FNF 09.30.13 10-Q
Table of Contents


 
 
 
 
 
 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-32630
FIDELITY NATIONAL FINANCIAL, INC.
______________________________________________________________________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Delaware
 
16-1725106
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
601 Riverside Avenue, Jacksonville, Florida
 
32204
(Address of principal executive offices)
 
(Zip Code)
(904) 854-8100
___________________________________________________________________
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES þ NO o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO R
     As of October 31, 2013, there were 249,720,579 shares of the Registrant’s Common Stock outstanding.
 
 
 
 
 
 
 
 
 
 



FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2013
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


Table of Contents


Part I: FINANCIAL INFORMATION

Item 1.
Condensed Consolidated Financial Statements

FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data)
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
ASSETS
Investments:
 
 
 
Fixed maturity securities available for sale, at fair value, at September 30, 2013 and December 31, 2012 includes pledged fixed maturity securities of $281 and $275, respectively, related to secured trust deposits
$
3,114

 
$
3,140

Preferred stock available for sale, at fair value
147

 
217

Equity securities available for sale, at fair value
137

 
138

Investments in unconsolidated affiliates
360

 
392

Other long-term investments
155

 
105

Short-term investments
46

 
62

Total investments
3,959

 
4,054

Cash and cash equivalents, at September 30, 2013 and December 31, 2012 includes $368 and $266, respectively, of pledged cash related to secured trust deposits
1,293

 
1,132

Trade and notes receivables, net of allowance of $21 and $22, at September 30, 2013 and December 31, 2012, respectively
493

 
479

Goodwill
1,894

 
1,909

Prepaid expenses and other assets
769

 
672

Other intangible assets, net
643

 
651

Title plants
374

 
374

Property and equipment, net
652

 
632

Total assets
$
10,077

 
$
9,903

LIABILITIES AND EQUITY
Liabilities:
 
 
 
Accounts payable and accrued liabilities, at September 30, 2013 and December 31, 2012 includes accounts payable to related parties of $5
$
1,297

 
$
1,308

Notes payable
1,348

 
1,344

Reserve for title claim losses
1,695

 
1,748

Secured trust deposits
644

 
528

Income taxes payable
28

 
103

Deferred tax liability
125

 
123

Total liabilities
5,137

 
5,154

Equity:
 
 
 
Common stock, Class A, $0.0001 par value; authorized 600,000,000 shares as of September 30, 2013 and December 31, 2012; issued 271,131,734 as of September 30, 2013 and 268,541,117 as of December 31, 2012

 

Preferred stock, $0.0001 par value; authorized 50,000,000 shares; issued and outstanding, none

 

Additional paid-in capital
4,096

 
4,018

Retained earnings
1,065

 
849

Accumulated other comprehensive earnings
11

 
59

Less: treasury stock, 41,396,266 shares and 39,995,513 shares as of September 30, 2013 and December 31, 2012, respectively, at cost
(692
)
 
(658
)
Total Fidelity National Financial, Inc. shareholders’ equity
4,480

 
4,268

Non-controlling interests
460

 
481

Total equity
4,940

 
4,749

Total liabilities and equity
$
10,077

 
$
9,903

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in millions, except per share data)

Three months ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Direct title insurance premiums
$
472

 
$
436

 
$
1,377

 
$
1,215

Agency title insurance premiums
630

 
569

 
1,779

 
1,501

Escrow, title related and other fees
437

 
428

 
1,361

 
1,228

Auto parts revenue
266

 
143

 
834

 
143

Restaurant revenue
336

 
298

 
1,037

 
551

Interest and investment income
29

 
36

 
99

 
109

Realized gains and losses, net
4

 
123

 
7

 
193

Total revenues
2,174

 
2,033

 
6,494

 
4,940

Expenses:
 
 
 
 
 
 
 
Personnel costs
540

 
470

 
1,605

 
1,322

Agent commissions
482

 
432

 
1,352

 
1,144

Other operating expenses
329

 
331

 
1,020

 
932

Cost of auto parts revenue, includes $19 and $55 of depreciation and amortization for the three and nine months ended September 30, 2013, respectively, and $6 for the three and nine months ended September 30, 2012
223

 
125

 
704

 
125

Cost of restaurant revenue
292

 
258

 
889

 
473

Depreciation and amortization
36

 
28

 
104

 
71

Provision for title claim losses
77

 
69

 
221

 
200

Interest expense
27

 
19

 
71

 
50

Total expenses
2,006

 
1,732

 
5,966

 
4,317

Earnings from continuing operations before income taxes and equity in (losses) earnings of unconsolidated affiliates
168

 
301

 
528

 
623

Income tax expense
54

 
70

 
172

 
188

Earnings from continuing operations before equity in earnings of unconsolidated affiliates
114

 
231

 
356

 
435

Equity in (losses) earnings of unconsolidated affiliates
(14
)
 
5

 
(20
)
 
13

Net earnings from continuing operations
100

 
236

 
336

 
448

Net (loss) earnings from discontinued operations, net of tax

 
(1
)
 
(2
)
 
11

Net earnings
100

 
235

 
334

 
459

Less: Net earnings attributable to non-controlling interests
2

 
1

 
8

 
4

Net earnings attributable to Fidelity National Financial, Inc. common shareholders
$
98

 
$
234

 
$
326

 
$
455

Earnings per share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net earnings from continuing operations attributable to Fidelity National Financial, Inc. common shareholders
$
0.43

 
$
1.06

 
$
1.46

 
$
2.02

Net (loss) earnings from discontinued operations attributable to Fidelity National Financial, Inc. common shareholders

 

 
(0.01
)
 
0.05

Net earnings attributable to Fidelity National Financial, Inc. common shareholders
$
0.43

 
$
1.06

 
$
1.45

 
$
2.07

Diluted
 
 
 
 
 
 
 
Net earnings from continuing operations attributable to Fidelity National Financial, Inc. common shareholders
$
0.43

