| FIDELITY NATIONAL FINANCIAL INC /DE/ Item 1A Risk Factors In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this Annual Report on Form 10-K or incorporated herein |
| Any of the risks described herein could result in a significant or material adverse effect on our results of operations or financial condition |
| General If adverse changes in the levels of real estate activity occur, our revenues may decline |
| Title insurance revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing |
| Our FIS segment would also be negatively affected if real estate activity levels decline |
| 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 |
| While both the volume and the average price of residential real estate transactions have recently experienced record highs, we do not expect these trends to continue |
| Further, interest rates have risen from record low levels in 2003, resulting in reductions in the level of mortgage refinancings and total mortgage originations in 2004 and again in 2005 |
| 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 |
| If either the level of real estate activity or the average price of real estate sales declines, it could adversely affect our title insurance revenues |
| The Mortgage Bankers Association currently projects residential mortgage production in 2006 to be dlra2dtta24 trillion, which would represent a 19dtta2prca decline relative to 2005 |
| The MBA further projects that the 19dtta2prca decrease will result from purchase transactions declining from dlra1dtta49 billion in 2005 to dlra1dtta43 billion in 2006 or 3dtta6prcaand refinance transactions dropping from dlra1dtta29 billion in 2005 to dlra0dtta81 billion or 37dtta1prca in 2006 |
| Revenues from certain of the businesses in our FIS segment are also closely related to the level of real estate transactions, such as real estate sales and mortgage refinancings |
| Our revenues in future periods will continue to be subject to these and other factors which are beyond our control and, as a result, are likely to fluctuate |
| 28 _________________________________________________________________ [80]Table of Contents Our rate of growth could be adversely affected if we are unable to acquire suitable acquisition candidates |
| As part of our growth strategy, we have made numerous acquisitions and we plan to continue to acquire complementary businesses, products and services |
| This strategy depends on our ability to identify suitable acquisition candidates and, assuming we find them, to finance such acquisitions on acceptable terms |
| We have historically used, and in the future may continue to use, a variety of sources of financing to fund our acquisitions, including cash from operations, debt and equity |
| Our ability to finance our acquisitions is subject to a number of risks, including the availability of adequate cash reserves from operations or of acceptable financing terms and variability in our stock price |
| FIS is highly leveraged and would likely need to issue equity to raise funds for a significant acquisition |
| These steps might require approval of FIS’s lenders, which might not be forthcoming |
| These factors may inhibit our ability to pursue attractive acquisition targets |
| If we are unable to acquire suitable acquisition candidates, we may experience slower growth |
| Our management has articulated an ongoing strategy to seek growth through acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus or geographic areas |
| This expansion of our business subjects us to associated risks, such as the diversion of management’s attention and lack of experience in operating such businesses, and may affect our credit and ability to repay the notes |
| Our management has stated that we will seek to operate as a true holding company with the flexibility to make acquisitions in lines of business that are not directly tied to or synergistic with our core operating segments |
| Accordingly, we have recently acquired, and may in the future acquire, businesses in industries or geographic areas with which management is less familiar than we are with our core businesses |
| These activities involve risks that could adversely affect our operating results, such as diversion of management’s attention and lack of substantial experience in operating such businesses |
| Also, in the last few years we have expanded the range and amount of real estate information services we provide, expanded our home warranty, auto and niche personal lines insurance businesses, expanded our commercial title insurance business and acquired underwriters of other lines of insurance products |
| There can be no guarantee that we will not enter into transactions or make acquisitions that will cause us to incur additional debt, increase our exposure to market and other risks and cause our credit or financial strength ratings to decline |
| We may encounter difficulties managing our growth and successfully integrating new businesses, including the businesses of Certegy following the merger, which could adversely affect our results of operations |
| A failure of new FIS to achieve expected synergies or to successfully cross-sell its products and services could result in the benefits of the merger not being attained |
| We have historically achieved growth through a combination of developing new products and services and, increasing our market share for existing products and acquisitions |
| Part of our strategy is to pursue opportunities to diversify and expand our operations by acquiring or making investments in other companies |
| The success of each acquisition will depend upon: • our ability to integrate the acquired business’ operations, products and personnel; • our ability to retain key personnel of the acquired business; • our ability to expand our financial and management controls and reporting systems and procedures; • our ability to maintain the customers and goodwill of the acquired business; and • any unexpected costs or unforeseen liabilities associated with the acquired business |
| The integration of two previously separate companies is a challenging, time-consuming and costly process |
| In the case of the merger with Certegy, it is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect FIS’s ability to maintain relationships with suppliers, customers and employees or to achieve the anticipated benefits of the merger |
| In addition, any successful integration of companies will require the dedication of significant management resources, which will 29 _________________________________________________________________ [81]Table of Contents temporarily detract attention from our day-to-day businesses |
| The same issues apply to the integration of any other business we acquire |
