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 2010 presentation.
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, specialty insurance and information services. We are the nation's largest title insurance company through our title insurance underwriters - Fidelity National Title, Chicago Title, Commonwealth Land Title, and Alamo Title - which collectively issued more title insurance policies in 2009 than any other title company in the United States. We also provide flood insurance, personal lines insurance, and home warranty insurance through our specialty insurance subsidiaries. We own a minority interest in Ceridian Corporation ("Ceridian"), a leading provider of global human resources, payroll, benefits and payment solutions. We also own a minority interest in Remy International, Inc. (“Remy”), a leading global vehicular parts designer, manufacturer, remanufacturer, marketer and distributor of aftermarket and original equipment electrical components for automobiles, light trucks, heavy-duty trucks and other vehicles.
Specialty Insurance. This segment consists of certain subsidiaries that issue flood, home warranty, homeowners’, automobile and other personal lines insurance policies.
On May 28, 2010, we completed the sale of our 32% interest in Sedgwick, our minority-owned affiliate that provides claims management services to large corporate and public sector entities, to a group of private equity funds. We received approximately $225.6 million in proceeds, of which $32.0 million is held in an indemnity escrow, for our ownership interest, resulting in a pre-tax gain of approximately $98.4 million.
Effective March 5, 2010, we entered into an agreement to amend and extend our credit agreement dated September 12, 2006 (the “Credit Agreement”) with Bank of America, N.A. as administrative agent and swing line lender (the “Administrative Agent”), and the other financial institutions party thereto, and an agreement to change the aggregate size of the credit facility under the Credit Agreement. These agreements reduced the total size of the credit facility from $1.1 billion to $951.2 million, with an option to increase the size of the credit facility to $1.1 billion, and created a new tranche, representing $925.0 million of the total credit facility, with an extended maturity date of March 5, 2013. Pricing for the new tranche is based on an applicable margin between 110 basis points to 190 basis points over LIBOR, depending on the senior debt ratings of FNF, and is at 150 basis points over LIBOR as of December 31, 2010.
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
Since December of 2008, the Federal Reserve has held interest rates at 0.0%-0.25%, and has indicated that rates will stay at this level for the foreseeable future. This action by the Federal Reserve, along with other government programs designed to increase liquidity in the mortgage markets, resulted in a significant increase in our refinance order volumes in December 2008 and continued to positively affect our revenues through the first nine months of 2009. In the fourth quarter of 2009 and through 2010, we again experienced a decline in order volumes. Mortgage interest rates remained at historically low levels throughout the first nine months of 2010 and have begun to increase in the fourth quarter of 2010 and the first quarter of 2011.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted and signed into law. The new legislation was designed to improve supervision and regulation of financial firms and financial markets, protect consumers and investors from financial abuse, provide the government with tools to manage a financial crisis and improve international regulatory standards and international cooperation. A new federal bureau was created and charged with writing and enforcing regulations to achieve these goals. Also part of the act was the creation of the Federal Insurance Office which will be responsible for monitoring aspects of the U.S. insurance industry, historically primarily the responsibility of various states’ departments of insurance. Regulations implementing the act have not yet impacted our business, but are continuing to be developed. As a result, we are uncertain to what degree this legislation may affect our business in the future.
Our specialty insurance business participates in the U.S. National Flood Insurance Program (“NFIP”), which was recently extended to September 30, 2011. We earn fees under that program for settling flood claims and administering the program. We serve as administrator and processor in our flood insurance business, and bear none of the underwriting or claims risk. The U.S. federal government is guarantor of flood insurance coverage written under the NFIP and bears the underwriting risk. Revenues from our flood insurance business are impacted by the volume and magnitude of claims processed as well as the volume and rates for policies written. For example, when a large number of claims are processed as a result of a natural disaster, such as a hurricane, we experience an increase in the fees that we receive for settling the claims.
Revenues from our personal lines insurance and home warranty businesses are impacted by the level of residential real estate purchase activity in the U.S. and the general state of the economy as well as our market share. In recent years, our homeowners’ insurance business has tightened underwriting standards and eliminated unprofitable agents and territories, a strategy which we believe will benefit us in the long term.
Our process for recording our reserves for claim losses begins with analysis of our loss provision rate. We forecast ultimate losses for each policy year based upon examination of historical policy year loss emergence (development) and adjustment of the emergence patterns to reflect policy year differences in the effects of various influences on the timing, frequency and severity of claims. We also use a technique that relies on historical loss emergence and on a premium-based exposure measurement. The latter technique is particularly applicable to the most recent policy years, which have few reported claims relative to an expected ultimate claim volume. After considering historical claim losses, reporting patterns and current market information, and analyzing quantitative and qualitative data provided by our legal, claims and underwriting departments, we determine a loss provision rate, which is recorded as a percentage of current premiums. This loss provision rate is set to provide for losses on current year policies, but due to development of prior years and our long claim duration, it periodically includes minor amounts of estimated adverse or positive development on prior years' policies. Any significant adjustments made to the loss reserves relating to the comparison to our actuarial analysis are made in addition to this loss provision rate. We have been recording our periodic loss provision rate at 6.8%, 7.3% and 8.5% of title premiums in 2010, 2009 and 2008, respectively, with 6.0%, 7.3% and 8.5% relating to the respective year. In 2010, adverse development of $30.4 million or 0.8% of 2010 premiums was accounted for in the loss provision rate. At each quarter end, our recorded reserve for claim losses is initially the result of taking the prior recorded reserve for claim losses, adding the current provision to that balance and subtracting actual paid claims from that balance, resulting in an amount that management then compares to the range of reasonable estimates provided by the actuarial calculation. This process resulted in us recording additional adjustments to our stated loss provision in 2009 and 2008, as noted below.
