Each of our business segments uses our executive offices in Santa Ana, California. This office campus consists of five office buildings, a technology center and a two-story parking structure, totaling approximately 490,000 square feet. Three office buildings, totaling approximately 210,000 square feet, and the fixtures thereto and underlying land, are subject to a deed of trust and security agreement securing payment of a promissory note evidencing a loan made in October 2003, to our principal title insurance subsidiary in the original sum of $55.0 million. This loan is payable in monthly installments of principal and interest, is fully amortizing and matures November 1, 2023. The outstanding principal balance of this loan was $19.2 million as of December 31, 2018.
This Management’s Discussion and Analysis contains certain financial measures that are not presented in accordance with generally accepted accounting principles (“GAAP”), including adjusted information and other revenues, adjusted personnel costs, and adjusted other operating expenses, in each case excluding the effects of recent acquisitions. The Company is presenting these non-GAAP financial measures because they provide the Company’s management and readers of this Annual Report on Form 10-K with additional insight into the operational performance of the Company relative to earlier periods. The Company does not intend for these non-GAAP financial measures to be a substitute for any GAAP financial information. In this Annual Report on Form 10-K, these non-GAAP financial measures have been presented with, and reconciled to, the most directly comparable GAAP financial measures. 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.
The Company’s title insurance and services segment issues title insurance policies on residential and commercial property in the United States and offers similar or related products and services internationally. This segment also provides closing and/or escrow services; accommodates tax-deferred exchanges of real estate; provides products, services and solutions designed to mitigate risk or otherwise facilitate real estate transactions, many of which products, services and solutions involve the use of real property-related data; maintains, manages and provides access to title plant records and images; and provides appraisals and other valuation-related products and services, lien release and document custodial services, warehouse lending services, default-related products and services, evidence of title, and banking, trust and wealth management services. The Company, through its principal title insurance subsidiary and such subsidiary’s affiliates, transacts its title insurance business through a network of direct operations and agents. Through this network, the Company issues policies in the 49 states that permit the issuance of title insurance policies, the District of Columbia and certain United States territories. The Company also offers title insurance, closing services and similar or related products and services, either directly or through third parties in other countries, including Canada, the United Kingdom, Australia, South Korea and various other established and emerging markets.
Title insurance policies are long-duration contracts with the majority of the claims reported to the Company within the first few years following the issuance of the policy. Generally, 70% to 80% of claim amounts become known in the first six years of the policy life, and the majority of IBNR reserves relate to the six most recent policy years. Changes in expected ultimate losses and corresponding loss rates for recent policy years are considered likely and could result in a material adjustment to the IBNR reserves. Based on historical experience, management believes a 50 basis point change to the loss rates for recent policy years, positive or negative, is reasonably likely given the long duration nature of a title insurance policy. For example, if the expected ultimate losses for each of the last six policy years increased or decreased by 50 basis points, the resulting impact on the Company’s IBNR reserve would be a corresponding increase or decrease of $122.4 million. A material change in expected ultimate losses and corresponding loss rates for older policy years is also possible, particularly for policy years with loss rates exceeding historical norms. The estimates made by management in determining the appropriate level of IBNR reserves could ultimately prove to be materially different from actual claims experience.
The provision transferred from IBNR title claims related to current year increased by $0.3 million in 2018 from 2017 and increased by $2.4 million in 2017 from 2016 and payments, net of recoveries, related to current year decreased by $0.5 million in 2018 from 2017 and increased by $2.4 million in 2017 from 2016, reflecting variability in claims volumes characteristic of a policy year during its first year of development.
For further discussion of title provision recorded in 2018, 2017 and 2016, see Results of Operations, pages 37 and 38.
The valuation techniques and inputs used to estimate the fair values of the Company’s debt and equity securities are summarized as follows:
The fair values of debt securities were based on the market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well-established independent broker-dealers. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services utilize the market approach in determining the fair values of the debt securities held by the Company. The Company obtains an understanding of the valuation models and assumptions utilized by the services and has controls in place to determine that the values provided represent fair values. The Company’s validation procedures include comparing prices received from the pricing services to quotes received from other third party sources for certain securities with market prices that are readily verifiable. If the price comparison results in differences over a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not made any material adjustments to the fair value measurements provided by the pricing services.
If the Company intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Company will be required to sell a debt security before it recovers its amortized cost basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses recognized in earnings. As of December 31, 2018, the Company did not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell any debt securities before recovery of their amortized cost basis.
The Company did not recognize any other-than-temporary impairment losses related to its debt securities for 2018 and 2017 and recognized $0.5 million of other-than-temporary impairment losses considered to be credit related for 2016.