 
$
1.04

 
$
1.43

 
$
1.97

Net (loss) earnings from discontinued operations attributable to Fidelity National Financial, Inc. common shareholders

 

 
(0.01
)
 
0.05

Net earnings attributable to Fidelity National Financial, Inc. common shareholders
$
0.43

 
$
1.04

 
$
1.42

 
$
2.02

Weighted average shares outstanding, basic basis
226

 
221

 
225

 
220

Weighted average shares outstanding, diluted basis
230

 
226

 
230

 
225

Cash dividends paid per share
$
0.16

 
$
0.14

 
$
0.48

 
$
0.42

 
 
 
 
 
 
 
 
Amounts attributable to Fidelity National Financial, Inc. common shareholders
 
 
 
 
 
 
 
Basic and diluted net earnings from continuing operations attributable to FNF common shareholders
$
98

 
$
237

 
$
328

 
$
449

Basic and diluted net (losses) earnings from discontinued operations attributable to FNF common shareholders

 
(3
)
 
(2
)
 
6

Basic and diluted net earnings attributable to FNF common shareholders
$
98

 
$
234

 
$
326

 
$
455

See Notes to Condensed Consolidated Financial Statements

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
 
(Unaudited)
Net earnings
$
100

 
$
235

 
$
334

 
$
459

Other comprehensive earnings:
 
 
 
 
 
 
 
Unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) (1)
1

 
22

 
(22
)
 
47

Unrealized (loss) gain on investments in unconsolidated affiliates (2)
(7
)
 
20

 
(18
)
 
18

Unrealized gain (loss) on foreign currency translation and cash flow hedging (3)
6

 
9

 
(3
)
 
8

Reclassification adjustments for change in unrealized gains and losses included in net earnings (4)
1

 
(3
)
 
(4
)
 
(10
)
     Minimum pension liability adjustment (5)

 

 
(1
)
 

Other comprehensive earnings (loss)
1

 
48

 
(48
)
 
63

Comprehensive earnings
101

 
283

 
286

 
522

Less: Comprehensive earnings attributable to non-controlling interests
2

 
1

 
8

 
4

Comprehensive earnings attributable to Fidelity National Financial, Inc. common shareholders
$
99

 
$
282

 
$
278

 
$
518

_______________________________________
 
(1)
Net of income tax expense (benefit) of $1 million and $13 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $(13) million and $27 million for the nine-month periods ended September 30, 2013 and 2012, respectively.
(2)
Net of income tax (benefit) expense of $(4) million and $11 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $(11) million and $10 million for the nine-month periods ended September 30, 2013 and 2012, respectively.
(3)
Net of income tax expense (benefit) of $4 million and $5 million for the three-month periods ended September 30, 2013 and 2012, respectively, and $(2) million and $5 million for the nine-month periods ended September 30, 2013 and 2012, respectively.
(4)
Net of income tax benefit (expense) of $1 million and $(2) million for the three-month periods ended September 30, 2013 and 2012, respectively, and $(2) million and $(6) million for the nine-month periods ended September 30, 2013 and 2012, respectively.
(5)
Net of income tax benefit of less than $1 million for the nine-month period ended September 30, 2013.
See Notes to Condensed Consolidated Financial Statements



3

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In millions)
(Unaudited)
 
Fidelity National Financial, Inc. Common Shareholders
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
 
 
 
 
 
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Treasury Stock
 
Non-controlling
 
 
 
Shares
 
Amount
 
Capital
 
Earnings
 
Earnings (Loss)
 
Shares
 
Amount
 
Interests
 
Total Equity
Balance, December 31, 2012
269

 
$

 
$
4,018

 
$
849

 
$
59

 
40

 
$
(658
)
 
$
481

 
$
4,749

Exercise of stock options
2

 

 
49

 

 

 

 

 

 
49

Treasury stock repurchased

 

 

 

 

 
1

 
(34
)
 

 
(34
)
Tax benefit associated with the exercise of stock options

 

 
3

 

 

 

 

 

 
3

Other comprehensive earnings — unrealized loss on investments and other financial instruments (excluding investments in unconsolidated affiliates)

 

 

 

 
(26
)
 

 

 

 
(26
)
Other comprehensive earnings — unrealized loss on investments in unconsolidated affiliates

 

 

 

 
(18
)
 

 

 

 
(18
)
Other comprehensive earnings — unrealized loss on foreign currency translation and cash flow hedging

 

 

 

 
(3
)
 

 

 

 
(3
)
Other comprehensive earnings — minimum pension liability adjustment

 

 

 

 
(1
)
 

 

 
(1
)
 
(2
)
Stock-based compensation

 

 
21

 

 

 

 

 
3

 
24

Dividends declared

 

 

 
(110
)
 

 

 

 

 
(110
)
Consolidation of previous minority-owned subsidiary

 

 
9

 

 

 

 

 
(23
)
 
(14
)
Contributions to non-controlling interests

 

 
(4
)
 

 

 

 

 
7

 
3

Subsidiary dividends declared to non-controlling interests

 

 

 

 

 

 

 
(15
)
 
(15
)
Net earnings

 

 

 
326

 

 

 

 
8

 
334

Balance, September 30, 2013
271

 

 
$
4,096

 
$
1,065

 
$
11

 
41

 
$
(692
)
 
$
460

 
$
4,940

See Notes to Condensed Consolidated Financial Statements



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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine months ended September 30,
 
 
2013
 
2012
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net earnings
$
334

 
$
459

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
            Depreciation and amortization
159

 
77

            Equity in losses (earnings) of unconsolidated affiliates
20

 
(13
)
Gain on sales of investments and other assets, net
(7
)
 
(2
)
 Gain on consolidation of O'Charley's Inc. and American Blue Ribbon Holdings, LLC

 
(73
)
 Bargain purchase gain on O'Charley's, Inc.

 
(48
)
 Gain on consolidation of Remy International Inc.

