The selected historical consolidated financial data for First American Financial Corporation (the “Company”) as of and for each of the five years in the period ended December 31, 2020, have been derived from the Company’s consolidated financial statements. The selected historical consolidated financial data should be read in conjunction with “Item 8. Financial Statements and Supplementary Data,” “Item 1 - Business,” and “
The consolidated financial statements have been prepared in accordance with GAAP and reflect the consolidated operations of the Company. The consolidated financial statements include the accounts of First American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence but does not control and is not the primary beneficiary, are accounted for using the equity method of accounting. Equity investments in which the Company does not exercise significant influence over the investee and without readily determinable fair values are accounted for at cost, less impairment, and are adjusted up or down for any observable price changes.
The reserve for property and casualty insurance losses reflects management’s best estimate of the amount necessary to settle all reported and unreported claims for the ultimate cost of insured losses based upon the facts of each case and the Company’s experience with similar cases. The Company also utilizes the services of an independent actuary as part of its reserve analysis. Because the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process, the ultimate cost of insured losses may be more or less than the reserve amount. Reserve estimates are regularly analyzed and updated to reflect the most current information available.
The Company provides for claims losses relating to its home warranty business based on the average cost per claim and historical loss experience as applied to the total of current claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience adjusted for estimated future increases in costs.
The provision transferred from IBNR title claims related to prior years decreased by $18.1 million, or 12.7%, in 2020 from 2019 and decreased by $3.9 million, or 2.6%, in 2019 from 2018. Payments, net of recoveries, related to prior years increased by $0.6 million, or 0.4%, in 2020 from 2019 and decreased by $5.5 million, or 3.6%, in 2019 from 2018. Generally, the provision transferred from IBNR title claims and payments are expected to decline with the runoff of older policy years that have higher expected ultimate losses, particularly policy years 2005 through 2008.
“Other” activity primarily includes foreign currency translation gains and losses and ceded reinsurance claims.
The provision related to current year increased by $53.8 million, or 29.5%, in 2020 from 2019 as a result of a higher current year provision of 4.5% in 2020 compared to 4.0% in 2019 and increases in title premiums and escrow fees in 2020 from 2019. The provision related to current year increased by $8.9 million, or 5.1%, in 2019 from 2018, as a result of increases in title premiums and escrow fees in 2019 from 2018.
For debt securities in an unrealized loss position for which the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt security, the Company determines whether the loss is due to credit-related factors or noncredit-related factors. For debt securities in an unrealized loss position for which the losses are primarily due to credit-related factors, the Company’s policy is to recognize the entire loss in earnings. For debt securities in an unrealized loss position for which the losses are determined to be the result of both credit-related and noncredit-related factors, the credit loss is determined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security. The cash flows expected to be collected are discounted using the effective interest rate (i.e., purchase yield) and for variable rate securities the interest rate is fixed at the rate in effect at the credit loss measurement date.
Business combinations. The Company allocates the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes estimates and assumptions, especially with respect to intangible assets.
Impairment assessment for goodwill. The Company is required to perform an annual goodwill impairment assessment for each reporting unit for which goodwill has been allocated. Those reporting units include title insurance, home warranty and property and casualty insurance. The Company’s trust and other services reporting unit has no allocated goodwill and is, therefore, not assessed for impairment. The Company has elected to perform this annual assessment in the fourth quarter of each fiscal year or sooner if circumstances indicate possible impairment. Based on accounting guidance, the Company has the option to perform a qualitative assessment to determine if the fair value is more likely than not (i.e., a likelihood of greater than 50%) less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test, or may choose to forego a qualitative assessment and perform a quantitative impairment test. The qualitative factors considered in this assessment may include macroeconomic conditions, industry and market considerations, overall financial performance as well as other relevant events and circumstances as determined by the Company. The Company evaluates the weight of each factor to determine whether it is more likely than not that impairment may exist. If the results of a qualitative assessment indicate the more likely than not threshold was not met, the Company may choose not to perform a quantitative impairment test. If, however, the more likely than not threshold is met, the Company will perform a quantitative test as required and discussed below.
Management’s quantitative impairment testing compares the fair value of each reporting unit to its carrying amount. The fair value of each reporting unit is determined by using discounted cash flow analysis and, where appropriate, market approach valuations. If the fair value of the reporting unit exceeds its carrying amount, the goodwill is not considered impaired and no additional analysis is required. However, if the carrying amount is greater than the fair value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, with the loss recognized limited to the total amount of goodwill allocated to that reporting unit.
The quantitative impairment test for goodwill utilizes a variety of valuation techniques, all of which require the Company to make estimates and judgments. Fair value is determined by employing an expected present value technique, which utilizes expected cash flows and an appropriate discount rate. The use of comparative market multiples (the “market approach”) compares the reporting unit to other comparable companies (if such comparables are present in the marketplace) based on valuation multiples to arrive at a fair value. In assessing the fair value, the Company utilizes the results of the valuations (including the market approach to the extent comparables are available) and considers the range of fair values determined under all methods and the extent to which the fair value exceeds the carrying amount of the reporting unit.
In the third quarter of 2020, the Company initiated a plan to sell its property and casualty insurance business, which triggered a goodwill impairment test for the property and casualty insurance reporting unit. Based on the results of the goodwill impairment test, the Company determined that the fair value of the property and casualty insurance reporting unit was less than its carrying amount. As a result, the Company recorded an impairment loss to goodwill of $34.2 million for 2020. See Note 2 Disposition of the Property and Casualty Insurance Business to the consolidated financial statements for further information on the disposition of the business. For 2019 and 2018, the Company performed quantitative impairment tests and determined that the fair value of its property and casualty insurance reporting unit exceeded the carrying amount and, therefore, no additional analysis was required.
The Company recognizes the effect of income tax positions only if sustaining those positions is considered more likely than not. Changes in recognition or measurement of uncertain tax positions are reflected in the period in which a change in judgment occurs. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense.
During 2020, the level of domestic title orders opened per day by the Company’s direct title operations increased 34.0% when compared to 2019. Residential refinance opened orders per day increased by 103.1%, residential purchase opened orders per day increased by 4.2%, and commercial opened orders per day decreased 9.1% in 2020 when compared to 2019.
