The historical operating results data, per share data and balance sheet data set forth below are derived from the Consolidated Financial Statements of the Company. Per share data has been retroactively adjusted for stock dividends and splits since the Company's inception. The Consolidated Financial Statements for years ended December 31, 1995, 1994, 1993, 1992 and 1991 have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Audited Consolidated Balance Sheets at December 31, 1995 and 1994 and Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for the years ended December 31, 1995, 1994, and 1993, and Notes thereto are included elsewhere herein and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.
(1) The Company acquired Fidelity Pennsylvania and ATIC on June 30, 1992. The selected financial data above includes the balance sheet accounts of Fidelity Pennsylvania and ATIC at December 31, 1995, 1994, 1993 and 1992 and the results of their operations for the years ended December 31, 1995, 1994 and 1993 and the six months ended December 31, 1992.
(2) The Company acquired Fidelity New York on March 17, 1993. See Note B of Notes to Consolidated Financial Statements. The selected financial data above includes the balance sheet accounts of Fidelity New York at December 31, 1995, 1994 and 1993 and the results of its operations for the years ended December 31, 1995 and 1994 and the period from March 17, 1993 through December 31, 1993.
(3) The Company acquired Agency Sales and Posting, Pente Enterprises, Inc. and Arizona Sales and Posting, Inc. (collectively, "ASAP") on December 7, 1993. This acquisition was accounted for as a pooling of interests, and certain Selected Financial Data has therefore been restated. See Note A of Notes to Consolidated Financial Statements. The Selected Financial Data above includes the balance sheet accounts of ASAP at December 31, 1995, 1994, 1993, 1992 and 1991, respectively, and the results of ASAP operations for the years then ended.
(7) Average fee per file is based upon title insurance premiums, escrow fees and certain other title related fees from direct operations divided by orders closed.
The following discussion is intended to provide information to facilitate the understanding and assessment of significant changes and trends related to the financial condition and results of operations of the Company. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements and the Notes thereto appearing elsewhere herein.
(1) The net claims paid ratio is the percentage resulting from total title claims paid, net of recoupments, divided by title insurance premiums.
(2) Percentage return on average equity is net earnings for the period divided by the simple average of total stockholders' equity as of the beginning and end of each year presented.
Title insurance revenue is closely related to the level of real estate activity and the average price of real estate sales. Real estate sales are directly affected by the availability of funds to finance purchases. Other factors affecting real estate activity include demand, mortgage interest rates, family income levels and general economic conditions. While the level of sales activity was relatively depressed in certain geographical areas during the period 1991 through mid-1993, lower mortgage interest rates beginning in the latter part of 1991 triggered an increase in refinancing activity which continued at record levels through 1993 and into the first quarter of 1994. During 1994 and early 1995, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions and a stagnation in residential resales and new home sales. Since late 1995, decreases in mortgage interest rates and the resulting improvement in the real estate market have had a favorable effect on the level of real estate activity, including refinancing transactions, new home sales and resales.
The Company's direct operations generate escrow fees from holding funds and documents in connection with the closing of real estate transactions, as well as other fees and revenue. Other fees and revenue primarily include document preparation fees, reconveyance fees, real estate information fees, foreclosure publishing and posting fees, exchange intermediary fees and fees received by ACS Systems, Inc. See Note B of Notes to Consolidated Financial Statements.
The trends in escrow fees are primarily related to the title insurance activity generated by the Company's direct operations. Escrow fees have fluctuated during the 1995, 1994 and 1993 years in a pattern generally consistent with the fluctuation in title insurance premiums. Escrow fees have decreased $2.6 million to $49.7 million in 1995, a 5.0% decrease from $52.3 million in 1994. The 1995 percentage decrease in escrow fees is not as significant as the percentage decrease in title premiums due to the change in the direct operation/agency business mix. See "Overview." Escrow fees decreased $17.7 million, or 25.3%, in 1994 from 1993 to $52.3 million from $70.0 million. The decrease in escrow fees in 1994 from 1993 is greater than the decrease in title insurance premiums due to the increase in agency title insurance premiums as a percentage of total title related revenue. Agency title insurance premiums do not generate escrow fees for the Company.
Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. During 1995, interest and investment income increased $5.7 million, or 47.9%, to $17.6 million from $11.9 million in 1994. The tax adjusted yield decreased slightly, to 6.4% in 1995 compared to 6.7% in 1994, while average invested assets, excluding real estate, decreased 23.0%, or $69.8 million, to $233.8 million in 1995 from $303.6 million in 1994. The difference in investment results is primarily attributable to the net capital gains (losses) recorded in 1995 versus 1994. During 1995, the Company recognized $5.2 million in capital gains compared to $3.1 million in capital losses recognized in 1994. Included in the gain amount is a net $3.4 million gain realized upon the sale of the Company's US Facilities Corporation common stock holdings during the third quarter of 1995. See "Recent Developments."
EXTRAORDINARY ITEM. During 1994, due to favorable market prices and the Company's belief that the Company's Common Stock and LYONs represent excellent investments, the Board of Directors authorized the Company to repurchase up to 5.5 million shares of its Common Stock or a comparable amount of its LYONs which are convertible into 21.095 shares of Common Stock per $1,000 maturity of LYONs. In accordance with this authorization, the Company purchased $48 million principal amount of LYONs at an average purchase price of $366.51 per $1,000 maturity of LYONs. As a result of the LYONs purchase transactions, the Company recorded an extraordinary gain on the early retirement of debt of $2.4 million, net of the related income tax effect. In March 1995, the board of directors authorized the repurchase of an additional 2.2 million shares of Common Stock or the equivalent amount of LYONs increasing the total amount authorized to 7.7 million shares or the equivalent amount of LYONs. See "Liquidity and Capital Resources" and "Recent Developments."
