One of our subsidiaries in the title insurance and services segment leases an aggregate of approximately 134,000 square feet of office space in four buildings of the International Technology Park in Bangalore, India. Five of the six leases associated with this space expire in 2012 and the sixth is currently a month-to-month lease. We have the option to terminate all of the leases in the International Technology Park in 2011.
The office facilities we occupy are, in all material respects, in good condition and adequate for their intended use.
This Management’s Discussion and Analysis contains certain financial measures, in particular presentation of certain balances excluding the impact of non-recurring items, that are not presented in accordance with generally accepted accounting principles (“GAAP”). The Company is presenting these non-GAAP financial measures because they provide the Company’s management and readers of the Annual Report on Form 10-K with additional insight into the operational performance of the Company relative to earlier periods and relative to the Company’s competitors. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. Readers of this Annual Report on Form 10-K should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures.
All of the assets and liabilities primarily related to the Company’s business-primarily the business and operations of TFAC’s title insurance and services segment and specialty insurance segment-have been retained by or transferred to the Company;
The Company’s historical financial statements prior to June 1, 2010 include assets, liabilities, revenues and expenses directly attributable to the Company’s operations. The Company’s historical financial statements prior to June 1, 2010 reflect allocations of corporate expenses from TFAC for certain functions provided by TFAC, including, but not limited to, general corporate expenses related to finance, legal, information technology, human resources, communications, compliance, facilities, procurement, employee benefits, and share-based compensation. These expenses have been allocated to the Company on the basis of direct usage when identifiable, with the remainder allocated on the basis of net revenue, domestic headcount or assets or a combination of such drivers. The Company considers the basis on which the expenses have been allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the periods presented. The Company’s historical financial statements prior to June 1, 2010 do not reflect the debt or interest expense it might have incurred if it had been a stand-alone entity. In addition, the Company expects to incur other expenses, not reflected in its historical financial statements prior to June 1, 2010, as a result of being a separate publicly traded company. As a result, the Company’s historical financial statements prior to June 1, 2010 do not necessarily reflect what its financial position or results of operations would have been if it had been operated as a stand-alone public entity during the periods covered prior to June 1, 2010, and may not be indicative of the Company’s future results of operations and financial position.
The Company consists of the following reportable segments and a corporate function:
The Company’s specialty insurance segment issues property and casualty insurance policies and sells home warranty products. The property and casualty insurance business provides insurance coverage to residential homeowners and renters for liability losses and typical hazards such as fire, theft, vandalism and other types of property damage. This business is licensed to issue policies in all 50 states and actively issues policies in 43 states. In its largest market, California, it also offers preferred risk auto
insurance to better compete with other carriers offering bundled home and auto insurance. The home warranty business provides residential service contracts that cover residential systems and appliances against failures that occur as the result of normal usage during the coverage period. This business currently operates in 39 states and the District of Columbia.
For recent policy years at early stages of development (generally the last three years), IBNR is estimated by applying an expected loss rate to total title insurance premiums and escrow fees and adjusting for policy year maturity using the estimated loss development patterns. The expected loss rate and patterns are based on historical experience and the relationship of the history to the applicable policy years. This is a generally accepted actuarial method of determining IBNR for policy years at early development ages. IBNR calculated in this way differs from
the IBNR a multiplicative loss development factor calculation would produce. Factor-based development effectively extrapolates results to date forward through the lifetime of the policy year’s development.
For more mature policy years (generally, policy years aged more than three years), IBNR is estimated using multiplicative loss development factor calculations. These years were exposed to adverse economic conditions during 2007-2010 that may have resulted in acceleration of claims and one-time losses. The possible extrapolation of these losses to future development periods by using factors was considered. The impact of economic conditions during 2007-2010 is believed to account for a much less significant portion of losses on policy years 2004 and prior than on more recent policy years. Policy years 2004 and prior were at relatively mature ages when the adverse development period began in 2007, and much of their losses had already been incurred by then. In addition, the loss development factors for policy years 2007 and prior are low enough that the potential for over-extrapolation is limited to an acceptable level.
assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned to each security in the Company’s available-for-sale portfolio is based on management’s assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The three hierarchy levels are defined as follows:
Level 3-Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Level 3 category includes non-agency mortgage-backed and asset-backed securities which are currently not actively traded.
Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, municipal bonds, foreign bonds, governmental agency bonds, governmental agency mortgage-backed securities and corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed and asset-backed securities, inputs and assumptions may also include the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. The fair value of non-agency mortgage-backed and asset-backed securities was obtained from the independent pricing service referenced above and subject to the Company’s validation procedures discussed above. However, due to the fact that these securities were not actively traded, there was less observable inputs available requiring the pricing service to use more judgment in determining the fair value of the securities, therefore the Company classified non-agency mortgage-backed and asset-backed securities as Level 3.
security, the seniority and duration of the securities, issuer-specific news and other developments, the financial condition and prospects of the issuer (including credit ratings), macro-economic changes (including the outlook for industry sectors, which includes government policy initiatives) and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
When an equity security has been in an unrealized loss position for greater than twelve months, the Company’s review of the security includes the above noted factors as well as what evidence, if any, exists to support that the security will recover its value in the foreseeable future, typically within the next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded.