In the third quarter of 2020, the Company initiated a plan to sell its property and casualty insurance business. As a result of this decision, the Company remeasured the assets and liabilities of its property and casualty insurance business at estimated fair value, less costs to sell, and recorded impairment losses to goodwill, other intangible assets, property and equipment and other assets totaling $54.9 million in 2020. The impairment losses are included in impairments on disposal of business on the consolidated statements of income and in the operating results of the specialty insurance segment. In the fourth quarter of 2020, the Company, as a result of the sale process, determined to pursue a book transfer rather than a sale. In January 2021, the Company entered into book transfer agreements with two third-party insurers, which will provide qualifying agents and customers of the Company an opportunity to transfer their policies. The Company expects the transfers to be completed by the end of the third quarter of 2022. The Company will seek to non-renew policies that are not transferred.
The Company’s residential purchase business experienced a decline in April 2020 with purchase orders opened by the Company’s direct title operations down significantly compared to April 2019. Government responses to the pandemic, however, resulted in low mortgage interest rates that stimulated residential refinance activity and improved housing affordability, leading to an elevated number of closed orders for both residential refinance and purchase transactions later in 2020. The Company expects this elevated level of activity to continue well into 2021.
The Company’s commercial business experienced a more persistent decline in order volumes beginning in April 2020, however, in the fourth quarter activity returned to historical levels with the recovery varying by asset class.
Direct premiums and escrow fees increased $301.9 million, or 13.8%, in 2020 from 2019 and $135.1 million, or 6.6%, in 2019 from 2018. The increase in direct premiums and escrow fees in 2020 from 2019 was primarily due to increases in the number of domestic title orders closed by the Company’s direct title operations, partially offset by decreases in the average domestic revenues per order closed. The increase in direct premiums and escrow fees in 2019 from 2018 was primarily due to an increase in the domestic title orders closed by the Company’s direct title operations, partially offset by a decrease in domestic average revenues per order closed. The domestic average revenues per order closed were $2,232, $2,558 and $2,600 for 2020, 2019 and 2018, respectively. The 12.7% decrease in average revenues per order closed in 2020 from 2019 was primarily due to a shift in the mix of direct revenues generated from higher premium commercial products to lower premium residential refinance products. The 1.6% decrease in average revenues per order closed in 2019 from 2018 was primarily due to a shift in the mix of direct revenues generated from higher premium commercial products to lower premium residential refinance products, partially offset by higher revenues per order from commercial transactions and higher residential real estate values. The Company’s direct title operations closed 1,043,800, 795,800 and 730,800 domestic title orders during 2020, 2019 and 2018, respectively. The 31.2% increase in orders closed in 2020 from 2019 and the 8.9% increase in orders closed in 2019 from 2018 were generally consistent with the changes in residential mortgage origination activity in the United States as reported in the MBA Forecast.
Agent premiums increased $386.3 million, or 16.3%, in 2020 from 2019 and $88.2 million, or 3.9%, in 2019 from 2018. Agent premiums are recorded when notice of issuance is received from the agent, which is generally when cash payment is received by the Company. As a result, there is generally a delay between the agent’s issuance of a title policy and the Company’s recognition of agent premiums. Therefore, full year agent premiums typically reflect mortgage origination activity from the fourth quarter of the prior year through the third quarter of the current year. The increase in agent premiums in 2020 from 2019 was generally consistent with the 11.4% increase in the Company’s direct premiums and escrow fees in the twelve months ended September 30, 2020 as compared with the twelve months ended September 30, 2019. The increase in agent premiums in 2019 from 2018 was generally consistent with the 2.6% increase in the Company’s direct premiums and escrow fees in the twelve months ended September 30, 2019 as compared with the twelve months ended September 30, 2018.
Information and other revenues primarily consist of revenues generated from fees associated with title search and related reports, title and other real property records and images, other non-insured settlement services, and risk mitigation products and services. These revenues generally trend with direct premiums and escrow fees but are typically less volatile since a portion of the revenues are subscription based and do not fluctuate with transaction volumes.
Net realized investment gains totaled $86.2 million for 2020 and were primarily from increases in the fair values of equity securities of $38.7 million and gains from the sales of debt securities. Net realized investment gains for 2020 also include gains recognized on certain non-marketable investments. Net realized investment gains were $55.7 million for 2019 and were primarily from an increase in the fair values of equity securities of $56.3 million. Net realized investment losses were $49.1 million for 2018 and were primarily from a decrease in the fair values of equity securities of $32.6 million and losses from the sales of debt securities. Net realized investment gains for 2020, 2019 and 2018 included impairment losses of $0.6 million, $7.8 million and $1.1 million, respectively. The impairment losses in 2020, 2019 and 2018 primarily related to internally developed software and the retirement of a trade name, respectively.
The premium split between underwriter and agents is in accordance with the respective agency contracts and can vary from region to region due to divergences in real estate closing practices and state regulations. As a result, the percentage of title premiums retained by agents can vary due to the geographic mix of revenues from agency operations. The changes in the percentage of title premiums retained by agents in 2020 from 2019 and in 2019 from 2018 were primarily due to changes in the geographic mix of agency revenues.
As of December 31, 2020, the IBNR claims reserve for the title insurance and services segment was $1,025.8 million, which reflected management’s best estimate. The Company’s internal actuary determined a range of reasonable estimates of $811.1 million to $1,054.1 million. The range limits are $214.7 million below and $28.3 million above management’s best estimate, respectively, and represent an estimate of the range of variation among reasonable estimates of the IBNR reserve. Actuarial estimates are sensitive to assumptions used in models, as well as the structures of the models themselves, and to changes in claims payment and incurral patterns, which can vary materially due to economic conditions, among other factors.
The 2019 rate of 4.0% reflected the ultimate loss rate for policy year 2019 and no change in the loss reserve estimates for prior policy years.
The 2018 rate of 4.0% reflected the ultimate loss rate for policy year 2018 and no change in the loss reserve estimates for prior policy years.
Depreciation and amortization expense increased $19.6 million, or 16.2%, in 2020 from 2019 and $2.6 million, or 2.2%, in 2019 from 2018. The increase in depreciation and amortization expense in 2020 from 2019 was primarily attributable to amortization of software and other intangible assets from new acquisitions of $22.0 million for 2020. The increase in depreciation and amortization expense in 2019 from 2018 was primarily attributable to higher amortization expense associated with internally developed software.
