We have our corporate headquarters on our campus in Jacksonville, Florida. The majority of our branch offices are leased from third parties (see note K 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.
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. Certain reclassifications have been made to the prior year amounts to conform with the 2011 presentation.
On December 22, 2008, we completed the acquisition of LandAmerica Financial Group's two principal title insurance underwriters, Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation, as well as United Capital Title Insurance Company (collectively, the “LFG Underwriters”). For periods subsequent to December 22, 2008, the LFG Underwriters are included in our consolidated financial statements.
Our financial results for the year ended December 31, 2008, include a charge to our provision for claim losses of $261.6 million ($154.1 million net of income taxes) which we recorded as a result of adverse claim loss development on prior policy years.
Investments as of December 31, 2011, 2010, 2009, 2008, and 2007, include securities pledged to secured trust deposits of $274.2 million, $252.1 million, $288.7 million, $382.6 million, and $513.8 million, respectively.
Cash and cash equivalents as of December 31, 2011, 2010, 2009, 2008, and 2007 include cash pledged to secured trust deposits of $161.3 million, $146.2 million, $96.8 million, $109.6 million, and $193.5 million, respectively.
As a result of favorable title insurance claim loss development on prior policy years, we recorded a credit in 2009 totaling $74.4 million, or $47.1 million net of income taxes, to our provision for claims losses. As a result of adverse title insurance claim loss development on prior policy years, we recorded charges in 2008 totaling $261.6 million, or $154.1 million
net of income taxes, and in 2007 totaling $217.2 million, or $159.5 million net of income taxes, to our provision for claim losses. These credits/charges were recorded in addition to our average provision for claim losses of 7.3%, 8.5% and 7.5% for the years ended December 31, 2009, 2008, and 2007, respectively.
We are a holding company that through our subsidiaries provides title insurance, mortgage services, and diversified 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 2011 than any other title company in the United States. We own a minority interest in Ceridian Corporation (“Ceridian”), a leading provider of global human capital management 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 and American Blue Ribbon Holdings, LLC, an owner and operator of the Village Inn, Bakers Square and Max & Erma's restaurants.
On February 5, 2012, we entered into a definitive agreement to acquire all of the outstanding shares of common stock of O'Charley's Inc., which operates more than 340 full-service restaurants under the O'Charley's, Ninety Nine and Stoney River Legendary Steaks concepts, that we do not currently own for $9.85 per share in cash. O'Charley's Inc. had 21,967,041 shares outstanding as of December 31, 2011. We own 2,079,542 or 9.5% of the outstanding shares of O'Charley's Inc. common stock prior to the tender offer. The merger is expected to close in May 2012 and is subject to successful completion of the tender and other customary closing conditions.
On December 27, 2011, we entered into a definitive agreement under which we will sell an 85% interest in our remaining subsidiaries that write personal lines insurance to WT Holdings, Inc. for approximately $119.5 million. The sales price is subject to typical closing adjustments based on working capital and surplus. The transaction is expected to close by the second quarter of 2012 and is subject to regulatory approval and closing conditions. Accordingly, the results of this business (which we refer to as our "at-risk" insurance business) for all periods presented are reflected as discontinued operations. The at-risk insurance business sale is expected to result in a pre-tax loss of approximately $15.1 million, which was recorded in the fourth quarter of 2011. See note A of the Notes to Consolidated Financial Statements for further details on this transaction.
On August 2, 2011, we completed an offering of $300.0 million in aggregate principal amount of 4.25% convertible senior notes due August 2018 (the "Notes"), pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The Notes were issued for cash at 100% of their principal amount. However, for financial reporting purposes, the notes were deemed to have been issued at 92.818% of par value, and as such we recorded a discount of $21.5 million to be amortized to August 2018, when the notes mature. The Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at our election, based on an initial conversion rate, subject to adjustment. We used $75.0 million of the proceeds from the Notes to purchase 4,609,700 shares of our common stock at $16.27 per share in privately negotiated transactions concurrently with the issuance. We used the remaining net proceeds along with other cash on hand for repayment of $250.0 million outstanding debt on our revolving credit agreement. Interest is payable semi-annually. See note H of the Notes to Consolidated Financial Statements.
Our financial statements reflect transactions with Fidelity National Information Services ("FIS"), which is a related party, and with Lender Processing Services ("LPS") through March 15, 2009, which was a related party until that date. See note A of the Notes to Consolidated Financial Statements.
when the United States economy is weak, including during high unemployment levels.
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 risks 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 elevated 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.
According to the MBA, U.S. mortgage originations (including refinancings) were approximately $1.3 trillion, $1.6 trillion and $2.0 trillion in 2011, 2010 and 2009, respectively. The MBA’s Mortgage Finance Forecast currently estimates an approximately $1.0 trillion mortgage origination market for 2012, which would be a decrease of 23.1% from 2011. The MBA forecasts that the 23.1% decrease will result almost entirely from decreased refinance activity.