The valuation of goodwill requires assumptions and estimates of many critical factors including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and the Company’s expectations as to future market conditions. These types of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future impairment
The Company’s primary means of share-based compensation is granting restricted stock units (“RSUs”). The fair value of a RSU grant is generally based on the market value of the Company’s shares on the date of grant and is generally recognized as compensation expense over the vesting period. RSUs granted to certain key employees have graded vesting and have a service and performance requirement and are therefore expensed using the accelerated multiple-option method to record share-based compensation expense. In addition, other RSUs granted to certain executive officers have a service and market requirement and are therefore expensed using the graded-vesting method to record share-based compensation expense. Due to the existence of the market requirement, the Company calculates the fair value on grant date using a Monte-Carlo Simulation to simulate a range of possible future stock prices for the Company. All other RSU awards have graded vesting and service is the only requirement to vest in the award and are therefore generally expensed using the straight-line single
option method to record share-based compensation expense. RSUs receive dividend equivalents in the form of RSUs having the same vesting requirements as the RSUs initially granted.
should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
whether there are any adverse qualitative factors indicating an impairment may exist. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2010. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
In October 2010, the FASB issued updated guidance related to accounting for costs associated with acquiring or renewing insurance contracts. The updated guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. Under the updated guidance only costs based on successful efforts (that is, acquiring a new or renewal contract) including direct-response advertising costs are eligible for capitalization. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued updated guidance related to credit risk disclosures for finance receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance for disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
A substantial portion of the revenues for the Company’s title insurance and services segment result from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions, and the construction and sale of new housing. In the specialty insurance segment, revenues associated with the initial year of coverage in both the home warranty and property and casualty operations are impacted by volatility in real estate transactions. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity.
Beginning at the end of September 2010, several lenders announced that they would suspend certain foreclosures as a result of potential deficiencies in their foreclosure processes. Additionally, over the last several months, certain court rulings have called into question some foreclosure practices. Though the ultimate effect of any such deficiencies, the foreclosure suspensions (which in large part have now been lifted) and the court rulings are currently unknown, the Company believes that revenues tied to foreclosures have declined, and may continue to decline, especially in the short term, and the Company may incur costs associated with its duty to defend its insureds’ title to foreclosed properties they have purchased. As of the current date, these matters have not had a material adverse effect on the Company. Though the Company will continue to monitor foreclosure developments, at this time, the Company does not believe these matters will have a material adverse effect on the Company in the future.
Direct premiums and escrow fees decreased 5.9% in 2010 from 2009 and 6.1% in 2009 from 2008. The decrease in 2010 from 2009 was primarily due to a decline in the number of title orders closed by the Company’s
Agent premiums decreased 0.4% in 2010 from 2009 and 10.9% in 2009 from 2008. The decrease in 2010 from 2009 was primarily due to the same factors impacting direct title operations offset in part by an increase in market share. According to the American Land Title Association’s comparative nine months ended September 30, 2010 market share data, the Company’s agency market share increased to 15.9% up from 14.5% for the same period of the prior year. The comparative nine months ended September 30, 2010 market share data are the most current market share data available from the American Land Title Association. The decrease in 2009 from 2008 was due to the same factors affecting the direct title operations as well as the cancellation of certain agency relationships. The Company is continuing to analyze the terms and profitability of its title agency relationships and is working to amend agent agreements to the extent possible. Amendments being sought include, among others, changing the percentage of premiums retained by the agent and the deductible paid by the agent on claims; if changes to the agreements cannot be made, the Company may elect to terminate certain agreements.
Information and other revenue decreased 7.6% in 2010 from 2009 and 7.9% in 2009 from 2008. These decreases were primarily attributable to the same factors affecting the direct title operations, as well as changes in the Company’s international and default revenues. The Company’s international information and other revenue was flat in 2010 compared to 2009, and down approximately 50% in 2009 compared to 2008. The decline in 2009 from 2008 was due to a downturn in the global economy and real estate markets. The Company’s default information and other revenue decreased approximately 14% in 2010 compared to 2009 and increased approximately 31% in 2009 compared to 2008. The decrease in 2010 compared to 2009 was primarily attributable to a decline in foreclosure activity as a result of moratoriums on foreclosures and increased market competition, which were partially offset by increased loss mitigation activities. The increase in 2009 compared to 2008 was the result of increased default and foreclosure activity driven by the decline in U.S. property values and increased unemployment rate.
Investment income decreased 27.8% in 2010 from 2009 and 23.2% in 2009 from 2008. The decrease in the current year from the prior year is primarily due to income recognized from the sale of title plant copies in 2009 while similar sales did not occur in 2010; lower interest income from deposits in 2010 due to lower yields; and a reduction in interest income from internal notes receivable when compared to 2009 due to a reduction in the notes receivable balance. The decrease in 2009 from 2008 primarily reflected declining yields earned from the investment portfolio, a decrease in interest earned on certain escrow deposits, which reflected lower yields and lower balances, and a decrease in investment income at the Company’s trust division as a result of a decline in deposits. These decreases were partially offset by an increase in the average investment portfolio balance and the sale of title plant copies in 2009.
Net other-than-temporary impairment losses recognized in earnings for the title insurance segment totaled $7.9 million, $33.0 million and $31.1 million for 2010, 2009 and 2008, respectively. The majority of the net other-than-temporary impairment losses recognized in 2010 related to the Company’s non-agency mortgage-backed securities portfolio. In 2009, the net other-than-temporary impairment losses pertained primarily to the Company’s equity securities portfolio and also to the non-agency mortgage-backed securities portfolios. In 2008, a $30.3 million net other-than-temporary impairment loss was recognized related to preferred securities issued by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
Title insurance personnel costs decreased 1.3% in 2010 from 2009 and 12.7% in 2009 from 2008. Included in personnel costs for 2010, and not in prior years, were $22.0 million of expenses associated with certain offshore functions that prior to the Separation were performed by TFAC and allocated to the Company. The allocations in prior years were included in the title insurance segment’s other operating expenses. These offshore functions are now part of the Company’s operations and their related personnel expenses are included in the title insurance segment’s personnel costs. Excluding the impact of these expenses, title insurance personnel costs decreased 3.3% in 2010 from 2009. This decrease was primarily due to domestic employee reductions, offset in part by increased expense in connection with the Company’s pension and other retirement plans. The decrease in title insurance personnel costs in 2009 from 2008 was primarily due to employee reductions, offset in part by employee separations costs and an increase in employee benefit expense due primarily to the profit-driven 401(k).