The Company's operating expenses primarily consist of personnel costs and other operating expenses which are incurred as title insurance orders are received and processed. Direct title insurance premiums and escrow fee revenue are recognized as income at the time the underlying real estate transaction closes. As a result, revenue lags approximately 60-90 days behind expenses and therefore gross margins may fluctuate.
monitor the prevailing market conditions and will respond as necessary, while positioning itself to take advantage of the real estate recovery as it occurs.
The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. Based on Company loss development studies, the Company believes that as a result of its underwriting and claims handling practices, as well as the refinancing business of prior years, the Company will maintain the trend of favorable claim loss experience. Based on this information, in 1995 and 1994 the Company recorded a provision for claim losses of 7.0% of title insurance premiums prior to major claim expense, net of recoupments and the impact of premium rates and Company loss experience in the state of Texas. Premiums are generally higher in Texas for similar coverage than in other states, while loss experience is comparable. As a result, losses as a percentage of premiums are lower. These factors resulted in a net provision for claim losses of 6.7% and 7.5% in 1995 and 1994, respectively. In 1993 the Company provided for claim losses at 9.0% of title premiums prior to major claim expense, net of recoupments and the impact of premium rates and Company loss experience in the state of Texas. The net provision for claim losses was 9.1% in 1993.
Minority interest expense in 1993 represents primarily accrued dividends for the year on $20.0 million of ATIC's Redeemable Series A Preferred Stock ("ATIC Preferred Stock"), held by Fidelity Pennsylvania's former parent, at an adjusted rate of 6.0% per annum. The ATIC Preferred Stock was purchased by the Company in March 1994. See Note A of Notes to Consolidated Financial Statements.
effective income tax rate decreased. See Note H of Notes to Consolidated Financial Statements for additional information regarding income taxes.
Two of the significant sources of the Company's funds are dividends and distributions from its subsidiaries. As a holding company, the Company receives cash from its subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses it incurs. The reimbursements are executed within the guidelines of various management agreements among the Company and its subsidiaries. Fluctuations in operating cash flows are primarily the result of increases or decreases in revenue. See "Overview." The Company's Insurance Subsidiaries and UTCs collect premiums and pay claims and operating expenses. The Insurance Subsidiaries also have cash flow sources derived from investment income, repayments of principal and proceeds from sales and maturities of investments and dividends from subsidiaries. Positive cash flow from Insurance Subsidiaries is invested primarily in short term investments and medium term bonds. Short term investments held by the Company's Insurance Subsidiaries provide liquidity for projected claims and operating expenses. The Insurance Subsidiaries are restricted by state regulations in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which the Company's six title underwriters can pay dividends or make other distributions to the Company. The UTCs are also regulated by insurance regulatory or banking authorities. Positive cash flow from the UTCs is invested primarily in cash and cash equivalents.
For purposes of satisfying insurance regulatory requirements, the Company is required to maintain certain levels of readily marketable securities and other liquid assets. At December 31, 1995, the fair value of the Company's total investment securities was $180.1 million. These investments consist of securities which the Company believes are readily marketable and could be liquidated if necessary. See "Business -- Investment Policies and Investment Portfolio."
During September 1995, the Company reached agreement on the terms of a $35 million credit facility with a banking syndicate led by Chase Manhattan Bank N.A. The facility includes a $22 million term loan and a $13 million revolving credit facility. The $22 million term loan has been used to refinance higher rate indebtedness and for general corporate purposes. The $13 million revolving credit facility is available to fund a portion of the Nations Title Inc. acquisition and for general corporate purposes. See "Recent Developments."
In February 1994, the Company issued zero coupon, convertible subordinated Liquid Yield Option Notes due February 2009 at an interest rate of 5.5% with a principal amount at maturity of $235,750,000. Net proceeds to the Company were approximately $101,000,000. The proceeds were used for investment and
In March 1993, the Company issued $22.5 million in Series A and B Senior Secured Notes due in April 1995, February 1998 and February 2000. The proceeds of this debt offering were used to purchase Fidelity New York. See Notes B and G of Notes to Consolidated Financial Statements for further details. In order to reduce interest expense incurred and interest rates paid, the Senior Notes were repaid during 1995. See "Results of Operations -- Extraordinary Item." In April 1993, the Company issued 1,402,000 shares of Common Stock, providing net proceeds to the Company of $17.8 million. The proceeds were used for general corporate purposes.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. Statement 121 requires that under certain conditions entities perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is
Statement of Financial Accounting Standards No. 123 ("Statement 123"), "Accounting for Stock-Based Compensation", was issued by the Financial Accounting Standards Board in October 1995. Statement 123 applies to all transactions in which an entity acquires goods or services by issuing instruments or by incurring liabilities where the payment amounts are based on the entity's common stock price, except for employee stock ownership plans ("ESOPs"). Statement 123 covers transactions with employees and non-employees and is applicable to both public and non-public entities. Statement 123 establishes a new method of accounting for stock-based compensation arrangements with employees. The new method is a fair value method rather than the intrinsic value method that is contained in Accounting Pronouncements Board Opinion No. 25 ("Opinion 25"). However, the Statement does not require an entity to adopt the new fair value based method for purposes of preparing its basic financial statements. Entities are allowed (1) to continue to use the Opinion 25 method or (2) to adopt the Statement 123 fair value based method. Once the fair value based method is adopted, an entity cannot change back to the Opinion 25 method. Also, the selected method applies to all of an entity's compensation plans and transactions. The Statement 123 fair value based method will result in higher compensation cost than the Opinion 25 intrinsic value based method for fixed stock option compensation plans and will result in a different compensation cost for variable stock option compensation plans. Sometimes the amount will be higher and sometimes the amount will be lower. Also, many employee stock purchase plans that are considered noncompensatory under Opinion 25 will be compensatory and result in the recognition of compensation costs under the fair value based method. For entities not adopting the Statement 123 fair value based method, the Statement creates a unique financial reporting situation. It requires entities that retain the Opinion 25 method for preparing their basic financial statements to display in the footnotes pro forma net income and earnings per share information as if the fair value based method had been adopted. Thus, these entities are required to account for employee compensation arrangements by two different methods and must present two separate measures of results of operations. Statement 123 is effective for fiscal years beginning after December 15, 1995. The Company intends to continue using the Opinion 25 method when accounting for stock based compensation in its basic financial statements upon adoption of Statement 123. The Company will choose the pro forma disclosure method.