Insurers generally are not subject to state income or franchise taxes. However, in lieu thereof, a premium tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s noninsurance subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance and services segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.3% for 2020 and 1.4% for 2019 and 2018, respectively.
The profit margins for the title insurance business reflect the high cost of performing the essential services required before insuring title, whereas the corresponding revenues are subject to regulatory and competitive pricing restraints. Due to the relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase. Title insurance profit margins are also impacted by the segment’s net investment income and net realized investment gains or losses, which may not move in the same direction as closed order volumes. Title insurance profit margins are affected by the composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. Title insurance profit margins are also affected by the percentage of title insurance premiums generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. The pretax margins were 15.7%, 16.1% and 12.4% for 2020, 2019 and 2018, respectively.
Net realized investment gains for the specialty insurance segment were $12.3 million for 2020 and were primarily from the increase in the fair values of equity securities of $6.8 million. Net realized investment gains for 2020 also included a gain recognized from the sale of real estate. Net realized investment gains for the specialty insurance segment were $10.7 million for 2019 and were primarily from the increase in the fair values of equity securities of $10.4 million. Net realized investment losses were $7.4 million for 2018 and were primarily from a decrease in the fair values of equity securities of $6.1 million and losses from the sales of debt securities.
Personnel costs and other operating expenses increased $9.1 million, or 5.7%, in 2020 from 2019 and $11.4 million, or 7.7%, in 2019 from 2018. The increase in 2020 from 2019 was primarily attributable to increased salary expense, due to higher average headcount, and higher advertising expense related to the home warranty business. The increase in 2019 from 2018 was primarily attributable to increases in professional services, salary, advertising and employee benefit expenses. The increase in salary expense was due to higher average salaries.
In connection with the Company’s decision to sell its property and casualty insurance business it recorded impairment losses to goodwill, other intangible assets, property and equipment and other assets totaling $54.9 million in 2020.
Net realized investment gains for the corporate segment totaled $6.5 million for 2020 and were primarily from the sale of real estate. There were no realized investment gains or losses for the corporate segment for 2019 and 2018.
Corporate personnel costs and other operating expenses were $57.0 million, $62.3 million and $35.6 million in 2020, 2019 and 2018, respectively. The decrease in 2020 when compared to 2019 was primarily attributable to lower expenses related to the Company’s deferred compensation plan. The increase in 2019 when compared to 2018 was primarily attributable to higher expenses related to the Company’s deferred compensation plan.
Interest expense increased $7.3 million, or 22.1%, in 2020 from 2019 and decreased $0.3 million, or 1.0%, in 2019 from 2018. The increase in 2020 from 2019 was due to the interest accrued on the $450.0 million of 4.00% senior unsecured notes that the Company issued in May 2020.
The Company’s inter-segment eliminations were not material for 2020, 2019 and 2018.
The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were 24.1% for 2020, 21.6% for 2019 and 21.9% for 2018. The differences in the effective tax rates year over year are typically due to changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contributions to pretax income and changes in the ratio of permanent differences to income before income taxes. In addition, the tax rate for 2020 reflected the impairment of nondeductible goodwill related to the Company’s Specialty Insurance segment and a benefit from foreign tax law changes. The tax rate for 2019 also reflected the resolution of state tax matters from prior years. The Company’s effective tax rate for 2018 also reflected an adjustment made to its initial 2017 estimates for the comprehensive tax reform legislation known as the Tax Cuts and Jobs Act.
See Note 15 Earnings Per Share to the consolidated financial statements for further discussion of earnings per share.
The substantial majority of the Company’s business is dependent upon activity in the real estate and mortgage markets, which are cyclical and seasonal. Periods of increasing interest rates and reduced mortgage financing availability generally have an adverse effect on residential real estate activity and therefore typically decrease the Company’s revenues. In contrast, periods of declining interest rates and increased mortgage financing availability generally have a positive effect on residential real estate activity, which typically increases the Company’s revenues. Residential purchase activity is typically slower in the winter months with increased volumes in the spring and summer months. Residential refinance activity is typically more volatile than purchase activity and is highly impacted by changes in interest rates. Commercial real estate volumes are less sensitive to changes in interest rates but fluctuate based on local supply and demand conditions for space and mortgage financing availability.
In November 2020, the Company announced that its board of directors had approved a new share repurchase plan, which authorizes the repurchase of up to $300.0 million of the Company’s common stock and of which $242.0 million remained as of December 31, 2020. Purchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions. Also, in November 2020, the Company terminated its prior share repurchase plan which authorized the repurchase of up to $250.0 million of the Company’s common stock. Cumulatively, during the year ended December 31, 2020, the Company repurchased and retired, under both the current and prior authorizations, 3.2 million shares of its common stock for a total purchase price of $138.6 million.
During the year ended December 31, 2020, the Company completed acquisitions for an aggregate purchase price of $397.6 million, which were funded through cash on hand and additional borrowings of $120.0 million under the Company’s credit facility.
As of December 31, 2020, the holding company’s sources of liquidity included $206.9 million of cash and cash equivalents and $700.0 million available on the Company’s revolving credit facility. Management believes that liquidity at the holding company is sufficient to satisfy anticipated cash requirements and obligations for at least the next twelve months.
The Company maintains a credit agreement with JPMorgan Chase Bank, N.A. in its capacity as administrative agent and the lenders party thereto. The credit agreement, which is comprised of a $700.0 million revolving credit facility, includes an expansion option that permits the Company, subject to satisfaction of certain conditions, to increase the revolving commitments and/or add term loan tranches in an aggregate amount not to exceed $350.0 million. Unless terminated earlier, the credit agreement will terminate on April 30, 2024. The obligations of the Company under the credit agreement are neither secured nor guaranteed. Proceeds under the credit agreement may be used for general corporate purposes. At December 31, 2020, the Company had no outstanding borrowings under the facility.
FirstFunding, Inc., a specialized warehouse lender to correspondent mortgage lenders, maintains secured warehouse lending facilities with several banking institutions. At December 31, 2020, outstanding borrowings under these facilities totaled $516.2 million.