As of December 31, 2010, the recorded reserve for title insurance claims losses was $2.21 billion. Excluding the fair value adjustment relating to the acquisition of the LFG Underwriters in 2008, the recorded reserves were $2.17 billion which was approximately $208.0 million below the central estimate provided by our internal actuary, but within the provided actuarial range of $2.15 billion to $2.6 billion. We also retained a third party actuarial firm with experience in the title industry to perform an independent analysis of our reserve for title claim losses. The report provided by this third party actuary had a central estimate of approximately $2.16 billion (with a range from $1.94 billion to $2.37 billion) or $15.0 million below our recorded reserves. Our recorded reserves for title claim losses fell within the actuarial range of both of these analyses. We believe that our recorded reserves are reasonable and represent our best estimate. In reaching this conclusion, we considered the following qualitative factors.
The development in 2010 that resulted in our recorded reserves being at the low end of the range of our actuarial estimate was primarily caused by the actual claims paid in 2010 being greater than expected claims paid in our actuarial model. These payments primarily related to the high volume policy years in the mid-2000s, particularly the 2005-2007 policy years. We believe that this development related to both the fact that these policy years have higher loss ratios and that the reporting of these claims has been accelerated. In addition, due to the volatility of claims payment experience, we have seen expansion of the actuarial range of estimated losses from the central estimate. The reasons for the higher loss payments and payment acceleration are as follows:
Increased volume of real estate transactions increased likelihood of errors in the closing process
Subsequent declining home equity values resulted in lender losses that would not have been losses had home equity been maintained
Some traditional actuarial methods, such as paid loss development, are particularly sensitive to distortions in payment activity. We believe that the recent high level of foreclosure activity in 2009 and 2010 noted above is accelerating the reporting of claims, particularly lender claims, thereby increasing paid losses and expenses in 2010. As a result, a paid loss development approach may temporarily overstate ultimate cost projections. We believe that losses and expenses related to this accelerated claims activity, specifically losses relating to lender policies, will have a shorter duration and that expected payments relating to these policy years will eventually return to or perhaps even drop below historical levels. We have also seen positive development relating to the 2009 and 2010 policy years, which we believe is indicative of more stringent underwriting standards by us and the lending industry.
During 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, 2009, our recorded reserve of $2.5 billion was $46.0 million below our actuary's central estimate, which we determined was reasonable and represented our best estimate.
charge is taken. Our investment portfolio exposure to sub-prime mortgage-backed securities is immaterial.
Our Level 2 fair value measures for fixed-maturities available for sale are provided by third-party pricing services. We utilize one firm for our taxable bond portfolio and another for our municipal bond portfolio. These pricing services are leading global providers of financial market data, analytics and related services to financial institutions. We only rely on one price for each instrument to determine the carrying amount of the assets on our balance sheet. The inputs utilized in these pricing methodologies include observable measures such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. We review the pricing methodologies for all of our Level 2 securities to ensure that we concur with their pricing methodologies and compare the resulting prices to other publicly available measures of fair value.
Our investments classified as Level 3 consist of auction rate securities which were included in the assets of the LFG Underwriters that were acquired on December 22, 2008, and structured notes that we purchased in the third quarter of 2009. There is no active market for the auction rate securities and they are valued using models with significant non-observable inputs. Fair values for these securities are provided by a third-party pricing service using a proprietary valuation model which considers factors such as time to maturity, interest rates, credit-worthiness of the issuer, trading characteristics, and available market data for similar securities. These securities 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. The structured notes represent less than two percent of our total investment portfolio. We review the pricing methodologies for our Level 3 investments to ensure that they are reasonable and believe they represent an exit price as of December 31, 2010.
Fidelity National Title Group. 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 78.6%, 79.6% and 78.3% of agent premiums earned in 2010, 2009 and 2008, respectively. We also record provision for claim losses at our current provision rate at the time we record the accrual for the premiums, which was 6.0%, 7.3% and 8.5% for 2010, 2009 and 2008, respectively, 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, 2010, 2009 and 2008 on our pretax earnings was an increase (decrease) of $10.7 million, $(3.4) million and $(6.4) million, respectively, excluding an adjustment recorded in 2008 relating to a change in our estimation process, which resulted in a decrease of $11.8 million in our pretax earnings for 2008. The amount due from our agents relating to this accrual, i.e. the agent premium less their contractual retained commission, was approximately $112.1 million and
Year ended December 31, 2008. As a result of a change in our actuarial model resulting, in part, from adverse claim loss development on prior policy years, we recorded a charge in 2008 of $261.6 million, or $154.1 million net of income taxes, to our provision for claim losses. This charge was recorded in addition to our 8.5% provision for claim losses.
Total revenue in 2010 decreased $88.1 million compared to 2009, reflecting a decrease in the Fidelity National Title Group segment, offset by increases in the specialty insurance segment and the corporate and other segment. Total revenue in 2009 increased $1,577.2 million compared to 2008, reflecting increases in the Fidelity National Title Group segment and the corporate and other segment, partially offset by a decrease in the specialty insurance segment.