Statement of Position 94-6 ("SOP 94-6"), "Disclosure of Certain Significant Risks and Uncertainties," was issued in December 1994. SOP 94-6 requires disclosures about certain risks and uncertainties that could significantly affect the amounts reported in an entity's financial statements in the near term and relate to: the nature of operations, the necessary use of estimates in the preparation of financial statements and significant concentrations in certain aspects of the entity's operations. SOP 94-6 is applicable to financial statements of both public and non-public companies, but does not cover governmental entities. SOP 94-6 is effective for financial statements issued for fiscal years ending after December 15, 1995. The Company has included SOP 94-6 related disclosures in its 1995 Consolidated Financial Statements.
On March 31, 1994, the Company purchased from Meridian Bank the ATIC Preferred Stock for $15.5 million, which represented a discount of approximately $6.2 million. As part of the agreement with Meridian Bank to purchase the ATIC Preferred Stock, the Company released Meridian Bank from its obligations to provide an additional $11 million in claims protection pursuant to the purchase agreement for
Fidelity Pennsylvania and ATIC. The Company believes that the loss reserves for Fidelity Pennsylvania and ATIC, when combined with the $6.2 million reduction in the purchase price of the ATIC Preferred Stock, which has been added to reserves for claim losses, will be sufficient to meet pre-1992 policy claims. This $11 million, in addition to the $20 million of ATIC Preferred Stock, had been available as protection to offset claim losses on pre-1992 policies in excess of assumed reserves if necessary, and therefore any development on the pre-1992 policies had not been reflected in the Company's Statements of Earnings. Subsequent to the Company's purchase of the ATIC Preferred Stock, adverse or favorable loss development on these pre-1992 policies is reflected in the Consolidated Statements of Earnings of the Company.
On April 26, 1994, The Company announced that it had made a proposal to acquire the outstanding stock of US Facilities Corporation ("US Facilities") for $15 per share. After numerous discussions with the US Facilities Board of Directors relative to the Company's acquisition of, or additional investment in, US Facilities, the Company and US Facilities Board of Directors were unable to come to a mutually acceptable agreement. During the third quarter of 1995 the Company disposed of its US Facilities holdings, recording a net realized gain of approximately $3.4 million, which has been included in the Company's 1995 Consolidated Statement of Earnings.
Effective August 15, 1994, the Company executed an Asset Option Agreement with WTC Financial ("WTC") and World Tax Service ("World Tax") to acquire an option to purchase a 60 percent undivided interest in all of the assets of World Tax for $3 million. Additional terms of the transaction included an option to WTC, World Tax's parent company, to purchase 110,000 shares of the Company's Common Stock at $13.18 per share. The Company also agreed to provide World Tax with a working capital line of credit in the amount of $2 million to be utilized exclusively by World Tax to fund operating and expansion needs.
On June 22, 1995, the Company acquired 100% of the common stock of World Tax, now known as Fidelity National Tax Service, from WTC for $1.8 million. The Company had previously executed an Asset Option Agreement ("Agreement") with WTC to acquire an option to purchase a 60% undivided interest in all of the assets of World Tax for $3.0 million. In connection with the Agreement, WTC was granted an option to purchase 110,000 shares of the Company's Common Stock at $13.18 per share. The option to purchase shares was acquired from WTC as part of the World Tax transaction. This transaction has been accounted for as a purchase.
During 1994, the Company paid $2.3 million in order to acquire a 100% ownership interest in an investment property where the Company had previously leased office space. The $2.3 million purchase price consisted of an $800,000 payment for the partnership interests of two third parties, and a $1.5 million payment to satisfy the then existing debt on the property. Two officers of the Company also held partnership interests in the property at the time of the acquisition. The partnership interests of the officers were transferred to the Company upon satisfaction of the debt. The Company disposed of the property during 1995 for its approximate book value.
On March 8, 1995, the Company acquired the common stock of Western Title Company of Washington, an underwritten title company with operations in King County (Seattle) and Snohomish County (Everett) in the state of Washington. Western Title Company of Washington was acquired from its selling shareholder for $3.2 million in cash. In addition, the Company also has an option to purchase a title plant in Pierce County (Tacoma), Washington. The Washington acquisition will operate as a subsidiary of the Company in King and Snohomish Counties under the name Fidelity National Title Company of Washington. The acquisition has been accounted for as a purchase.