First American Trust, FSB, a federal savings bank, maintains a secured line of credit with the Federal Home Loan Bank and federal funds lines of credit with certain correspondent institutions. In addition, First American Trust, FSB is a party to master repurchase agreements under which securities may be loaned or sold. At December 31, 2020, no amounts were outstanding under any of these facilities.
The Company’s debt to capitalization ratios were 23.7% and 18.5% at December 31, 2020 and December 31, 2019, respectively. The Company’s adjusted debt to capitalization ratios, excluding secured financings payable of $516.2 million and $278.4 million at December 31, 2020 and December 31, 2019, were 17.0% and 14.1%, respectively.
Investment portfolio. The Company maintains a high quality, liquid investment portfolio that is primarily held at its insurance and banking subsidiaries. As of December 31, 2020, 93% of the Company’s investment portfolio consisted of debt securities, of which 64% were either United States government-backed or rated AAA and 98% were either rated or classified as investment grade. Percentages are based on the estimated fair values of the securities. Credit ratings reflect published ratings obtained from globally recognized securities rating agencies. If a security was rated differently among the rating agencies, the lowest rating was selected. For further information on the credit quality of the Company’s investment portfolio at December 31, 2019, see Note 4 Debt and Equity Securities to the consolidated financial statements.
Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2020, due by period, is as follows:
The timing of payments related to claims losses is estimated and is not set contractually. Nonetheless, based on historical claims experience, the Company anticipates the above payment patterns. Changes in future claims settlement patterns, judicial decisions, legislation, economic conditions and other factors could affect the timing and amount of actual claims payments. The timing and amount of payments in connection with employee benefit plans are based on the Company’s current estimates and require the use of assumptions. Changes in assumptions could affect the amount and timing of employee benefit plan payments.
Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $7.1 billion and $7.3 billion at December 31, 2020 and 2019, respectively, of which $3.1 billion and $3.2 billion, respectively, were held at First American Trust, FSB. The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying consolidated balance sheets. The remaining escrow deposits were held at third-party financial institutions.
II. Condensed Financial Information of Registrant as of December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018
To the Board of Directors and Stockholders of First American Financial Corporation
We have audited the accompanying consolidated balance sheets of First American Financial Corporation and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
As described in Notes 1 and 11 to the consolidated financial statements, as of December 31, 2020, approximately $1.025 billion of the Company’s reserve for known and incurred but not reported claims represented the incurred but not reported (“IBNR”) loss reserve balance for the title insurance and services segment. Management provides for title insurance losses through a charge to expense when the related premium revenue is recognized. The amount charged to expense is generally determined by applying a loss provision rate to total title insurance premiums and escrow fees. Management estimates the loss provision rate at the beginning of each year and reassesses the rate quarterly, which involves an evaluation of the results of an in-house actuarial review. The Company’s in-house actuary performs a reserve analysis utilizing generally accepted actuarial methods that incorporate cumulative historical claims experience and loss development factors. For recent policy years at early stages of development (generally the last three years), IBNR is generally estimated using a combination of expected loss rate and multiplicative loss development factor calculations. For more mature policy years, IBNR generally is estimated using multiplicative loss development factor calculations. Current economic and business trends are also reviewed and used in the reserve analysis. These include conditions in the real estate and mortgage markets, changes in residential and commercial real estate values, and changes in the levels of defaults and foreclosures that may affect claims levels and patterns of emergence, as well as any company-specific factors that may be relevant to past and future claims experience.
In the third quarter of 2020, the Company initiated a plan to sell the property and casualty insurance business. In the fourth quarter of 2020, the Company, as a result of the sale process, determined to pursue a book transfer rather than a sale. In January 2021, the Company entered into book transfer agreements with two third-party insurers, which will provide qualifying agents and customers of the Company an opportunity to transfer their policies. The Company expects the transfers to be completed by the end of the third quarter of 2022. The Company will seek to non-renew policies that are not transferred.
The consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) and reflect the consolidated operations of the Company. The consolidated financial statements include the accounts of First American Financial Corporation and all controlled subsidiaries. All significant intercompany transactions and balances have been eliminated. Equity investments in which the Company exercises significant influence, but does not control and is not the primary beneficiary, are accounted for using the equity method of accounting. Equity investments in which the Company does not exercise significant influence over the investee and without readily determinable fair values are accounted for at cost, less impairment, and are adjusted up or down for any observable price changes.
Accounts receivable are generally due within thirty days and are recorded net of an allowance for credit losses. The Company considers accounts outstanding longer than the contractual payment terms as past due. The Company determines the allowance by considering a number of factors, including the length of time trade accounts receivable are past due, previous loss history, a specific customer’s ability to pay its obligations to the Company and the current condition, and future expectations, of the general economy and industry as a whole. Amounts are written off in the period in which they are deemed to be uncollectible.
Deposits with banks are short-term investments with initial maturities of generally more than 90 days.
Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, foreign governments, various U.S. and foreign corporations, certain state and political subdivisions and mortgage-backed securities. The Company classifies its debt securities as available-for-sale with unrealized gains or losses recorded as a component of accumulated other comprehensive income/loss.
On January 1, 2020, the Company adopted updated accounting guidance that changed the impairment methodology for available-for-sale debt securities. Under the new guidance, when the fair value of an available-for-sale debt security falls below its amortized cost, entities must determine whether the decline in fair value is due to credit-related factors or noncredit-related factors. Declines in fair value that are credit-related are now recorded on the balance sheet through an allowance for credit losses with a corresponding adjustment to earnings and declines that are noncredit-related are recognized through other comprehensive income/loss.
The Company’s policy is to present accrued interest receivable on debt securities within accounts and accrued income receivable on the balance sheet. Accrued interest receivable on debt securities at December 31, 2020 totaled $29.1 million. The Company has elected to not measure an allowance for credit losses for accrued interest receivable on debt securities and maintains a policy that all receivables ninety days past due are written off as credit loss expense. Debt securities are placed on non-accrual status, and accrual of interest is discontinued, when management determines that collectibility of contractual amounts is not reasonably assured. Interest income is recognized on a cash basis for interest payments received on debt securities in non-accrual status.
The Company maintains investments in debt securities in accordance with certain statutory requirements for the funding of statutory premium reserves and state deposits. At December 31, 2020 and 2019, the fair values of such investments totaled $93.6 million and $91.6 million, respectively. See Note 3 Statutory Restrictions on Investments and Stockholders’ Equity for additional discussion of the Company’s statutory restrictions.