 
(79
)
Stock-based compensation
24

 
17

Tax benefit associated with the exercise of stock options
(3
)
 
(7
)
Changes in assets and liabilities, net of effects from acquisitions:
 
 
 
Net decrease in pledged cash, pledged investments, and secured trust deposits
11

 

Net increase in trade receivables
(14
)
 
(12
)
Net increase in prepaid expenses and other assets
(47
)
 
(5
)
Net decrease in accounts payable, accrued liabilities, deferred revenue and other
(27
)
 
(13
)
Net decrease in reserve for title claim losses
(81
)
 
(64
)
Net change in income taxes
(25
)
 
140

Net cash provided by operating activities
344

 
377

Cash flows from investing activities:
 
 
 
Proceeds from sales of investment securities available for sale
495

 
402

Proceeds from calls and maturities of investment securities available for sale
230

 
273

Proceeds from sale of other assets

 
2

Collection of seller note from sale of flood insurance

 
75

Additions to property and equipment
(98
)
 
(43
)
Purchases of investment securities available for sale
(681
)
 
(822
)
Net proceeds from (purchases of) short-term investment securities
16

 
(3
)
Net purchases of other long-term investments
(81
)
 

Contributions to investments in unconsolidated affiliates
(19
)
 

Net other investing activities
(1
)
 

Acquisition of O'Charley's Inc. and American Blue Ribbon Holdings, LLC, net of cash acquired

 
(122
)
Acquisition of J. Alexander's Corporation, net of cash acquired

 
(72
)
Acquisition of Remy International, Inc., net of cash acquired

 
64

Proceeds from sale of personal lines insurance business

 
120

Other acquisitions/disposals of businesses, net of cash acquired
(19
)
 
(26
)
Net cash used in investing activities
(158
)
 
(152
)
Cash flows from financing activities:
 
 
 
Borrowings
329

 
634

Debt service payments
(325
)
 
(495
)
Proceeds from sale of 4% ownership interest of Digital Insurance, Inc.
3

 

Make-whole call penalty on early extinguishment of debt


 
(5
)
Additional investment in non-controlling interest
(14
)
 

Dividends paid
(109
)
 
(93
)
Subsidiary dividends paid to non-controlling interest shareholders
(15
)
 
(7
)
Exercise of stock options
49

 
68

Debt issuance costs
(14
)
 
(8
)
Tax benefit associated with the exercise of stock options
3

 
7

Purchases of treasury stock
(34
)
 
(22
)
Net cash (used in) provided by financing activities
(127
)
 
79

Net increase in cash and cash equivalents, excluding pledged cash related to secured trust deposits
59

 
304

Cash and cash equivalents, excluding pledged cash related to secured trust deposits at beginning of period
866

 
504

Cash and cash equivalents, excluding pledged cash related to secured trust deposits at end of period
$
925

 
$
808

Supplemental cash flow information:
 
 
 
Income taxes paid
$
183

 
$
63

Interest paid
$
72

 
$
46

See Notes to Condensed Consolidated Financial Statements

5

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A — Basis of Financial Statements
The unaudited financial information in this report includes the accounts of Fidelity National Financial, Inc. and its subsidiaries (collectively, “we,” “us,” “our,” or “FNF”) prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and the instructions to Form 10-Q and Article 10 of Regulation S-X. All adjustments considered necessary for a fair presentation have been included. This report should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2012.
Certain reclassifications have been made in the 2012 Condensed Consolidated Financial Statements to conform to classifications used in 2013.
Description of Business
We are a leading provider of title insurance, mortgage services 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. We hold a 55% ownership interest in American Blue Ribbon Holdings ("ABRH"), the owner and operator of the O'Charley's, Ninety Nine Restaurants, Max & Erma's, Village Inn and Bakers Square restaurant concepts. ABRH also franchises O'Charley's, Max and Erma's and Village Inn concepts. We also have an 87% ownership interest in J. Alexander's Holdings, LLC ("J. Alexander's"), an upscale dining restaurant owner and operator of the J. Alexander's and Stoney River Legendary Steaks ("Stoney River") concepts. In addition, we hold a 51% ownership interest in 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. FNF also owns a minority interest in Ceridian Corporation ("Ceridian"), a leading provider of global human capital management and payment solutions.
Recent Developments
On October 24, 2013, we offered 17,250,000 shares of our common stock at an offering price of $26.75 per share, pursuant to an effective registration statement previously filed with the Securities and Exchange Commission. We granted the underwriters a 30-day option to purchase 2,587,500 additional shares at the offering price, which was subsequently exercised in full. A total of 19,837,500 shares were issued on October 30, 2013, for net proceeds of approximately $510 million. The net proceeds from this offering will be used to pay a portion of the cash consideration for the previously announced merger with Lender Processing Services, Inc. ("LPS"). If we do not consummate the merger, the net proceeds will be used for general corporate purposes, which may include the repurchase of shares of our common stock.
On May 28, 2013, we announced the signing of a definitive agreement under which we will acquire all of the outstanding common stock of LPS for an estimated $33.25 per common share, for a total equity value of approximately $2.9 billion. Under the terms of the definitive agreement, we will pay the consideration for the LPS shares of common stock in a combination of cash and shares of our common stock, subject to adjustments as described in the agreement. At closing, we will combine our ServiceLink business with LPS and after closing sell a 35% minority equity interest to funds affiliated with Thomas H. Lee Partners, L.P. The transaction is subject to approval by LPS shareholders, approvals from applicable federal and state regulators and satisfaction of other customary closing conditions. On July 12, 2013, we received a second request from the United States Federal Trade Commission (the "FTC") regarding their regulatory review of the transaction. The effect of the second request is to extend the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) until 30 days after LPS and FNF have substantially complied with the second request, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. LPS and FNF are responding to the second request and are committed to working cooperatively with the FTC staff as it conducts its review of the proposed transaction. Although LPS and FNF believe that the transactions contemplated by the merger agreement do not raise regulatory concerns material to the transaction and that all requisite regulatory approvals can be obtained on a timely basis, LPS and FNF cannot be certain when or if these approvals will be obtained. Closing of the transaction currently is expected to occur late in December of 2013 or January of 2014.
On February 25, 2013, we formed J. Alexander's, a restaurant company which is focused on the upscale dining segment. J. Alexander's consists of thirty J. Alexander's locations and ten Stoney River locations. ABRH contributed the ten Stoney River locations to J. Alexander's for an approximate 28% ownership interest in the new company, giving us an overall 87% ownership interest in J. Alexander's. The operations of J. Alexander's are consolidated in our existing Restaurant Group segment. Previously, in September 2012 we purchased all of the outstanding common stock of J. Alexander's Corporation for total consideration of $70 million in cash, net of cash acquired of $7 million.
On December 31, 2012, we acquired Digital Insurance, Inc. ("Digital Insurance"). Total consideration paid was $98 million in cash, net of cash acquired of $3 million. We have consolidated the operations of Digital Insurance as of December 31, 2012.