Impairment of equity method investments. The carrying value of investments accounted for under the equity method of accounting is 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.
The weighted-average discount rate assumptions used to determine net periodic benefit costs for the Company’s unfunded supplemental benefits plans for 2018, 2017 and 2016, were as follows:
The Company’s total revenues for 2018 were $5.7 billion, which reflected a decrease of $24.5 million, or 0.4%, when compared with $5.8 billion for 2017. This decrease was attributable to lower agent premiums in the title insurance and services segment and a higher level of net realized investment losses, partially offset by higher net investment income and direct premiums and escrow fees. The increase in direct premiums and escrow fees attributable to the title insurance and services segment was $30.6 million, or 1.5%. Direct premiums and escrow fees from domestic commercial and residential purchase transactions increased $57.5 million and $22.6 million, or 8.3% and 2.5%, respectively, while direct premiums and escrow fees from domestic residential refinance transactions decreased $49.3 million, or 21.4%, in 2018 when compared to 2017.
According to the Mortgage Bankers Association’s February 11, 2019 Mortgage Finance Forecast (the “MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the transactions) decreased 6.6% in 2018 when compared with 2017. According to the MBA Forecast, the dollar amount of purchase originations increased 3.7% and refinance originations decreased 25.6%. This volume of domestic residential mortgage origination activity contributed to an increase in direct premiums and escrow fees for the Company’s direct title operations of 2.5% from domestic residential purchase transactions and a 21.4% decrease in direct premiums and escrow fees from domestic refinance transactions in 2018 when compared to 2017.
The Company adopted new accounting guidance on January 1, 2018, which requires investments in equity securities with readily determinable fair values to be measured at fair value with changes in the fair value recognized through net income. Previously, changes in the fair value where recognized through accumulated other comprehensive loss on the consolidated balance sheets. Beginning in the first quarter of 2018, the Company records changes in the fair values of its equity securities as a component of net realized investment gains (losses) on the consolidated statements of income. See Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated financial statements for further discussion of the new guidance.
During 2018, the Company completed acquisitions for an aggregate purchase price of $82.9 million, which are included in the Company’s title insurance and services segment. These acquisitions enable the Company to offer its customers new ways to reduce risk and increase efficiency.
In addition to the Company’s innovative activities, other participants in the real estate and mortgage industries are seeking to innovate in ways that could impact the Company’s businesses. These participants include certain of the Company’s sources of business, competitors and ultimate customers. Innovations of these participants may change the demand for the Company’s products and services, the manner in which the Company’s products and services are ordered or fulfilled and the revenue or profitability derived from the products and services. The Company’s efforts to anticipate and participate in these transformations could require significant additional investment and may not succeed, resulting in a reduction in market share or profitability. The ultimate degree to which these and other innovations in the real estate industry will impact the Company’s business and results of operations is not currently known.
On December 22, 2017, comprehensive tax reform legislation known as the Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law. The Tax Reform Act amended the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The changes resulting from the Tax Reform Act had an overall favorable impact on the Company’s effective tax rate, and the Company expects the Tax Reform Act will continue to have an overall favorable impact on its effective tax rate in the future.
Additionally, the Company continues to monitor developments in its regulatory environment. Currently, federal officials are discussing various potential changes to laws and regulations that could impact the Company’s businesses, including the reform of government-sponsored enterprises such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) and data privacy regulations, among others. In addition, the Tax Reform Act included changes that could affect the real estate and mortgage markets, including changes to the mortgage interest deduction, the increase in the standard deduction (which limits the benefit of itemizing and deducting mortgage interest separately) and the limitation of state and local tax deductions, among others. The full extent of the impact of the Tax Reform Act on volumes of real estate transactions and mortgage originations is not currently known. Other changes in these areas, and more generally in the regulatory environment in which the Company and its customers operate, could similarly impact the volume of mortgage originations in the United States and the Company’s competitive position and results of operations.
Net investment income increased $85.9 million, or 62.5%, in 2018 from 2017 and $26.7 million, or 24.1%, in 2017 from 2016. The increase in 2018 from 2017 was mainly attributable to higher average balances due primarily to strength in our commercial business and rising short-term interest rates, which drove higher income from the Company’s cash and investment portfolio, tax-deferred property exchange business and escrow balances. The increase in 2017 from 2016 was primarily attributable to the increase in short-term interest rates which drove higher income from the Company’s cash and investment portfolio, tax-deferred property exchange business and escrow balances.