The decrease in title premiums from direct operations in 2010 is due primarily to a decrease in closed order volumes that was partially offset by an increase in fee per file. Closed order volumes were 1,574,300 and 1,792,000 in the years ending 2010 and 2009, respectively. The average fee per file in our direct operations was $1,387 and $1,248 in the years ending 2010 and 2009, respectively, with the increase reflecting a higher volume of purchase transactions relative to refinance transactions, increases in title insurance rates across 26 states, and a modest increase in commercial transactions, partially offset by declines in home values, particularly in California, Arizona, Florida, and Nevada. The fee per file tends to change as the mix of refinance and purchase transactions changes, because purchase transactions generally involve the issuance of both a lender’s policy and an owner’s policy, resulting in higher fees, whereas refinance transactions typically only require a lender’s policy, resulting in lower fees. The fee per file will also increase as the proportion of commercial orders increases. The increase in title premiums from direct operations in 2009 compared to 2008 was due to our acquisition of the LFG Underwriters and increases in closed order volumes, which were partially offset by decreases in average fee per file. Excluding the operations of the LFG Underwriters in 2009, direct title premiums increased $78.1 million, or 6.8%, in 2009 compared to 2008. Excluding the operations of LFG Underwriters in 2009, closed order volumes in our direct operations were approximately 1,507,800 in 2009 and 1,121,200 in 2008. Increases in 2009 reflect increases in refinance transactions as mortgage rates remained at historic lows during the year. Mortgage interest rates in 2009 were significantly lower than in 2008 due to the introduction of government programs designed to provide liquidity to the home mortgage market. Average mortgage interest rates decreased substantially at the end of 2008 as the government introduced programs intended to increase liquidity in the mortgage markets. The average fee per file in our direct operations, excluding the operations of the LFG Underwriters in 2009, was $1,236 and $1,503 for the years ended December 31, 2009 and 2008, respectively. The decrease in 2009 reflects declines in home values, a slow commercial market, and an increase in refinance transactions relative to purchase transactions.
The decrease 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 is a significant decrease in business from our largest agent in 2010 as compared to 2009. The increase in agency premiums in 2009 was primarily due to our acquisition of the LFG Underwriters and high remittances compared to prior years. Excluding the title premiums generated by the LFG Underwriters in 2009, agency title premiums increased $144.5 million, or 9.3%, in 2009 compared to 2008. The increase in 2009 was primarily due to increased remittances and accrued agency premiums that were consistent with the increases in direct title premiums, partially offset by reductions in agency relationships.
Escrow, title-related and other fees decreased $26.6 million, or 2.0%, in 2010 compared to 2009 and increased $281.6 million, or 26.3% in 2009 compared to 2008. In the Fidelity National Title Group segment, escrow fees, which are more directly related to our direct operations, 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 $25.9 million, or 3.4%, 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. In the corporate and other segment, other fees increased $21.0 million or 59.0% in 2010 compared to 2009 primarily due to the sale of a parcel of land and timber at our majority owned affiliate Cascade Timberlands as well as an increase in revenue from an affiliate which provides realtor services. The increase of escrow, title-related and other fees in 2009 is primarily due to the acquisition of the LFG Underwriters. Excluding the LFG Underwriters, escrow, title-related and other fees from title operations increased $133.2 million, or 12.9% in 2009 compared to 2008. Excluding the LFG Underwriters, escrow fees in the title segment increased $78.1 million or 7.6% in 2009 compared to 2008. The percentage increase in escrow fees was greater than the percentage increase in direct premiums primarily as a result of an increase in residential direct title premiums, for which escrow fees are proportionately higher, and a decrease in commercial direct title premiums, for which escrow fees are proportionately lower. Other fees in the title segment increased $55.1 million or 8.8% for the year ended December 31, 2009 due to an increase in the division of our business that manages real estate owned by financial institutions as well as recent acquisitions.
Net realized gains (losses) were $236.7 million, $27.4 million, and $(22.5) million for the years ended December 31, 2010, 2009, and 2008, respectively. The net realized gain for the year ended December 31, 2010, includes a $98.4 million gain on the sale of our 32% interest in Sedgwick in May 2010, a $27.2 million gain on the sale of a corporate bond purchased during 2009, a $21.7 million gain on the sale of FIS stock as part of a tender offer, $11.4 million in gains resulting from an increase in the value of our structured notes, and $62.4 million in gains from the sale of other various fixed maturity securities. The net realized gain for the year ended December 31, 2009, included impairment charges totaling $6.9 million on equity securities that were deemed to be other-than-temporarily impaired, net realized gains on sales of investments of $22.8 million, and net gains on sales of other
assets of $4.6 million. The net realized loss for the year ended December 31, 2008, included impairment charges totaling $59.0 million on fixed maturity and equity securities and other investments that were deemed to be other-than-temporarily impaired, net realized gains on sales of investments of $4.4 million, net gains on sales of other assets of $7.3 million, and a gain of $24.8 million on the sale of 20% of our interest in Sedgwick.
Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), postage and courier services, computer services, professional services, travel expenses, general insurance, and trade and notes receivable allowances. Other operating expenses were $1,269.6 million, $1,343.5 million, and $1,179.8 million for the years ended December 31, 2010, 2009, and 2008. The decrease in 2010 was due mainly to decreases in cost of sales and several other expense categories mainly relating to the declines in business levels in the title segment offset by an increase in the specialty insurance segment related to higher business levels. The increase in 2009 was mainly due to an increase in the Fidelity National Title Group segment due to the acquisition of the LFG Underwriters.
Depreciation and amortization expense was $90.4 million, $109.2 million, and $122.1 million for the years ended December 31, 2010, 2009, and 2008, respectively. The decrease in both years is due to assets being fully depreciated and a decrease in capital spending over the past few years.
Income tax expense (benefit) was $185.6 million, $106.8 million, and $(119.9) million for the years ended December 31, 2010, 2009, and 2008, respectively. Income tax expense (benefit) as a percentage of earnings (loss) before income taxes for the years ended December 31, 2010, 2009, and 2008 was 33.0%, 31.0%, and 42.9%, respectively. The fluctuation in income tax expense (benefit) as a percentage of earnings (loss) before income taxes is attributable to our estimate of ultimate income tax liability, and changes in the characteristics of net earnings (loss) year to year, such as the weighting of operating income versus investment income. Income tax benefit as a percentage of loss before income taxes was higher than normal in 2008, due to the fact that, in periods when a net loss is recognized, the effect of tax-exempt interest income is reversed. Generally, when pretax income is recognized, tax-exempt income has the effect of lowering the effective tax rate whereas, when a pretax loss is recognized, tax-exempt income has the effect of increasing the effective tax rate.
Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income for the years ended December 31, 2010, 2009 and 2008, was $131.8 million, $138.9 million, and $120.2 million, respectively. The decrease in 2010 compared to 2009 is due to overall declines in bond interest income on our fixed maturity securities in 2010. The increase in 2009 compared to 2008 was primarily the result of an increased investment portfolio resulting from the acquisition of the LFG Underwriters, partially offset by declines in short-term interest rates and a decrease in interest income attributable to the securities lending program.
The provision for claim losses includes an estimate of anticipated title and title-related claims and escrow losses. The estimate of anticipated title and title-related claims is accrued as a percentage of title premium revenue based on our historical loss experience and other relevant factors. We monitor our claims loss experience on a continual basis and adjust the provision for claim losses accordingly as new information becomes known, new loss patterns emerge, or as other contributing factors are considered and incorporated into the analysis of the reserve for claim losses. The claim loss provision for title insurance was $248.9 million, $264.7 million, and $491.0 million for the years ended December 31, 2010, 2009, and 2008, respectively. These amounts reflected average claim loss provision rates of 6.8%, 7.3%, and 8.5% of title premiums for the years ended December 31, 2010, 2009, and 2008, respectively, and in 2009 and 2008 also included additional credits/charges as follows:
Revenues from the homeowners’ and automobile insurance lines of business increased $11.8 million, or 7.9%, in 2010 compared to 2009, due to higher sales volumes in 2010. Revenues from the homeowners’ and automobile insurance lines of business decreased $9.5 million, or 6.4%, in 2009 compared to 2008, due to tighter underwriting standards, the elimination of certain unprofitable agents and territories, and a lower real estate market overall.
Personnel costs were $47.9 million, $45.3 million, and $45.2 million for the years ended December 31, 2010, 2009, and 2008, respectively. As a percentage of total specialty insurance revenues, personnel costs were 11.8% in 2010, 11.9% in 2009 and 11.8% in 2008.
The corporate and other segment is primarily comprised of the operations of our parent holding company and smaller entities not included in our operating segments. It generated pretax earnings (losses) of $44.1 million, $(71.6) million, and $(83.7) million for the years ended December 31, 2010, 2009, and 2008, respectively. The increase in pretax earnings in 2010 from 2009 is due to a $98.4 million gain on the sale of our 32% interest in Sedgwick and a $27.2 million gain on the sale of a corporate bond. Interest expense in this segment was $45.9 million, $35.9 million, and $52.4 million for the years ended December 31, 2010, 2009 and 2008, respectively. See the analysis of interest expense under “Consolidated Results of Operations” for further discussion.
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 $0.69 per share during 2010, or approximately $156.6 million. During the forth quarter of 2010, our Board of Directors set a new dividend payout target of 30% of 2010 net earnings for 2011 common stock dividends, which results in a decrease from the dividend payout level in 2010. Additional uses of cash flow are expected to include stock repurchases, acquisitions, and debt repayments. On January 27, 2011, our Board of Directors formally declared a $0.12 per share cash dividend that is payable on March 31, 2011 to stockholders of record as of March 17, 2011. We continually assess our capital allocation strategy, including decisions relating to the amount of our dividend, reducing debt, repurchasing our stock, and/or conserving cash. The declaration of any future dividends is at the discretion of our Board of Directors. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities, potential sales of non-strategic assets, and borrowings on existing credit facilities. Our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts.
Financing. On May 5, 2010, we completed an offering of $300.0 million in aggregate principal amount of our 6.60% notes due May 2017 (the "notes"), pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The notes were priced at 99.897% of par to yield 6.61% annual interest. As such we recorded a discount of $0.3 million, which is netted against the $300.0 million aggregate principal amount of notes. The discount is amortized to May 2017 when the notes mature. We received net proceeds of $297.3 million, after expenses, which were used to repay outstanding borrowings under our credit agreement. Interest is payable semi-annually. These notes contain customary covenants and events of default for investment grade public debt. These events of default include a cross default provision, with respect to any other debt of the Company in an aggregate amount exceeding $100 million for all such debt, arising from (i) failure to make a principal payment when due or (ii) the occurrence of an event which results in such debt being due and payable prior to its scheduled maturity.
automatically terminate. As of December 31, 2010, we had outstanding debt with a principal amount of $250.0 million under the Credit Agreement, composed of $6.9 million due October 2011 with interest payable monthly at LIBOR plus 0.475% (0.74% at December 31, 2010) and $243.1 million due March 2013 with interest payable monthly at LIBOR plus 1.50% (1.76% at December 31, 2010.)
On April 14, 2009, we received $331.4 million in net proceeds from our offering of a total of 18,170,000 shares of our common stock. The proceeds were partially used to repay $135.0 million in borrowings under our $1.1 billion revolving credit facility. In addition, we used the proceeds to purchase $67.8 million in par value of our 7.30% notes due in 2011 for an aggregate purchase price of $68.7 million, including accrued interest of $1.2 million, and $3.0 million in par value of our 5.25% notes due in 2013 for an aggregate purchase price of $2.8 million. In the third and fourth quarters of 2009, one of our underwriters purchased $7.8 million in par value of our 7.30% notes for a total purchase price of $8.0 million.
On December 22, 2008, in connection with the acquisition of the LFG Underwriters, we entered into a $50.0 million subordinated note payable to LFG, due December 2013, with interest of 2.36% payable annually. On March 1, 2010, we paid approximately $49.0 million to the LFG Liquidation Trust in full satisfaction of this obligation.
The uncertainty and variation in the timing and amount of claim payments could have a material impact on our cash flows from operations in a particular period.
In addition to our title insurance reserves, at December 31, 2010, we held claim reserves of $61.8 million in our specialty insurance business segment. There is also uncertainty with respect to the precise payout pattern of these reserves, which we have estimated in the table above based on historical experience.