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


Digital Insurance is the nation's leading employee benefits platform specializing in health insurance distribution and benefits management for small and mid-sized businesses.

During the third quarter of 2012, we acquired 1.5 million additional shares of Remy, increasing our ownership interest to 16.3 million shares or 51% of Remy's total outstanding common shares. As a result of this acquisition we began to consolidate the results of Remy effective August 14, 2012. We previously held a 47% ownership interest in Remy.
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%. Total consideration paid was $122 million in cash, net of cash acquired of $35 million. Our investment in ABRH prior to the merger was $37 million and was included in Investments in unconsolidated affiliates on the Condensed Consolidated Balance Sheet. Our investment in O'Charley's prior to the tender offer of $14 million was included in Equity securities available for sale on the Condensed Consolidated Balance Sheet. We have consolidated the operations of ABRH with the O'Charley's group of companies, beginning on May 11, 2012. A realized gain of $66 million, which is included in Realized gains and losses on the Condensed Consolidated Statement of Earnings, was recognized in the nine months ending September 30, 2012 for the difference between our basis in our equity method investment of ABRH prior to consolidation and the fair value of our investment in ABRH at the date of consolidation. In regards to O'Charley's, we recognized a realized gain of $7 million in the nine months ending September 30, 2012, respectively. The gain results from the difference in the basis of our holdings in O'Charley's common stock prior to consolidation and the fair value of O'Charley's common stock at the date of consolidation. As a result of the final valuation, we recognized and measured the identifiable assets acquired and liabilities assumed from the O'Charley's purchase at fair value. Upon completion of the fair value process, the net assets of O'Charley's received by FNF exceeded the purchase price resulting in a bargain purchase gain of $48 million, which is included in Realized gains and losses on the Consolidated Statement of Earnings for 2012. The bargain purchase gain was due to the release of a valuation allowance on O'Charley's net deferred tax assets. O'Charley's previously had recorded a valuation allowance on the deferred tax assets, due to its history of net losses and the low probability of being able to utilize these assets. We also recorded an $11 million increase to our Additional paid-in capital during 2012, related to the fair value of the non-controlling interest portion of our ownership in O'Charley's.
Discontinued Operations
The results from two closed J. Alexander's locations and a settlement services company closed in the second quarter of 2013 are reflected in the Condensed Consolidated Statements of Earnings as discontinued operations for all periods presented. Total revenues included in discontinued operations was $9 million for the three months ending September 30, 2012, and $8 million and $28 million for the nine months ending September 30, 2013 and 2012, respectively. Pre-tax (loss) earnings included in discontinued operations are $(1) million for the three and nine months ending September 30, 2013 and 2012, and $(3) million and $7 million for the nine months ending September 30, 2013 and 2012, respectively.
On May 1, 2012, we completed the sale of an 85% interest in our subsidiaries that write personal lines insurance to WT Holdings, Inc. for $120 million. Accordingly, the results of this business through the date of sale (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. Total revenues from the at-risk insurance business included in discontinued operations are $57 million for the nine months ending September 30, 2012. Pre-tax earnings from the at-risk insurance business included in discontinued operations are $10 million for the nine months ending September 30, 2012.
Transactions with Related Parties
Agreements with Fidelity National Information Services, Inc. ("FIS")
A summary of the agreements that were in effect with FIS through September 30, 2013 is as follows:
Information Technology (“IT”) and data processing services from FIS. This agreement governs IT support services provided to us by FIS, primarily consisting of infrastructure support and data center management. Subject to certain early termination provisions, the agreement expires on or about June 30, 2014, with an option to renew for one additional year. Certain subsidiaries of FIS have also provided technology consulting services to FNF during 2013.
Administrative aviation corporate support and cost-sharing services to FIS.
A detail of net revenues and expenses between us and FIS that were included in our results of operations for the periods presented is as follows:

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


 
Three months ended September 30, 2013
 
Three months ended September 30, 2012
 
Nine months ended September 30, 2013
 
Nine months ended September 30, 2012
 
(In millions)
Corporate services and cost-sharing revenue
$
1

 
$
1

 
$
4

 
$
4

Data processing expense
(9
)
 
(8
)
 
(25
)
 
(25
)
Net expense
$
(8
)
 
$
(7
)
 
$
(21
)
 