On February 1, 2012, the Obama Administration announced new initiatives designed to increase refinancing of mortgages,
reduce foreclosures and improve the housing market. Under these initiatives, among other things: (i) certain borrowers with loans insured by Fannie Mae or Freddie Mac ("GSEs" and such loans, "GSE loans") and certain borrowers with non-GSE loans, through a new FHA program, would be able to refinance their mortgages and take advantage of historically low interest rates; (ii) the FHA will begin transitioning foreclosed properties in the nations hardest-hit cities into rental housing units; (iii) GSEs and major banks have begun offering one year of forbearance (up from three months) to certain unemployed borrowers; and (iv) the Home Affordable Modification Program ("HAMP") was extended through 2013, including easing the eligibility requirements and increasing the financial incentives for banks to participate. As indicated, the Obama Administration has already begun implementing these initiatives, except for the refinancing initiatives; however, the GSEs have not started the refinancing program. The Obama Administration is looking to Congress to pass legislation to implement a refinancing program for non-GSE loans. We are uncertain to what degree these initiatives may affect our results in the future.
During 2010, a number of lenders imposed freezes on foreclosures in some or all states as they reviewed their foreclosure practices. In response to these freezes, the Office of the Comptroller of the Currency ("OCC") is concurrently reviewing the foreclosure practices in the residential mortgage loan servicing industry. On April 13, 2011, the OCC and other federal regulators announced formal consent orders against several national bank mortgage servicers and third-party servicer providers for inappropriate practices related to residential mortgage loan servicing and foreclosure processing. The consent orders require the servicers to promptly correct deficiencies and make improvements in practices for residential mortgage loan servicing and foreclosure processing, including improvements to future communications with borrowers and a comprehensive "look back" to assess whether foreclosures complied with federal and state laws and whether any deficiencies in the process or related documentation resulted in financial injury to borrowers. We are not involved in these enforcement actions and we do not believe that we are exposed to significant losses resulting from faulty foreclosure practices. 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 significant additional claims exposure to us because 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 reduced exposure 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. Many states continue to evaluate foreclosure practices and related legislation may change in the future. As with the freezes on foreclosures in 2010, the consent orders imposed by the federal regulators may continue to delay lender foreclosure completions.
On February 9, 2012, federal officials, state attorneys general and representatives of Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and Ally Financial agreed to a $25 billion settlement of federal and state investigations into the foreclosure practices of banks and other mortgage servicers from September 2008 to December 2011. Under the settlement, approximately one million underwater borrowers will have their mortgages reduced by lenders and 300,000 homeowners will be able to refinance their homes at lower interest rates. We are uncertain to what degree these initiatives may affect our results in the future.
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, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. 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 and especially 2011, we again saw an increase in fee per file and in the volume of commercial transactions, which may indicate an improvement in availability of financing in the commercial markets.
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 additional 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, occasionally 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 for events that predate the issuance of the policy.
Due to the uncertainty inherent in the process and due 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
In 2009, we released $74.4 million of our loss reserves in addition to recording our loss provision rate of 7.3%. The release of excess reserves was due to consideration of positive development in our actuary's analysis of our reserve position in light of lower claim payments in 2009.
As of December 31, 2011, the recorded reserve for title insurance claims losses was $1.9 billion, which was approximately $0.1 billion below the central estimate provided by our actuary, but within the provided actuarial range of $1.8 billion to $2.2 billion. We believe that our recorded reserves are reasonable and represent our best estimate. In reaching this conclusion, we considered the following qualitative factors.
Increased values and volumes of real estate transactions and weaker loan underwriting standards increased the likelihood of fraudulent transactions
Increased exposure to mechanic lien claims from failures of builders and developers
In addition, during the first half of 2009 we were integrating the claims processing function of the LFG Underwriters which involved the closing and consolidation of claims centers and subsequent integration into our existing operations.
considered in the other-than-temporary impairment analysis. We believe that our monitoring and analysis has provided 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 charge is taken. Our investment portfolio exposure to sub-prime mortgage-backed securities is immaterial.
The following table presents our fair value hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2011 and 2010, respectively:
Our Level 3 investments consist of structured notes that were purchased in the third quarter of 2009, and in 2010 also include auction rate securities which were included in the assets of the LFG Underwriters acquired on December 22, 2008. The structured notes are held for general investment purposes and represent less than one percent of our total investment portfolio. The structured notes are classified as other long-term investments and are measured in their entirety at fair value with changes in fair value recognized in earnings. The fair value of these instruments are the product of a proprietary valuation model utilized by the trading desk of the broker-dealer and contain assumptions relating to volatility, the level of interest rates, and the underlying value of the indexes, exchange-traded funds, and foreign currencies. We review the pricing methodologies for our Level 3 investments to
Other Intangible Assets. We have intangible assets that were acquired through business acquisitions. These assets consist of purchased customer relationships, trademarks, contracts, and the excess of purchase price over the fair value of identifiable net assets acquired (goodwill), discussed above. The determination of estimated useful lives and the allocation of the purchase price to the fair values of the intangible assets requires significant judgment and may affect the amount of future amortization on intangible assets other than goodwill.
The valuation of intangible assets such as purchased customer relationships and contracts involves significant estimates and assumptions concerning matters such as customer retention, future cash flows and discount rates. If any of these assumptions change, it could affect the carrying value of these assets in the future. Purchased customer relationships are amortized over their estimated useful lives using an accelerated method which takes into consideration expected customer attrition rates over a ten-year period. Contractual relationships are generally amortized using the straight-line method over their contractual life. Trademarks are considered intangible assets with indefinite lives and are reviewed for impairment at least annually. There were no impairment charges recorded relating to intangible assets during 2011, 2010 or 2009.