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 $43.9 million and $75.4 million as of December 31, 2010 and 2009, 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. We are party to an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”). The owner/lessor in this arrangement acquired land and various real property improvements associated with new construction of an office building in Jacksonville, Florida, that are part of FNF’s corporate campus and headquarters. The lease expires on June 28, 2011, with renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of December 31, 2010, the full $75.0 million had been drawn on the facility to finance land costs and related fees and expenses and the outstanding balance was $70.1 million. The lease includes guarantees by us of up to 86.7% of the outstanding lease balance, and options to purchase the facilities at the outstanding lease balance. The guarantee becomes effective if we decline to purchase the facilities at the end of the lease and also decline to renew the lease. In February 2011, we started the process of renewing the lease. The lessor financed the acquisition of the facilities through funding provided by third-party financial institutions. 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 Operations. We do not believe the lessor is a variable interest entity, as defined by generally accepted accounting principles on consolidation of variable interest entities.
Consolidated Statements of Operations for the years ended December 31, 2010, 2009, and 2008
Consolidated Statements of Equity for the years ended December 31, 2010, 2009, and 2008
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, 2010 and 2009, and the related Consolidated Statements of Operations, Comprehensive Earnings, Equity and Cash Flows for each of the years in the three-year period ended December 31, 2010, and our report dated February 23, 2011 expressed an unqualified opinion on those Consolidated Financial Statements.
In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
The accompanying Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles in the United States 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 Statement of Operations 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 September 25, 2009, we closed on the sale of Fidelity National Capital, Inc. (“FN Capital”), a wholly-owned financing and leasing subsidiary, to Winthrop Resources Corporation. Accordingly, the sale and results of FN Capital for periods prior to the sale are reflected in the financial statements as discontinued operations for all periods presented. Net proceeds to FNF from the sale of FN Capital were $49.2 million. We recorded a pre-tax loss on the sale of $3.4 million ($2.2 million after tax). Total revenues from FN Capital included in discontinued operations were $29.3 million and $32.1 million for the years ended
December 31, 2009 and 2008, respectively. Pre-tax (loss) income included in discontinued operations was $(2.1) million and $3.4 million for the years ended December 31, 2009, and 2008, respectively.
In February 2009, we transferred our ownership interest in FNRES Holdings, Inc. (“FNRES”) to Lender Processing Services, Inc. ("LPS"), a related party at the time, in exchange for all of the outstanding shares of Investment Property Exchange Services, Inc. (“IPEX”), a company that facilitates real estate exchanges under Section 1031 of the Internal Revenue Code. The purchase price of IPEX was approximately $43.0 million, which was the fair value of FNF’s 61% holdings in FNRES. The results of operations of FNRES are reflected as discontinued operations in the Consolidated Statements of Operations for all periods presented. Discontinued operations included revenues from FNRES operations of $3.5 million and $45.8 million for the years ending December 31, 2009 and 2008, respectively. Discontinued operations included pre-tax losses related to FNRES operations of $0.5 million and $19.0 million in years ending December 31, 2009, and 2008, respectively.
Other long-term investments consist primarily of structured notes, and are carried at fair value as of the balance sheet dates. Fair values are based on exit prices obtained from a broker-dealer.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Unrealized gains or losses on fixed maturity and equity securities which are classified as available for sale, net of applicable deferred income tax expenses (benefits), are excluded from earnings and credited or charged directly to a separate component of equity. If any unrealized losses on fixed maturity or equity securities are deemed other-than-temporary, such unrealized losses are recognized as realized losses. Unrealized losses are deemed other-than-temporary if factors exist that cause us to believe that the value will not increase to a level sufficient to recover our cost basis. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: (i) our need and intent to sell the investment prior to a period of time sufficient to allow for a recovery in value; (ii) the duration and extent to which the fair value has been less than cost; and (iii) the financial condition and prospects of the issuer. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and assumed in a business combination. Goodwill and other intangible assets with indefinite useful lives are tested for impairment annually or more frequently if circumstances indicate potential impairment, through a comparison of fair value to the carrying amount. In evaluating the recoverability of goodwill, we perform an annual goodwill impairment test based on an analysis of the discounted future cash flows generated by the underlying assets.
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.
Fidelity National Title Group. 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 78.6%, 79.6% and 78.3% of agent premiums earned in 2010, 2009 and 2008, 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 6.8%, 7.3% and 8.5% for 2010, 2009 and 2008, respectively, 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, 2010, 2009 and 2008 on our pretax earnings was an increase (decrease) of $10.7 million, $(3.4) million and $(6.4) million, respectively, excluding an adjustment recorded in 2008 relating to a change in our estimation process, which resulted in a decrease of $11.8 million in our pretax earnings for 2008. The amount due from our agents relating to this accrual, i.e. the agent premium less their contractual retained commission, was approximately $112.1 million and $88.1 million at December 31, 2010 and 2009, respectively, which represents agency premiums of approximately $546.0 million and $425.4 million at December 31, 2010 and 2009, respectively, and agent commissions of $433.9 million and $337.3 million at December 31, 2010 and 2009, respectively.
During the second half of 2008, we re-evaluated and refined the method that we used to estimate this accrual, which resulted in a reduction in 2008 revenue from agency title insurance premiums of $138.5 million compared to the revenues that would have been accrued under our prior method. During 2008, due to the real estate market's continued slow down and the fact that mortgage originations and refinancing transactions were decreasing in volume, we increased our scrutiny on unprofitable, low-remitting and high-claims agent relationships resulting in a significant reduction in the number of agents with which we continued to conduct business. As a result of the reduction in transaction volumes due to both the economy and the terminated agents, we reviewed and refined the process we used to estimate agency premium accruals relying more on remittance patterns of our agents over the previous 15 months and less on the historical trends of our direct operations. The impact of this adjustment was a decrease of $11.8 million in 2008 pretax earnings and $7.6 million in 2008 net income, or approximately $0.04 per share, compared to the amounts that would have been recorded under our prior method. The impact of the adjustment on pretax earnings of only $11.8 million is due to the expense accruals noted above. We believe that this adjustment is properly reflected as a change in accounting estimate in 2008.