Personnel costs increased $35.4 million, or 2.2%, in 2018 from 2017 and $58.3 million, or 3.7%, in 2017 from 2016. The increases were largely driven by recent acquisitions. Excluding the $28.3 million impact of new acquisitions for the year ended December 31, 2018, personnel costs increased $7.1 million, or 0.4%, in 2018 compared to 2017. The slight increase in 2018 from 2017, adjusted for the impact of new acquisitions, was primarily attributable to higher employee benefit, salary, severance and stock-based compensation expenses, partially offset by lower incentive compensation, overtime and temporary labor expenses. The increase in employee benefit costs was due to a higher 401(k) savings plan match. The higher salary expense was due to one additional payroll day and higher average headcount in our international operations. Excluding the $57.5 million impact of new acquisitions for the year ended December 31, 2017, personnel costs increased $0.8 million, or were essentially flat, in 2017 compared to 2016. The minor increase in 2017 from 2016, adjusted for the impact of new acquisitions, was primarily attributable to higher salary, incentive compensation and employee retention costs, mostly offset by lower temporary labor costs and overtime expense. The higher salary cost was due to an increase in average salaries, partially offset by lower average headcount. The increase in incentive compensation expense was due to higher profitability. Personnel costs included severance expense of $15.2 million, $10.1 million and $8.3 million for 2018, 2017 and 2016, respectively.
The Company continues to closely monitor order volumes and related staffing levels and intends to adjust staffing levels as considered necessary. The Company’s direct title operations opened 981,800, 1,069,000 and 1,281,400 domestic title orders in 2018, 2017 and 2016, respectively, representing decreases of 8.2% in 2018 from 2017 and 16.6% in 2017 from 2016.
As of December 31, 2018, the IBNR claims reserve for the title insurance and services segment was $877.1 million, which reflected management’s best estimate. The Company’s internal actuary determined a range of reasonable estimates of $737.7 million to $925.8 million. The range limits are $139.4 million below and $48.7 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.
Depreciation and amortization expense decreased $2.5 million, or 2.0%, in 2018 from 2017 and increased $28.5 million, or 30.6%, in 2017 from 2016. The decrease in 2018 from 2017 was primarily attributable to 2017 being impacted by $5.3 million of accelerated amortization charges and $4.7 million in out-of-period adjustments, both of which are further discussed below. The decrease in 2018 was partially offset by $7.7 million of amortization expense related to recent acquisitions. The increase in 2017 from 2016 was primarily attributable to higher amortization expense associated with internally developed technology and purchased software licenses, $6.5 million related to recent acquisitions, and $4.7 million in out-of-period adjustments to fully amortize certain title plant imaging assets that were misclassified as title plants assets. The higher amortization expense related to internally developed technology included $5.3 million of accelerated amortization for 2017, resulting from a shortened useful life for a software interface. For further discussion of the out-of-period adjustments see Note 1 Basis of Presentation and Significant Accounting Policies to the consolidated financial statements.
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 pre-tax margins were 12.4%, 12.1% and 11.7% for the years ended December 31, 2018, 2017 and 2016, respectively.
Personnel costs and other operating expenses increased $10.0 million, or 7.1%, in 2018 from 2017 and $9.1 million, or 7.0%, in 2017 from 2016. The increase in 2018 from 2017 was primarily attributable to higher salary expense due to higher average salaries, higher allocations related to corporate shared services, and higher advertising, sales tax, and employee benefit expenses. The increase in 2017 from 2016 was primarily attributable to higher salary expense due to higher average headcount, higher incentive compensation in the home warranty business on higher revenue and profitability, and higher offshore labor expense related to increased customer support activities associated with increased volume in the home warranty business. The increase was also related to a $3.5 million benefit recorded in 2016 from higher deferred acquisition costs associated with the change in how the Company reports installment fees related to home warranty residential service contracts.
The provision for property and casualty claims, expressed as a percentage of property and casualty insurance premiums, was 82.3% in 2018, 85.0% in 2017 and 63.3% in 2016. The decrease in rate in 2018 from 2017 was primarily attributable to the occurrence of one event in 2018 compared with two events in 2017 with losses exceeding property and casualty’s reinsurance retention limit of $5.0 million for each event. During the fourth quarter of 2018 there was one wildfire in California that exceeded the reinsurance retention limit compared to two separate wildfires during the fourth quarter of 2017 that exceeded the reinsurance retention limit. The increase in rate in 2017 from 2016 was primarily attributable to an increase in the severity and, to a lesser extent, frequency of claims. The increase in claims severity was primarily due to wildfires in California, including the two separate wildfires with losses exceeding the reinsurance retention limit for each event, and rainstorms in the western portion of the United States.