Revenue Recognition. Our direct title insurance premiums and escrow, title-related and other fees are recognized as revenue at the time of closing of the related transaction as the earnings process is then considered complete, whereas premium revenues from agency operations and agency commissions include an accrual based on estimates using historical information of the volume of transactions that have closed in a particular period for which premiums have not yet been reported to us. The accrual for agency premiums is necessary because of the lag between the closing of these transactions and the reporting of these policies to us by the agent. Historically, the time lag between the closing of these transactions by our agents and the reporting of these policies, or premiums, to us has been up to 15 months, with 60-70% reported within three months following closing, an additional 20-30% reported within the next three months and the remainder within seven to fifteen months. In addition to accruing these earned but unreported agency premiums, we also accrue agent commission expense, which was 77.1%, 78.6% and 79.6% of agent premiums
Total revenue in 2011 decreased $573.7 million compared to 2010, reflecting a decrease in both the Fidelity National Title Group and the corporate and other segments. Total revenue in 2010 decreased $108.0 million compared to 2009, reflecting a decrease in the Fidelity National Title Group segment offset by an increase in the corporate and other segment.
Escrow, title-related and other fees increased $27.7 million, or 2.0%, in 2011 compared to 2010, consisting of an increase of $38.9 million in the Fidelity National Title Group segment offset by a decrease of $11.2 million in the corporate and other segment. Escrow, title-related and other fees decreased $22.6 million, or 1.6% in 2010 compared to 2009, consisting of decreases of $47.9 million in the Fidelity National Title Group segment offset by an increase of $25.3 million in the corporate and other segment.
The change in revenue from operations is discussed in further detail at the segment level below.
Net realized gains and losses totaled $6.7 million, $235.7 million, and $25.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. The net realized gain for the year ended December 31, 2011 includes $28.2 million net gains on
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 $1,578.0 million, $1,578.6 million, and $1,620.0 million for the years ended December 31, 2011, 2010 and 2009, respectively. Personnel costs as a percentage of total revenues were 32.6%, 29.2%, and 29.3% for the years ended December 31, 2011, 2010, and 2009, respectively. In the Fidelity National Title Group segment, the decrease of $17.9 million in 2011 from 2010 is due mainly to decreases in open and closed order counts. The decrease in personnel costs of $44.1 million in 2010 from 2009 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 earned in 2009 by certain executives upon realizing our synergy goals with respect to the acquisition of the LFG Underwriters. Average employee count in the title segment increased to 17,036 in 2011 from 16,747 in 2010 and decreased in 2010 from 17,411 in 2009. Personnel costs in the title segment as a percentage of total revenues from direct title premiums and escrow, title-related and other fees were 54.3%, 56.3% and 55.5% for the years ended December 31, 2011, 2010, and 2009, respectively. The increase in personnel costs in the corporate and other segment of $17.3 million in 2011 from 2010 is due mainly to higher bonus accruals earned as part of our cost savings initiative as well as improved overall profitability. Personnel costs in the corporate and other segment increased $2.7 million in 2010 from 2009. Included in personnel costs is stock-based compensation expense of $26.6 million, $25.1 million, and $33.7 million for the years ended December 31, 2011, 2010, and 2009, respectively.
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 title claim losses is discussed in further detail below at the segment level.
Income tax expense was $134.4 million, $189.8 million, and $96.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. Income tax expense as a percentage of earnings from continuing operations before income taxes for the years ended December 31, 2011, 2010, and 2009 was 32.4%, 34.6%, and 30.7%, respectively. The fluctuation in income tax expense as a percentage of earnings from continuing operations before income taxes is attributable to our estimate of ultimate income tax liability and changes in the characteristics of net earnings year to year, such as the weighting of operating income versus investment income.
Equity in earnings (losses) of unconsolidated affiliates was $9.7 million, $(1.2) million, and $(11.7) million for the years ended December 31, 2011, 2010, and 2009, respectively, and consisted of our equity in the net earnings (losses) of Ceridian, Remy, other investments in unconsolidated affiliates and our former investment in Sedgwick in 2010 and 2009.
In 2011, the proportion of agency premiums to direct premiums decreased, with agency premiums comprising 56.1% of total premiums in 2011, compared with 61.4% in 2010. In 2010 the proportion of agency premiums to direct premiums decreased slightly to 61.4% of total premiums, compared with 62.4% in 2009.
The decrease of $407.1 million in agency premiums in 2011 is primarily the result of a decrease in remitted and accrued agency premiums related to the mix of business. Our agency operations typically garner a lower percentage of commercial and refinance transactions and a higher percentage of purchase transactions. We periodically review our agency relationships and consider the agent's experience, financial condition and loss history. Also contributing to the decrease in agency premiums were strategic reductions of agency relationships based on these reviews since the 2010 period. The decrease of $215.6 million in agency premiums in 2010 is primarily the result of a decrease in remitted and accrued agency premiums that is consistent with the decrease in direct title premiums. Contributing to the decrease in remitted premiums in both periods is a significant decrease in business from one of our largest agents.
In the Fidelity National Title Group segment, escrow fees, which are more directly related to our direct operations, increased $26.5 million, or 4.9%, in 2011 compared to 2010 due to the increase in direct title premiums over the prior year. Other fees in the Fidelity National Title Group segment, excluding escrow fees, increased $12.4 million, or 1.5%, in 2011 compared to 2010 primarily due to an increase in revenues from commercial transactions offset by a decrease in revenues at a division of our business that manages real estate owned by financial institutions due to a continued delay in lender foreclosure completions. Escrow fees in the Fidelity National Title Group segment decreased $21.7 million, or 3.8%, in 2010 compared to 2009 due to the decrease in residential transactions. Other fees in the Fidelity National Title Group segment, excluding escrow fees, decreased $26.2 million, or 3.2%, in 2010 compared to 2009 primarily due to a decrease in revenues from a division of our business that manages real estate owned by financial institutions.