On March 9, 1995, the Company announced that its board of directors authorized the additional repurchase, in the open market or in privately negotiated transactions, of up to 2.2 million shares of its Common Stock, or comparable amount of the Company's LYONs. This is in addition to the 5.5 million shares or comparable amount of LYONs previously authorized for repurchase by the board of directors -- 1.1 million shares on March 31, 1994, 1.1 million shares on June 15, 1994, and an additional 3.3 million shares on August 11, 1994. Any shares repurchased will initially be held by the Company. A limited number of shares may be used for various stock-based employee benefit programs, and the remainder will be used for other general corporate purposes. As of March 18, 1996, the Company had repurchased 5,168,853 shares of its Common Stock for an aggregate price of $56.3 million, or $10.89 per share. Additionally, as of March 18, 1996, the Company had repurchased $48 million in maturity amount of LYONs for an aggregate price of $17.6 million, all of which were purchased in 1994. The repurchase of the LYONs resulted in an extraordinary gain of $2.4 million which is net of related income taxes, unamortized debt issuance costs and amortized original issue discount, and is reflected in the 1994 Consolidated Statement of Earnings.
On May 2, 1995, the Company acquired the common stock of Butte County Title Company, an underwritten title company with operations in Butte County in the state of California. Butte County Title Company was acquired from its selling shareholders for $400,000 in cash, which approximated book value. The acquired company operates as a subsidiary of the Company in Butte County, and is now known as Fidelity National Title Company of California. The acquisition has been accounted for as a purchase.
first quarter of 1996, following final determination of the purchase price. The Company believes that the combination of its direct operations and Nations' strong agency network will provide a balance to Fidelity's title premium revenue between direct and agency, as well as hedge against future market downturns. Once assimilated, this acquisition should increase the Company's operating efficiencies and produce certain economies of scale, resulting in increased profits and enhancing its balance sheet. The Nations acquisition will significantly increase market share in areas where Fidelity National Financial, Inc. and subsidiaries have a limited presence, particularly in those areas where business in primarily agent driven, as well as in states where the Company currently has a strong position, while increasing its presence in the key title insurance states.
On March 1, 1996, the Company delivered a Notice of Stockholder Intention to Submit Business to Giant. The Company intends to appear at Giant's 1996 Annual Meeting to elect four persons to the Board of Directors of Giant. Each of the four nominees has informed the Company that they believe it is in the best interests of the stockholders of Giant to merge into the Company. The Company currently owns 705,489 shares of the common stock of Giant (14.8%).
On March 6, 1996, the Company's Board of Directors declared a cash dividend of $.07 per share which will be payable on May 3, 1996, to stockholders of record on April 15, 1996.
SEASONALITY. Historically, the greatest volume of residential resale activity has occurred in the spring and summer months. However, events during the past five years, including numerous actions taken by the Federal Reserve Board, have caused unusual fluctuations in real estate activity, particularly in the seasonal pattern of residential resale and refinance activity. The Company cannot predict whether the historical pattern of residential resale and refinance activity will continue to be affected by such outside factors.
We have audited the Consolidated Balance Sheets of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1995 and 1994 and the related Consolidated Statements of Earnings, Stockholders' Equity and Cash Flows for each of the years in the three-year period ended December 31, 1995. 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.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the consolidated financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles.
INFORMATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1992 IS RESTATED.
Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the "Company"), Fidelity National Title Insurance Company ("Fidelity Title"), which, in turn, is the parent company of Fidelity National Title Insurance Company of California ("Fidelity California"), and Fidelity National Title Insurance Company of Tennessee ("Fidelity Tennessee"); Fidelity National Title Insurance Company of Pennsylvania ("Fidelity Pennsylvania"), which, in turn, is the parent company of American Title Insurance Company ("ATIC"); Fidelity National Title Insurance Company of New York ("Fidelity New York") and Fidelity National Title Insurance Company of Texas ("Fidelity Texas"), which was merged into Fidelity Title in December 1993, (collectively, the "Insurance Subsidiaries"); and its wholly owned underwritten title companies (collectively, "the UTCs"), including Fidelity National Title Company ("FNTC") and Fidelity National Title Company of California ("FNCAL"), is one of the largest national underwriters engaged in the business of issuing title insurance policies and performing other title related services such as escrow, collection and trust activities, real estate tax information services, trustee sale guarantees, foreclosure publishing and posting services and exchange intermediary services in connection with real estate transactions. Title insurance services are provided primarily through the Company's direct operations and otherwise through independent title insurance agents who issue title policies on behalf of the Insurance Subsidiaries. Title insurance is generally accepted as the most efficient means of determining title to, and the priority of interests in, real estate in nearly all parts of the United States. Today, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made or to allow the sale of loans in the secondary market.
In December 1993, the Company acquired, for 470,136 shares of Common Stock, all of the capital stock of a group of three companies Agency Sales and Posting, Pente Enterprises, Inc. and Arizona Sales and Posting, Inc. (collectively, "ASAP"), that are in the business of providing newspaper publication and posting of notices of real estate foreclosure sales, conducting such sales and providing publication of other legal notices. The transaction has been accounted for as a pooling of interests.
The results of operations of the separate enterprises and the combined amounts presented in the Consolidated Financial Statements as a result of the pooling of interests are summarized below:
- --------------- (1) Prior to the acquisition, Agency Sales and Posting and Arizona Sales and Posting, Inc. reported as S Corporations for income tax reporting purposes, with all earnings treated as if distributed to the stockholders and taxable to them. As a result, no provision for income taxes had been recorded by Agency Sales and Posting and Arizona Sales and Posting, Inc. prior to the acquisition by the Company. Pro forma adjustments have not been made to the results of operations to present income taxes which would otherwise have been incurred by these entities as these adjustments would be immaterial. See Note H.