A summary of premiums retained by agents and agent premiums is as follows:
Title insurance other operating expenses (principally related to direct operations) decreased 13.5% in 2010 from 2009 and 13.8% in 2009 from 2008. Excluding the impact of the allocations for certain offshore functions discussed in the personnel costs discussion above, the decrease in other operating expenses was 10.9% in 2010 from 2009. This decrease reflected lower occupancy costs as a result of the continued consolidation/closure of certain title offices and other cost-containment programs. The decrease in 2009 from 2008 was also primarily due to lower occupancy costs as a result of the consolidation/closure of certain title offices and other cost-containment programs.
The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 6.1% in 2010, 6.8% in 2009 and 10.4% in 2008. The current year rate of 6.1% reflects an expected ultimate loss rate of 4.9% for policy year 2010, with a net upward adjustment to the reserve for prior policy years. The changes in estimates resulted primarily from higher than expected claims emergence experienced during 2010 for policies issued prior to 2009, and lower than expected claims emergence experienced during 2010 for policy year 2009. The prior year rate of 6.8% reflected an expected ultimate loss rate of 7.0% for policy year 2009, with a minor downward adjustment to the reserve for certain prior policy years. The rate of 10.4% for 2008 included a $78.0 million reserve strengthening adjustment. The 2008 reserve strengthening adjustment reflected changes in estimates for ultimate losses expected, primarily from policy years 2006 and 2007. The changes in estimates resulted primarily from higher than expected claims emergence, in both frequency and aggregate amounts, experienced during 2008, for those policy years. There were many factors that impacted the claims emergence, including but not limited to: decreases in real estate prices during 2008; increases in defaults and foreclosures during 2008; and higher than expected claims emergence from lenders policies.
Loss ratios (projected to ultimate value) for policy years 2005-2007 are higher than loss ratios for policy years 1992-2004. The major causes of the higher loss ratios for those three policy years are believed to be confined mostly to that period. These causes included: rapidly increasing residential real estate prices which led to an increase in the incidences of fraud, lower mortgage loan underwriting standards and a higher concentration than usual of subprime mortgage loan originations.
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 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 1.1% for 2010, 1.1% for 2009 and 1.3% for 2008.
Net realized investment gains (losses) and net other-than-temporary impairment losses recognized in earnings for the specialty insurance segment totaled gains of $1.8 million in 2010, compared with losses of $5.5 million and $4.2 million in 2009 and 2008, respectively. The current year net gains were primarily driven by the sale of debt securities. The prior year net losses were primarily driven by impairment losses taken on certain debt, preferred equity and common equity securities. The 2008 net losses were primarily due to realized losses on the sale of certain securities.
The provision for home warranty claims, expressed as a percentage of home warranty premiums, was 50.6% in 2010, 53.9% in 2009 and 60.5% in 2008. The decrease in rate in 2010 from 2009 was primarily due to a reduction in the average cost of claims and, to a lesser extent, fewer incidents. The decrease in rate in 2009 from 2008 was primarily due to a reduction in the average cost of claims.
The provision for property and casualty claims, expressed as a percentage of property and casualty insurance premiums, was 53.0% in 2010, 49.8% in 2009 and 54.3% in 2008. The increase in rate in 2010 from 2009 was primarily due to the return of seasonal winter storms in the first and fourth quarters of 2010, including an unusual hailstorm over Arizona in October 2010. These increases in 2010 were partially offset by lower routine or non-event core losses. The decrease in the rate in 2009 from 2008 was the result of a decline in seasonal winter storm and wildfire losses, as well as lower routine or non-event core losses.
Premium taxes as a percentage of specialty insurance segment premiums were 1.5% in 2010, 1.6% in 2009 and 1.5% in 2008.
A large part of the revenues for the specialty insurance businesses are generated by renewals and are not dependent on the level of real estate activity. With the exception of loss expense, the majority of the expenses for this segment are variable in nature and therefore generally fluctuate consistent with revenue fluctuations. Accordingly, profit margins for this segment (before loss expense) are relatively constant, although as a result of some fixed expenses, profit margins (before loss expense) should nominally improve as revenues increase. Pre-tax margins were 15.0%, 11.3% and 7.0% for 2010, 2009 and 2008, respectively.
Investment income totaled $8.7 million and $2.3 million in 2010 and 2009, respectively, and a loss of $0.2 million in 2008. The increase in 2010 is primarily due to an increase in yields earned on investments associated with the Company’s deferred compensation plan.
Corporate personnel costs and other operating expenses increased $23.7 million, or 69.9%, in 2010 over 2009 and decreased $3.0 million, or 8.2%, in 2009 from 2008. The increase in 2010 is primarily due to a higher level of corporate personnel costs and other operating expenses following the Separation when compared to the amounts allocated from TFAC prior to the Separation. Following the Separation, the Company is a separate publicly traded company, which resulted in a higher level of corporate costs. The increase is also due to an increase in personnel costs associated with the Company’s deferred compensation plan. The increase in costs associated with the Company’s deferred compensation plan is offset by the increase in income earned on investments associated with the deferred compensation plan, as discussed above. Other operating expenses also increased due to professional services expenses incurred in the current year related to the Separation. The decrease in 2009 from 2008 was primarily due to changes in technology initiatives and the impact of other corporate-wide cost saving initiatives that the Company implemented.
