The statements contained in this Quarterly Report on Form 10-Q that are not
purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our expectations, hopes,
intentions or strategies regarding the future. All forward-looking statements
included in this document are based on information available to us on the date
hereof, and we assume no obligation to update any such forward-looking
statements. It is important to note that our actual results could vary
materially from those forward-looking statements contained herein due to many
factors, including, but not limited to: changes in general economic, business
and political conditions, including changes in the financial markets; continued
weakness or adverse changes in the level of real estate activity, which may be
caused by, among other things, high or increasing interest rates, a limited
supply of mortgage funding or a weak U.S. economy; our potential inability to
find suitable acquisition candidates, acquisitions in lines of business that
will not necessarily be limited to our traditional areas of focus, or
difficulties in integrating acquisitions; our dependence on distributions from
our title insurance underwriters as our main source of cash flow; significant
competition that our operating subsidiaries face; compliance with extensive
government regulation of our operating subsidiaries and adverse changes in
applicable laws or regulations or in their application by regulators; and other
risks detailed in the "Statement Regarding Forward-Looking Information," "Risk
Factors" and other sections of the Company's Form 10-K and other filings with
the Securities and Exchange Commission.
The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2011.
Overview
We are a leading provider of title insurance, mortgage services and restaurant
and other diversified services. FNF is the nation's largest title insurance
company through its title insurance underwriters - Fidelity National Title,
Chicago Title, Commonwealth Land Title and Alamo Title - that collectively issue
more title insurance policies than any other title company in the United States.
FNF also holds a 55% ownership interest in American Blue Ribbon Holdings, LLC
("ABRH"), the owner and operator of the O'Charley's, Ninety Nine Restaurants,
Max & Erma's, Village Inn, Bakers Square, and Stoney River Legendary Steaks
concepts. In addition, among other operations, FNF owns minority interests in
Ceridian Corporation ("Ceridian"), a leading provider of global human capital
management and payment solutions and Remy International, Inc. ("Remy"), a
leading designer, manufacturer, remanufacturer, marketer and distributor of
aftermarket and original equipment electrical components for automobiles, light
trucks, heavy-duty trucks and other vehicles.
We currently have three reporting segments as follows:
• Fidelity National Title Group. 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, and home warranty insurance.
• Restaurant Group. The restaurant group segment consists of the operations
of ABRH, in which we have a 55% ownership interest. ABRH is the owner and
operator of the O'Charley's, Ninety Nine Restaurants, Max & Erma's,
Village Inn, Bakers Square, and Stoney River Legendary Steaks concepts.
• Corporate and Other. The corporate and other segment consists of the
operations of the parent holding company, certain other unallocated
corporate overhead expenses, other smaller operations, and our share in
the operations of certain equity investments, including Ceridian and Remy.
Acquisition of O'Charley's Inc. and Merger with ABRH
On April 9, 2012, we successfully closed a tender offer for the outstanding
common stock of O'Charley's Inc. ("O'Charley's"). We have consolidated the
results of O'Charley's as of April 9, 2012. On May 11, 2012, we merged
O'Charley's with our investment in ABRH in exchange for an increase in our
ownership position in ABRH from 45% to 55%. As of June 30, 2012, there were 322
company-owned restaurants in the O'Charley's group of companies and 222
company-owned restaurants in the legacy ABRH group of companies. Total
consideration paid was $122.2 million in cash, net of cash acquired of $35.0
million. Our investment in ABRH prior to the merger of $37.2 million was
included in investments in unconsolidated affiliates on the Condensed
Consolidated Balance Sheets. Our investment in O'Charley's prior to the tender
offer of $13.8 million was included in equity securities available for sale on
the Condensed Consolidated Balance Sheets. We have consolidated the operations
of ABRH, including the O'Charley's group of companies, beginning on May 11,
2012.