The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were 21.9% for 2018, 5.3% for 2017 and 28.1% for 2016. 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. The Company’s effective tax rate for 2018 also includes a reduction in the federal tax rate from 35% to 21% as a result of the Tax Reform Act. In addition, the Company’s effective tax rate for 2018 reflects the adjustment made to its initial 2017 estimates for the Tax Reform Act. The Company’s effective tax rate for 2017 reflects the estimated impact of the Tax Reform Act, state tax benefits relating to the termination of the Company’s pension plan, and the release of reserves relating to tax positions taken on prior year tax returns. For further discussion of the impact of the Tax Reform Act on the Company’s consolidated financial statements, see Note 11 Income Taxes to the consolidated financial statements. In addition, the Company’s effective tax rates for 2018 and 2017 reflected the adoption of new accounting guidance related to the accounting for share-based payment transactions, which requires, among other items, that all excess tax benefits and tax deficiencies associated with share-based payment transactions be recorded in income tax expense rather than in additional paid-in capital, as previously required. The Company’s effective tax rate for 2016 reflects the resolution of certain tax authority examinations and tax credits claimed in 2016 and in prior years.
See Note 12 Earnings Per Share to the consolidated financial statements for further discussion of earnings per share.
The Company continually assesses its capital allocation strategy, including decisions relating to dividends, stock repurchases, capital expenditures, acquisitions and investments. In August 2018, the Company’s board of directors approved an increase in the Company’s quarterly cash dividend to 42 cents per common share, representing an 11% increase from the prior level of 38 cents per common share. The dividend increase became effective beginning with the September 2018 dividend. In January 2019, the Company’s board of directors approved a first quarter cash dividend of 42 cents per common share. Management expects that the Company will continue to pay quarterly cash dividends at or above the current level. The timing, declaration and payment of future dividends, however, falls within the discretion of the Company’s board of directors and will depend upon many factors, including the Company’s financial condition and earnings, the capital requirements of the Company’s businesses, restrictions imposed by applicable law and any other factors the board of directors deems relevant from time to time.
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, 2018, the Company was in compliance with the financial covenants under the credit agreement.
The Company anticipates that it will enter into a successor credit agreement prior to the current agreement’s termination on May 14, 2019. If necessary, the Company has sufficient liquidity available at its holding company to repay the outstanding balance of $160.0 million without causing significant liquidity issues.
The Company’s debt to capitalization ratio was 17.8% and 17.4% at December 31, 2018 and 2017, respectively. The increase in 2018 reflects the debt assumed in connection with the Company’s 2018 acquisition of a specialized warehouse lender.
Capital expenditures. Capital expenditures are primarily related to software development costs and purchases of property and equipment and software licenses. Capital expenditures totaled $125.5 million, $136.7 million and $132.3 million for 2018, 2017 and 2016, respectively.
Contractual obligations. A summary of the Company’s contractual obligations at December 31, 2018, by due date, 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 significant assumptions. Changes in significant assumptions could affect the amount and timing of employee benefit plan payments. The Company is not able to reasonably estimate the timing of payments, or the amount by which the liability for the Company’s uncertain tax positions will increase or decrease over time; therefore the liability of $13.3 million has not been included in the contractual obligations table.
Off-balance sheet arrangements. The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $7.6 billion and $7.5 billion at December 31, 2018 and 2017, respectively, of which $3.6 billion and $2.9 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.
I. Summary of Investments-Other than Investments in Related Parties as of December 31, 2018
We have audited the accompanying consolidated balance sheets of First American Financial Corporation and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, 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, 2018, 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, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for unrealized gains and losses associated with equity securities and the manner in which it accounts for other components of net periodic pension and postretirement benefit cost in 2018.
Accounts and accrued income receivable, less allowances of $22,841 and $23,066
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. 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 for any observable price changes.
During 2017, the Company identified certain uncollectible balances related to fees within its title insurance and services segment, which primarily related to reporting periods prior to 2016, that should have been previously written off. To correct for this error, the Company recorded an adjustment in 2017, which increased other operating expenses and increased accounts payable and accrued liabilities by $8.5 million.
Also, during 2017, the Company identified certain title plant assets within its title insurance and services segment that should have been previously written off, and certain title plant imaging assets that were misclassified as title plant assets. To correct for these errors, the Company recorded adjustments in 2017 to net realized investment gains, depreciation and amortization and title plants and other indexes. The impact of these adjustments included an increase to depreciation and amortization of $4.7 million, a decrease to net realized investment gains of $1.8 million and a decrease to title plant and other indexes of $6.5 million.