$
(21
)
We believe the amounts earned by us or charged to us under each of the foregoing arrangements are fair and reasonable. The IT infrastructure support and data center management services provided to us are priced within the range of prices that FIS offers to its unaffiliated third party customers for the same types of services. However, the amounts we earned or were charged under these arrangements were not negotiated at arm’s-length, and may not represent the terms that we might have obtained from an unrelated third party. The net amounts due to FIS as a result of these agreements were $5 million as of September 30, 2013 and December 31, 2012.
Included in equity securities available for sale are 1,603,860 shares of FIS stock which were purchased during the fourth quarter of 2009 in connection with a merger between FIS and Metavante Technologies, Inc. The fair value of our investment was $74 million and $56 million as of September 30, 2013 and December 31, 2012, respectively.
Also included in fixed maturities available for sale are FIS bonds with a fair value of $42 million and $53 million as of September 30, 2013 and December 31, 2012, respectively. During the three and nine months ended September 30, 2013, we sold FIS bonds with a fair value of approximately $5 million.
Earnings Per Share
Basic earnings per share, as presented on the Condensed Consolidated Statement of Earnings, is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period. In periods when earnings are positive, diluted earnings per share is calculated by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding plus the impact of assumed conversions of potentially dilutive securities. For periods when we recognize a net loss, diluted earnings per share is equal to basic earnings per share as the impact of assumed conversions of potentially dilutive securities is considered to be antidilutive. We have granted certain options and shares of restricted stock as well as convertible debt instruments which have been treated as common share equivalents for purposes of calculating diluted earnings per share for periods in which positive earnings have been reported.
Options to purchase shares of our common stock that are antidilutive are excluded from the computation of diluted earnings per share. Antidilutive options totaled one million shares for the three and nine-month periods ended September 30, 2013 and three million shares for the three and nine-month periods ended September 30, 2012.






















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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


Note B — Fair Value Measurements
The following table presents the fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, respectively:
 
September 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In millions)
Assets:
 
 
 
 
 
 
 
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$
132

 
$

 
$
132

State and political subdivisions

 
1,157

 

 
1,157

Corporate debt securities

 
1,656

 

 
1,656

Mortgage-backed/asset-backed securities

 
116

 

 
116

Foreign government bonds

 
53

 

 
53

Preferred stock available for sale
70

 
77

 

 
147

Equity securities available for sale
137

 

 

 
137

Other long-term investments

 

 
39

 
39

Interest rate swap contracts

 
1

 

 
1

Foreign currency contracts

 
3

 

 
3

Total assets
$
207

 
$
3,195

 
$
39

 
$
3,441

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$
1

 
$

 
$
1

Commodity contracts

 
3

 

 
3

Total liabilities
$

 
$
4

 
$

 
$
4


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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In millions)
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
U.S. government and agencies
$

 
$
140

 
$

 
$
140

State and political subdivisions

 
1,300

 

 
1,300

Corporate debt securities

 
1,499

 

 
1,499

Mortgage-backed/asset-backed securities

 
154

 

 
154

Foreign government bonds

 
47

 

 
47

Preferred stock available for sale
109

 
108

 

 
217

Equity securities available for sale
138

 

 

 
138

Other long-term investments

 

 
41

 
41

Commodity contracts

 
1

 

 
1

Foreign currency contracts

 
6

 

 
6

Total assets
$
247

 
$
3,255

 
41

 
$
3,543

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$
2

 
$

 
$
2

Foreign currency contracts

 
1

 

 
$
1

Commodity contracts

 
3

 

 
3

Total liabilities
$

 
$
6

 
$

 
$
6


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 and preferred stock portfolio and another for our tax-exempt bond portfolio. These pricing services are leading global providers of financial market data, analytics and related services to financial institutions. We 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 by obtaining an understanding of the valuation models and assumptions used by the third-party as well as independently comparing the resulting prices to other publicly available measures of fair value and internally developed models. The pricing methodologies used by the relevant third party pricing services are as follows:

U.S. government and agencies: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers.

State and political subdivisions: These securities are valued based on data obtained for similar securities in active markets and from inter-dealer brokers. Factors considered include relevant trade information, dealer quotes and other relevant market data.

Corporate debt securities: These securities are valued based on dealer quotes and related market trading activity. Factors considered include the bond's yield, its terms and conditions, or any other feature which may influence its risk and thus marketability, as well as relative credit information and relevant sector news.
 
Mortgage-backed/asset-backed securities: These securities are comprised of agency mortgage-backed securities, commercial mortgage-backed securities, collaterized mortgage obligations, and asset-backed securities. They are valued based on available trade information, dealer quotes, cash flows, relevant indices and market data for similar assets in active markets.

Foreign government bonds: These securities are valued based on a discounted cash flow model incorporating observable market inputs such as available broker quotes and yields of comparable securities.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


Preferred stock: Preferred stocks are valued by calculating the appropriate spread over a comparable U.S. Treasury security. Inputs include benchmark quotes and other relevant market data.

Our Level 2 fair value measures for our interest rate swap, foreign exchange contracts, and commodity contracts are valued using the income approach. This approach uses techniques to convert future amounts to a single present value amount based upon market expectations (including present value techniques, option-pricing and excess earnings models).
Our Level 3 investments consist of structured notes that were purchased in 2009. The structured notes had a par value of $38 million and fair value of $39 million at September 30, 2013, and a par value of $38 million and fair value of $41 million at December 31, 2012. The structured notes are held for general investment purposes and represent approximately 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 represents exit prices obtained from a broker-dealer. These exit prices 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 value of the underlying commodity indices. We reviewed the pricing methodologies for our Level 3 investments to ensure that they are reasonable and believe they represent an exit price for the securities as of September 30, 2013.
The following table presents the changes in our investments that are classified as Level 3 for the period ended September 30, 2013 (in millions):
Balance, December 31, 2012
$
41

Net realized loss
(2
)
Balance, September 30, 2013
$
39

The carrying amounts of short-term investments, accounts receivable and notes receivable approximate fair value due to their short-term nature. Additional information regarding the fair value of our investment portfolio is included in Note C.
Note C — Investments
The carrying amounts and fair values of our available for sale securities at September 30, 2013 and December 31, 2012 are as follows:
 
September 30, 2013
 
Carrying
 
Cost
 
Unrealized
 
Unrealized
 
Fair
 
Value
 
Basis
 
Gains
 
Losses
 
Value
 
(In millions)
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
132

 
$
126

 
$
6

 
$

 
$
132

State and political subdivisions
1,157

 
1,123

 
37

 
(3
)
 