Interest expense increased $2.4 million in 2010 over 2009 and increased $3.0 million in 2009 over 2008. Interest expense prior to the Separation related to draws made in 2008 used for the Company’s operations in the amount of $140.0 million under TFAC’s credit agreement that was allocated to the Company. In connection with the Separation, the Company borrowed $200.0 million under its new credit facility and paid off the allocated portion of TFAC’s debt. Interest expense increased in 2010 over 2009 because the Company’s new credit facility bears interest at a higher rate than the allocated portion of TFAC’s debt. The increase in 2009 over 2008 is due to 2009 reflecting a full year of expense, while interest expense in 2008 reflects approximately half a year of expense, as the draws were made in the second and third quarters of 2008.
Eliminations represent interest income and related interest expense associated with intercompany notes between the Company’s segments, which are eliminated in the consolidated financial statements. The Company’s inter-segment eliminations were not material for the year ended December 31, 2010. The Company did not record inter-segment eliminations for the years ended December 31, 2009 and 2008, as there was no inter-segment income or expense.
The Company’s effective income tax rate (income tax expense as a percentage of income before income taxes), was 39.2% for 2010, 34.3% for 2009 and 37.5% for 2008. The absolute differences in the effective tax rates were primarily due to changes in the ratio of permanent differences to income before income taxes and noncontrolling interests, reserve adjustments recorded in 2009 and 2008 for which corresponding tax benefits were recognized, as well as changes in state and foreign income taxes resulting from fluctuations in the Company’s noninsurance and foreign subsidiaries’ contribution to pretax profits. In addition, certain interest and penalties relating to uncertain tax positions were released during 2009 and 2008 based on changes in facts and circumstances associated with the related tax uncertainty.
Net income (loss) and per share information are summarized as follows see Note 13 Earnings (Loss) Per Share to the consolidated financial statements:
Per share information for the current year and prior years was computed using the number of shares of common stock outstanding immediately following the Separation, as if such shares were outstanding for the entire period prior to the Separation.
The Company’s two significant sources of internally generated funds are dividends and other payments from its subsidiaries. Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2011 is $194.3 million. Such restrictions have not had, nor are they expected to have, an impact on the Company’s ability to meet its cash obligations.
Cash provided by operating activities amounted to $155.5 million, $233.6 million and $110.4 million for the years ended December 31, 2010, 2009 and 2008, respectively, after net claim payments of $456.2 million, $452.2 million and $482.2 million, respectively. The principal nonoperating uses of cash and cash equivalents for the year ended December 31, 2010 were the repayment of debt (to TFAC and third parties), cash distribution to TFAC in connection with the Separation, additions to the investment portfolio, capital expenditures and dividends to common stockholders. The most significant nonoperating sources of cash and cash equivalents for the year ended December 31, 2010 were increases in the deposit balances at the Company’s banking operations, proceeds from the Company’s new revolving credit facility and proceeds from the sales and maturities of debt and equity securities.
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 and the Collateral Agent may exercise remedies under the collateral documents. Upon the occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. At December 31, 2010, the Company is in compliance with the debt covenants under the credit agreement.
attributable to the decrease in total equity and increase in notes and contract payable during the current year. Equity decreased due to the net distribution to TFAC made by the Company in connection with the Separation. The increase in debt was also a result of the Separation. Notes and contracts payable are more fully described in Note 10 Notes and Contracts Payable to the consolidated financial statements.
Substantially all securities in the Company’s non-agency mortgage-backed and asset-backed portfolio are senior tranches and were investment grade at the time of purchase, however many have been downgraded below investment grade since purchase. The table below summarizes the composition of the Company’s non-agency mortgage-backed and asset-backed securities by collateral type, year of issuance and current credit ratings. Percentages are based on the amortized cost basis of the securities and credit ratings are based on S&P’s and Moody’s published ratings. If a security was rated differently by both rating agencies, the lower of the two ratings was selected. All amounts and ratings are as of December 31, 2010.
The Company assessed its non-agency mortgage-backed and asset-backed securities portfolio to determine what portion of the portfolio, if any, is other-than-temporarily impaired at December 31, 2010. Management’s analysis of the portfolio included its expectations of the future performance of the underlying collateral, including, but not limited to, prepayments, defaults and loss severity assumptions. In developing these expectations, the Company utilized publicly available information related to individual assets, analysts’ expectations on the expected performance of similar underlying collateral and certain of CoreLogic’s securities, loans and property data and market analytic tools. As a result of the Company’s security-level review, it recognized total other-than-temporary impairments of $8.5 million on its non-agency mortgage-backed securities for the year ended December 31, 2010. $6.3 million of other-than-temporary impairment losses were considered to be credit related and were recognized in earnings and $2.2 million of other-than-temporary impairment losses were considered to be related to factors other than credit and were therefore recognized in other comprehensive income for the year ended December 31, 2010. The amounts remaining in other comprehensive income should not be recorded in earnings, because the losses were not considered to be credit related based on the Company’s other-than-temporary impairment analysis as discussed above.
Contractual obligations. A summary, by due date, of the Company’s total contractual obligations at December 31, 2010, is as follows:
Trust assets totaled $2.9 billion at December 31, 2010 and 2009, and were held at First American Trust, FSB. Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company under GAAP and, therefore, are not included in the accompanying consolidated balance sheets. However, the Company could be held contingently liable for the disposition of these assets.
The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company totaled $609.9 million and $385.0 million at December 31, 2010 and December 31, 2009, respectively, of which $408.8 million and $186.1 million at December 31, 2010 and December 31, 2009, respectively, were held at the Company’s subsidiary, First Security Business Bank (“FSBB”). The like-kind exchange deposits held at FSBB are included in the accompanying consolidated balance sheets in cash and cash equivalents with offsetting liabilities included in deposits. The remaining exchange deposits were held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company under GAAP and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed in bank deposits with FDIC insured institutions. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.
As discussed in Note 1, amounts recorded for allocations of certain expenses directly attributable to the operations of First American Financial Corporation are not necessarily representative of the amounts that would have been reflected in the financial statements had the Company operated as a separate, stand-alone entity.