The carrying amounts reported in the Consolidated Balance Sheets for trade receivables approximate their fair value.
Cost in excess of net assets acquired and other intangible assets
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("Statement 109"), "Accounting for Income Taxes." Statement 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities and expected benefits of utilizing net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, are applied to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted. The cumulative effect of the adoption of Statement 109 was not material at January 1, 1993, nor to the results of operations for the year ended December 31, 1993.
protection to offset claim losses on pre-1992 policies in excess of assumed reserves if necessary, and therefore any development on the pre-1992 policies had not been reflected in the Company's Consolidated Statements of Earnings. Subsequent to the Company's purchase of the ATIC Preferred Stock, adverse or favorable loss development on these pre-1992 policies is reflected in the Consolidated Statements of Earnings of the Company.
In the ordinary course of business, the Company reinsures certain risks with other insurers for the purpose of limiting its maximum loss exposure and also assumes reinsurance for certain risks of other insurers for the purpose of earning additional revenue. The Company cedes or assumes a portion of certain policy liabilities under agent fidelity, excess of loss, and case-by-case reinsurance agreements. Reinsurance agreements provide that in the event of a loss (including costs, attorneys' fees and expenses) exceeding the retained amounts, the reinsurer is liable for the excess amount assumed. However, the ceding company remains primarily liable in the event the reinsurer does not meet its contractual obligations. Reinsurance activity is not significant.
Fidelity Title, domiciled in Arizona, prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the Department of Insurance of the State of Arizona. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (the "NAIC"), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed.
The Company received written approval from the Department of Insurance of the State of Arizona to admit certain accounts receivable related to its trustee sale guarantees which have aged to 180 days outstanding. This differs from prescribed statutory accounting practices. Statutory accounting practices prescribed by Arizona require that accounts receivable aged greater than 90 days outstanding be non-admitted. As of December 31, 1995, that permitted transaction increased statutory surplus by $2.3 million over what it would have been had the prescribed accounting practice been followed.
On November 15, 1993, the Company declared a 3 for 2 stock split, payable in the form of a 50% stock dividend, to shareholders of record on December 8, 1993, distributed December 23, 1993.
Earnings per share is computed by dividing net earnings by the weighted average number of common and common equivalent shares outstanding during the period. The Company has granted certain options and warrants which have been treated as common share equivalents for purposes of calculating primary and fully diluted earnings per share. The Liquid Yield Option Notes ("LYONs") are considered other dilutive securities for purposes of calculating fully diluted earnings per share to the extent that they are not antidilutive. Primary and fully diluted earnings per share are approximately the same for all periods presented.
Certain reclassifications have been made in the 1994 and 1993 Consolidated Financial Statements to conform to the classifications used in 1995.
In March 1993, the Company acquired the common stock of Fidelity National Title Insurance Company of New York ("Fidelity New York"), (formerly Security Title and Guaranty Company), a New York based title insurance underwriter, from Helmsley Enterprises, Inc. for $21.0 million in cash. Fidelity New York had a net book value before purchase accounting adjustments of $31.7 million on the date of acquisition. The acquisition has been accounted for as a purchase. The acquisition of Fidelity New York was financed through the private placement in March 1993 of 8.375% Senior Secured Notes, Series A, in the aggregate principal amount of $12.5 million and 8.735% Senior Secured Notes, Series B in the aggregate principal amount of $10 million. See Note G.
The assets acquired and liabilities assumed in the acquisition of Fidelity New York were as follows (dollars in thousands):
Selected unaudited pro forma combined results of operations for the year ended December 31, 1993, assuming the Fidelity New York acquisition occurred on January 1, 1993, are presented as follows:
In April 1994, the Company acquired all of the capital stock of ACS Systems, Inc. ("ACS") for an adjusted purchase price of 209,370 shares of the Company's Common Stock and certain future considerations
The assets acquired, including cost in excess of assets acquired, and liabilities assumed in the acquisition of ACS were as follows (dollars in thousands):
On May 2, 1995, the Company acquired the common stock of Butte County Title Company, an underwritten title company with operations in Butte County in the state of California. Butte County Title Company was acquired from its selling shareholders for $400,000 in cash, which approximated book value. The acquired company operates as a subsidiary of the Company in Butte County, and is now known as Fidelity National Title Company of California. The acquisition has been accounted for as a purchase. The Fidelity National Title Company of California results of operations were not material to the Consolidated Financial Statements.
On June 22, 1995, the Company acquired 100% of the common stock of World Tax Service ("World Tax"), now known as Fidelity National Tax Service ("Fidelity Tax"), from WTC Financial ("WTC"), the parent company of World Tax, for $1.8 million. The Company had previously executed an Asset Option Agreement ("Agreement") with WTC to acquire an option to purchase a 60% undivided interest in all of the assets of World Tax for $3.0 million. In connection with the Agreement, WTC was granted an option to purchase 110,000 shares of the Company's Common Stock at $13.18 per share. The option to purchase shares
The assets acquired and liabilities assumed in the acquisition of Fidelity National Title Company were as follows (dollars in thousands):
Selected unaudited pro forma combined results of operations for the years ended December 31, 1995 and 1994, assuming the Fidelity National Title Company of Washington, Fidelity Tax and Fidelity National Title Company acquisitions occurred on January 1, 1995 and 1994, are presented as follows:
In 1995, the Company reclassified fixed maturity securities previously classified as held to maturity to available for sale. See Note O. The carrying amounts and fair values of the Company's fixed maturity securities at December 31, 1995 and 1994 are as follows:
The carrying value of the Company's investment in equity securities is fair value. As of December 31, 1995, gross unrealized gains and gross unrealized losses on equity securities were $9,054,000 and $2,110,000, respectively. Gross unrealized gains and gross unrealized losses on equity securities were $693,000 and $3,118,000, respectively, as of December 31, 1994.