Acquisition of J. Alexander's Corporation
On June 25, 2012, we entered into a definitive agreement to merge J. Alexander's
Corporation ("J. Alexander's") with ABRH in a transaction which values the
equity of J. Alexander's at approximately $72.0 million. In addition to
approvals by the J. Alexander's shareholders, the consummation of the
transactions is subject to certain closing conditions. The transaction is
targeted
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to close in the fourth quarter of 2012. J. Alexander's Corporation operates 33
J. Alexander's restaurants in 13 states.
Discontinued Operations
On May 1, 2012, we completed the sale of an 85% interest in our remaining
subsidiaries that write personal lines insurance to WT Holdings, Inc. for $119.0
million. Accordingly, the results of this business (which we refer to as our
"at-risk" insurance business) for all periods presented are reflected in the
Condensed Consolidated Statements of Earnings as discontinued operations. The
at-risk insurance business sale resulted in a pre-tax loss of $15.1 million,
which was recorded in the fourth quarter of 2011. Total revenues from the
at-risk insurance business included in discontinued operations are $20.9 million
and $43.1 million for the three months ending June 30, 2012 and 2011,
respectively, and $57.1 million and $85.0 million for the six months ending June
30, 2012 and 2011, respectively. Pre-tax earnings (losses) from the at-risk
insurance business included in discontinued operations are $6.4 million and
$(7.8) million for the three months ending June 30, 2012 and 2011, respectively,
and $10.4 million and $(8.0) million for the six months ending June 30, 2012 and
2011, respectively.
On October 31, 2011, we completed the sale of our flood insurance business to
WRM America Holdings LLC ("WRM America") for $135.0 million in cash and
dividends, and a $75.0 million seller note included in Trade and Notes
Receivable on the Condensed Consolidated Balance Sheet as of June 30, 2012. The
seller note has an 8.0% annual interest coupon, with interest payable quarterly
and principal payable in full eighteen months subsequent to closing on April 30,
2013. The flood insurance business sale resulted in a pre-tax gain of
approximately $154.1 million ($94.9 million after tax), which was recorded in
the fourth quarter of 2011. Total revenues from the flood business included in
discontinued operations were $47.7 million and $82.1 million for the three and
six months ending June 30, 2011, respectively. Pre-tax earnings from the flood
business included in discontinued operations were $9.0 million and $14.0 million
for the three and six months ended June 30, 2011, respectively.
Transactions with Related Parties
Our financial statements reflect related party transactions with Fidelity
National Information Services ("FIS"), which is a related party. See Note A of
the Notes to Condensed Consolidated Financial Statements for further details on
our transactions with related parties.
Business Trends and Conditions
Fidelity National Title Group
Title insurance revenue is closely related to the level of real estate activity
which includes sales, mortgage financing and mortgage refinancing. The levels of
real estate activity are primarily affected by the average price of real estate
sales, the availability of funds to finance purchases and mortgage interest
rates. Declines in the level of real estate activity or the average price of
real estate sales will adversely affect our title insurance revenues. Both the
volume and the average price of residential real estate transactions have
experienced declines in many parts of the country over the past several years
from 2005 and prior levels, resulting in a reduction of revenues in our
businesses.
We have found that residential real estate activity generally decreases in the
following situations:
• when mortgage interest rates are high or increasing;
• when the mortgage funding supply is limited; and
• when the United States economy is weak, including during high unemployment
levels.
In 2007, as interest rates on adjustable rate mortgages reset to higher rates,
foreclosures on subprime mortgage loans increased to record levels. This
resulted in a significant decrease in levels of available mortgage funding as
investors became wary of the risks associated with investing in subprime
mortgage loans. In addition, tighter lending standards and a bearish outlook on
the real estate environment caused potential home buyers to become reluctant to
purchase homes. In 2008, the increase in foreclosure activity, which had
previously been limited to the subprime mortgage market, became more widespread
as borrowers encountered difficulties in attempting to refinance their
adjustable rate mortgages. In the last three years, the elevated mortgage
delinquency and default rates caused negative operating results at a number of
banks and financial institutions and, as a result, significantly reduced the
level of lending activity. Multiple banks have failed over the past three years
and others may fail in the future, further reducing the capacity of the mortgage
industry to make loans.
According to the Mortgage Banker's Association ("MBA"), U.S. mortgage
originations (including refinancings) were approximately $1.3 trillion, $1.6
trillion and $2.0 trillion in 2011, 2010 and 2009, respectively. As of June 12 ,
2012, the MBA's Mortgage Finance Forecast estimates an approximately $1.3
trillion mortgage origination market for 2012.