Certain 2008 and 2009 amounts have been reclassified to conform to the 2010 presentation.
During 2010, the Company changed the presentation of its revenues. This change resulted in direct revenues from escrow and insured products being presented separately from direct revenues from non-insured products. Direct revenues from escrow and insured products are included in direct premiums and escrow fees, while direct revenues from non-insured products are included in information and other. Information and other is primarily comprised of revenues generated from fees associated with title search and related reports, title and other real property records and images, and other non-insured settlement services. The Company has reclassified prior period data to conform to the current presentation.
The Company classifies its publicly traded debt and equity securities as available-for-sale and carries them at fair value with unrealized gains or losses classified as a component of accumulated other comprehensive loss. See Note 3 Debt and Equity Securities to the consolidated financial statements for discussion of the Company’s accounting policies pertaining to its debt and equity securities, including other-than-temporary impairment and fair value measurement.
Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting or the cost method of accounting, and notes receivable. For the year ended December 31, 2010, the Company recognized $3.9 million of impairment losses on other long-term investments, including $3.2 million related to a note receivable and $0.7 million related to other investments. For the year ended December 31, 2009, the Company recognized a $2.2 million impairment loss on a note receivable. For the year ended December 31, 2008, the Company recognized $38.8 million of impairment losses on other long-term investments, including $14.9 million related to an investment in non-voting convertible preferred stock, $17.1 million related to a note receivable of a diversified provider of real estate settlement services that declared bankruptcy and $6.8 million related to an investment in affiliate. Additionally, in 2008, the Company wrote-off $5.3 million in other accounts receivable related to the aforementioned diversified provider of real estate settlement services. In making the determination as to whether an individual investment was impaired, the Company assessed the then-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 us), 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 was operating.
Loans, including impaired loans, are generally classified as nonaccrual if they miss more than three contractual payments, which usually represent past due between 60 to 90 days or more. Loans that are on a current payment status or miss 1 or 2 contractual payments may also be classified as nonaccrual if they are classified by the regulators in an examination, and the circumstances have not improved. The Company’s general
The allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the Company believes that, in light of the collateral securing its loan portfolio, the current allowance for loan losses is an adequate allowance against foreseeable losses.
Title plants and other indexes includes title plants of $502.9 million and capitalized real estate data, net of $1.7 million at December 31, 2010 and title plants of $484.7 million and capitalized real estate data, net of $3.5 million at December 31, 2009. Title plants are carried at original cost, with the costs of daily maintenance (updating) charged to expense as incurred. Because properly maintained title plants have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation or amortization. The Company analyzes its title plants for impairment on an annual basis. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors. Capitalized real estate data is amortized using the straight-line method over estimated useful lives of 5 to 15 years.
The valuation of goodwill requires assumptions and estimates of many critical factors, including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and management’s expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future impairment losses that could be material.
In addition, the Company carries long-lived assets held for sale at the lower of cost or market as of the date that certain criteria have been met. As of December 31, 2010 and 2009 no long-lived assets were classified as held for sale.
Invested equity refers to the net assets of the Company which reflects TFAC’s investment in the Company prior to the Separation and excludes noncontrolling interests.
The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $3.03 billion and $2.46 billion at December 31, 2010 and 2009, respectively, of which $0.9 billion and $0.9 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB, are included in the accompanying consolidated balance sheets, in cash and cash equivalents and debt and equity securities, with offsetting liabilities included in deposits. The remaining escrow deposits were held at third-party financial institutions.
The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company totaled $609.9 million and $385.0 million at December 31, 2010 and December 31, 2009, respectively, of which $408.8 million and $186.1 million at December 31, 2010 and December 31, 2009, respectively, were held at the Company’s subsidiary, First Security Business Bank (“FSBB”). The like-kind exchange deposits held at FSBB are included in the accompanying consolidated balance sheets in cash and cash equivalents with offsetting liabilities included in deposits. The remaining exchange deposits were held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company under generally accepted accounting principles and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed in bank deposits with FDIC insured institutions. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the return on the proceeds.
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidelines relating to transfers of financial assets which amended existing guidance by removing the concept of a qualifying special purpose entity and establishing a new “participating interest” definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale, and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Enhanced disclosures are also required to provide information about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This guidance must be applied as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this standard had no impact on the Company’s consolidated financial statements.
and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued updated guidance related to credit risk disclosures for financing receivables and the related allowance for credit losses. The updated guidance requires entities to disclose information at disaggregated levels, specifically defined as “portfolio segments” and “classes”. Expanded disclosures include, among other things, roll-forward schedules of the allowance for credit losses and information regarding the credit quality of receivables (including their aging) as of the end of a reporting period. The updated guidance is effective for interim and annual reporting periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual reporting periods beginning after December 15, 2010. Except for the disclosure requirements, the adoption of this standard had no impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued updated guidance related to disclosure of supplementary pro forma information in connection with business combinations. The updated guidance clarifies the acquisition date that should be used for reporting pro forma financial information when comparative financial statements are presented. The updated guidance also expands supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2010. Except for the disclosure requirements, management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued updated guidance related to when goodwill impairment testing should include Step 2 for reporting units with zero or negative carrying amounts. The updated guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts requiring those entities to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating an impairment may exist. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2010. Management does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements as none of its reporting units have zero or negative carrying amounts.
Investments carried at $134.2 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 2010.
Pursuant to insurance and other regulations under which the Company’s insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2011 is $194.3 million.
been recognized. At December 31, 2009, the $36.8 million gross unrealized losses include $17.2 million of unrealized losses for securities determined to be other-than-temporarily impaired and $19.6 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The $28.4 million and $26.2 million other-than-temporary impairments recorded in accumulated other comprehensive income (“AOCI”) through December 31, 2010 and December 31, 2009, respectively, represent the amount of other-than-temporary impairment losses recognized in AOCI which, from January 1, 2009, were not included in earnings due to the fact that the losses were not considered to be credit related. Other-than-temporary impairments were recognized in AOCI for non-agency mortgage-backed and asset-backed securities only.