Net margin from agency title insurance premiums we retain as a percentage of total agency premiums increased from 21.4% in 2010 to 22.9% in 2011. The increase in 2011 is due primarily to the modification of various agency agreements since 2010 which resulted in an increase to our retained premium including our move to an 80%/20% split in New York. Also contributing to the change is a significant decrease in business from one of our largest agents from 2010 for which our retained premium was lower than that of our other agency contracts. 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 corporate and other segment consists of the operations of the parent holding company, certain other unallocated corporate overhead expenses, other smaller operations, and our share in the operations of certain equity investments, including Ceridian and Remy and our former investment in Sedgwick in 2010 and 2009. The corporate and other segment generated revenues of $46.7 million, $183.1 million and $33.3 million for the years ended December 31, 2011, 2010, and 2009, respectively.
This segment generated pretax (losses) earnings of $(115.5) million, $42.3 million, and $(72.0) million for the years ended
Cash Requirements. Our current cash requirements include operating expenses, taxes, payments of interest and principal on our debt, capital expenditures, business acquisitions, and dividends on our common stock. We paid dividends of $0.48 per share during 2011, or approximately $105.1 million. On February 8, 2012, our Board of Directors formally declared a $0.14 per share cash dividend that is payable on March 30, 2012 to stockholders of record as of March 16, 2012. The Board of Directors currently intends to maintain the quarterly cash dividend of $0.14 per share for 2012. However, the declaration of any future dividends is at the discretion of our Board of Directors. Additional uses of cash flow are expected to include stock repurchases, acquisitions, and debt repayments.
Our insurance subsidiaries generate cash from premiums earned and their respective investment portfolios and these funds are adequate to satisfy the payments of claims and other liabilities. Due to the magnitude of our investment portfolio in relation to our claims loss reserves, we do not specifically match durations of our investments to the cash outflows required to pay claims, but do manage outflows on a shorter time frame.
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, other strategic initiatives and/or conserving cash. During 2011, we were able to increase our liquidity through the sale of our flood insurance business, which generated approximately $119.5 million in net cash proceeds during 2011. During 2010, we were able to create additional liquidity through the sale of our 32% interest in Sedgwick, which generated cash proceeds of approximately $193.6 million in 2010 and $32.0 million in 2011.
Our cash flows provided by operations for the years ended December 31, 2011, 2010, and 2009 were $124.9 million, $182.5 million and $380.3 million, respectively. The decrease in cash provided by operations of $57.6 million from 2010 to 2011 is due mainly to a higher proportion of income relating to investing activities in 2010 as compared to 2011 and various smaller changes in other assets and liabilities. 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.
We used $75.0 million of the proceeds from the Notes to purchase 4,609,700 shares of our common stock at $16.27 per share in privately negotiated transactions concurrently with the issuance. We used the remaining net proceeds along with other cash on hand for repayment of $250.0 million outstanding debt on our revolving credit agreement.
with Bank of America, N.A. as Administrative Agent and Swing Line Lender, 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 160 basis points to 240 basis points over LIBOR, depending on the senior debt ratings of FNF. 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. At December 31, 2011, we were in compliance with all debt covenants. During the year ended December 31, 2011, we borrowed and repaid $200.0 million and $350.0 million, respectively, under the credit agreement. As of December 31, 2011, we had outstanding debt with a principal amount of $100.0 million under the Credit Agreement, due March 2013 with interest payable monthly at LIBOR plus 2.00% (2.28% at December 31, 2011).
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, 2011, our required annual payments relating to these contractual obligations were as follows:
Capital Stock Transactions. On April 14, 2009, we offered 15,800,000 shares of common stock at an offering price of $19.00 per share, pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The underwriters were granted and chose to exercise an option to purchase additional shares equal to 15% of the offering, or 2,370,000 shares, at the offering price. A total of 18,170,000 shares was issued on April 20, 2009, for net proceeds of approximately $331.4 million. The proceeds were used as follows: $135.0 million to repay borrowings under our $1.1 billion revolving credit facility, $71.5 million to repurchase our public bonds, $50.8 million to repurchase shares of our common stock, $25.0 million as part of a $57.1 million capital infusion into Lawyers Title and Commonwealth Land Title, and the remainder for general corporate purposes.
On October 1, 2009, pursuant to an investment agreement between us and FIS dated March 31, 2009 (the “Investment Agreement”), we invested a total of $50.0 million in FIS common stock in connection with a merger between FIS and Metavante Technologies, Inc. Under the terms of the Investment Agreement, we purchased 3,215,434 shares of FIS’s common stock at a price of $15.55 per share. Additionally, we received a transaction fee of $1.5 million from FIS. During the third quarter of 2010, we sold 1,611,574 shares as part of a tender offer by FIS at $29.00 per share for a realized gain of $21.7 million. The fair value of this investment is $42.6 million and $43.9 million as of December 31, 2011 and 2010, respectively, and is recorded in equity securities. Changes in fair value of the FIS stock are recorded as other comprehensive earnings.