1,157

Corporate debt securities
1,656

 
1,613

 
50

 
(7
)
 
1,656

Foreign government bonds
53

 
52

 
2

 
(1
)
 
53

Mortgage-backed/asset-backed securities
116

 
111

 
5

 

 
116

Preferred stock available for sale
147

 
153

 
2

 
(8
)
 
147

Equity securities available for sale
137

 
76

 
62

 
(1
)
 
137

Total
$
3,398

 
$
3,254

 
$
164

 
$
(20
)
 
$
3,398


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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


 
December 31, 2012
 
Carrying
 
Cost
 
Unrealized
 
Unrealized
 
Fair
 
Value
 
Basis
 
Gains
 
Losses
 
Value
 
(In millions)
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
 
 
U.S. government and agencies
$
140

 
$
130

 
$
10

 
$

 
$
140

State and political subdivisions
1,300

 
1,240

 
60

 

 
1,300

Corporate debt securities
1,499

 
1,439

 
72

 
(12
)
 
1,499

Foreign government bonds
47

 
45

 
2

 

 
47

Mortgage-backed/asset-backed securities
154

 
145

 
9

 

 
154

Preferred stock available for sale
217

 
207

 
10

 

 
217

Equity securities available for sale
138

 
103

 
40

 
(5
)
 
138

Total
$
3,495

 
$
3,309

 
$
203

 
$
(17
)
 
$
3,495

The cost basis of fixed maturity securities available for sale includes an adjustment for amortized premium or discount since the date of purchase.
The following table presents certain information regarding contractual maturities of our fixed maturity securities at September 30, 2013:
 
 
September 30, 2013
 
 
Amortized
 
% of
 
Fair
 
% of
Maturity
 
Cost
 
Total
 
Value
 
Total
 
 
(Dollars in millions)
One year or less
 
$
445

 
15
%
 
$
451

 
14
%
After one year through five years
 
1,856

 
61

 
1,918

 
62

After five years through ten years
 
605

 
20

 
622

 
20

After ten years
 
7

 

 
7

 

Mortgage-backed/asset-backed securities
 
111

 
4

 
116

 
4

Total
 
$
3,024

 
100
%
 
$
3,114

 
100
%
Subject to call
 
$
1,601

 
53
%
 
$
1,638

 
53
%
Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Included above in amounts subject to call are $1,214 million and $1,244 million in amortized cost and fair value, respectively, of fixed maturity securities with make-whole call provisions as of September 30, 2013.
Equity securities available for sale includes an investment in FIS stock. The fair value of our investment in the FIS stock was $74 million and $56 million at September 30, 2013 and December 31, 2012, respectively.
Included in our other long-term investments are fixed maturity structured notes purchased in 2009 and various cost-method investments. The structured notes are carried at fair value (see Note B) and changes in the fair value of these structured notes are recorded as Realized gains and losses in the Condensed Consolidated Statements of Earnings. The carrying value of the structured notes was $39 million and $41 million as of September 30, 2013 and December 31, 2012, respectively. We recorded no loss relating to the structured notes during the three months ended September 30, 2013 and we recorded a $2 million loss related to the structured notes in the nine-month period ended September 30, 2013, and recorded a net loss of $4 million and $2 million in the three and nine-month period ended September 30, 2012.

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


    Net unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013 and December 31, 2012, were as follows (in millions):
September 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
State and political subdivisions
$
143

 
$
(3
)
 
$

 
$

 
$
143

 
$
(3
)
Corporate debt securities
402

 
(5
)
 
15

 
(2
)
 
417

 
(7
)
Foreign government bonds
26

 
(1
)
 

 

 
26

 
(1
)
Preferred stock available for sale
103

 
(8
)
 

 

 
103

 
(8
)
Equity securities available for sale
5

 
(1
)
 

 

 
5

 
(1
)
Total temporarily impaired securities
$
679

 
$
(18
)
 
$
15

 
$
(2
)
 
$
694

 
$
(20
)
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Value
 
Losses
 
Value
 
Losses
 
Value
 
Losses
Corporate debt securities
$
96

 
$
(5
)
 
$
34

 
$
(7
)
 
$
130

 
$
(12
)
Equity securities available for sale
31

 
(3
)
 
3

 
(2
)
 
34

 
(5
)
Total temporarily impaired securities
$
127

 
$
(8
)
 
$
37

 
$
(9
)
 
$
164

 
$
(17
)
During the three-month period ended September 30, 2013, we recorded no impairment charges relating to investments that were determined to be other-than-temporarily impaired. During the nine-month period ended September 30, 2013 we recorded impairment charges on fixed maturity securities relating to investments that were determined to be other-than-temporarily impaired, which resulted in a charge of $1 million. During the three and nine-month periods ended September 30, 2012, we recorded no impairment charges relating to investments that were determined to be other-than-temporarily impaired. Impairment charges recorded during 2013 related to fixed maturity securities primarily related to our conclusion that the credit risk of these holdings was high and the ability of the issuer to pay the full amount of the principal outstanding was unlikely. As of September 30, 2013, we held no fixed maturity securities for which other-than-temporary impairment had been previously recognized. It is possible that future events may lead us to recognize potential future impairment losses related to our investment portfolio and that unanticipated future events may lead us to dispose of certain investment holdings and recognize the effects of any market movements in our condensed consolidated financial statements.
The following table presents realized gains and losses on investments and other assets and proceeds from the sale or maturity of investments and other assets for the three and nine-month periods ending September 30, 2013 and 2012, respectively:
 
 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
 
 
Gross Realized Gains
 
Gross Realized Losses
 
Net Realized Gains (Losses)
 
Gross Proceeds from Sale/Maturity
 
Gross Realized Gains
 
Gross Realized Losses
 
Net Realized Gains (Losses)
 
Gross Proceeds from Sale/Maturity
 
 
(Dollars in millions)
 
