FNF

Business Context and Reporting Period

Company: Fidelity National Financial, Inc. (FNF)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: FNF is a holding company and the nation's largest title insurance provider, operating through three segments: Fidelity National Title Group, Specialty Insurance (flood, home warranty, personal lines), and Corporate and Other (including equity interests in Sedgwick, Ceridian, and Remy). The company operates through a network of over 1,600 direct offices and nearly 7,500 agents.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 37.1% to $5.83 billion in 2009 compared to 2008. This growth was driven primarily by the acquisition of LandAmerica Financial Group's (LFG) title underwriters in December 2008 and an increase in refinance activity due to historically low interest rates.
• Profitability Turnaround: The company returned to profitability with net earnings of $222.3 million, reversing a net loss of $179.0 million in 2008. This improvement was significantly aided by a $74.4 million favorable claim loss development credit (reserve release) in 2009, contrasting with a $261.6 million adverse development charge in 2008.
• Debt Reduction: Total notes payable decreased by approximately $489 million (36%) to $861.9 million. The company utilized proceeds from a $331.4 million equity offering in April 2009 to repay borrowings under its revolving credit facility and repurchase public bonds.
• Claim Loss Provision: The provision for claim losses as a percentage of title premiums dropped to 5.1% in 2009 from 18.2% in 2008, reflecting improved claims management and favorable development on prior policy years.

Guidance, Outlook, and Risks

• Market Outlook: Management anticipates continued volatility in the real estate market. The Mortgage Bankers Association forecasts a 39.5% decrease in the mortgage origination market for 2010, driven almost entirely by decreased refinance activity as interest rates stabilize.
• Rate Increases: FNF has instituted revised title insurance rates in 24 states (including California) with increases generally ranging from 5% to 10% to offset declining volumes and fee compression.
• Key Risks:
  • Real Estate Activity: Revenues are highly correlated with real estate sales and refinancing volumes, which remain suppressed by economic conditions and mortgage funding availability.
  • Claim Loss Volatility: Estimating future title losses is complex. While 2009 saw favorable development, future adverse developments or large claims could require significant additional reserve charges.
  • Regulatory Environment: The company faces extensive state-level regulation regarding rates, capital requirements, and market conduct. California, representing 17.6% of title premiums, poses specific regulatory risks.
  • Legal Proceedings: Numerous class actions are pending regarding alleged improper premiums, recording fee overcharges, and antitrust violations. While management believes these will not have a material adverse effect on overall financial condition, outcomes remain uncertain.
• Liquidity: The company maintains a $1.1 billion revolving credit facility (with $700 million unused as of year-end). Dividend payments from subsidiaries are restricted by state insurance regulations, limiting the parent company's ability to access cash without regulatory approval.

Investor Verification Checklist

• Claim Reserve Adequacy: Verify the sustainability of the 2009 reserve release ($74.4 million) and monitor future claim loss development trends, given the volatility seen in 2007 and 2008.
• Refinance Volume Sensitivity: Assess the impact of the projected 39.5% drop in 2010 mortgage originations on future revenue, particularly given the heavy reliance on refinance transactions in 2009.
• Legal Exposure: Review the status of pending class actions regarding recording fees and antitrust allegations, specifically the outcomes of appeals in New York and Texas.
• Debt Covenants: Confirm compliance with financial covenants in the $1.1 billion credit agreement, particularly regarding leverage ratios and capitalization levels.
• Investment Portfolio Quality: Monitor the valuation of the $4.7 billion investment portfolio, specifically the $69.7 million par value of auction rate securities held at a fair value of $45.2 million.