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than facility and equipment leasing arrangements. On June 29, 2004 we 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, at our corporate campus and headquarters. The lessor financed the acquisition of the facilities through funding provided by third-party financial institutions. On June 27, 2011, we renewed and amended the synthetic lease for the facilities. The amended synthetic lease provides for a five year term ending June 27, 2016 and had an outstanding balance as of December 31, 2011 of $71.3 million. The amended lease includes guarantees by us of up to 83.0% 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 the end of the lease and also decline to renew the lease. The lessor is a third-party company and we have no affiliation or relationship with the lessor or any of its employees, directors or affiliates, and transactions with the lessor are limited to the operating lease agreements and the associated rent expense that have been included in other operating expenses in the Consolidated Statements of Earnings. We do not believe the lessor is a variable interest entity, as defined in the FASB standard on consolidation of variable interest entities.
For a description of recent accounting pronouncements, see note Q of Notes to Consolidated Financial Statements included elsewhere herein.
Consolidated Statements of Earnings for the years ended December 31, 2011, 2010, and 2009
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2011, 2010, and 2009
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related Consolidated Statements of Earnings, Comprehensive Earnings, Equity and Cash Flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 23, 2012 expressed an unqualified opinion on those Consolidated Financial Statements.
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, 2011, 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, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
We are a holding company that through our subsidiaries provides title insurance, mortgage services and diversified 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 2011 than any other title company in the United States. We own a minority interest in Ceridian Corporation (“Ceridian”), a leading provider of global human capital management 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 and American Blue Ribbon Holdings, LLC, an owner and operator of the Village Inn, Bakers Square and Max & Erma's restaurants.
Corporate and Other. The corporate and other segment consists of the operations of the parent holding company, certain other unallocated corporate overhead expenses, other smaller operations, and our share in the operations of certain equity investments, including Ceridian and Remy and our former investment in Sedgwick in 2009 and 2010.
The accompanying Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States (GAAP) and include our accounts as well as our wholly-owned and majority-owned subsidiaries. All intercompany profits, transactions and balances have been eliminated. Our investments in non-majority-owned partnerships and affiliates are accounted for using the equity method until such time that they become wholly or majority-owned. Earnings attributable to noncontrolling interests are recorded on the Consolidated Statements of Earnings relating to majority-owned subsidiaries with the appropriate noncontrolling interest that represents the portion of equity not related to our ownership interest recorded on the Consolidated Balance Sheets in each period.
On February 5, 2012, we entered into a definitive agreement to acquire all of the outstanding shares of common stock of O'Charley's Inc., which operates more than 340 full-service restaurants under the O'Charley's, Ninety Nine and Stoney River Legendary Steaks concepts, that we do not currently own for $9.85 per share in cash. O'Charley's Inc. had 21,967,041 shares outstanding as of December 31, 2011. We own 2,079,542 or 9.5% of the outstanding shares of O'Charley's Inc. common stock prior to the tender offer. The transaction is expected to close in May 2012 and is subject to successful completion of the tender and other customary closing conditions.
On December 27, 2011, we entered into a definitive agreement under which we will sell an 85% interest in our remaining subsidiaries that write personal lines insurance to WT Holdings, Inc. for approximately $119.5 million. The sales price is subject to typical closing adjustments based on working capital and surplus. The transaction is expected to close by the second quarter of 2012 and is subject to regulatory approval and closing conditions. Accordingly, the results of this business (which we refer to as our "at-risk" insurance business) for all periods presented are reflected in the Consolidated Statements of Earnings as discontinued
operations. The at-risk insurance business sale is expected to result in a pre-tax loss of approximately $15.1 million, which was recorded in the fourth quarter of 2011. Total revenues from the at-risk insurance business included in discontinued operations are $162.8 million, $160.9 million and $149.1 million for the years ending December 31, 2011, 2010, and 2009, respectively. Pre-tax (loss) earnings from the at-risk insurance business included in discontinued operations are $(23.6) million, $(16.4) million and $1.3 million for the years ending December 31, 2011, 2010, and 2009, respectively. Total assets of $317.4 million and total liabilities of $145.6 million related to the at-risk business are considered held for sale and are included in prepaid and other assets and accounts payable and accrued liabilities, respectively, in the Consolidated Balance Sheet as of December 31, 2011.
On May 28, 2010, we completed the sale of our 32% interest in Sedgwick, our former minority-owned affiliate that provides claims management services to large corporate and public sector entities, to a group of private equity funds. See note C 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 valued based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly. 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 analyses 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, 2011 and 2010, we determined there were no events or circumstances which indicated that the carrying value exceeded the fair value.
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, 2011, capitalized software was $186.1 million, less accumulated amortization of $158.0 million. At December 31, 2010, capitalized software was $191.7 million, less accumulated amortization of $147.7 million.
Our reserve for claim losses includes known claims as well as losses we expect to incur, net of recoupments. Each known claim is reserved based on our review as to the estimated amount of the claim and the costs required to settle the claim. Reserves for claims which are incurred but not reported are established at the time premium revenue is recognized based on historical loss experience and also take into consideration other factors, including industry trends, claim loss history, current legal environment, geographic considerations and type of policy written.