A summary of the agreements that were in effect with FIS through December 31, 2010, is as follows:
Real estate management, real estate lease and equipment lease agreements. Included in our revenues are amounts received related to leases of certain equipment to FIS and the sublease of certain office space, furniture and furnishings to FIS. A majority of the leases of equipment to FIS were between FN Capital and FIS and the related receipts are no longer revenue to us subsequent to the sale of FN Capital on September 25, 2009.
Certain reclassifications have been made in the 2009 and 2008 Consolidated Financial Statements to conform to the classifications used in 2010.
The fair value hierarchy established by the accounting standards on fair value measurements includes three levels which are based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. Financial assets and liabilities that are recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:
The following table presents our fair value hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2010 and 2009, respectively:
Our Level 2 fair value measures for fixed-maturities available for sale are provided by third-party pricing services. We utilize one firm for our taxable bond portfolio and another for our tax-exempt bonds and municipal bond portfolio. These pricing services are leading global providers of financial market data, analytics and related services to financial institutions. We only rely on one price for each instrument to determine the carrying amount of the assets on our balance sheet. The inputs utilized in these pricing methodologies include observable measures such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. We review the pricing methodologies for all of our Level 2 securities to ensure that we concur with their pricing methodologies and compare the resulting prices to other publicly available measures of fair value. The pricing methodologies used by the relevant third party pricing services are:
Our Level 3 investments consist of auction rate securities which were included in the assets of the LFG Underwriters that were acquired on December 22, 2008, and structured notes that were purchased in the third quarter of 2009. The auction rate securities are classified in other fixed-maturity investments and had a par value of $14.1 million and fair value of $9.5 million at December 31, 2010 and a par value of $69.7 million and fair value of $45.2 million at December 31, 2009. These securities represent less than one percent of our total investment portfolio. There is no active market for the auction rate securities and they are valued using models with significant non-observable inputs. Fair values for these securities are provided by a third-party pricing service using a proprietary valuation model which considers factors such as time to maturity, interest rates, credit-worthiness of the issuer, trading characteristics, and available market data for similar securities. The structured notes had a par value of $75.0 million and fair value of $90.1 million at December 31, 2010 and a par value of $75.0 million and fair value of $78.7 million at December 31, 2009. The structured notes are held for general investment purposes and represent less than two 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 ensure that they are reasonable and believe they represent an exit price as of December 31, 2010.
The carrying amounts and fair values of our fixed maturity securities at December 31, 2010 and 2009 are as follows:
The majority of our mortgage-backed and asset-backed securities were acquired as a result of the acquisition of the LFG Underwriters on December 22, 2008. At December 31, 2010 all of our mortgage-backed and asset-backed securities are rated AAA. The mortgage-backed and asset-backed securities are made up of $141.7 million of agency mortgage-backed securities, $0.2 million of collateralized mortgage obligations, $16.0 million of commercial mortgage-backed securities, and $26.1 million in asset-backed securities.
The change in net unrealized gains and losses on fixed maturities for the years ended December 31, 2010, 2009, and 2008 was $(52.5) million, $150.0 million, and $(1.3) million, respectively.
Equity securities at December 31, 2010 and 2009 consisted of investments at a cost basis of $51.1 million and $64.6 million, respectively, and fair value of $75.2 million and $92.5 million, respectively. The carrying value of our investment in equity securities is fair value. The balance of equity securities is primarily composed of 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 $43.9 million and $75.4 million as of December 31, 2010 and 2009, respectively. As of December 31, 2010, gross unrealized gains and gross unrealized losses on equity securities were $24.4 million and $0.3 million, respectively. As of December 31, 2009, gross unrealized gains and gross unrealized losses on equity securities were $28.4 million and $0.5 million, respectively. The change in unrealized gains (losses) on equity securities for the years ended December 31, 2010, 2009 and 2008 was a net (decrease) increase of $(3.8) million, $36.2 million, and $(5.5) million, respectively. There were no significant investments in banks, trust and insurance companies at December 31, 2010 or 2009.
We lend fixed maturity and equity securities to financial institutions in short-term security lending transactions. Our security lending policy requires that the cash received as collateral be 102% or more of the fair value of the loaned securities. At December 31, 2010 and 2009, we had security loans outstanding with fair values of $9.1 million and $25.6 million, respectively. Securities loaned under such transactions may be sold or re-pledged by the transferee. We were liable for cash collateral under our control of $9.4 million and $26.5 million at December 31, 2010 and 2009, respectively, which has been included in cash and cash equivalents and in accounts payable and accrued liabilities.
Net realized gains (losses) related to investments were $127.8 million, $22.8 million, and $(49.4) million for the years ended December 31, 2010, 2009 and 2008, respectively. Net realized gains related to other assets were $108.9 million, $4.6 million, and $26.9 million for the years ended December 31, 2010, 2009, and 2008, respectively, including a $98.4 million gain on the sale of our investment in Sedgwick during 2010.
In April 2009, the FASB updated their guidance on recognition of other-than-temporary impairments on investments, specifically on debt and equity securities for which changes in fair value are not regularly recognized in earnings. In accordance with the updated guidance, we determined that a total of $1.3 million in other-than-temporary impairments on fixed maturity securities had previously been recognized in relation to investments held at April 1, 2009, all of which were related to credit losses. We further concluded that no cumulative effect adjustment was necessary as a result of implementing the updated guidance as all of the securities for which an other-than-temporary impairment had previously been recognized were sold within three months of the updated guidance. As of December 31, 2010 and 2009, we held no investments for which an other-than-temporary impairment had been previously recognized.