Equity investments in which the Company exercises significant influence but does not control, and is not the primary beneficiary, are accounted for under the equity method of accounting. These investments are initially measured at cost and are generally adjusted by the Company’s share of equity in the income or losses of the investee. The carrying values of these investments are written down, or impaired, to fair value when a decline in value is considered to be other-than-temporary. In making the determination as to whether an individual investment is impaired, the Company assesses the current and expected financial condition of each relevant entity, including, but not limited to, the anticipated ability of the entity to make its contractually required payments to the Company (with respect to debt obligations to the Company), the results of valuation work performed with respect to the entity, the entity’s anticipated ability to generate sufficient cash flows and the market conditions in the industry in which the entity is operating.
In connection with the Company’s decision in the third quarter of 2020 to sell the property and casualty insurance business, it recognized impairment losses on its capitalized software of $17.6 million for the year ended December 31, 2020. See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the disposition of the business. Impairment losses on property and equipment for the year ended December 31, 2019 primarily related to impairments of $6.0 million on internally developed software. Impairment losses on property and equipment for the year ended December 31, 2018 were insignificant.
As most of the Company’s leases do not provide an implicit discount rate, the Company applies its incremental borrowing rate, which is based on the information available as of the commencement date, in determining the present value of its lease payments.
The Company does not separately account for nonlease components (e.g., common-area maintenance costs) from the associated lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) on leases of commercial real estate and instead accounts for both components as a single lease component for purposes of recognizing lease assets and liabilities. Variable lease costs, which include any variable lease and nonlease components and rents that vary based on changes to an index or rate, are expensed as incurred.
The Company is required to perform an annual goodwill impairment assessment for each reporting unit for which goodwill has been allocated. Those reporting units include title insurance, home warranty and property and casualty insurance. The Company’s trust and other services reporting unit has no allocated goodwill and is, therefore, not assessed for impairment. The Company has elected to perform this annual assessment in the fourth quarter of each fiscal year or sooner if circumstances indicate possible impairment. Based on accounting guidance, the Company has the option to perform a qualitative assessment to determine if the fair value is more likely than not (i.e., a likelihood of greater than 50%) less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test, or may choose to forego a qualitative assessment and perform a quantitative impairment test. The qualitative factors considered in this assessment may include macroeconomic conditions, industry and market considerations, overall financial performance as well as other relevant events and circumstances as determined by the Company. The Company evaluates the weight of each factor to determine whether it is more likely than not that impairment may exist. If the results of a qualitative assessment indicate the more likely than not threshold was not met, the Company may choose not to perform a quantitative impairment test. If, however, the more likely than not threshold is met, the Company will perform a quantitative test as required and discussed below.
In the third quarter of 2020, the Company initiated a plan to sell its property and casualty insurance business, which triggered a goodwill impairment test for the property and casualty insurance reporting unit. Based on the results of the goodwill impairment test, the Company determined that the fair value of the property and casualty insurance reporting unit was less than its carrying amount. As a result, the Company recorded an impairment loss to goodwill of $34.2 million for the year ended December 31, 2020. For 2019 and 2018, the Company performed quantitative impairment tests and determined that the fair value of its property and casualty insurance reporting unit exceeded the carrying amount and, therefore, no additional analysis was required.
The Company chose to forego qualitative assessments for its title insurance and home warranty reporting units for 2020 and performed quantitative impairment tests. Based on the results of these tests, the Company determined that the fair values for both reporting units exceeded their carrying amounts and, therefore, no additional analysis was required. The results of the Company’s qualitative assessments in 2019 and 2018 for its title insurance and home warranty reporting units supported the conclusion that their fair values were not more likely than not less than their carrying amounts and, therefore, a quantitative impairment test was not considered necessary. As a result of the Company’s annual goodwill impairment assessments for its title insurance and home warranty reporting units, the Company did not record any goodwill impairment losses for the years ended December 31, 2020, 2019 or 2018.
Management uses estimated future cash flows (undiscounted and excluding interest) to measure the recoverability of intangible assets with finite lives, whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If the undiscounted cash flow analysis indicates that the carrying amount is not recoverable, an impairment loss is recorded for the excess of the carrying amount over its fair value. Management’s impairment assessment for indefinite-lived other intangible assets may involve calculating the fair value by using a discounted cash flow analysis or through a market approach valuation. If the fair value exceeds its carrying amount, the asset is not considered impaired and no additional analysis is required. However, if the carrying amount is greater than the fair value, an impairment loss is recorded equal to the excess.
For recent policy years at early stages of development (generally the last three years), IBNR is generally estimated using a combination of expected loss rate and multiplicative loss development factor calculations. For more mature policy years, IBNR generally is estimated using multiplicative loss development factor calculations. The expected loss rate method estimates IBNR by applying an expected loss rate to total title insurance premiums and escrow fees and by adjusting for policy year maturity using estimated loss development patterns. Multiplicative loss development factor calculations estimate IBNR by applying factors derived from loss development patterns to losses realized to date. The expected loss rate and loss development patterns are based on historical experience and the relationship of the history to the applicable policy years.
The volume and timing of title insurance claims are subject to cyclical influences from both the real estate and mortgage markets. Title policies issued to lenders constitute a large portion of the Company’s title insurance volume. These policies insure lenders against losses on mortgage loans due to title defects in the collateral property. Even if an underlying title defect exists that could result in a claim, often the lender must realize an actual loss, or at least be likely to realize an actual loss, for a title insurance liability to exist. As a result, title insurance claims exposure is sensitive to lenders’ losses on mortgage loans and is affected in turn by external factors that affect mortgage loan losses, particularly macroeconomic factors.
Information and other revenues are recognized when control of the promised goods or services is transferred to the customer and in an amount that reflects the consideration the Company expects to be entitled to in exchange for these goods or services.
The Company records a contract asset, and recognizes revenue, upon delivery of certain products related to the closing of a real estate transaction where the Company’s right to payment is subject to the closing of the transaction. The Company records a contract liability for payments received in advance of revenue recognition for certain products or services. Contract assets and liabilities were not material at December 31, 2020 and 2019. Revenues recognized during the years ended December 31, 2020, 2019 and 2018 that were included in contract liabilities at the beginning of the respective period were not material.