The changes in unrealized gains (losses) on equity securities for the years ended December 31, 1995, 1994 and 1993 were $9,369,000, $(2,725,000) and $250,000, respectively.
Total realized gains (losses) included in interest and investment income amounted to $5,213,000, $(3,086,000) and $4,246,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
The allowance for doubtful receivables is primarily related to notes receivable due from unconsolidated real estate partnerships. Interest income is not recognized on the Company's non-performing notes receivable.
The carrying amounts and estimated fair values of the Company's notes receivable were as follows at December 31, 1995 and 1994 (dollars in thousands):
The fair values of significant notes receivable are established using discounted cash flow analyses based on current market interest rates and comparison of rates being received to interest rates currently being offered for similar loans to borrowers with similar credit ratings. Loans with similar characteristics are aggregated for purposes of the calculations. All other notes receivable are not significant individually or in the aggregate, or are current and at market rates, and their carrying value is assumed to approximate fair value.
A note with an outstanding balance of $305,000 at December 31, 1995 and 1994, secured by a second deed of trust, is guaranteed by an officer of the Company. Secured notes with an aggregate total outstanding balance of $585,000 are due from certain officers of the Company.
Officers and directors of the Company have ownership interests in one of the partnerships formed for the development of a commercial office building and one of the partnerships formed for the development of a retail facility. The Company leases space in both the commercial office building and the retail facility. The officers and directors received varying limited partnership interests as consideration for guaranteeing certain construction loans. Two of these partnerships, representing raw land investments, also have officers and directors of the Company as partners with ownership interests that are based on cash contributions. These two partnerships require that all of the partners, including the Company, make pro-rata capital contributions should the partnerships require additional funds to pay liabilities.
At December 31, 1995 and 1994, the Company also had a 76% interest in a real estate partnership which is consolidated with the Company.
The Company's Credit Agreement, dated as of September 21, 1995, which includes a $22 million dollar term loan and a $13 million dollar revolving credit facility, is collateralized by the common stock of certain Insurance Subsidiaries. Additionally, the Company must comply with certain affirmative and negative covenants related to the Credit Agreement which require, among other things, that the Company maintain certain financial ratios related to liquidity, net worth, capitalization, investments, restricted payments and certain dividend restrictions. The Company was in compliance with these covenants. At December 31, 1995, the maximum amount available to pay dividends is $6,955,000.
The carrying amounts and estimated fair values of the Company's notes payable were as follows at December 31, 1995 and 1994 (dollars in thousands):
The effect of the change in 1993 of the Federal statutory tax rate on income tax expenses was not material.
The deferred tax assets and liabilities at December 31, 1994 consisted of the following:
The provision for claim losses includes an estimate of anticipated title claims and major claims. The estimate of anticipated title claims is accrued as a percentage of title premium revenue based on the Company's historical loss experience and other relevant factors. The Company monitors its claims experience on a continual basis and adjusts the provision for claim losses accordingly. Based on loss development studies completed during 1995, the Company believes that as a result of its underwriting and claims handling practices, as well as the refinancing business of prior years, the Company will maintain the trend of favorable claim loss experience.
The Company's title insurance underwriting subsidiaries are, in the ordinary course of business, subject to claims made under, and from time-to-time are named as defendants in legal proceedings relating to, policies of insurance they have issued or other services performed on behalf of insured policy holders and other customers. The Company believes that the reserves reflected in its Consolidated Financial Statements are adequate to pay losses and loss adjustment expenses which may result from such claims and proceedings; however, such estimates may be more or less than the amount ultimately paid when the claims are settled.
In October 1992, Fidelity California filed an action for declaratory relief in U.S. District Court (Eastern District-Fresno, California) to determine its obligations and liabilities, if any, under a certain title insurance policy issued to National Westminster Bank U.S.A. ("NatWest") (Fidelity National Title Insurance Company of California v. National Westminster Bank U.S.A. and related counterclaim). NatWest filed a counterclaim for damages and certain equitable relief seeking compensatory damages of approximately $7,732,000, punitive damages in an unspecified amount, attorneys' fees, interest and costs. The Company has a reinsurance agreement in place that will reimburse the Company for all amounts paid in excess of $2.0 million. Fidelity California has previously recorded a claim loss reserve related to this matter in the Consolidated Financial Statements. The primary issues concern whether Fidelity California's policy insured the priority of NatWest's deed of trust over certain mechanics' lien claims and whether Fidelity California had an obligation to defend and indemnify NatWest against an action by a mechanics' lien claimant to enforce its claim of lien. As part of a counterclaim lawsuit, NatWest has added allegations of breach of the covenant of good faith and fair dealing. Fidelity California believes that the policy and endorsements issued to the insured exclude coverage for mechanics' liens. In September 1994, a three week trial was concluded. The court had asked for post trial briefing, which was provided by the parties and the case was submitted for decision in September 1994. No ruling has been received from the court. Management believes that the ruling will not have a material adverse effect on Fidelity National Title Insurance Company of California or the Company.