In addition to our equity method investment in Remy, included in our fixed maturity securities available for sale are $54.8 million and $4.1 million of Remy’s bonds as of December 31, 2010 and 2009, respectively. On December 17, 2010, as part of a credit refinancing, Remy called these bonds at 109 percent of par, payable January 14, 2011. We received the proceeds and will recognize a gain of $8.5 million in the first quarter of 2011. During 2010, we also purchased $29.7 million of Remy's term loan, which is included in our fixed maturity securities available for sale. On January 21, 2011, as part of a Common Stock Rights Offering ("the Offering") to all Remy common shareholders, we purchased an additional 9.9 million shares of Remy common stock in exchange for tendering our 42,359 shares of Remy preferred stock held and cash of $26.0 million. Following the Offering and preferred stock conversion, we own 14.8 million shares of Remy common stock, representing a 47% ownership interest.
three-month and one-month lag, respectively. Accordingly, our net earnings for the year ended December 31, 2010, includes our equity in Ceridian’s earnings for the period from September 30, 2009 through September 30, 2010 and our net earnings for the year ended December 31, 2009, includes our equity in Ceridian’s earnings for the period from September 30, 2008 through September 30, 2009. Our net earnings for the year ended December 31, 2010, includes our equity in Remy's earnings for the period from November 30, 2009 through November 30, 2010 and our net earnings for the year ended December 31, 2009, includes our equity in Remy's earnings for the period from November 30, 2008 through November 30, 2009. In addition, we record our share of the other comprehensive income (loss) of unconsolidated affiliates. As of December 31, 2010, included within the statement of equity, we had recorded accumulated other comprehensive losses of $53.8 million and $14.8 million related to our investments in Ceridian and Remy, respectively, and $0.1 million related to our other investments in unconsolidated affiliates.
Summarized financial information for the periods included in our financials for Ceridian is presented below.
(1) Includes adjustments recorded of $109.8 million relating to purchase accounting adjustments to the fair values of assets and liabilities assumed as of December 22, 2008 as part of the acquisition of the LFG Underwriters.
Amortization expense for amortizable intangible assets, which consist primarily of customer relationships, was $21.7 million, $25.3 million, and $22.0 million for the years ended December 31, 2010, 2009, and 2008, respectively. Other intangible assets primarily represents non-amortizable intangible assets such as trademarks and licenses. Estimated amortization expense for the next five years for assets owned at December 31, 2010, is $21.2 million in 2011, $18.6 million in 2012, $14.3 million in 2013, $11.3 million in 2014 and $10.1 million in 2015.
On May 5, 2010, we completed an offering of $300.0 million in aggregate principal amount of our 6.60% notes due May 2017 (the "notes"), pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. The notes were priced at 99.897% of par to yield 6.61% annual interest. As such we recorded a discount of $0.3 million, which is netted against the $300.0 million aggregate principal amount of notes. The discount is amortized to May 2017 when the notes mature. We received net proceeds of $297.3 million, after expenses, which were used to repay outstanding borrowings under our credit agreement. Interest is payable semi-annually. These notes contain customary covenants and events of default for investment grade public debt. These events of default include a cross default provision, with respect to any other debt of the Company in an aggregate amount exceeding $100 million for all such debt, arising from (i) failure to make a principal payment when due or (ii) the occurrence of an event which results in such debt being due and payable prior to its scheduled maturity.
The $236.2 million aggregate principal amount of 5.25% notes due March 2013 and the $165.6 million aggregate principal amount of 7.30% notes due August 2011 contain customary covenants and events of default for investment grade public debt. The indenture governing the 7.30% notes and the 5.25% notes also contains customary events of default. These events of default include a cross default provision, with respect to any other debt of the Company in an aggregate amount exceeding $20 million for all such debt, arising from (i) failure to make a principal payment when due or (ii) the occurrence of an event which results in such debt being due and payable prior to its scheduled maturity. The available capacity under our Credit Agreement as of December 31. 2010 would be more than enough to repay the $165.6 million aggregate principal amount of our 7.30% notes due in August 2011.
Income tax expense (benefit) on continuing operations consists of the following:
The significant components of deferred tax assets and liabilities at December 31, 2010 and 2009 consist of the following:
Tax benefits of $3.0 million, $2.4 million, and $0.3 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, 2010, 2009, and 2008, respectively.
As of December 31, 2010 and 2009, we had approximately $1.6 million and $1.4 million (including interest of $0.6 million and $0.5 million), respectively, of total gross unrecognized tax benefits that, if recognized, would favorably affect our income tax rate. These amounts are reported on a gross basis and do not reflect a federal tax benefit on state income taxes. We record interest and penalties related to income taxes as a component of income tax expense.
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, there were developments, including two court rulings, relating to coverages under certain insurance policies that caused us to reevaluate our position on maintaining a recorded insurance recoverable. The fact that we received an adverse ruling in our case against the insurer on our Comprehensive General Liability policy together with a reevaluation of our position by new legal counsel, caused us to reverse $63.2 million of the receivable, recorded as a charge to the provision for claim losses, during the quarter ended September 30, 2009. We also received a favorable summary judgment relating to an insurance providers’ duty to defend the Company under our Miscellaneous Professional Liability policy. In light of these developments, we did not believe it appropriate to carry more than the anticipated $20 million recovery for compensatory damages on the Miscellaneous Professional Liability policy as a receivable as of September 30, 2009. During the quarter ended December 31, 2009, the Company paid an additional $8.8 million in respect of these claims and received payments of $11.8 million relating to the Miscellaneous Professional Liability Policy and continued to negotiate with the carrier who had been found to act in bad faith under the terms of that policy. As of December 31, 2009, we carried an $8.2 million receivable related to these coverages. During the first quarter of 2010, we reached a settlement agreement with the same carrier for an additional $16.2 million, representing the remaining $8.2 million receivable and $8 million in compensatory damages. The $16.2 million settlement amount was received in February 2010.
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 significant 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 the Company's financial condition, results of operations or cash flows.
