on property and equipment was $40.6 million, $53.0 million, and $65.6 million for the years ended
At December 31, 2010, the estimated fair value of our outstanding notes payable was approximately $957.6 million or $5.6 million higher than its carrying value. The carrying value of our notes payable was approximately $849.1 million or $12.8 million lower than its estimated fair value at December 31, 2009. The fair values of our unsecured notes payable are based on established market prices for the securities on December 31, 2010 and 2009. The fair value of our syndicated credit agreement is estimated using a discounted cash flow analysis based on current market interest rates and comparison of interest rates being paid to our current incremental borrowing rates for similar types of borrowing arrangements.
and the other financial institutions party thereto, and an agreement to change the aggregate size of the credit facility under the Credit Agreement. These agreements reduced the total size of the credit facility from $1.1 billion to $951.2 million, with an option to increase the size of the credit facility to $1.1 billion, and created a new tranche, representing $925.0 million of the total credit facility, with an extended maturity date of March 5, 2013. Pricing for the new tranche is based on an applicable margin between 110 basis points to 190 basis points over LIBOR, depending on the senior debt ratings of FNF, and is at 150 basis points over LIBOR as of December 31, 2010. The Credit Agreement remains subject to affirmative, negative and financial covenants customary for financings of this type, including, among other things, limits on the creation of liens, sales of assets, the incurrence of indebtedness, restricted payments, transactions with affiliates, and certain amendments. The Credit Agreement prohibits us from paying dividends to our stockholders if an event of default has occurred and is continuing or would result therefrom. The Credit Agreement requires us to maintain certain financial ratios and levels of capitalization. The Credit Agreement includes customary events of default for facilities of this type (with customary grace periods, as applicable). These events of default include a cross-default provision that, subject to limited exceptions, permits the lenders to declare the Credit Agreement in default if: (i) (A) we fail to make any payment after the applicable grace period under any indebtedness with a principal amount (including undrawn committed amounts) in excess of 3% of our net worth, as defined in the Credit Agreement, or (B) we fail to perform any other term under any such indebtedness, or any other event occurs, as a result of which the holders thereof may cause it to become due and payable prior to its maturity; or (ii) certain termination events occur under significant interest rate, equity or other swap contracts. The Credit Agreement provides that, upon the occurrence of an event of default, the interest rate on all outstanding obligations will be increased and payments of all outstanding loans may be accelerated and/or the lenders’ commitments may be terminated. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the Credit Agreement shall automatically become immediately due and payable, and the lenders’ commitments will automatically terminate.
On April 14, 2009, we received $331.4 million in net proceeds from our offering of a total of 18,170,000 shares of our common stock. The proceeds were partially used to repay $135 million in borrowings under our $1.1 billion revolving credit facility. In addition, we used the proceeds to purchase $67.8 million in par value of our 7.30% notes due in 2011 for an aggregate purchase price of $68.7 million, including accrued interest of $1.2 million, and $3.0 million in par value of our 5.25% notes due in 2013 for an aggregate purchase price of $2.8 million. In the third and fourth quarters of 2009, one of our subsidiaries purchased $7.8 million in par value of our 7.30% notes for a total purchase price of $8.0 million.
At December 31, 2010, we have net operating losses on a pretax basis of $115.1 million available to carryforward and offset future federal taxable income through 2027. The amount of capital losses available to carryforward and offset capital gain income through 2014 is $20.0 million on a pretax basis. We expect to produce sufficient capital gain income to fully utilize these capital losses.
As of December 31, 2010, management determined that the $4.1 million valuation allowance was no longer required. The decrease of the valuation allowance in the amount of $4.1 million was recorded as a reduction of income tax expense and decreased the effective tax rate by 0.73%. We believe that, based on our historical pattern of taxable income, we will produce sufficient income in the future to realize our remaining deferred tax assets.
We continually update loss reserve estimates as new information becomes known, new loss patterns emerge, or as other contributing factors are considered and incorporated into the analysis of reserve for claim losses. A substantial portion of our reserve for claim losses is attributable to title insurance operations. Estimating future title loss payments is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. Due to the uncertainty inherent in the process and to the judgment used by management the ultimate liability may be greater or less than our current reserves. As a result of continued volatility experienced during 2010 in claim development on policy years 2005 - 2007, we believe there is an increased level of uncertainty attributable to these policy years.