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 publicly traded debt securities as available-for-sale with unrealized gains or losses recorded as a component of accumulated other comprehensive loss.
As a result of its security-level review, the Company did not recognize any other-than-temporary impairment losses considered to be credit related for the years ended December 31, 2018 and 2017 and recognized $0.5 million of other-than-temporary impairment losses considered to be credit related for the year ended December 31, 2016. It is possible that the Company could recognize additional other-than-temporary impairment losses on securities it owns at December 31, 2018 if future events or information cause it to determine that a decline in fair value is other-than-temporary.
The Company adopted new accounting guidance on January 1, 2018, which requires investments in equity securities with readily determinable fair values to be measured at fair value with changes in fair value recognized through net income. See Recently Adopted Accounting Pronouncements within this note for further discussion of the new guidance.
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 value of these investments is 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.
Equity investments in which the Company does not exercise significant influence over the investee and without readily determinable fair values are measured at cost, less impairment and are adjusted for any observable price changes.
See Note 20 Business Combinations for further information about the Company’s 2018 acquisition of a specialized warehouse lender.
Buildings and furniture and equipment are initially recorded at cost and are generally depreciated using the straight-line method over estimated useful lives ranging from 5 to 40 years and from 1 to 15 years, respectively. Leasehold improvements are initially recorded at cost and are amortized over the lesser of the remaining term of the respective lease or the estimated useful life, using the straight-line method. Computer software, which is acquired or developed for internal use and for use with the Company’s products, is amortized over estimated useful lives ranging from 1 to 15 years using the straight-line method. Software development costs, which include certain payroll-related costs of employees directly associated with developing software in addition to incremental payments to third parties, are capitalized from the time technological feasibility is established until the software is ready for use.
Title plants and other indexes included title plants of $530.4 million and $526.2 million and capitalized real estate data of $47.1 million and $42.3 million at December 31, 2018 and 2017, respectively. Title plants are carried at 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 at least annually for impairment. This analysis includes, but is not limited to, the effects of obsolescence, duplication, demand and other economic factors. Capitalized real estate data is initially recorded at cost and is amortized using the straight-line method over estimated useful lives ranging from 5 to 15 years.
The Company 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 rate (the loss provision rate) to total title insurance premiums and escrow fees. The Company’s management estimates the loss provision rate at the beginning of each year and reassesses the rate quarterly to ensure that the resulting incurred but not reported (“IBNR”) loss reserve and known claims reserve included in the Company’s consolidated balance sheets together reflect management’s best estimate of the total costs required to settle all IBNR and known claims. If the ending IBNR reserve is not considered adequate, an adjustment is recorded.
Amounts related to contingent litigation and regulatory liabilities are accrued if it is probable that a liability has been incurred and an amount is reasonably estimable. The Company records legal fees in other operating expenses in the period incurred.
Information and other revenues and escrow fees are within the scope of new accounting guidance related to the recognition of revenue from contracts with customers, which the Company adopted effective January 1, 2018. Under the new guidance, revenue is 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. See Recently Adopted Accounting Pronouncements within this note for further discussion of the new guidance.
For those products and services where the Company’s performance obligation is satisfied at a point in time and for which there is no ongoing obligation, revenue is recognized upon delivery. For those products and services where the Company satisfies its performance obligation over time as the product or service is being transferred to the customer, revenue is generally recognized using the output method as the products or services are delivered.
The Company has elected to apply the optional exemptions allowed under the new guidance whereby the Company is not required to disclose either the transaction price allocated to performance obligations that are unsatisfied as of the end of the period or an explanation as to when the Company expects to recognize the related revenue. Such contracts generally include performance obligations that are contingent upon the closing of a real estate transaction or include variable consideration based on order volumes, and have remaining contract terms of generally less than three years. The Company is eligible to apply the optional exemptions to its remaining performance obligations due to 1) the performance obligation is part of a contract that has an original duration of one year or less, 2) the associated revenue being recognized is based on the Company’s right to invoice for the value of the product or service delivered, 3) the associated variable consideration is being allocated entirely to wholly unsatisfied performance obligations or 4) immateriality.
For information about the Company’s revenues disaggregated by reportable segment see Note 21 Segment Financial Information.
The Company informally funds its nonqualified deferred compensation plan through tax-advantaged investments known as variable universal life insurance. The Company’s deferred compensation plan assets are included as a component of other assets and the Company’s deferred compensation plan liability is included as a component of pension costs and other retirement plans on the consolidated balance sheets. The income earned on the Company’s deferred compensation plan assets is included as a component of net investment income and the income earned by the deferred compensation plan participants is included as a component of personnel costs on the consolidated statements of income.