For information about the Company’s revenues disaggregated by reportable segment see Note 23 Segment Financial Information.
The Company’s title insurance business assumes and cedes large title insurance risks through reinsurance and its property and casualty insurance business purchases reinsurance to limit risk associated with large losses from single events. Additionally, the Company has limited reinsurance arrangements related to certain products offered through its international operations. In reinsurance arrangements, the primary insurer retains a certain amount of risk under a policy and cedes the remainder of the risk under the policy to the reinsurer. The primary insurer pays the reinsurer a premium in exchange for accepting this risk of loss. The primary insurer generally remains liable to its insured for the total risk, but is reinsured under the terms of the reinsurance agreement. The amount of premiums assumed and ceded is recorded as a component of direct premiums and escrow fees on the Company’s consolidated statements of income. The total amount of premiums assumed and ceded in connection with reinsurance was less than 1.0% of consolidated premium and escrow fees for each of the three years in the period ended December 31, 2020. Payments and recoveries on reinsured losses for the Company’s title insurance business were immaterial during the years ended December 31, 2020, 2019 and 2018. For information related to payments and recoveries on reinsured losses for the Company’s property and casualty insurance business see Note 11 Reserve for Known and Incurred But Not Reported Claims.
The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $7.1 billion and $7.3 billion at December 31, 2020 and 2019, respectively, of which $3.1 billion and $3.2 billion, respectively, were held at First American Trust, FSB. The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying consolidated balance sheets. The remaining escrow deposits were held at third-party financial institutions.
The Company regularly reviews the financial strength of third-party financial institutions where like-kind exchange deposits are held and, based on this review and the fact that all amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation, does not expect any credit losses; therefore the Company has not recorded a liability for credit losses.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance intended to reduce potential diversity in practice in accounting for the costs of implementing cloud computing arrangements (i.e., hosting arrangements) that are service contracts. The updated guidance aligns the requirements for capitalizing implementation costs for these arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance on a prospective basis, effective January 1, 2020, did not have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued updated guidance intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The updated guidance replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses and requires the consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The adoption of this guidance on a modified-retrospective basis, effective January 1, 2020, did not have a material impact, except for the disclosure requirements, on the Company’s consolidated financial statements. See Note 1 Basis of Presentation and Significant Accounting Policies, Note 4 Debt and Equity Securities and Note 5 Allowance for Credit Losses - Accounts Receivable for further information on the Company’s credit losses.
In January 2021, the Company entered into book transfer agreements with two third party insurers, which will provide qualifying agents and customers of the Company an opportunity to transfer their policies. The Company expects the transfers to be completed by the end of the third quarter of 2022. The Company will seek to non-renew policies that are not transferred.
FATICO is domiciled in Nebraska and its statutory-based financial statements are prepared in accordance with accounting practices prescribed or permitted by the Nebraska Department of Insurance. The National Association of Insurance Commissioners’ (“NAIC”) Accounting Practices and Procedures Manual (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by the state of Nebraska. The state of Nebraska has adopted certain prescribed accounting practices that differ from those found in the NAIC SAP. Specifically, the timing of amounts released from the statutory premium reserve under Nebraska’s required practice differs from NAIC SAP resulting in total statutory capital and surplus that was lower than if reported in accordance with NAIC SAP by $267.5 million and $235.5 million at December 31, 2020 and 2019, respectively.
Statutory accounting principles differ in some respects from GAAP, and these differences include, but are not limited to, non-admission of certain assets (principally limitations on deferred tax assets, goodwill, capitalized furniture and equipment, investment in subsidiaries and affiliates, real estate, capitalized software, and premiums and other receivables 90 days past due), reporting of bonds at amortized cost, recognition of credit losses, the lack of recognition of right-of-use assets and lease liabilities on the balance sheet for lease commitments in which the Company is a lessee, changes in the fair values of equity securities, amortization of goodwill, deferral of premiums received as statutory premium reserve, supplemental reserve (if applicable) and exclusion of the incurred but not reported claims reserve.
Investments in debt securities at December 31, 2020, by contractual maturities, are as follows:
Included in debt securities at December 31, 2020, were bank loans totaling $54.2 million, of which $50.7 million were non-investment grade; high yield corporate debt securities totaling $52.4 million, all of which were non-investment grade; and emerging market debt securities totaling $73.0 million, of which $6.7 million were non-investment grade.
The composition of the debt securities portfolio in an unrealized loss position at December 31, 2020, by credit rating, is as follows:
Debt securities in an unrealized loss position at December 31, 2020, included bank loans totaling $37.3 million, of which $34.4 million were non-investment grade; high yield corporate debt securities totaling $5.3 million, all of which were non-investment grade; and emerging market debt securities totaling $0.3 million, all of which were non-investment grade.
Activity in the allowance for credit losses on accounts receivable for the year ended December 31, 2020 is summarized as follows:
The balance at beginning of period was determined under previous accounting guidance. Transition to the updated guidance did not result in an adjustment to the allowance. See Note 1 Basis of Presentation and Significant Accounting Policies for further information on the recently adopted accounting policy.
In connection with the Company’s decision in the third quarter of 2020 to sell the property and casualty insurance business, it recognized impairment losses on its capitalized software of $17.6 million for the year ended December 31, 2020. See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the disposition of the business.
Cash flow information related to lease liabilities is summarized as follows:
Finance lease assets obtained in exchange for new finance lease liabilities
In the third quarter of 2020, the Company initiated a plan to sell its property and casualty insurance business, which triggered a goodwill impairment test for the property and casualty insurance reporting unit. Based on the results of the goodwill impairment test, the Company determined that the fair value of the property and casualty insurance reporting unit was less than its carrying amount. As a result, the Company recorded an impairment loss to goodwill of $34.2 million for the year ended December 31, 2020. See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the disposition of the business.
Amortization expense for finite-lived intangible assets was $43.3 million, $28.4 million and $30.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The current year increase in finite-lived intangible assets primarily reflects the impact of acquisitions during 2020. For further discussion about the Company’s acquisitions in 2020, see Note 22 Business Combinations.