Our direct title insurance premiums and escrow, title-related and other fees are recognized as revenue at the time of closing of the related transaction as the earnings process is then considered complete, whereas premium revenues from agency operations and agency commissions include an accrual based on estimates using historical information of the volume of transactions that have closed in a particular period for which premiums have not yet been reported to us. The accrual for agency premiums is necessary because of the lag between the closing of these transactions and the reporting of these policies to us by the agent. Historically, the time lag between the closing of these transactions by our agents and the reporting of these policies, or premiums, to us has been up to 15 months, with 60-70% reported within three months following closing, an additional 20-30% reported within the next three months and the remainder within seven to fifteen months. In addition to accruing these earned but unreported agency premiums, we also accrue agent commission expense, which was 77.1%, 78.6% and 79.6% of agent premiums earned in 2011, 2010 and 2009, respectively. We also record provision for claim losses at our average provision rate at the time we record the accrual for the premiums, which was 7.0% for 2011 and 2010 and 7.3% for 2009, and accruals for premium taxes and other expenses relating to our premium accrual. The resulting impact to pretax earnings in any period is less than 10% of the accrued premium amount. The impact of the change in the accrual for agency premiums and related expenses for the years ended December 31, 2011, 2010 and 2009 on our pretax earnings was an increase (decrease) of $7.8 million, $10.7 million and $(3.4) million, respectively. The amount due from our agents relating to this accrual, i.e. the agent premium less their contractual retained commission, was approximately $91.3 million and $112.1 million at December 31, 2011 and 2010, respectively, which represents agency premiums of approximately $441.2 million and $546.0 million at December 31, 2011 and 2010, respectively, and agent commissions of $349.9 million and $433.9 million at December 31, 2011 and 2010, respectively.
Revenues from home warranty insurance policies are recognized over the life of the policy, which is one year. The unrecognized portion is recorded as deferred revenue.
Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period. In periods when earnings are positive, diluted earnings per share is calculated by dividing net earnings available to common stockholders by the sum of the weighted average number of common shares outstanding and the impact of assumed conversions of potentially dilutive securities. For periods when we recognize a net loss, diluted earnings per share is equal to basic earnings per share as the impact of assumed conversions of potentially dilutive
securities is considered to be anti-dilutive. We have granted certain options, warrants and restricted stock which have been treated as common share equivalents for purposes of calculating diluted earnings per share for periods in which positive earnings have been reported.
A summary of the agreements that were in effect with FIS through December 31, 2011, is as follows:
Real estate management and lease agreements. Included in our revenues are amounts received related to leases or subleases of certain office space and furnishings 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 $5.6 million and $8.3 million as of December 31, 2011 and 2010, respectively.
Also included in fixed maturities available for sale are FIS bonds with a fair value of $23.6 million and $27.4 million as of December 31, 2011 and 2010, respectively, as well as an FIS term loan acquired in May 2011 with a fair value of $13.0 million as of December 31, 2011.
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. A detail of related party revenues and expenses between FNF and LPS are as follows. For the period from January 1 through March 15, 2009, we recorded agency title premiums of $84.2 million. We recorded agency title commissions of $73.8 million for the period from January 1 through March 15, 2009. We recorded other revenue of $4.9 million for the period from January 1 through March 15, 2009. Other operating expenses relating to agreements with LPS were $18.9 million for the period from January 1 through March 15, 2009.
We account for stock-based compensation plans using the fair value method. 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.
Certain reclassifications have been made in the 2010 and 2009 Consolidated Financial Statements to conform to the classifications used in 2011.
The following table presents the changes in our investments that are classified as Level 3 for the years ended December 31, 2011 and 2010 (in millions).
The carrying amounts of short-term investments, 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 H.
The carrying amounts and fair values of our available for sale securities at December 31, 2011 and 2010 are as follows:
The change in net unrealized gains and losses on fixed maturities for the years ended December 31, 2011, 2010, and 2009 was $(9.9) million, $(52.5) million, and $150.0 million, respectively.
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. Included above in amounts subject to call are $1,024.0 million and $1,047.5 million in amortized cost and fair value, respectively, of fixed maturity securities with make-whole call provisions as of December 31, 2011.
Equity securities at December 31, 2011 and 2010 consisted of investments at a cost basis of $83.2 million and $51.1 million, respectively, and fair value of $105.7 million and $75.2 million, respectively. Equity securities are carried at fair value. The balance of equity securities includes an investment in FIS stock, which we purchased on October 1, 2009 for $50.0 million, pursuant to an investment agreement between us and FIS dated March 31, 2009 in connection with a merger between FIS and Metavante Technologies, Inc. During the third quarter of 2010, we sold 1,611,574 shares as part of a tender offer by FIS at $29.00 per share for a realized gain of $21.7 million. The fair value of this investment is $42.6 million and $43.9 million as of December 31, 2011 and 2010, respectively. The change in unrealized gains (losses) on equity securities for the years ended December 31, 2011, 2010
Net unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2011 and 2010 are as follows (in millions):
the updated guidance. As of December 31, 2011 we held $106.7 million of fixed maturity securities for which other-than-temporary impairments had been previously recognized; all of the impairments related to credit losses. In 2010, we held no investments for which an other-than-temporary impairment had been previously recognized.