In August 1994, CommerceBank filed a lawsuit (the "Lawsuit") against Tustin Retail (a real estate partnership), Manchester (a general partner in Tustin Retail) and two officers of the Company (also general partners in Tustin Retail). The Lawsuit is essentially a judicial foreclosure under a deed of trust securing a $4,350,000 note dated February 18, 1992, to CommerceBank from Tustin Retail (the "Note"). In December 1995, the Federal Deposit Insurance Corporation, which took control of CommerceBank, submitted a bid at the property foreclosure auction and acquired the property for $2.9 million. A fair value hearing is scheduled for June 1996, in order to determine the remaining amount due under the Note, if any. The defendants believe that the value of the real property subject to the deed of trust securing the Note is sufficient to satisfy any amounts due under the Note, based on an independent appraisal of the property substantiating such value. The defendants intend to vigorously defend the Lawsuit if it cannot be settled. Management believes that the Lawsuit will not have a material adverse effect on Manchester or the Company.
Title insurance companies are subject to extensive regulation under applicable state laws. Each insurance company is usually subject to a holding company act in its state of domicile which regulates, among other matters, the ability to pay dividends and investment policies. The laws of most states in which the Company transacts business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting principles, financial practices, establishing reserve and capital and surplus requirements, defining suitable investments for reserves, capital and surplus and approving rate schedules. The Company has analyzed its current Insurance Subsidiary structure and the regulatory environments of the various states of domicile of the Insurance Subsidiaries. Based on this analysis the Company has implemented a program to merge certain of its Insurance Subsidiaries, resulting in two or three Insurance Subsidiaries as opposed to the current six. The Company is also reviewing the potential redomestication of certain Insurance Subsidiaries.
Pursuant to statutory accounting requirements of the various states in which the Insurance Subsidiaries are qualified, they must defer a portion of premiums earned as an unearned premium reserve for the protection of policyholders and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined on a quarterly basis by statutory formula based upon either the age and dollar amount of policy liabilities underwritten or the age and dollar amount of statutory premiums written. As of December 31, 1995, the combined statutory unearned premium reserve required and reported for the Insurance Subsidiaries was $121.5 million.
A preliminary report of examination has been received for Fidelity Title. The preliminary report, as forwarded to the Company by the State of Arizona Department of Insurance, indicates that the Arizona examiners are proposing adjustments that would impact Fidelity Title's statutory capital and surplus, as well as its amount available for dividends, if recorded. The Company is involved in ongoing discussions with the Arizona examiners and has reached a preliminary agreement with the Arizona examiners regarding these issues. The agreed upon adjustments have been considered in the calculation of dividend capability, statutory surplus and statutory income (loss) reported below.
A final report of examination for Fidelity California as filed by the State of California Department of Insurance has been received by the Company. The report indicated that the examiners had adjustments which impacted the statutory capital and surplus of Fidelity California. In addition, these adjustments affected the Fidelity California amount available for dividends. Adjustments required as a result of the examination of Fidelity California have been considered in the calculation of dividend capability, statutory surplus and statutory income (loss) reported below.
Statutorily calculated net worth determines the maximum insurable amount under any single title insurance policy. As of January 1, 1996, the statutory single policy maximum insurable amounts for Fidelity Title, Fidelity Pennsylvania, ATIC and Fidelity New York were $25.2 million, $30.0 million, $2.9 million and $25.0 million, respectively. There are no statutory single risk limits prescribed for Fidelity California or Fidelity Tennessee.
The combined statutory capital and surplus of the Insurance Subsidiaries was $71,052,000, $85,553,000 and $92,548,000 as of December 31, 1995, 1994 and 1993, respectively. The combined statutory income (loss) of the Insurance Subsidiaries was $(699,000), $5,288,000 and $31,350,000 for the years ended December 31, 1995, 1994 and 1993, respectively. These amounts do not include certain of the proposed ATIC examination adjustments previously discussed.
As a condition to continued authority to underwrite policies in the states in which the Insurance Subsidiaries conduct their business, the Insurance Subsidiaries are required to pay certain fees and file information regarding their officers, directors and financial condition. In addition, the Company's escrow and trust business is subject to regulation by various state banking authorities.
Under Arizona law, minimum statutory requirements are $500,000 for capital and $250,000 for surplus. Under California law, the minimum statutory requirement is $500,000 for paid-in capital represented by shares of stock. Under Tennessee law, minimum statutory requirements are $100,000 for capital, and $500,000 for capital and surplus combined. Under Pennsylvania law, the minimum statutory requirements are capital of not less than $250,000, and paid in initial surplus at least equal to fifty percent of capital. Under Florida law, the minimum statutory requirement is surplus as to policyholders of not less than the greater of $1,500,000 or 10% of total liabilities. Under New York law, the minimum statutory requirement is $250,000 for capital and initial surplus. Each of the Company's title underwriters have complied with the minimum statutory requirements as of December 31, 1995, with the exception of ATIC, after considering the proposed examination adjustments previously discussed.
In November 1995, the National Association of Insurance Commissioners ("NAIC") distributed the latest draft of the Title Insurers Model Act (the "Act"). The purpose of the Act is to provide guidance to the
state insurance regulatory agencies relative to the effective regulation and supervision of the title insurance industry and title insurers. The Act addresses aspects of the title insurance industry from corporate structure and financial and accounting information to market conduct and legal standards. The effective date of the Act has not been specified in the draft of the Act. Certain provisions of the Act will be phased in over a multi-year period.
The UTCs are also subject to certain regulation by insurance regulatory or banking authorities, primarily relating to minimum net worth and dividend capability. Minimum net worth of $7.5 million and $2.5 million is required for FNTC and FNCAL, respectively. In addition, the Company has agreed to notify the State of California Department of Insurance of dividend payments by FNTC and FNCAL greater than 30% of earnings before income taxes for a period of three years.