In connection with the Company’s decision in the third quarter of 2020 to sell the property and casualty insurance business, it recognized impairment losses on its finite-lived intangible assets - customer relationships of $3.2 million for the year ended December 31, 2020. See Note 2 Disposition of the Property and Casualty Insurance Business for further information on the disposition of the business.
NOTE 11. Reserve for Known and Incurred But Not Reported Claims:
“Other” activity primarily includes foreign currency translation gains and losses and ceded reinsurance claims. Payments and recoveries on reinsured losses for the Company’s title insurance business were immaterial during the years ended December 31, 2020, 2019 and 2018. Payments on reinsured losses for the Company’s property and casualty insurance business totaled $4.3 million, $21.1 million, and $15.3 million, and recoveries totaled $3.5 million, $10.3 million, and $20.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 5.0% for the year ended December 31, 2020 and 4.0% for the years ended December 31, 2019 and 2018, respectively.
The following reflects information as of December 31, 2020 about incurred and paid claims development, net of reinsurance, as well as cumulative claims frequency by claims event, and the total of incurred but not reported claims plus expected development on reported claims included with the net incurred claims amounts.
The information below about incurred and paid claims development for the years ended December 31, 2011 to 2019, is presented as supplementary information.
Supplementary information about average historical claims duration for the Company’s specialty insurance segment as of December 31, 2020, is as follows:
4.30% senior unsecured notes due February 1, 2023, effective interest rate of 4.35%
Line of credit borrowings due April 30, 2024, interest rate of 3.30% at December 31, 2019
The weighted-average interest rate for the Company’s notes and contracts payable was 4.27% and 4.22% at December 31, 2020 and 2019, respectively.
In May 2020, the Company issued $450.0 million of 4.00% senior unsecured notes due in 2030. Interest is due semi-annually on May 15 and November 15, beginning November 15, 2020. The Company used a portion of the net proceeds from the sale to repay all borrowings outstanding under its credit facility, increasing the unused capacity thereunder to the full $700.0 million size of the facility.
The credit agreement includes representations and warranties, reporting covenants, affirmative covenants, negative covenants, financial covenants and events of default customary for financings of this type. Upon the occurrence of an event of default the lenders may accelerate the loans. Upon the occurrence of certain insolvency and bankruptcy events of default the loans will automatically accelerate. As of December 31, 2020, the Company was in compliance with the financial covenants under the credit agreement.
For the years ended December 31, 2020, 2019 and 2018, domestic and foreign pretax income, before noncontrolling interests, were $850.0 million and $73.3 million, $857.2 million and $47.8 million, and 571.9 million and $37.6 million, respectively.
The Company’s actual income taxes differ from the amounts computed by applying the federal income tax rate of 21% for the years ended December 31, 2020, 2019 and 2018. A reconciliation of these differences is as follows:
The exercise of stock options and vesting of RSUs represent a tax benefit that has been reflected as a reduction of income taxes payable and a reduction of income tax expense for the years ended December 31, 2020, 2019 and 2018. The benefits recorded were $3.8 million, $3.2 million and $5.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
At December 31, 2020, the Company had available net operating loss carryforwards for income tax purposes totaling $68.1 million, consisting of federal, state and foreign losses of $1.5 million, $34.7 million and $31.9 million, respectively. Of the aggregate net operating losses, $30.8 million has an indefinite expiration and the remaining $37.3 million expires at various times beginning in 2021.
As of December 31, 2020, 2019 and 2018, the liability for income taxes associated with uncertain tax positions was $7.2 million, $1.5 million and $13.3 million, respectively. The increase in the liability during 2020 was primarily attributable to positions taken on the Company’s tax returns for prior years, the net decrease in the liability during 2019 was primarily the result of the resolution of state tax matters from prior years, and the net increase in the liability during 2018 was attributable to new uncertain tax positions. The liabilities could be reduced by $2.1 million, $0.4 million, and $3.7 million as of December 31, 2020, 2019 and 2018, respectively, due to offsetting tax benefits associated with the correlative effects of potential adjustments, including timing adjustments and state income taxes. The net liability, if recognized, would favorably affect the Company’s effective income tax rate.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018 is as follows:
For the year ended December 31, 2020, 203 thousand RSUs were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect. For the years ended December 31, 2019 and 2018, RSUs excluded from diluted weighted-average common shares outstanding due to their antidilutive effect were not material. No stock options had a dilutive effect on weighted-average common shares outstanding during the year ended December 31, 2020, as all remaining stock options outstanding were exercised during the fourth quarter of 2019.
The Company maintains a deferred compensation plan for certain employees that allows participants to defer up to 100% of their salary, commissions and certain bonuses. Participants can allocate their deferrals among a variety of investment crediting options (known as “deemed investments”). The term deemed investments means that the participant has no ownership interest in the funds they select; the funds are only used to measure the gains or losses that will be attributed to each participant’s deferral account over time. Participants can elect to have their deferral balance paid out while they are still employed or after their employment ends. The deferred compensation plan is exempt from most provisions of the Employee Retirement Income Security Act (“ERISA”) because it is only available to a select group of management and highly compensated employees and is not a qualified employee benefit plan. To preserve the tax-deferred savings advantages of a nonqualified deferred compensation plan, federal law requires that it be unfunded or informally funded. Participant deferrals, and any earnings on those deferrals, are general unsecured obligations of the Company. The Company informally funds the deferred compensation plan through a tax-advantaged investment known as variable universal life insurance. Deferred compensation plan assets are held as an asset of the Company within a special trust, known as a “Rabbi Trust.” At December 31, 2020 and 2019, the value of the assets held in the Rabbi Trust of $116.0 million and $103.5 million, respectively, and the unfunded liabilities of $131.3 million and $115.1 million, respectively, were included in the consolidated balance sheets in other assets and pension costs and other retirement plans, respectively.
The Company also has nonqualified, unfunded supplemental benefit plans covering certain management personnel. The Executive and Management Supplemental Benefit Plans, subject to certain limitations, provide participants with maximum benefits of 30% and 15%, respectively, of average annual compensation over a fixed five-year period. Effective January 1, 2011, the plans were closed to new participants.
Certain of the Company’s subsidiaries have separate savings and employee benefit plans. Expenses related to these plans and the Company’s deferred compensation plan are included below under “other plans, net”.