(Dollars in millions)
Fixed maturity securities available for sale
 
$
1

 
$
(1
)
 
$

 
$
111

 
$
8

 
$
(4
)
 
$
4

 
$
577

Preferred stock available for sale
 
1

 

 
1

 
11

 
7

 
(2
)
 
5

 
121

Equity securities available for sale
 
2

 
(1
)
 
1

 
20

 
4

 
(1
)
 
3

 
27

Other long-term investments
 
 
 
 
 

 

 
 
 
 
 
(2
)
 

Other assets
 
 
 
 
 
2

 

 
 
 
 
 

 

Debt extinguishment costs
 
 
 
 
 

 

 
 
 
 
 
(3
)
 

Total
 
 
 
 
 
$
4

 
$
142

 
 
 
 
 
$
7

 
$
725


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


 
 
Three months ended September 30, 2012
 
Nine months ended September 30, 2012
 
 
Gross Realized Gains
 
Gross Realized Losses
 
Net Realized Gains (Losses)
 
Gross Proceeds from Sale/Maturity
 
Gross Realized Gains
 
Gross Realized Losses
 
Net Realized Gains (Losses)
 
Gross Proceeds from Sale/Maturity
 
 
(Dollars in millions)
 
(Dollars in millions)
Fixed maturity securities available for sale
 
$
4

 
$

 
$
4

 
$
257

 
$
9

 
$

 
$
9

 
$
667

Preferred stock available for sale
 

 

 

 
2

 



 

 
7

Equity securities available for sale
 
1

 

 
1

 
1

 
1



 
1

 
1

Other long-term investments
 
 
 
 
 
4

 

 
 
 
 
 
2

 

Gain on consolidation of O'Charley's and ABRH
 
 
 
 
 

 

 
 
 
 
 
73

 

Bargain purchase gain on O'Charley's
 
 
 
 
 
48

 

 
 
 
 
 
48

 

Gain on consolidation of Remy
 
 
 
 
 
79

 

 
 
 
 
 
79

 

Loss on early extinguishment of 5.25% bonds
 
 
 
 
 
(6
)
 

 
 
 
 
 
(6
)
 

Other assets
 
 
 
 
 
(7
)
 

 
 
 
 
 
(13
)
 
2

Total
 
 
 
 
 
$
123

 
$
260

 
 
 
 
 
$
193

 
$
677

Investments in unconsolidated affiliates are recorded using the equity method of accounting. As of September 30, 2013 and December 31, 2012, investments in unconsolidated affiliates consisted of the following (dollars in millions):
 
Current Ownership
 
September 30, 2013
 
December 31, 2012
Ceridian
32
%
 
$
297

 
$
351

Other
Various

 
63

 
41

     Total
 
 
$
360

 
$
392


During the first quarter of 2013, we purchased $24 million in Ceridian bonds which are included in Fixed maturity securities available for sale on the Condensed Consolidated Balance Sheets, and have a fair value of $27 million as of September 30, 2013. Subsequent to September 30, 2013, we purchased an additional $9 million in Ceridian bonds, which will be included in Fixed maturity securities available for sale on the Condensed Consolidated Balance Sheets.
We account for our equity in Ceridian on a three-month lag. Accordingly, our net earnings for the three and nine-month periods ended September 30, 2013, includes our equity in Ceridian’s earnings for the three and nine-month periods ended June 30, 2013, and our net earnings for the three and nine-month periods ended September 30, 2012, includes our equity in Ceridian’s earnings for the three and nine-month periods ended June 30, 2012. During the three and nine-month periods ended September 30, 2013 and 2012, we recorded $15 million and $24 million, and $2 million and $10 million in equity in losses of Ceridian, respectively. Equity in earnings of other unconsolidated affiliates was $1 million and $4 million and $7 million and $23 million for the three and nine-month periods ended September 30, 2013 and 2012, respectively.

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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


Summarized financial information for Ceridian for the relevant dates and time periods included in our Condensed Consolidated Financial Statements is presented below.
 
June 30, 2013
 
September 30, 2012
 
(In millions)
Total current assets before customer funds
$
1,161

 
$
1,209

Customer funds
4,230

 
3,925

Goodwill and other intangible assets, net
4,490

 
4,630

Other assets
134

 
157

Total assets
$
10,015

 
$
9,921

Current liabilities before customer obligations
$
922

 
$
995

Customer obligations
4,212

 
3,874

Long-term obligations, less current portion
3,448

 
3,445

Other long-term liabilities
484

 
489

Total liabilities
9,066

 
8,803

Equity
949

 
1,118

Total liabilities and equity
$
10,015

 
$
9,921


 
Three Months Ended June 30, 2013
 
Three Months Ended June 30, 2012
 
Nine Months Ended June 30, 2013
 
Nine Months Ended June 30, 2012
 
(In millions)
Total revenues
$
359

 
$
356

 
$
1,134

 
$
1,123

Loss before income taxes
(40
)
 
(12
)
 
(72
)
 
(44
)
Net loss
(48
)
 
(9
)
 
(86
)
 
(38
)




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FIDELITY NATIONAL FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — continued


Note D —Remy Derivative Financial Instruments and Concentration of Risk
The following describes risks based and derivative instruments held by Remy.
Foreign Currency Risk
Remy manufactures and sells products primarily in North America, South America, Asia, Europe and Africa. As a result, financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which Remy manufactures and sells products. Remy generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, Remy considers managing certain aspects of its foreign currency activities through the use of foreign exchange contracts. Remy primarily utilizes forward exchange contracts with maturities generally within fifteen months to hedge against currency rate fluctuations, some of which are designated as hedges. As of September 30, 2013, Remy had the following outstanding foreign currency contracts to hedge forecasted purchases and revenues (in millions):
 
