Because these factors can change dramatically, revenue levels in the title insurance industry can also change dramatically. For example, beginning in the second half of 1999 and through 2000, steady interest rate increases caused by actions taken by the Federal Reserve Board resulted in a significant decline in refinancing transactions. As a result, the market shifted from a refinance-driven market in 1998 to a more traditional market driven by new home purchases and resales in 1999 and 2000. However, beginning in January 2001 and continuing through June of 2003, the Federal Reserve Board reduced interest rates by 550 basis points, bringing interest rates down to their lowest level in recent history, which again significantly increased the volume of refinance activity. Beginning in mid-June 2003 and continuing through December 2003, the ten-year treasury bond yield steadily increased from a low of nearly 3.0% to more than 4.5%, causing mortgage interest rates to rise, which decreased the volume of refinance activity. Although mortgage interest rates again dropped during February and March of 2004, causing open orders to increase substantially towards the end of the first quarter of 2004, rates have fluctuated only slightly since then, and have not decreased to a level that triggered significant refinance volume in 2004 such as that experienced in 2003.
Information Services Segment. The level of residential real estate activity, such as the number of residential resales, new home sales and mortgage originations, also affects revenues derived from many of the services we provide in our information services segment. We experienced increased residential loan refinancing activity coupled with record levels of residential resale and new home sales during 2000 through 2003. While refinancing activity declined, residential sales remained strong in 2004. We expect that current interest rate levels and any future increase in interest rates will most likely result in levels of mortgage originations in 2005 that are lower than 2004.
affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. See Note A of Notes to the Consolidated Financial Statements for a more detailed description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements.
percentage of total revenue to 23.7% in 2004 from 22.0% in 2003 and increased from 20.1% in 2002. The increase in other operating expenses as a percentage of total revenue in 2004 and 2003 is consistent with the increase in personnel costs as a percentage of total revenue.
attributable to lower than expected payment levels on previous issue years that included periods of increased resale activity as well as a high proportion of refinance business. As a result, title policies issued in previous years have been replaced by the more recently issued policies, therefore generally terminating much of the loss exposure on the previously issued policies. The unfavorable development during 2003 reflects higher than expected payment levels on previously issued policies.
Our title claims loss reserve projected annual payments as of December 31, 2004 were as follows:
Capital Stock Transactions. On April 24, 2002, our Board of Directors approved a three-year stock repurchase program. Purchases are made by us from time to time in the open market, in block purchases or in privately negotiated transactions. From January 1, 2004, through December 31, 2004, we repurchased a total of 430,500 shares of common stock for $16.5 million, or an average price of $38.33. Additionally, on December 13, 2004, we entered into an agreement to repurchase 2,530,346 shares of Company common stock from Willis Stein & Partners (“Willis Stein”) and J.P. Morgan Chase, as escrow agent for the former stockholder of Aurum. We acquired Aurum in March 2004. The purchase price per share of $44.35 was a discount to the closing price of the Company’s common stock on December 13, 2004.
The Consolidated Financial Statements for 2002 were prepared using Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” to record stock-based employee compensation. As discussed in Note M to the Consolidated Financial Statements, effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to record stock-based employee compensation, applying the prospective method of adoption in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”
Fidelity National Financial, Inc., through its principal subsidiaries (collectively, the “Company”), is the largest title insurance and diversified real estate information services and solutions company in the United States. The Company’s title insurance underwriters - Fidelity National Title, Chicago Title, Ticor Title, Security Union Title and Alamo Title - together issue all of the Company’s title insurance policies in 49 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands, and in Canada and Mexico.
Specialty Insurance. The specialty insurance segment, consisting of our various non-title insurance subsidiaries, issues flood, home warranty, homeowners, automobile and personal lines insurance policies.
Goodwill represents the excess of cost over fair value of identifiable net assets acquired and assumed in a business combination. SFAS No. 142, Goodwill and Intangible Assets (“SFAS No. 142”) requires that intangible assets with estimable lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets(SFAS No. 144). SFAS No. 144 also provides that goodwill and other intangible assets with indefinite useful lives should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The Company measures for impairment on an annual basis.
On November 8, 2004, the Company acquired all of the outstanding stock of InterCept, Inc. (“InterCept”) for $18.90 per share. The total purchase price was approximately $419.4 million and was paid by $407.3 million of cash with the remaining purchase price relating to the issuance of Company options for vested InterCept options. InterCept provides both outsourced and in-house, fully integrated core banking solutions for community banks, including loan and deposit processing and general ledger and financial accounting operations. InterCept also operates significant item processing and check imaging operations, providing imaging for customer statements, clearing and settlement, reconciliation and automated exception processing in both outsourced and in-house relationships for customers.
On March 31, 2003, the Company acquired Key Title Company (“Key Title”) for $22.5 million in cash. Key Title operates in 12 counties in the state of Oregon.
Net realized gains amounted to $37.0 million, $106.4 million and $15.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. Included in 2004 were gains related to the Company’s investment in Covansys warrants of $16.2 million. Included in 2003 net realized gains is a $51.7 million realized gain as a result of InterActive Corp’s acquisition of Lending Tree Inc. and the subsequent sale of the Company’s InterActive Corp common stock and a realized gain of $25.0 million on the sale of New Century Financial Corporation common stock. Included in 2002 net realized gains are other-than-temporary impairment losses of $11.3 million recorded on CKE Restaurants, Inc. during the fourth quarter of 2002 and $3.3 million recorded on MCI WorldCom bonds in the second quarter of 2002.
On November 8, 2004, the Company through one of its subsidiaries, entered into a new credit agreement providing for a $500.0 million, 5-year revolving credit facility due November 8, 2009. The facility provides an option to increase the size of the credit facility an additional $100.0 million. The new credit agreement bears interest at a variable rate based on leverage and is unsecured. The current interest rate under the new credit agreement is LIBOR plus 0.50%. In addition, the Company will pay a 0.15% commitment fee on the entire facility. On November 8, 2004 the Company drew down approximately $410 million to fund the acquisition of InterCept. On March 9, 2005, the Company paid down this facility and terminated the agreement (see Note R).
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future to realize its net deferred tax assets or realization of its deferred tax assets will coincide with the turnaround in its deferred tax liabilities. A valuation allowance will be established for any portion of a deferred tax asset that management believes may not be realized. Adjustments to the valuation allowance will be made if there is a change in management’s assessment of the amount of deferred tax asset that is realizable.
In the fall of 2004, the California Department of Insurance began its investigation into reinsurance practices in the title insurance industry. This investigation paralleled the inquiries of the National Association of Insurance Commissioners, which has been looking into this topic for approximately one year. Other state insurance departments also have made formal or informal inquiries to us regarding these matters. The Company has been cooperating and intends to continue to cooperate with these investigations. The Company has discontinued all reinsurance agreements of the type the investigations cover. The amount of premiums the Company ceded to reinsurers has been approximately $10 million over the existence of these agreements. These investigations are at an early stage and as a result the Company is unable to give any absolute assurance regarding their consequences for the industry or for it.
at not less than the fair market value on the date of grant. A total of 212,695 stock options were outstanding as of December 31, 2004. No further awards may be granted under this plan.
In 2004, the Company also assumed pension plans relating to its acquisition of Kordoba. These plans cover benefits for retirees in Germany and amount to a liability of approximately $18.0 million at December 31, 2004 and results are included within the following disclosures for the period from September 30, 2004 (the acquisition date of Kordoba) through December 31, 2004.