| Realizing the beneficial synergies expected from the merger with Certegy will depend on a number of factors, some of which include: • retention of key management, marketing, and technical personnel after the merger; • correctly identifying areas where personnel and facilities can be consolidated without adverse effects on results of operations; • customers not deferring purchasing decisions as a result of the merger; • the ability of the combined company to increase sales of its products; and • competitive conditions in the industries in which the combined company operates |
| The failure to achieve the anticipated synergies could result in a failure to attain the expected benefits to the business, financial condition and operating results of FIS, and ultimately to our results of operations |
| While we intend to take advantage of this merger to seek cross-selling opportunities, such cross-selling efforts may face potential challenges for various reasons, such as difficulties in coordinating and incentivizing employees within one combined company and maintaining optimal quality control, managing existing customers’ potential resistance to outsourcing functions to a new vendor and other matters |
| If the cross-selling synergies for increased revenue do not occur, the benefits of the merger may not ultimately be achieved |
| We are a holding company and depend on distributions from our subsidiaries for cash |
| We are a holding company whose primary assets are the securities of our operating subsidiaries |
| Our ability to pay debt service on our notes and our other obligations and to pay dividends is dependent on the ability of our subsidiaries to pay dividends or make other distributions or payments to us |
| Our subsidiaries are not obligated to make funds available to us |
| If our operating subsidiaries are not able to pay dividends to us, we may not be able to meet our obligations or pay dividends on our common stock |
| FNT’s title insurance and specialty insurance subsidiaries must comply with state laws which require them to maintain minimum amounts of working capital, surplus and reserves, and place restrictions on the amount of dividends that they can distribute to us |
| Compliance with these laws will limit the amounts our regulated subsidiaries can dividend to us |
| During 2006, FNT’s title insurers will be able to pay dividends or make distributions to FNT without prior regulatory approval of approximately dlra289dtta9 million |
| Our other subsidiaries include FIS and our specialty insurance operations |
| However, at present FIS is highly leveraged and specialty insurance is a smaller, growing operation and, as a result, it will likely be difficult under current circumstances for either of them to be a significant source of cash to us |
| Although the merger with Certegy resulted in the combined company having a lower degree of leverage than pre-merger FIS alone, the combined company still has substantial leverage and has its own needs for cash and accordingly may be unable to provide significant cash flow to FNF FIS currently expects that following the merger it will continue paying quarterly dividends of dlra0dtta05 per share |
| However, FIS’s senior credit facilities contain covenants limiting the amount of dividends FIS can pay on its common stock to dlra60 million per year, plus certain other amounts, except that dividends on common stock may not be paid if any event of default under the facilities shall have occurred or be continuing or would result from such payment |
| Further, any dividends FIS does pay would also be paid to the stockholders of FIS other than us |
| We could have conflicts with our subsidiaries, and our chief executive officer and chairman of our board of directors is also the chairman of the board of directors of both FNT and FIS Conflicts may arise between our majority-owned subsidiaries FNT and FIS and us as a result of our ongoing agreements and the nature of our respective businesses |
| We will seek to manage any potential conflicts through our agreements with our subsidiaries and through oversight by independent members of our 30 _________________________________________________________________ [82]Table of Contents board of directors |
| However, there can be no assurances that such measures will be effective or that we will be able to resolve all potential conflicts |
| Similar conflicts could arise between FNT and FIS William P Foley, II, is our chief executive officer and the chairman of our board of directors and the chairman of the board of each of FNT and FIS As an officer and director of multiple companies, he has obligations to us and to such other companies and may have conflicts of interest with respect to matters potentially or actually involving or affecting our and their respective businesses |
| As an officer and director of multiple companies, he may also have conflicts of time with respect to his multiple responsibilities |
| Foley is able to allot, then his oversight of that company’s activities could be diminished |
| Some of our executive officers and directors own substantial amounts of stock or options of FNT or FIS Such ownership could create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different implications for us and FNT or FIS Some of our executive officers and directors own substantial amounts of FNT and FIS stock and stock options because of their relationships with FNF, FNT and FIS Such ownership could create or appear to create potential conflicts of interest when our directors and officers are faced with decisions that involve FNT, FIS or any of their respective subsidiaries |
| The markets in which our principal operating subsidiaries operate are highly competitive |
| Some of our competitors have greater resources than us, and we may face competition from new entrants with alternative products or services |
| The market for FIS’s services is intensely competitive |
| FIS’s competitors vary in size and in the scope and breadth of the services they offer |
| Some of its competitors have substantial resources |
| Since many of FIS’s larger potential customers in its bank core processing and mortgage processing businesses have historically developed their key applications in-house and therefore view their system requirements from a make-versus-buy perspective, FIS often competes against its potential customers’ in-house capacities |
| In its card services business, our FIS segment faces direct competition from third-party payment processors and companies that market software for the electronic payments industry |
| We also compete against software and transaction processing systems developed and used in-house by our potential customers |
| Our competitors may develop products and services that are superior to or that achieve greater market acceptance than our products and services |
| Certain of our competitors may have significantly greater financial, technical, marketing or other resources than we do |
| As a result, our competitors may be in a position to respond more quickly than we can to new or emerging technologies and changes in customer requirements, or may devote greater resources than we can to the development, promotion, sale and support of their products and services |