The following table summarizes the benefit obligations and funded status associated with the Company’s unfunded supplemental benefit plans:
The weighted-average discount rate assumptions used to determine net periodic benefit costs for the Company’s unfunded supplemental benefits plans for the years ended December 31, 2020, 2019 and 2018, were as follows:
The discount rate assumptions used for the Company’s benefit plans reflect the yield available on high-quality, fixed-income debt securities that match the expected timing of the benefit obligation payments.
The Company expects to make cash contributions of $15.4 million to its unfunded supplemental benefit plans during 2021.
Benefit payments, which reflect expected future service, as appropriate, are expected to be made as follows:
The following tables present the fair values of the Company’s assets, measured on a recurring basis, as of December 31, 2020 and 2019:
There were no transfers between Levels 1, 2 and 3 during the years ended December 31, 2020 and 2019. Transfers into or out of the Level 3 category occur when unobservable inputs become either more, or less, significant to the fair value measurement. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.
The fair value of notes receivable, net is estimated based on current market rates offered for notes with similar maturities and credit quality.
The fair value of notes and contracts payable is estimated based on current rates offered for debt of similar remaining maturities.
The First American Financial Corporation 2020 Incentive Compensation Plan (the “Incentive Compensation Plan”), effective January 22, 2020, permits the granting of stock options, stock appreciation rights, restricted stock, RSUs, performance units, performance shares and other stock-based awards. Eligible participants, which include the Company’s directors and officers, as well as other employees, may elect to defer the distribution of their RSUs to a future date beyond the scheduled vesting date. At December 31, 2020, 3.5 million shares of common stock remain available to be issued from either authorized and unissued shares or previously issued shares acquired by the Company, subject to certain annual limits based on the type of award granted. The Incentive Compensation Plan terminates 10 years from its effective date unless previously canceled by the Company’s board of directors.
As of December 31, 2020, there was $27.4 million of total unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted-average period of 2.2 years. The fair value of RSUs is generally based on the market value of the Company’s shares on the date of grant. The weighted-average grant-date fair value of RSUs was $63.14, $51.46 and $54.80 for the years ended December 31, 2020, 2019 and 2018, respectively. The total fair value of shares distributed for the years ended December 31, 2020, 2019 and 2018 was $56.0 million, $50.5 million and $54.5 million, respectively. At December 31, 2020, 1.1 million shares were vested but not distributed.
The following table presents a summary of the changes in each component of AOCI for the years ended December 31, 2020, 2019 and 2018:
Change in unrealized gains (losses) on debt securities for which credit-related portion was recognized in earnings
The following table presents the effects of the reclassifications out of AOCI on the respective line items in the consolidated statements of income:
The Company and its subsidiaries are parties to a number of non-ordinary course lawsuits. These lawsuits frequently are similar in nature to other lawsuits pending against the Company’s competitors.
Most of the non-ordinary course lawsuits to which the Company and its subsidiaries are parties challenge practices in the Company’s title insurance business, though a limited number of cases also pertain to the Company’s other businesses. These lawsuits include, among others, cases alleging, among other assertions, that the Company or one of its subsidiaries improperly charged fees for products and services, improperly performed debt collection practices, improperly handled property and casualty claims and gave items of value to builders as inducements to refer business in violation of certain laws, such as consumer protection laws and laws generally prohibiting unfair business practices, and certain obligations, including:
Wilmot vs. First American Financial Corporation, et al., filed on April 20, 2007 and pending in the Superior Court of the State of California, County of Los Angeles.
These lawsuits are putative class actions for which a class has not been certified; however, the appellate court has remanded the Wilmot action back for certification of a subclass. For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.
The Company and/or its subsidiaries are also parties to consumer class actions and a securities class action in connection with the information security incident that occurred during the second quarter of 2019. All of these lawsuits are putative class actions for which a class has not been certified. For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss.
While some of the lawsuits described above may be material to the Company’s financial results in any particular period if an unfavorable outcome results, the Company does not believe that any of these lawsuits will have a material adverse effect on the Company’s overall financial condition, results of operations or cash flows.
The Company’s title insurance, property and casualty insurance, home warranty, banking, thrift, trust and wealth management businesses are regulated by various federal, state and local governmental agencies. Many of the Company’s other businesses operate within statutory guidelines. Consequently, the Company may from time to time be subject to examination or investigation by such governmental agencies. Currently, governmental agencies are examining or investigating certain of the Company’s operations. These exams and investigations include an inquiry by the New York Attorney General and the Massachusetts Attorney General into competitive practices in the title insurance industry. With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company records a liability representing its best estimate of the financial exposure based on known facts. While the ultimate disposition of each such exam or investigation is not yet determinable, the Company does not believe that individually or in the aggregate they will have a material adverse effect on the Company’s financial condition, results of operations or cash flows. Some of these exams or investigations could, however, result in changes to the Company’s business practices which could ultimately have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
The Company’s Canadian operations provide certain services to lenders which it believes to be exempt from excise tax under applicable Canadian tax laws. However, in October 2014, the Canadian taxing authority provided internal guidance that the services in question should be subject to the excise tax. During July 2019, the Company received an assessment from the Canadian taxing authority. The amount of the assessment is $15.7 million, which is based on the exchange rate as of, and includes interest charges through, December 31, 2020. As the Company does not believe that the services in question are subject to excise tax, it intends to avail itself of avenues of appeal, and it believes it is reasonably likely that the Company will prevail on the merits. Accordingly, the Company filed a notice of appeal with the Canadian taxing authority in March 2020. Based on the current facts and circumstances, the Company does not believe a loss is probable, therefore no liability has been recorded.
Current year acquisitions included the purchase of a company that provides document, eClose and fulfillment technology for the mortgage industry on March 2, 2020 for a purchase price of $350.0 million. In connection with the purchase, the Company recorded goodwill, property and equipment and other intangible assets of $216.4 million, $19.0 million and $129.0 million, respectively. The Company recognized revenues of $69.6 million and pre-tax income of $4.5 million since the acquisition date, related to the acquiree, during the year ended December 31, 2020. The Company expects $121.9 million of the goodwill recorded upon acquisition to be deductible for tax purposes.
Unrealized gains on debt securities for which credit-related portion was recognized in earnings
The holding company received cash dividends from subsidiaries of $573.9 million, $384.8 million and $394.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.