Sales of debt and equity securities resulted in realized gains of $15.2 million, $19.5 million and $6.3 million and realized losses of $2.6 million, $3.5 million and $5.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
asset-backed securities in its portfolio that are in an unrealized loss position. The methodology and key assumptions used in estimating the present value of cash flows expected to be collected are described below. For the securities that were determined not to be other-than-temporarily impaired at December 31, 2010, the present value of the cash flows expected to be collected exceeded the amortized cost of each security.
Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to each security, including the probability of default and the estimated timing and amount of recovery. The detailed inputs used to project expected future cash flows may be different depending on the nature of the individual debt security. Specifically, the cash flows expected to be collected for each non-agency mortgage-backed and asset-backed security are estimated by analyzing loan-level detail to estimate future cash flows from the underlying assets, which are then applied to the security based on the underlying contractual provisions of the securitization trust that issued the security (e.g. subordination levels, remaining payment terms, etc.). The Company uses third-party software to determine how the underlying collateral cash flows will be distributed to each security issued from the securitization trust. The primary assumptions used in estimating future collateral cash flows are prepayment speeds, default rates and loss severity. In developing these assumptions, the Company considers the financial condition of the borrower, loan to value ratio, loan type and geographical location of the underlying property. The Company utilizes publicly available information related to specific assets, generally available market data such as forward interest rate curves and CoreLogic’s securities, loans and property data and market analytics tools.
As a result of the Company’s security-level review, it recognized total other-than-temporary impairments of $8.5 million and $45.0 million on its non-agency mortgage-backed and asset-backed securities for the years ended December 31, 2010 and 2009, respectively. $6.3 million and $18.8 million of other-than-temporary impairment losses were considered to be credit related and were recognized in earnings for the years ended
The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the years ended December 31, 2010 and 2009.
Level 1-Valuations based on unadjusted quoted market prices in active markets for identical securities. The fair value of equity securities are classified as Level 1.
The following table presents the Company’s available-for-sale investments measured at fair value on a recurring basis as of December 31, 2010 and December 31, 2009, classified using the three-level hierarchy for fair value measurements:
The following table presents a summary of the changes in fair value of Level 3 available-for-sale investments for the years ended December 31, 2010 and 2009:
Aging analysis of loans receivables at December 31, 2010, is as follows:
Amortization expense for finite-lived intangible assets was $14.5 million, $14.1 million and $16.0 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 6.1% in 2010, 6.8% in 2009 and 10.4% in 2008. The current year rate of 6.1% reflects an expected ultimate loss rate of 4.9% for policy year 2010, with a net upward adjustment to the reserve for prior policy years. The changes in estimates resulted primarily from higher than expected claims emergence experienced during 2010 for policies issued prior to 2009, and lower than expected claims emergence experienced during 2010 for policy year 2009. The prior year rate of 6.8% reflected an expected ultimate loss rate of 7.0% for policy year 2009, with a minor downward adjustment to the reserve for certain prior policy years. The rate of 10.4% for 2008 included a $78.0 million reserve strengthening adjustment. The 2008 reserve strengthening adjustment reflected changes in estimates for ultimate losses expected, primarily from policy years 2006 and 2007. The changes in estimates resulted primarily from higher than expected claims emergence, in both frequency and aggregate amounts, experienced during 2008, for those policy years. There were many factors that impacted the claims emergence, including but not limited to: decreases in real estate prices during 2008; increases in defaults and foreclosures during 2008; and higher than expected claims emergence from lenders policies. The Company continuously monitors the impact, if any, of these types of events on its reserve balances and adjusts the reserves when facts and circumstances indicate a change is warranted.
government actions that may mitigate or exacerbate recent trends. Other factors, including factors not yet identified, may also influence claims development. At this point, economic and certain market conditions appear to be improving, yet significant uncertainty remains. This environment results in increased potential for actual claims experience to vary significantly from projections, in either direction, which would directly affect the claims provision. If actual claims vary significantly from expected, reserves may need to be adjusted to reflect updated estimates of future claims.
The weighted-average interest rate for the Company’s notes and contracts payable was 3.66% and 5.44% at December 31, 2010 and 2009, respectively.
The credit agreement is comprised of a $400.0 million revolving credit facility. The revolving loan commitments terminate on the third anniversary of the date of closing, or June 1, 2013. On June 1, 2010, the Company borrowed $200.0 million under the facility and transferred such funds to CoreLogic, as previously contemplated in connection with the Separation. Proceeds may also be used for general corporate purposes. At December 31, 2010, the interest rate associated with the $200.0 million borrowed under the facility is 3.06%. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for additional discussion of the $200.0 million transferred to CoreLogic.
At the Company’s election, borrowings under the credit agreement bear interest at (a) the Alternate Base Rate plus the Applicable Rate or (b) the Adjusted LIBO Rate plus the Applicable Rate (in each case as defined in the agreement). The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders) such other number of months for Eurodollar borrowings of loans. The Applicable Rate varies depending upon the rating assigned by Moody’s and/or S&P to the credit agreement, or if no such rating is in effect, the Index Debt Rating. The minimum Applicable Rate for Alternate Base Rate borrowings is 1.50% and the maximum is 2.25%. The minimum Applicable Rate for Adjusted LIBO Rate borrowings is 2.50% and the maximum is 3.25%.
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 and may exercise their remedies under the collateral documents. Upon the occurrence of certain insolvency and bankruptcy events of default the loans automatically accelerate. At December 31, 2010, the Company is in compliance with the debt covenants under the credit agreement.