On November 24, 2010, plaintiffs filed a 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, Lawyers Title Insurance Company, and Does 1-20. 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. Plaintiffs have 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. We have employed counsel and intend to vigorously defend the action. The case did not include a statement as to the amount of damages demanded, but instead included a demand for damages in an amount to be proved at trial. Due to the early stage of this case, it is not possible to make meaningful estimates, if any, of the amount or range of loss that could result from this case at this time.
Rent expense incurred under operating leases during the years ended December 31, 2010, 2009 and 2008 was $137.2 million, $153.1 million, and $138.0 million, respectively. Rent expense in 2010, 2009, and 2008 includes abandoned lease charges related to office closures of $11.7 million, $7.4 million, and $23.4 million, respectively.
We are party to an off-balance sheet financing arrangement (commonly referred to as a “synthetic lease”). The owner/lessor in this arrangement acquired land and various real property improvements associated with new construction of an office building in Jacksonville, Florida, that are part of FNF’s corporate campus and headquarters. The lease expires on June 28, 2011, with renewal subject to consent of the lessor and the lenders. The lessor is a third-party limited liability company. The synthetic lease facility provides for amounts up to $75.0 million. As of December 31, 2010, the full $75.0 million had been drawn on the facility to finance land costs and related fees and expenses and the outstanding balance was $70.1 million. The lease includes guarantees by us of up to 86.7% of the outstanding lease balance, and options to purchase the facilities at the outstanding lease balance. The guarantee becomes effective if we decline to purchase the facilities at the end of the lease and also decline to renew the lease. In February 2011, we started the process of renewing the lease. The lessor financed the acquisition of the facilities through funding provided by third-party financial institutions. 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 Operations. We do not believe the lessor is a variable interest entity, as defined in the FASB standard on consolidation of variable interest entities.
Pursuant to statutory accounting requirements of the various states in which our insurers are domiciled, these insurers 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 by statutory formula based upon either the age, number of policies and dollar amount of policy liabilities underwritten, or the age and dollar amount of statutory premiums written. As of December 31, 2010, the combined statutory unearned premium reserve required and reported for our title insurers was $1,994.0 million. In addition to statutory unearned premium reserves, each of our insurers maintains reserves for known claims and surplus funds for policyholder protection and business operations.
The combined statutory capital and surplus of our title insurers was $1,129.5 million and $988.2 million as of December 31, 2010 and 2009, respectively. The combined statutory net (losses) earnings of our title insurance subsidiaries were $(46.6) million, $237.2, and $(170.5) million for the years ended December 31, 2010, 2009, and 2008, respectively.
Pursuant to statutory requirements of the various states in which our insurers are domiciled, such insurers must maintain certain levels of minimum capital and surplus. Each of our insurers has complied with the minimum statutory requirements as of December 31, 2010.
Our underwritten title companies are also subject to certain regulation by insurance regulatory or banking authorities, primarily
relating to minimum net worth. Minimum net worth requirements for each underwritten title company are as follows: $7.5 million for Fidelity National Title Company, $2.5 million for Fidelity National Title Company of California, $3.0 million for Chicago Title Company, and $0.4 million for Ticor Title Company of California, Commonwealth Land Title Company, and Lawyers Title Company. These underwritten title companies are in compliance with all of their respective minimum net worth requirements at December 31, 2010.
During the three-year period ended December 31, 2010, we have offered our employees the opportunity to participate in
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, 2010, 2009, and 2008.
Stock option transactions under the Omnibus Plan for 2008, 2009, and 2010 are as follows:
The following table summarizes information related to stock options outstanding and exercisable as of December 31, 2010:
At December 31, 2010, the total unrecognized compensation cost related to non-vested stock option grants and restricted stock grants is $45.5 million, which is expected to be recognized in pre-tax income over a weighted average period of 1.58 years.
In connection with the Chicago Title merger, we assumed Chicago Title’s noncontributory defined contribution plan and noncontributory defined benefit pension plan (the “Pension Plan”). The Pension Plan covers certain Chicago Title employees. The benefits are based on years of service and the employee’s average monthly compensation in the highest 60 consecutive calendar months during the 120 months ending at retirement or termination. Effective December 31, 2000, the Pension Plan was frozen and there will be no future credit given for years of service or changes in salary. The accumulated benefit obligation is the same as the projected benefit obligation due to the pension plan being frozen as of December 31, 2000. Pursuant to the FASB standard on employers’ accounting for defined benefit pension and other post retirement plans, the measurement date is December 31.
The net pension liability included in accounts payable and accrued liabilities as of December 31, 2010, and 2009 is $22.0 million and $27.6 million, respectively. The discount rate used to determine the benefit obligation as of the years ending December 31, 2010 and 2009 was 5.04% and 5.61%, respectively. As of the years ending December 31, 2010 and 2009 the net benefit obligation was $158.1 million and $152.2 million, respectively, and the fair value of plan assets was $136.1 million and $124.6 million, respectively. The net periodic expense included in the results of operations relating to these plans was $7.4 million, $5.6 million, and $3.8 million for the years ending December 31, 2010, 2009, and 2008, respectively.
This segment consists of the operations of our title insurance underwriters and related businesses. This segment provides core title insurance and escrow and other title related services including collection and trust activities, trustee’s sales guarantees, recordings and reconveyances.
This segment consists of certain subsidiaries that issue flood, home warranty, homeowners’, automobile, and other personal lines insurance policies.
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 method investments, including Ceridian and Remy and our former investment in Sedgwick. During the year ended December 31, 2008, we recorded a $4.0 million impairment charge to an intangible asset in the corporate and other segment.
In December 2010, the FASB updated ASC Topic 805, to clarify disclosure requirements related to comparative financial statements presented as a result of a business combination. This update is effective prospectively for business combinations occurring during the first annual reporting period beginning on or after December 15, 2010. We do not expect this update to have a material impact on our financial condition or results of operations.