During the year ended December 31, 2009, we released excess title reserves of $74.4 million in addition to recording an average 7.3% provision for claims losses. The release of excess reserves was due to analysis of the reserve position in light of consistently lower claim payments since 2008. During the year ended December 31, 2008, we recorded a charge to the provision for title claim losses of $261.6 million resulting from adverse claim loss development on prior policy years. This charge was in addition to the provision for title insurance claim losses of 8.5% for 2008. Because reported and paid claims continued to exceed expected claims in these years, we modified our actuarial model in 2008 to more heavily weight the three most recent full years’ data on loss experience and to incorporate that data into the assumptions and factors that determine ultimate expected loss experience
for all prior calendar years. In response to the favorable development on recent year claims, the average title loss provision rate decreased in 2009 and 2010.
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. This customary litigation includes but is not limited to a wide variety of cases arising out of or related to title and escrow claims, for which we make provisions through our loss reserves. Additionally, like other insurance companies, our ordinary course litigation includes a number of class action and purported class action lawsuits which make allegations related to aspects of our insurance operations. We believe that no actions, other than the matter discussed below, depart from customary litigation incidental to our business.
Various governmental entities are studying the title insurance product, market, pricing, business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. We receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies from time to time about various matters relating to our business. Sometimes these take the form of civil investigative subpoenas or market conduct examinations. We attempt to cooperate with all such inquiries. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities which require us to pay money or take other actions.
In conducting our operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets. We have a contingent liability relating to proper disposition of these balances for our customers, which amounted to $4.6 billion at December 31, 2010. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no investments or loans outstanding as of December 31, 2010 and 2009 related to these arrangements.
Our 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. As of December 31, 2010, $2,825.9 million of our net assets are restricted from dividend payments without prior approval from the Departments of Insurance. During 2011, our title insurers can pay or make distributions to us of approximately $76.1 million, without prior approval.
Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the various state insurance regulatory authorities. The National Association of Insurance Commissioners' (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by each of the states that regulate us. Each of the states have adopted a material prescribed accounting practice that differs from that found in NAIC SAP. Specifically, the timing of amounts added or released from the statutory unearned premium reserve under NAIC SAP differs from the states' required practice. Statutory surplus at December 31, 2010 and 2009, respectively, was lower by approximately $288.1 million and $245.3 million than if we had reported such amounts in accordance with NAIC SAP.
On October 25, 2006, the Board of Directors approved a three-year stock repurchase program under which we can repurchase up to 25 million shares of our common stock. We may make repurchases from time to time in the open market, in block purchases or in privately negotiated transactions, depending on market conditions and other factors. Since the original commencement of the plan adopted in October 2006, and through September 2009, we repurchased a total of 17,161,120 shares for $286.2 million, or an average of $16.68 per share. This includes 4,320,750 shares repurchased in 2009 for $57.1 million, or an average of $13.21 per share and 3,165,470 shares repurchased in 2008 for $46.0 million, or $14.53 per share. On July 21, 2009, the Board of Directors approved a new three-year stock repurchase program under which we can repurchase up to 15 million shares through July 31, 2012. We began repurchasing shares under this program in October 2009, and we repurchased a total of 1,294,400 shares for $17.9 million, or an average of $13.83 per share in 2009 and 8,664,262 shares for $117.6 million, or an average of $13.57 per share in 2010, including 859,866 shares purchased on January 4, 2010 for $11.6 million from the administrator of two of our former subsidiaries’ employee benefit plans. Because we were actively repurchasing shares of our stock on the open market as part of the stock repurchase plan, we agreed to purchase the shares from the administrator at a price of $13.46 per share, the market price at the time of purchase. Subsequent to year-end we repurchased a total of 560,150 shares for $7.8 million or an average of $13.92 per share through market close on February 22, 2011. Since the original commencement of the plan adopted July 21, 2009, we have repurchased a total of 10,518,812 shares for $143.3 million, or an average of $13.62 per share. On January 27, 2011, our Board of Directors approved an increase in the number of shares that may be repurchased under the program, resulting in 10,000,000 shares in the aggregate remaining that may be purchased under the plan.