Employee benefits include an employee stock purchase plan, three stock option plans and a 401(k) plan.
In 1987, stockholders approved the adoption of an Employee Stock Purchase Plan ("ESPP"). Under the terms of the ESPP and subsequent amendments, there are 6,600,000 shares of the Company's Common Stock available for purchase at current market prices by Company employees who meet certain vesting requirements. Pursuant to the ESPP, Company employees may contribute an amount between 5% and 15% of their base salary and certain commissions. The Company contributes varying amounts as specified in the ESPP. During the years ended December 31, 1995, 1994 and 1993, 261,075, 300,752 and 228,127 shares, respectively, were purchased and allocated to employees, based upon their contributions, at an average price of $11.82, $13.17 and $15.88 per share, respectively. The Company contributed $1.4 million or the equivalent of 118,644 shares for the year ended December 31, 1995; $1.3 million or the equivalent of 103,094 shares for the year ended December 31, 1994; and $1.3 million or the equivalent of 88,796 shares for the year ended December 31, 1993 in accordance with the employer's matching contribution. A total of 4,674,265 shares have been purchased by both the ESPP and employees since the adoption of the ESPP.
In 1994, the stockholders approved the adoption of the 1993 Stock Plan ("1993 Plan"). Under the terms of the 1993 Plan, options may be granted to officers, key employees and non-employee directors of the Company. The number of shares of Common Stock reserved for issuance under the 1993 Plan is 825,000. The per-share option price is determined at the date of grant provided that the price for incentive stock options shall not be less than 100% of their market value or award stock shares. The 1993 Plan also contains an automatic grant of non-qualified stock options to non-employee directors at an exercise price equal to 100% of fair value at date of grant, and the right to exercise such options shall vest equally over three years.
The following table sets forth activity in the 1987 and 1991 Stock Option Plans and the 1993 Stock Plan from December 31, 1993 through December 31, 1995:
As noted in Note A, effective January 1, 1993, the Company adopted Statement 109 which requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Implementation of Statement 109 resulted in non-cash adjustments to the following balance sheet accounts:
In the normal course of business the Company enters into off-balance sheet credit risk associated with both its title insurance claims settlements. This credit risk is in the form of standby letters of credit outstanding of $317,000 at December 31, 1995 and 1994. Although the Company has credit risk associated with these obligations, it also has contractual rights associated with the claims settlement procedures.
The Company places its cash equivalents and short-term investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure with any one financial institution. Investments in commercial paper of industrial firms and financial institutions are rated A1, P1 or better.
The counterparty to the agreement relating to the Company's interest rate swap instrument consists of a major high credit quality financial institution. The Company does not believe that there is significant risk of nonperformance by this counterparty because the Company continually monitors the credit rating of such counterparties, and limits the financial exposure and the amount of agreements entered into with any one financial institution. While the notional amounts of financial instruments are often used to express the volume of these transactions, the potential accounting loss on these transactions if the counterparty failed to perform is limited to the amounts, if any, by which the counterparty's obligation under the contract exceeds the obligation of the Company to the counterparty.
The Company has a significant concentration of credit risk in its real estate operations which owns commercial real estate properties for its title insurance related direct operations in California and Arizona. As of December 31, 1995 and 1994, the Company's investments in real estate and partnerships totalled $8,659,000 and $9,591,000, respectively. Real estate related notes receivable of $1,992,000 and $2,428,000, respectively, which are net of reserves of $2,357,000 and $2,342,000, respectively, were outstanding at December 31, 1995 and 1994, and were secured by either commercial real estate or were due from real estate related partnerships. The Company feels that this concentration of credit risk is adequately secured by either the underlying real estate or the related assets available from the general partners guaranteeing the loans. See Notes D, E and J.
In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 115 ("Statement 115"), "Accounting for Certain Investments in Debt and Equity Securities." Statement 115 requires that investments be classified as "held to maturity," "available for sale" or "trading securities." Statement 115 defines investments in securities as "held to maturity" based upon a positive intent and ability to hold those securities to maturity. Investments held to maturity are reported at amortized cost. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in operations. Debt and equity securities not classified as "held to maturity" or "trading securities" are classified as "available for sale" and recorded at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders' equity, net of related income tax effect. The Company adopted Statement 115 on January 1, 1994 and the impact on the results of operations and financial position was not material. In November 1995, the Financial Accounting Standards Board Emerging Issues Task Force granted all entities a one-time opportunity to reconsider their ability and intent to hold securities accounted for under Statement 115 as held to maturity. This allows entities to transfer securities from the held to maturity category without "tainting" their remaining held to maturity securities. The Board emphasized that this would be a one-time event. The Company has reassessed the appropriateness of the classifications of securities held and has chosen to reclassify its held to maturity portfolio to available for sale in 1995, in order to provide additional investment portfolio management flexibility. The fair value of the securities transferred from the held to maturity portfolio to the available for sale portfolio totalled $25.5 million and resulted in an unrealized gain of $459,000, before applicable income taxes.
In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("Statement 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. Statement 121 requires that under certain conditions entities perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. If the sum of the expected future cash flows, undiscounted and without interest charges, is less than the asset's carrying amount, an impairment loss is considered; if the sum of the expected future cash flows is more than the asset's carrying amount, an impairment loss cannot be recognized. Measurement of an impairment loss is based on the fair value of the asset. Statement 121 requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less cost to sell, except for assets covered by the provisions of Accounting Pronouncements Board Opinion No. 30. Statement 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995. The Company does not anticipate that the adoption of Statement 121 will have a material effect on the Consolidated Financial Statements.