Since December of 2008, the Federal Reserve has held the federal funds rate at
0.0%-0.25%, and has indicated that rates will stay at this level through at
least 2014. Mortgage interest rates remained at historically low levels
throughout 2011 and continued
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to decrease in the first six months of 2012.
Several pieces of legislation were enacted to address the struggling mortgage
market and the current economic and financial environment. On October 24, 2011,
the Federal Housing Finance Agency announced a series of changes to the Home
Affordable Refinance Program ("HARP") which would make it easier for certain
borrowers who owe more than their home is worth and who are current on their
mortgage payments to refinance their mortgages at lower interest rates. The new
program reduces or eliminates the risk-based fees Fannie Mae and Freddie Mac
charge on many loans, raises the loan-to-home value ratio requirement for
refinancing, and streamlines the underwriting process. According to the Federal
Housing Authority ("FHA"), lenders began taking refinancing applications on
December 1, 2011 under the modified HARP. We believe that the modified HARP
program has had a positive impact on the volume of our refinance orders during
the second quarter of 2012. We are uncertain to what degree the modified HARP
program may affect our results in the future.
On February 1, 2012, the Obama Administration announced new initiatives designed
to increase refinancing of mortgages, reduce foreclosures and improve the
housing market. Under these initiatives, among other things: (i) certain
borrowers with loans insured by Fannie Mae or Freddie Mac ("GSEs" and such
loans, "GSE loans") and certain borrowers with non-GSE loans, through a new FHA
program, would be able to refinance their mortgages and take advantage of the
currently low interest rates; (ii) the FHA will begin transitioning foreclosed
properties in the nation's hardest-hit cities into rental housing units; (iii)
GSEs and major banks have begun offering one year of forbearance (up from three
months) to certain unemployed borrowers; and (iv) the Home Affordable
Modification Program ("HAMP") was extended through 2013, including easing the
eligibility requirements and increasing the financial incentives for banks to
participate. As indicated, the Obama Administration has already begun
implementing these initiatives, except for the refinancing initiatives; however,
the GSEs have not started the refinancing program. The Obama Administration is
looking to Congress to pass legislation to implement a refinancing program for
non-GSE loans. We are uncertain to what degree these initiatives may affect our
results in the future.
During 2010, a number of lenders imposed freezes on foreclosures in some or all
states as they reviewed their foreclosure practices. In response to these
freezes, the Office of the Comptroller of the Currency ("OCC") is concurrently
reviewing the foreclosure practices in the residential mortgage loan servicing
industry. On April 13, 2011, the OCC and other federal regulators announced
formal consent orders against several national bank mortgage servicers and
third-party servicer providers for inappropriate practices related to
residential mortgage loan servicing and foreclosure processing. The consent
orders require the servicers to promptly correct deficiencies and make
improvements in practices for residential mortgage loan servicing and
foreclosure processing, including improvements to future communications with
borrowers and a comprehensive "look back" to assess whether foreclosures
complied with federal and state laws and whether any deficiencies in the process
or related documentation resulted in financial injury to borrowers. We are not
involved in these enforcement actions and we do not believe that we are exposed
to significant losses resulting from faulty foreclosure practices. Our title
insurance underwriters issue title policies on real estate owned properties to
new purchasers and lenders to those purchasers. We believe that these policies
will not result in significant additional claims exposure to us because even if
a court sets aside a foreclosure due to a defect in documentation, the
foreclosing lender would be required to return to our insureds all funds
obtained from them, resulting in reduced exposure under the title insurance
policy. Further, we believe that under current law and the rights we have under
our policies, we would have the right to seek recovery from the foreclosing
lender in the event of a failure to comply with state laws or local practices in
connection with a foreclosure. Many states continue to evaluate foreclosure
practices and related legislation may change in the future. The consent orders
imposed by the federal regulators have continued to delay lender foreclosure
completions.
On February 9, 2012, federal officials, state attorneys general and
representatives of Bank of America, JP Morgan Chase, Wells Fargo, Citigroup and
Ally Financial agreed to a $25 billion settlement of federal and state
investigations into the foreclosure practices of banks and other mortgage
servicers from September 2008 to December 2011. Under the settlement,
approximately one million underwater borrowers will have their mortgages reduced
by lenders and 300,000 homeowners will be able to refinance their homes at lower
interest rates. We are uncertain to what degree these initiatives have affected
our results or may affect our results in the future.