During the three-year period ended December 31, 2010, our eligible employees could voluntarily participate in employee stock purchase plans (“ESPPs”) sponsored by us and our subsidiaries. Pursuant to the ESPPs, employees may contribute an amount between 3% and 15% of their base salary and certain commissions. We contribute varying amounts as specified in the ESPPs.
We contributed $11.9 million, $11.4 million, and $15.2 million to the ESPPs in the years ended December 31, 2010, 2009, and 2008, respectively, in accordance with the employer’s matching contribution.
In 2005, we established the FNT 2005 Omnibus Incentive Plan (the “Omnibus Plan”) authorizing the issuance of up to 8 million shares of common stock, subject to the terms of the Omnibus Plan. On October 23, 2006, the stockholders of FNT approved an amendment to increase the number of shares available for issuance under the Omnibus Plan by 15.5 million shares. The increase was in part to provide capacity for options and restricted stock to be issued to replace Old FNF options and restricted stock. On May 29, 2008, the stockholders of FNF approved an amendment to further increase the number of shares for issuance under the
Ominbus Plan by 11.0 million shares. The primary purpose of the increase was to assure that we had adequate means to provide equity incentive compensation to our employees on a going-forward basis. The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance shares, performance units, other cash and stock-based awards and dividend equivalents. As of December 31, 2010, there were 2,666,901 shares of restricted stock and 21,826,954 stock options outstanding under this plan. Awards granted are determined and approved by the Compensation Committee of the Board of Directors. Options vest over a 3 to 4 year period, and the exercise price for options granted equals the market price of the underlying stock on the grant date. A grant of approximately 0.8 million shares was made to various employees and directors in 2010 and vests according to certain time based and operating performance criteria. A grant of 1.5 million shares made to the Chairman in 2009 contains time based and market based criteria for vesting purposes.
Restricted stock transactions under the Omnibus Plan in 2008, 2009, and 2010 are as follows:
We account for stock-based compensation plans in accordance with the FASB standard on share-based payments, which requires that compensation cost relating to share-based payments be recognized in the consolidated financial statements based on the fair value of each award. Using the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period. Net earnings reflects stock-based compensation expense amounts of $25.1 million, $33.7 million, and $32.7 million, for the years ended December 31, 2010, 2009, and 2008, respectively, which are included in personnel costs in the reported financial results of each period.
We assumed certain health care and life insurance benefits for retired Chicago Title employees in connection with the Chicago Title merger. Beginning on January 1, 2001, these benefits were offered to all employees who met specific eligibility requirements. Additionally, in connection with the acquisition of the LFG Underwriters, we assumed certain of the LFG Underwriters nonqualified benefit plans, which provide various postretirement benefits to certain executives and retirees. The costs of these benefit plans are accrued during the periods the employees render service. We are both self-insured and fully insured for postretirement health care and life insurance benefit plans, and the plans are not funded. The health care plans provide for insurance benefits after retirement and are generally contributory, with contributions adjusted annually. Postretirement life insurance benefits are primarily contributory, with coverage amounts declining with increases in a retiree’s age. The aggregate benefit obligation for these plans was $26.0 million and $35.9 million at December 31, 2010 and 2009, respectively. The net (benefit) costs included in the results of operations relating to these plans were $(1.3) million, $1.7 million, and $1.5 million for the years ending December 31, 2010, 2009, and 2008, respectively.
Note P. Financial Instruments with Off-Balance Sheet Risk and Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents, short-term investments, and trade receivables.
amount of credit exposure with any one financial institution. Investments in commercial paper of industrial firms and financial institutions are rated investment grade by nationally recognized rating agencies.
In December 2010, the FASB updated ASC Topic 350, expanding requirements over goodwill impairment testing. Under the modified guidance, all companies must assess the existence and extent of impairment on all reporting units whose carrying amounts are zero or negative considering both quantitative and qualitative factors. This update is effective for interim and annual periods beginning after December 15, 2010. We do not expect this update to have a material impact on our financial condition or results of operations.