At December 31, 2010, the Company had a net payable to CoreLogic of $61.5 million related to tax matters prior to the Separation. This amount is included in the Company’s consolidated balance sheet in due to CoreLogic/TFAC, net. At December 31, 2009, the Company had a net receivable from TFAC of $14.2 million related to tax matters prior to the Separation. This amount is included in the Company’s consolidated balance sheet in income taxes receivable and accounts payable and accrued liabilities.
As of December 31, 2010, United States taxes were not provided for on the earnings of the Company’s foreign subsidiaries of $118.1 million, as the Company has invested or expects to invest the undistributed earnings indefinitely. If in the future these earnings are repatriated to the United States, or if the Company determines that the earnings will be remitted in the foreseeable future, additional tax provisions may be required. It is not practical to calculate the deferred taxes associated with these earnings; however foreign tax credits may be available to reduce federal income taxes in the event of distribution.
The Company records a liability for potential tax assessments based on its estimate of the potential exposure. New tax laws and new interpretations of laws and rulings by tax authorities may affect the liability for potential tax assessments. Due to the subjectivity and complex nature of the underlying issues, actual payments or assessments may differ from estimates. To the extent the Company’s estimates differ from actual payments or assessments, income tax expense is adjusted. The Company’s income tax returns in several jurisdictions are being examined by various tax authorities. The Company believes that adequate amounts of tax and related interest, if any, have been provided for any adjustments that may result from these examinations.
The Company’s potential dilutive securities are stock options and RSUs. Stock options and RSUs are reflected in diluted net income (loss) per share attributable to the Company’s stockholders by application of the treasury-stock method. There are no reconciling items for net income (loss) attributable to the Company for the three years ended December 31, 2010 necessary for the diluted net income (loss) per share attributable to the Company’s stockholders calculation. A reconciliation of weighted-average shares outstanding is as follows:
For the year ended December 31, 2010, 1.4 million stock options and RSUs were excluded from the weighted-average diluted common shares outstanding due to their antidilutive effect.
The Company assumed TFAC’s defined benefit pension plan, which was closed to new entrants effective December 31, 2001 and amended to “freeze” all benefit accruals as of April 30, 2008. The Company assumed the entire benefit obligation and all the plan assets associated with the defined benefit pension plan, including the portion attributable to participants who were employees of the businesses retained by CoreLogic in connection with the Separation, and CoreLogic issued a $19.9 million note payable to the Company which approximated the unfunded portion of the benefit obligation attributable to those participants. See Note 18 Transactions with CoreLogic/TFAC to the consolidated financial statements for further discussion of this note receivable from CoreLogic.
The Company’s Savings Plan allows for employee-elective contributions up to the maximum amount as determined by the Internal Revenue Code. The Company makes discretionary contributions to the Savings Plan based on profitability, as well as contributions of the participants. The Company’s expense related to the Savings Plan amounted to $12.1 million, $15.5 million and $0.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. This expense represents the discretionary contribution made by the Company following the Separation and by TFAC to the Company’s employees’ accounts prior to the Separation. There was no contribution or expense for the year ended December 31, 2008 related to the Savings Plan as a result of the determination that TFAC did not meet the requirement for a profit driven 401(k) match. The Savings Plan allows the participants to purchase the Company’s common stock as one of the investment options, subject to certain limitations. The Savings Plan held 4,968,000 shares of the Company’s common stock, representing 4.8% of the total shares outstanding, at December 31, 2010. TFAC’s 401(k) Savings Plan held 6,790,000 shares of TFAC common stock, representing 6.6% of the total shares outstanding, at December 31, 2009.
2010, irrespective of the participant’s actual retirement date; and (iii) cap the maximum annual benefit at $500,000 for the Company’s chief executive officer, at $350,000 for all other Executive Supplemental Benefit Plan participants and at $250,000 for all Management Supplemental Benefit Plan participants. The amendments to the Executive and Management Supplemental Benefit Plans were accounted for as negative plan amendments with the resulting decrease in the projected benefit obligations being recorded to accumulated other comprehensive income as a prior service credit.
Certain of the Company’s subsidiaries have separate savings plans and the Company’s international subsidiaries have other employee benefit plans that are included in the other plans, net line item shown below.
The Company’s estimated net loss and prior service credit for defined benefit pension and supplemental benefit plans that will be amortized from accumulated other comprehensive income (loss) into net periodic cost over the next fiscal year are expected to be an expense of $26.1 million and a credit of $4.4 million, respectively.
The Company expects to make cash contributions to its pension plans of approximately $36.4 million during 2011.
The fair value of loans receivable is estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality.
The methodology for determining the fair value of debt and equity securities is discussed in Note 3 Debt and Equity Securities to the consolidated financial statements.
The fair value of the notes receivable from CoreLogic/TFAC is estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to third party borrowers of similar credit quality.
Prior to the Separation, the Company participated in TFAC’s share-based compensation plans and the Company’s employees were issued TFAC equity awards. The equity awards consisted of RSUs and stock options. At the date of the Separation, TFAC’s outstanding equity awards for employees of the Company and former employees of its businesses were converted into equity awards of the Company with adjustments to the number of shares underlying each such award and, with respect to options, adjustments to the per share exercise price of each such award, to maintain the pre-separation value of such awards. No material changes were made to the vesting terms or other terms and conditions of the awards. As the post-separation value of the equity awards was equal to the pre-separation value and no material changes were made to the terms and conditions applicable to the awards, no incremental expense was recognized by the Company related to the conversion.