| Moreover, new competitors or alliances among competitors may emerge and rapidly decrease our market share |
| We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater resources than us |
| Accordingly, competitive pressures may have a material adverse effect on our business, financial condition and results of operations |
| The title insurance industry is also highly competitive |
| According to Demotech, the top five title insurance companies accounted for 90dtta2prca of net premiums collected in 2004 |
| The number and size of competing companies varies in the different geographic areas in which we conduct our title insurance business |
| In our principal markets, competitors include other major title underwriters such as The First American Corporation, LandAmerica Financial Group, Inc, Old Republic International Corporation and Stewart Information Services Corporation, as well as numerous smaller title insurance companies and independent agency operations at the regional and local level |
| These smaller companies may expand into other markets in which we compete |
| Also, the removal of regulatory barriers might result in new competitors entering the title insurance business, and those new competitors may include companies that have greater financial resources than we do and possess other competitive advantages |
| Competition among the major title insurance companies, expansion 31 _________________________________________________________________ [83]Table of Contents by smaller regional companies and any new entrants with alternative products could affect our business operations and financial condition |
| From time to time, we adjust the title insurance rates we charge in a particular state as a result of competitive conditions in that state |
| For example, in response to recent rate reductions by certain of our title insurance competitors, we recently adjusted our rate structure in California for refinancings |
| This change could have an adverse impact on our results of operations, although its ultimate impact will depend, among other things, on the volume and mix of our future refinancing business in that state |
| We expect the markets for our products and services to remain highly competitive |
| Our failure to remain competitive may have a material adverse effect on our business, financial condition and results of operations |
| Risks Relating to our Insurance Business Our insurance subsidiaries must comply with extensive regulations |
| These regulations may increase our costs or impede, or impose burdensome conditions on, actions that we might seek to take to increase the revenues of those subsidiaries |
| Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they operate |
| These agencies have broad administrative and supervisory power relating to the following, among other matters: • licensing requirements; • trade and marketing practices; • accounting and financing practices; • capital and surplus requirements; • the amount of dividends and other payments made by insurance subsidiaries; • investment practices; • rate schedules; • deposits of securities for the benefit of policyholders; • establishing reserves; and • regulation of reinsurance |
| Most states also regulate insurance holding companies like us with respect to acquisitions, changes of control and the terms of transactions with our affiliates |
| State regulations may impede or impose burdensome conditions on our ability to increase or maintain rate levels or on other actions that we may want to take to enhance our operating results |
| In addition, we may incur significant costs in the course of complying with regulatory requirements |
| We cannot assure you that future legislative or regulatory changes will not adversely affect our business operations |
| ” State regulation of the rates we charge for title insurance could adversely affect our results of operations |
| Our title insurance subsidiaries are subject to extensive rate regulation by the applicable state agencies in the jurisdictions in which they operate |
| Title insurance rates are regulated differently in the various states, with some states requiring the subsidiaries to file rates before such rates become effective and some states promulgating the rates that can be charged |
| In almost all states in which the title subsidiaries operate, our rates must not be excessive, inadequate or unfairly discriminatory |
| The California Department of Insurance (“CDI”) has recently undertaken an examination of the levels of pricing and competition in the title insurance industry in California, with a view to determining whether prices are too high and if so, implementing rate reductions |
| The CDI commissioned an analysis of the title insurance and escrow industry in California, and a report was prepared by an economist at the request of the 32 _________________________________________________________________ [84]Table of Contents California Insurance Commissioner |
| The report concluded that a reasonable degree of competition does not exist in the markets for title insurance and escrow services in California, and the CDI began holding hearings in January 2006 to address the report’s findings |
| The Company is unable to predict the outcome of the CDI’s examination, or whether it will result in new legislation, regulation or restrictions on its title insurance operations in California |
| California is the largest source of revenue for the title insurance industry, including for us |
| In 2005, California-based premiums accounted for 45dtta1prca of premiums earned by FNT’s direct operations and 1dtta8prca of its agency premium revenues |
| In the aggregate, California accounted for approximately 21prca of our total title insurance premiums for 2005 |
| A significant part of our revenues and profitability are therefore subject to FNT’s operations in California and to the prevailing regulatory conditions in California |
| Adverse regulatory developments in California, which could include reductions in the maximum rates permitted to be charged, inadequate rate increases or more fundamental changes in the design or implementation of the California title insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition |
| Insurance regulators in New York, Colorado, Florida, Nevada and Texas have also announced similar inquiries (or other reviews of title insurance rates) and other states could follow |
| State regulators may use their rate-regulation oversight authority to take steps to cause us to reduce our rates, or block our attempts to increase our rates |
| Such actions by regulators could adversely affect our operating results |
| Further, US Representative Oxley, the Chairman of the House Financial Services Committee, recently asked the Government Accountability Office (the GAO) to investigate the title insurance industry |
| Representative Oxley stated that the Committee is concerned about payments that certain title insurers have made to developers, lenders and real estate agents for |