During the years ended December 31, 2011, 2010, and 2009, we recorded an aggregate of $9.7 million, $(1.2) million, and $(11.7) million, respectively, in equity in earnings (losses) of unconsolidated affiliates. We account for our equity in Ceridian and Remy on a three-month and one-month lag, respectively. Accordingly, our net earnings for the year ended December 31, 2011, includes our equity in Ceridian’s earnings for the period from October 1, 2010 through September 30, 2011 and our net earnings for the year ended December 31, 2010, includes our equity in Ceridian’s earnings for the period from October 1, 2009 through September 30, 2010. Our net earnings for the year ended December 31, 2011, includes our equity in Remy's earnings for the period from December 1, 2010 through November 30, 2011 and our net earnings for the year ended December 31, 2010, includes our equity in Remy's earnings for the period from December 1, 2009 through November 30, 2010. In addition, we record our share of the other comprehensive earnings (loss) of unconsolidated affiliates. As of December 31, 2011, included within the Consolidated Statements of Equity, we had recorded accumulated other comprehensive losses of $55.0 million and $22.9 million related to our
investments in Ceridian and Remy, respectively, and less than $0.1 million related to our other investments in unconsolidated affiliates.
Amortization expense for amortizable intangible assets, which consist primarily of customer relationships, was $16.5 million, $19.1 million, and $22.1 million for the years ended December 31, 2011, 2010, and 2009, respectively. Other intangible assets primarily represent non-amortizable intangible assets such as trademarks and licenses. Estimated amortization expense for the next five years for assets owned at December 31, 2011, is $18.3 million in 2012, $14.3 million in 2013, $11.5 million in 2014, $10.5 million in 2015 and $9.4 million in 2016.
We account separately for the liability and equity components of the Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Based on market data available for our publicly traded, senior, unsecured corporate bonds, we estimated the implied interest rate of the Notes to be 5.5%, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair value of the liability component of $278.5 million, calculated as the present value of implied future payments. The $21.5 million difference between the cash proceeds of $300.0 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the Notes are not considered currently redeemable at the balance sheet date. If the Notes were converted as of December 31, 2011, the if-converted value would not exceed the principal amount. As a policy election under applicable guidance related to the calculation of diluted net income per share, we elected the net-share settlement method as our stated settlement policy and applied the treasury stock method in the calculation of the dilutive impact of the Notes, which was anti-dilutive for the year ended December 31, 2011.
In August 2011, we borrowed $200.0 million on our revolving credit agreement and subsequently repaid the remaining$165.6 million principal amount of our outstanding 7.30% notes due August 2011. In December 2011, we repaid an additional $100.0 million on our revolving credit agreement.
On December 22, 2008, in connection with the acquisition of the LFG Underwriters, we entered into a $50 million subordinated note payable to LFG, due December 2013, with interest of 2.36% payable annually. On March 1, 2010, we paid approximately $49 million to the LFG Liquidation Trust in full satisfaction of this obligation.
Our net deferred tax (liability) asset was $(95.0) million and $32.1 million at December 31, 2011, and 2010, respectively. The significant changes in the deferred taxes are as follows: The deferred tax relating to insurance reserves changed from a deferred tax asset of $29.3 million to a deferred tax liability of $75.6 million due primarily to actual title losses paid and deducted during the year, in addition to increased claims reserves established for statutory and tax purposes. Utilization of prior year capital losses caused a decrease in the deferred tax asset by $7.4 million. The deferred tax liability for investment securities changed from $30.7 million to $38.3 million due in large part to the deferred tax recorded on the discount on convertible bonds issued in August 2011 recorded in additional paid in capital. See Note H. Tax amortization of goodwill and intangible assets increased the deferred tax liability from $88.9 million to $95.7 million.
Tax benefits of $6.3 million, $3.0 million, and $2.4 million associated with the exercise of employee stock options and the vesting of restricted stock grants were allocated to equity for the years ended December 31, 2011, 2010, and 2009, respectively.
The Internal Revenue Service (“IRS”) has selected us to participate in the Compliance Assurance Program that is a real-time audit. During 2011, the IRS completed its examination of our consolidated tax return for the tax year ended 2009, which resulted in no additional tax. We are currently under audit by the Internal Revenue Service for the 2010, 2011 and 2012 tax years.
In 2008, we assumed an estimated $1,115.8 million in additional reserves for claim losses with the acquisition of the LFG Underwriters. During 2009 we completed our evaluation of the fair value of this claims reserve as of the acquisition date and adjusted the balance by $3.1 million to reflect our best estimate of the fair value of the liability.
In 2011, we entered into agreements to sell our at-risk insurance businesses, resulting in a decrease to the reserve for claim losses of $59.2 million. See Note A under "Discontinued Operations".
Beginning in 2007, we began making payments on a group of related claims alleging negligence and fraud related to issuing title insurance policies and closing escrow transactions. We believed that we had the ability to recoup all of these payments, subject to a $10 million retention, from various insurance policies. Through December 31, 2007, we had paid approximately $51.9 million in claims, had received cash recoupment from insurance carriers of approximately $15.5 million and had an insurance recoverable of $31.4 million included in the Consolidated Balance Sheet. Through March 31, 2008, we had paid an additional $79.3 million in claims, had received an additional $27.5 million in cash recoupment from insurance carriers and had an insurance recoverable of $78.2 million included in the Consolidated Balance Sheet. During the remainder of 2008 and through the third quarter of 2009 there were approximately $8.2 million in claims payments and approximately $3.2 million in insurance recoveries resulting in an $83.2 million insurance recoverable included in the Consolidated Balance Sheet at that time. During September and October 2009,
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings where it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and which represents our best estimate has been recorded. None of the amounts we have currently recorded is considered to be individually or in the aggregate material to our financial condition. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending cases is generally not yet determinable. While some of these matters could be material to our operating results for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition, results of operations or cash flows.