 
Currency Denomination
Foreign currency contract
 
September 30, 2013
 
December 31, 2012

South Korean Won Forward
 
$
46

 
$
56

Mexican Peso Contracts
 
$
55

 
$
67

Brazilian Real Forward
 
$
12

 
$
18

Hungarian Forint Forward
 
11

 
14

British Pound Forward
 
£
3

 
£
1

There were net accumulated unrealized gains of $1 million relating to these instruments as of September 30, 2013. Accumulated unrealized net gains of $3 million were recorded in Accumulated other comprehensive earnings (loss) as of December 31, 2012, related to these instruments. As of September 30, 2013, gains related to these instruments of $1 million are expected to be reclassified to the Condensed Consolidated Statement of Earnings within the next 12 months. Any ineffectiveness during the three and nine-month periods ended September 30, 2013 was immaterial.
Interest rate risk
During 2010, Remy entered into an interest rate swap agreement in respect of 50% of the outstanding principal balance of its Term B Loan under which a variable LIBOR rate with a floor of 1.75% was swapped to a fixed rate of 3.35%. Due to the significant value of the terminated swaps which were transferred into this swap, this interest rate swap is an undesignated hedge and changes in the fair value are recorded as Interest expense in the accompanying Condensed Consolidated Statements of Earnings.
On March 27, 2013, Remy terminated its undesignated Term B Loan interest rate swap and transferred the value into a new undesignated interest rate swap agreement of $72 million of the outstanding principal loan balance under which Remy will swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 4.05% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72 million. Due to the significant value of the terminated swaps which were transferred into this new swap, this interest rate swap is an undesignated hedge and changes in the fair value are recorded as Interest expense in the accompanying Condensed Consolidated Statements of Earnings.
On March 27, 2013, Remy also entered into a designated interest rate swap agreement for $72 million of the outstanding principal balance of its long term debt. Under the terms of the new interest rate swap agreement, Remy will swap a variable LIBOR rate with a floor of 1.25% to a fixed rate of 2.75% with an effective date of December 30, 2016 and expiration date of December 31, 2019. The notional value of this interest rate swap is $72 million. This interest rate swap has been designated as a cash flow hedging instrument. Accumulated unrealized net gains of $1 million were recorded in Accumulated other comprehensive income (loss) as of September 30, 2013, and there were none as of December 31, 2012. As of September 30, 2013, no gains are expected to be reclassified to the Condensed Consolidated Statement of Earnings within the next twelve months. Any ineffectiveness during the three and nine-month periods ended September 30, 2013 was immaterial.
The interest rate swaps reduce Remy's overall interest rate risk.
Commodity price risk
Remy production processes are dependent upon the supply of certain components whose raw materials are exposed to price fluctuations on the open market. The primary purpose of Remy's commodity price forward contract activity is to manage the

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volatility associated with forecasted purchases. Remy monitors commodity price risk exposures regularly to maximize the overall effectiveness of commodity forward contracts. The principal raw material hedged is copper. Forward contracts are used to mitigate commodity price risk associated with raw materials, generally related to purchases forecast for up to twenty-four months in the future. Additionally, Remy purchases certain commodities during the normal course of business which result in physical delivery and are excluded from hedge accounting.
Remy had twenty-nine commodity price hedge contracts outstanding at September 30, 2013, and thirty-six commodity price hedge contracts outstanding at December 31, 2012, with combined notional quantities of 5,423 and 6,566 metric tons of copper, respectively. These contracts mature within the next fifteen months and are designated as cash flow hedging instruments. Accumulated unrealized net losses of $3 million and $1 million, excluding the tax effect, were recorded in Accumulated other comprehensive earnings as of September 30, 2013, and December 31, 2012, respectively, related to these contracts. As of September 30, 2013, net losses related to these contracts of $3 million are expected to be reclassified to the accompanying Condensed Consolidated Statement of Earnings within the next 12 months. Hedging ineffectiveness during the three and nine-month periods ended September 30, 2013 was immaterial.
Other
Remy's derivative positions and any related material collateral under master netting agreements are presented on a net basis.
For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the change in fair value method, are recognized in the accompanying Condensed Consolidated Statement of Earnings. Derivative gains and losses included in Accumulated other comprehensive earnings for effective hedges are reclassified into the accompanying Condensed Consolidated Statement of Earnings upon recognition of the hedged transaction.
Any derivative instrument designated initially, but no longer effective as a hedge, or initially not effective as a hedge, is recorded at fair value and the related gains and losses are recognized in the accompanying Condensed Consolidated Statement of Earnings. Remy's undesignated hedges are primarily Remy's interest rate swaps whose fair value at inception of the instrument due to the rollover of existing interest rate swaps resulted in ineffectiveness. All asset and liability derivatives are included in Prepaid expenses and other assets and Accounts payable and accrued liabilities, respectively, on the Condensed Consolidated Balance Sheets. The following table discloses the fair values of Remy's derivative instruments (in millions):  
 
 
September 30, 2013
 
December 31, 2012
 
 
Asset Derivatives
 
Liability Derivatives
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Commodity contracts
 
$

 
$
3

 
$
1

 
$
2

Foreign currency contracts
 
3

 

 
6

 

Interest rate swap contracts
 
1

 

 

 

Total derivatives designated as hedging instruments
 
$
4

 
$
3

 
$
7

 
$
2

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate swap contracts
 
$

 
$
1

 
$

 
$
2

 Gains and losses on Remy's derivative instruments, which are reclassified from Accumulated other comprehensive earnings (AOCE) into earnings, are included in Cost of auto parts revenue for commodity and foreign currency contracts, and Interest expense for interest rate swap contracts on the accompanying Condensed Consolidated Statement of Earnings.




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The following table discloses the effect of Remy's derivative instruments for the three months ended September 30, 2013 (in millions):
 
 
Amount of gain recognized in AOCE (effective portion)
 
Amount of gain (loss) reclassified from AOCE into income (effective portion)
 
Amount of gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
 
Amount of gain recognized in income
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
 
Commodity contracts
 
$
3

 
$
(2
)
 
$

 
$

Foreign currency contracts
 
3

 
1