On June 1, 2010, certain executive officers were granted performance based RSUs. Up to one third of the performance based RSUs will vest on each of the third, fourth and fifth anniversaries of the date of the grant if the employee remains employed by the Company and the Company, as of the prospective vesting date, has met the specified compounded annual total stockholder return criteria. Due to the existence of the market requirement, the Company calculated the fair value of the performance based RSUs on the grant date using a Monte-Carlo Simulation to simulate a range of possible future stock prices for the Company. The performance based RSUs have a service and market requirement and are therefore expensed using the graded-vesting method to record share-based compensation expense. The performance based RSUs receive dividend equivalents in the form of performance based RSUs having the same vesting requirements as the performance based RSUs initially granted.
The following table presents the share-based compensation expense associated with (i) the Company’s employees that participated in TFAC’s share-based compensation plans prior to the Separation and (ii) the Company’s share-based compensation plans following the Separation:
(1) At the date of the Separation, TFAC’s outstanding RSUs for employees of the Company and former employees of its businesses were converted into Company RSUs using a conversion ratio based on the closing price of TFAC common stock on June 1, 2010 divided by the closing price of the Company’s common stock on June 1, 2010.
Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 2010 are as follows:
Total rental expense for all operating leases and month-to-month rentals was $125.4 million, $157.9 million and $194.7 million for the years ended December 31, 2010, 2009 and 2008, respectively.
The Company considers the basis on which the expenses were allocated to be a reasonable reflection of the utilization of services provided to or the benefit received by the Company during the pre-separation periods presented. The allocations may not, however, reflect the expense the Company would have incurred as an independent publicly traded company for these periods. Actual costs that may have been incurred as a stand-alone company during these periods would have depended on a number of factors, including the chosen
organizational structure, the functions outsourced versus performed by employees and strategic decisions in areas such as information technology and infrastructure. Following the Separation, the Company is no longer allocated corporate income and overhead expense, as the Company performs these functions using its own resources.
In connection with the Separation, the Company and TFAC entered into various transition services agreements with effective dates of June 1, 2010. The agreements include transitional services in the areas of information technology, tax, accounting and finance, employee benefits and internal audit. Except for the information technology services agreements, the transition services agreements are short-term in nature. The Company incurred $5.4 million for the year ended December 31, 2010, under these agreements which are included in other operating expenses in the consolidated statement of income. No amounts were reflected in the consolidated statements of income prior to June 1, 2010, as the transition services agreements were not effective prior to the Separation.
On June 1, 2010, the Company received a note receivable from CoreLogic in the amount of $19.9 million that accrues interest at 6.52%. Interest was first due on July 1, 2010 and is due quarterly thereafter. The note receivable is due on May 31, 2017. The note approximated the unfunded portion of the benefit obligation attributable to participants of the defined benefit pension plan who were employees of TFAC’s businesses that were retained by CoreLogic in connection with the Separation. See Note 14 Employee Benefit Plans to the consolidated financial statements for further discussion of the defined benefit pension plan.
Prior to the Separation, certain transactions with TFAC were settled in cash and the remaining transactions were settled by non-cash capital contributions between the Company and TFAC, which resulted in net non-cash
contributions from TFAC to the Company of $2.1 million in the current year prior to June 1, 2010. Following the Separation, all transactions with CoreLogic are settled, on a net basis, in cash.
Boucher v. First American Title Insurance Company, filed on May 16, 2007 and pending in the United States District Court for the Western District of Washington,
Hickman v. First American Title Insurance Company, filed on May 25, 2007 and pending in the United States District Court for the District of Ohio,
Lang v. First American Title Insurance Company of New York, filed on January 11, 2008 and pending in the United States District Court for the Western District of New York,
Levine v. First American Title Insurance Company, filed on February 26, 2009 and pending in the United States District Court for the Eastern District of Pennsylvania,
Scott v. First American Title Insurance Company, filed on March 7, 2007 and pending in the United States District Court for the Eastern District of Kentucky,
Zaldana v. First American Financial Corporation, et al., filed on July 15, 2008 and pending in the United States District Court for the Northern District of California.
All of these lawsuits are putative class actions for which a class has not been certified. Consequently, for the reasons described above, the Company has not yet been able to assess the probability of loss.
Both of these lawsuits are putative class actions for which a class has not been certified. Consequently, for the reasons described above, the Company has not yet been able to assess the probability of loss.
Diehl v. First American Title Insurance Company, et al., filed on December 11, 2009 and pending in the United States District Court for the District of Montana,
Eide v. First American Title Company, filed on February 26, 2010 and pending in the Superior Court of the State of California, County of Kern,
Gunning v. First American Title Insurance Company, filed on July 14, 2008 and pending in the United States District Court for the Eastern District of Kentucky,
Kirk v. First American Financial Corporation, filed on June 15, 2006 and pending in the Superior Court of the State of California, County of Los Angeles,
Tavenner v. Talon Group, filed on August 18, 2009 and pending in the United States District Court for the Western District of Washington and
In addition to the acquisitions discussed above, during the year ended December 31, 2009, the Company purchased the remaining noncontrolling interests in six companies already included in the Company’s consolidated financial statements. The total purchase price of these transactions was $62.5 million in cash and $8.6 million in notes payable.
The corporate division consists of certain financing facilities as well as the corporate services that support the Company’s business operations. Eliminations consist of inter-segment revenues and related expenses included in the results of the operating segments. The Company did not record inter-segment eliminations for the years ended December 31, 2009 and 2008, as there was no inter-segment income or expense.
Selected financial information about the Company’s operations by segment for each of the past three years is as follows:
Total revenues from external customers separated between domestic and foreign operations and by segment for each of the three years ending December 31, 2010, 2009 and 2008 is as follows:
Long-lived assets separated between domestic and foreign operations and by segment as of December 31, 2010, 2009 and 2008 are as follows:
First American Financial Corporation is a holding company that transacts all of its business through its subsidiaries. The Parent Company Financial Statements should be read in connection with the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.
The Company received cash dividends from subsidiaries of $83.8 million during the seven months ended December 31, 2010.