On November 24, 2010, plaintiffs filed a purported class action in the United States District Court, Northern District of California, Oakland Division titled Vivian Hays, et al. vs. Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation, which we refer to as the Hays action. Plaintiffs seek to represent a class of all persons who deposited their exchange funds with LandAmerica 1031 Exchange Service (“LES”) and were not able to use them in their contemplated exchanges due to the alleged illiquidity of LES caused by the collapse of the auction rate security market in early 2008. Plaintiffs allege Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation (which was merged into Fidelity National Title Insurance Company) knew of the problems at LES and had an obligation of disclosure to exchangers, but did not disclose and instead recommended exchangers use LES in order to fund prior exchangers' transactions with money from new exchangers. In the initial complaint, plaintiffs sued our subsidiaries Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation for negligence, breach of fiduciary duty, constructive fraud and aiding and abetting LES. Plaintiffs ask for compensatory and punitive damages, prejudgment interest and reasonable attorney's fees. The case was transferred on our motion to a Multi-District Litigation proceeding in South Carolina and a status conference was held on April 22, 2011. This case was stayed until a decision was made on motions pending in a similar class action against an unrelated party. The court in that case ruled on June 15, 2011 on the motion to dismiss the complaint filed by the unrelated party and dismissed the complaint. The plaintiffs in the case against Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation filed an amended complaint on August 15, 2011. The complaint added approximately twenty new plaintiffs and two new defendants; Commonwealth Land Title Company and LandAmerica Charter Title Company, both of which are affiliates of FNF. It also expanded the causes of action. The new causes of action are aiding and abetting fraud committed by LES; conspiracy to commit fraud with LES; aiding and abetting breach of fiduciary duty by LES; aiding and abetting conversion of trust funds by LES; enterprise liability; negligence; breach of fiduciary duty; conversion of escrow funds and RICO liability. We filed a motion to dismiss the second amended complaint on September 30, 2011 as we believe we have strong legal and factual defenses to this action. The amended complaint
as that of each state in which it is licensed. The insurance commissioners of their respective states of domicile are the primary regulators of our title insurance subsidiaries. Each of the insurers is subject to periodic regulatory financial examination by regulatory authorities, and certain of these examinations are currently ongoing.
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, 2011 and 2010, respectively, was lower by approximately $255.1 million and $288.1 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. 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. On January 27, 2011, our Board of Directors approved an additional 5 million shares that may be repurchased under the program. In the year ended December 31,
2011, we repurchased a total of 5,419,850 shares for $86.2 million, or an average of $15.90 per share. Included in our share repurchases during 2011 were 4,609,700 shares for $75.0 million or an average $16.27 per share, purchased utilizing proceeds from the $300.0 million convertible note offering. Since the original commencement of the plan adopted July 21, 2009, we have repurchased a total of 15,378,512 shares for $221.7 million, or an average of $14.42 per share, and there are 4,621,488 shares available to be repurchased under the plan.
We contributed $12.6 million, $11.9 million, and $11.4 million to the ESPPs in the years ended December 31, 2011, 2010, and 2009, respectively, in accordance with the employer’s matching contribution.
401(k) profit sharing plans (the “401(k) Plans”), qualified voluntary contributory savings plans which are available to substantially all of our employees. Eligible employees may contribute up to 40% of their pretax annual compensation, up to the amount allowed pursuant to the Internal Revenue Code. There was no employer match for the years ended December 31, 2011, 2010, and 2009. Beginning in 2012, we initiated an employer match on the 401(k) plan whereby we will match $0.25 on each $1.00 contributed up to the first 6% of eligible earnings contributed to the Plan. The employer match will be credited to the FNF Stock Fund, in the FNF 401(k) Plan.
Stock option transactions under the Omnibus Plan for 2009, 2010, and 2011 are as follows:
The risk free interest rates used in the calculation of compensation cost are the rates that correspond to the weighted average expected life of an option. The volatility was estimated based on the historical volatility of FNF’s stock price over a term equal to the weighted average expected life of the options. For options granted in the years ended December 31, 2011, 2010, and 2009, we used risk free interest rates of 1.0%, 2.0%, and 2.5%, respectively; volatility factors for the expected market price of the common stock of 53%, 57%, and 53%, respectively; expected dividend yields of 3.1%, 5.0%, and 3.9%, respectively; and weighted average expected lives of 4.7 years, 4.4 years, and 4.8 years, respectively. The weighted average fair value of each option granted in the years ended December 31, 2011, 2010, and 2009, were $5.56, $4.57, and $5.32, respectively.
At December 31, 2011, the total unrecognized compensation cost related to non-vested stock option grants and restricted stock grants is $43.5 million, which is expected to be recognized in pre-tax income over a weighted average period of 1.66 years.
We assumed certain health care and life insurance benefits for retired Chicago Title employees in connection with the Chicago
Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse
In May 2011, the FASB updated ASC Topic 820, to clarify requirements on fair value measurements and related disclosures. This update is effective for interim and annual periods beginning after December 15, 2011. The additional requirements in this update will be included in the note on fair value measurements upon adoption. We do not expect this update to have a material impact on our financial condition or results of operations.