The Company operates in other countries, including Canada, the United Kingdom, Australia, South Korea and Hong Kong. The functional currencies of the Company’s foreign subsidiaries are generally their respective local currencies. The financial statements of foreign subsidiaries with local currencies that were determined to be the functional currency are translated into U.S. dollars as follows: assets and liabilities at the exchange rate as of the balance sheet date, equity at the historical rates of exchange, and income and expense amounts at average rates prevailing during the period. Translation adjustments resulting from the translation of the subsidiaries’ accounts are included in accumulated other comprehensive loss as a separate component of stockholders’ equity. For those foreign subsidiaries where the U.S. dollar has been determined to be the functional currency, non-monetary assets and liabilities are translated using historical rates, while monetary assets and liabilities are translated at current rates, with remeasurement gains and losses included in other operating expenses. Gains and losses resulting from foreign currency transactions are included within other operating expenses.
The Company assumes and cedes large title insurance risks through reinsurance. Additionally, the Company’s property and casualty insurance business purchases reinsurance to limit risk associated with large losses from single events. 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, 2018. Payments and recoveries on reinsured losses for the Company’s title insurance business were immaterial during the years ended December 31, 2018, 2017 and 2016. For information related to payments on reinsured losses for the Company’s property and casualty insurance business see Note 8 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 $7.6 billion and $7.5 billion at December 31, 2018 and 2017, respectively, of which $3.6 billion and $2.9 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.
In May 2017, the Financial Accounting Standards Board (“FASB”) issued updated guidance intended to reduce diversity in practice by clarifying which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In March 2017, the FASB issued updated guidance intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost through the disaggregation of the service cost component from the other components of net benefit cost. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this change in accounting principle at the beginning of 2018 and applied the change retrospectively. As a result, other components of net benefit cost totaling $175.0 million and $101.5 million were reclassified from personnel costs to other operating expenses on the consolidated statements of income for the years ended December 31, 2017 and 2016, respectively. See Note 13 Employee Benefit Plans for further information on the Company’s net periodic pension costs.
In January 2016, the FASB issued updated guidance intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. In addition to making other targeted improvements to current guidance, the updated guidance also requires all equity investments, except those accounted for under the equity method of accounting or those that result in consolidation of the investee, to be measured at fair value with changes in the fair value recognized through net income. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company adopted this guidance at the beginning of 2018 and recognized cumulative net unrealized gains, net of taxes, of $40.6 million related to its investments in equity securities, previously classified as available-for-sale, through a cumulative-effect adjustment to retained earnings. Changes in the fair values of these investments are reflected in net realized investment gains/losses on the Company’s consolidated statements of income. See Note 3 Debt and Equity Securities for further discussion of the Company’s investments in equity securities.
In May 2014, the FASB issued updated guidance for recognizing revenue from contracts with customers to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries, and across capital markets. The new revenue standard contains principles that an entity will apply to determine the measurement of revenue and the timing of recognition. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. Revenue from insurance contracts is not within the scope of this guidance. In 2016, the FASB issued additional updates to the new guidance primarily to clarify, among other things, the implementation guidance related to principal versus agent considerations, identifying performance obligations, accounting for licenses of intellectual property, and to provide narrow-scope improvements and additional practical expedients. In February 2017, the FASB issued an additional update to the new guidance to clarify the scope of derecognition guidance for nonfinancial assets and to provide guidance for partial sales of nonfinancial assets. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company elected to adopt the new guidance under the modified retrospective approach, which did not have a material impact on its consolidated financial statements. See Revenues within this note for further information about the Company’s revenues within the scope of the new guidance.
In August 2018, the FASB issued updated guidance as part of its disclosure framework project intended to improve the effectiveness of disclosures in the notes to the financial statements. The updated guidance eliminates, adds and modifies certain disclosure requirements related to fair value measurements. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. Except for the disclosure requirements, the Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
The Company’s principal title insurance subsidiary, First American Title Insurance Company (“FATICO”), maintained total statutory capital and surplus of $1.2 billion as of December 31, 2018 and 2017. Statutory net income for the years ended December 31, 2018, 2017 and 2016 was $258.4 million, $306.5 million and $150.0 million, respectively. FATICO was in compliance with the minimum statutory capital and surplus requirements as of December 31, 2018.
Sales of debt securities resulted in realized gains of $3.3 million, $5.4 million and $12.6 million, realized losses of $20.3 million, $16.4 million and $2.7 million, and proceeds of $1.3 billion, $821.0 million and $561.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The composition of the investment portfolio at December 31, 2018, by credit rating, is as follows:
A summary of the changes in the carrying amount of goodwill, by reportable segment, for the years ended December 31, 2018 and 2017, is as follows:
For further discussion about the Company’s acquisitions in 2018 and 2017, see Note 20 Business Combinations.