In addition to state-level regulation, our title insurance business is subject
to regulation by federal agencies, including the newly formed Consumer Financial
Protection Bureau ("CFPB"). The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 established the CFPB, and in January 2012, President
Obama appointed its first director. The CFPB has been given broad authority to
regulate, among other areas, the mortgage and real estate markets in matters
pertaining to consumers. This authority includes the enforcement of the Real
Estate Settlement Procedures Act formerly placed with the Department of Housing
and Urban Development. We cannot be certain what impact, if any, the CFPB will
have on our title insurance business.
Historically, real estate transactions have produced seasonal revenue levels for
title insurers. The first calendar quarter is typically the weakest quarter in
terms of revenue due to the generally low volume of home sales during January
and February. The third calendar quarter has been typically the strongest in
terms of revenue primarily due to a higher volume of home sales in the summer
months and the fourth quarter is usually also strong due to commercial entities
desiring to complete transactions by year-end. In the past four years we have
seen a divergence from these historical trends with orders being negatively
affected by a reduction in the availability of financing, rising default levels,
and falling home values causing an overall downward trend in home
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sales. In addition we have noted short term fluctuations through recent years in
resale and refinance transactions as a result of changes in interest rates and
the implementation and subsequent expiration of government programs designed to
stimulate the real estate market.
Because commercial real estate transactions tend to be driven more by supply and
demand for commercial space and occupancy rates in a particular area rather than
by macroeconomic events, we believe that our commercial real estate title
insurance business is less dependent on the industry cycles discussed above than
our residential real estate title business. However, from 2007 to 2009 we
experienced a significant decrease in our average commercial fee per file, which
we believe was due, in part, to a decrease in the number of closings of larger
deals due to difficulties or delays in obtaining financing. During 2010 and 2011
and in the first six months of 2012, we have experienced an increase in fee per
file and in the volume of commercial transactions, which may indicate an
improvement in availability of financing in the commercial markets.
Restaurant Group
The restaurant industry is highly competitive and is often affected by changes
in consumer tastes and discretionary spending patterns; changes in general
economic conditions; public safety conditions or concerns; demographic trends;
weather conditions; the cost of food products, labor, energy and other operating
costs; and governmental regulations. The restaurant industry is also
characterized by high capital investments for new restaurants and relatively
high fixed or semi-variable restaurant operating expenses. Because of the high
fixed and semi-variable expenses, changes in sales in existing restaurants are
generally expected to significantly affect restaurant profitability because many
restaurant costs and expenses are not expected to change at the same rate as
sales. Restaurant profitability can also be negatively affected by inflationary
and regulatory increases in operating costs and other factors. The three most
significant commodities that may affect our cost of food and beverage are beef,
seafood, and poultry which accounted for almost 50 percent of our overall cost
of food and beverage in the past. Generally, temporary increases in these costs
are not passed on to guests; however, in the past, we have adjusted menu prices
to compensate for increased costs of a more permanent nature.
Average weekly sales per restaurant are typically higher in the first and fourth
quarters than in subsequent quarters, and we typically generate a
disproportionate share of our earnings from operations in the first and fourth
quarters. Holidays, severe weather and other disruptive conditions may impact
sales volumes seasonally in some operating regions. Because of the seasonality
of our business, results for any quarter are not necessarily indicative of the
results that may be achieved for the full fiscal year.
In 2010, the Patient Protection and Affordable Care Act ("Affordable Care Act")
was passed and becomes effective in 2014. We are continuing to assess the impact
of the Affordable Care Act on our health care benefit costs. The imposition of
any requirement that we provide health insurance benefits to employees that are
more extensive than the health insurance benefits we currently provide, or the
imposition of additional employer paid employment taxes on income earned by our
employees, could have a material adverse affect on our results of operations in
the future. The Affordable Care Act is likely to similarly affect the restaurant
industry in general. Additionally, our suppliers may also be affected by higher
minimum wage and benefit standards, which could result in higher costs for goods
and services supplied to us.
Our revenues in future periods will continue to be subject to these and other
factors that are beyond our control and, as a result, are likely to fluctuate.
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