Current year payments, net of recoveries, include $228.3 million, $225.6 million and $211.3 million for the years ended December 31, 2018, 2017 and 2016, respectively, that relate to the Company’s specialty insurance segment. Prior year payments, net of recoveries, include $56.7 million, $46.1 million and $41.4 million for the years ended December 31, 2018, 2017 and 2016, respectively, that relate to the Company’s specialty insurance segment.
“Other” 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, 2018, 2017 and 2016. Payments on reinsured losses for the Company’s property and casualty insurance business totaled $15.3 million, $8.9 million, and $2.1 million, and recoveries totaled $20.3 million, $9.6 million, and $2.0 million for the years ended December 31, 2018, 2017 and 2016, respectively.
The provision for title insurance losses, expressed as a percentage of title insurance premiums and escrow fees, was 4.0% for the years ended December 31, 2018 and 2017 and 5.5% for the year ended December 31, 2016.
The 2016 rate of 5.5% reflected an ultimate loss rate of 4.5% for policy year 2016 and a $42.6 million net increase in loss reserve estimates for prior policy years. The increase in loss reserve estimates for prior policy years was primarily attributable to potential uncertainty with respect to the Company’s exposure to large title claims. A large title claim is defined as a title claim with a total ultimate loss in excess of $2.5 million. This uncertainty was due to the following factors, among others: (i) the volatility associated with the timing and severity of large title claims, (ii) the potential of incurring one or more large title claims that significantly exceed estimated ultimate losses indicated by current historical trends, and (iii) the complexity associated with handling large title claims which makes it difficult to estimate the ultimate outcome. While the Company believed its claims reserve attributable to large title claims was reasonable, this uncertainty increased the potential for adverse loss development.
A reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expense at December 31, 2018, is as follows:
Trust deed notes with maturities through 2023, collateralized by land and buildings with net book values of $39,283 and $46,478 at December 31, 2018 and 2017, respectively, weighted-average interest rate of 5.26% and 5.27%, at December 31, 2018 and 2017, respectively
Other notes and contracts payable with maturities through 2032, weighted-average interest rate of 4.49% and 4.70% at December 31, 2018 and 2017, respectively
The weighted-average interest rate for the Company’s notes and contracts payable was 4.42% and 4.24% at December 31, 2018 and 2017, respectively.
Also, on December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118, which provided for a one-year measurement period that allowed businesses time to evaluate the financial statement implications of the Tax Reform Act and to analyze its impact on financial statements issued during the measurement period. This was in recognition of the fact that the ultimate impact of the Tax Reform Act on a business’ financial statements could differ, perhaps materially, from the amounts originally estimated due to further refinement of tax calculations, changes in interpretations and assumptions related to the Tax Reform Act, guidance issued by taxing authorities and regulatory bodies, and actions businesses could take as a result of the Tax Reform Act. The Company completed its accounting for the impact of the Tax Reform Act during the measurement period and recorded adjustments of $6.8 million to its initial 2017 estimates during the fourth quarter of 2018. Specifically, during 2018 the Company relied on regulations issued by the Internal Revenue Service and recorded an additional $3.0 million of foreign tax credits available to offset taxes due on the future repatriation of foreign earnings. In addition, the Company recorded a tax benefit of $3.8 million as a result of adjustments made to its deferred tax balances as of December 31, 2017, primarily due to a change in its tax accounting method related to statutory premium reserves. These amounts are reflected in the 2018 summary of income taxes and effective tax rate reconciliation below.
For the years ended December 31, 2018, 2017 and 2016, domestic and foreign pretax income from continuing operations before noncontrolling interests were $571.9 million and $37.6 million, $391.4 million and $53.9 million, and $416.5 million and $61.1 million, respectively.
The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were 21.9% for 2018, 5.3% for 2017, and 28.1% for 2016. The effective tax rates differ from the federal statutory rate as a result of state and foreign income taxes for which the Company is liable, as well as permanent differences between amounts reported for financial statement purposes and taxable income. The Company’s effective tax rates for 2018 and 2017 also include the impact of the Tax Reform Act as discussed above, as well as the recognition of excess tax benefits associated with share-based payment transactions through income tax expense. The Company’s effective tax rate for 2017 also reflects state tax benefits relating to the termination of the Company’s defined benefit pension plan and the release of reserves relating to tax positions taken on prior year tax returns. The Company’s effective tax rate for 2016 reflects the resolution of certain tax authority examinations and tax credits claimed in 2016 and in prior years.
In connection with the Company’s June 2010 spin-off from its prior parent, the Company entered into a tax sharing agreement which governs the Company’s and its prior parent’s respective rights, responsibilities and obligations for certain tax-related matters. At December 31, 2018 and 2017, the Company had a net payable to its prior parent of $15.6 million and $15.0 million, respectively, related to tax matters prior to the spin-off. These amounts are included in the Company’s consolidated balance sheets in accounts payable and accrued liabilities. The increase during the current year was primarily the result of an additional accrual for tax matters prior to the spin-off.
At December 31, 2018, the Company had available net operating loss carryforwards for income tax purposes totaling $78.2 million, consisting of federal, state and foreign losses of $0.4 million, $35.9 million and $41.9 million, respectively. Of the aggregate net operating losses, $28.6 million has an indefinite expiration and the remaining $49.6 million expires at various times beginning in 2019.
As of December 31, 2018, 2017 and 2016, the liability for income taxes associated with uncertain tax positions was $13.3 million, $12.8 million and $18.1 million, respectively. The net increase in the liability during 2018 was attributable to new uncertain tax positions and the net decreases in the liabilities during 2017 and 2016 were primarily attributable to activity related to examinations conducted by various taxing authorities. The liabilities could be reduced by $3.7 million as of December 31, 2018 and 2017, and $5.7 million as of December 31, 2016, due to offsetting tax benefits associated with the correlative effects of potential adjustments, including timing adjustments and state income taxes. The net amounts of $9.6 million, $9.1 million and $12.4 million as of December 31, 2018, 2017 and 2016, respectively, if recognized, would favorably affect the Company’s effective tax rate.
It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months. Any such change may be the result of ongoing audits or the expiration of federal and state statutes of limitations for the assessment of taxes.
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 that 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 taxing authorities. The Company believes that adequate amounts of tax and related interest, if any, from any adjustments that may result from these examinations have been provided for.
The First American Financial Corporation 401(k) Savings Plan (the “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 the contributions of participants. The Savings Plan held 2,162,000 shares and 2,428,000 shares of the Company’s common stock, representing 1.9% and 2.2% of the Company’s total common shares outstanding at December 31, 2018 and 2017, respectively. Effective July 1, 2015, participants in the Savings Plan can no longer make additional investments in common stock of the Company.
During 2016, the Company, and a subsidiary of the Company, terminated their funded defined benefit pension plans. Also, during 2016, the Company made additional cash contributions of $84.8 million above scheduled amounts and provided lump sum distributions to certain participants from pension plan assets totaling $127.2 million, for which the Company recognized $66.3 million in settlement costs. During 2017, the Company made cash contributions of $34.0 million to fully fund its pension obligation, completed the transfer of all remaining benefit obligations related to the pension plans to a highly rated insurance company, and recognized $152.4 million in settlement costs in the consolidated statements of income.
The following table summarizes the benefit obligations and funded status associated with the Company’s unfunded supplemental benefit and funded defined benefit pension plans:
The Company adopted new accounting guidance which requires the components of net periodic cost, other than the service cost component, to be included in other operating expenses in the Company’s consolidated statements of income. The change was applied retrospectively to the prior year, which resulted in a reclass of $175.0 million and $101.5 million from personnel costs to other operating expenses for the years ended December 31, 2017 and 2016, respectively. For further information about the new guidance see Note 1 Basis of Presentation and Significant Accounting Policies.
For the years ended December 31, 2017 and 2016, net periodic cost includes costs related to the Company’s previously terminated defined benefit pension plans, for which the Company has no remaining obligation.
The fair values of debt securities were based on the market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well-established, independent broker-dealers. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services utilize the market approach in determining the fair values of the debt securities held by the Company. The Company obtains an understanding of the valuation models and assumptions utilized by the services and has controls in place to determine that the values provided represent fair values. The Company’s validation procedures include comparing prices received from the pricing services to quotes received from other third party sources for certain securities with market prices that are readily verifiable. If the price comparison results in differences over a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not made any material adjustments to the fair value measurements provided by the pricing services.
The following tables present the fair values of the Company’s assets, measured on a recurring basis, as of December 31, 2018 and 2017:
There were no transfers between Levels 1 and 2 during the years ended December 31, 2018 and 2017. Transfers into or out of the Level 3 category occur when unobservable inputs become 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 following tables present a summary of the changes in the fair values of Level 3 assets for the years ended December 31, 2018 and 2017:
The carrying amount of secured financings receivable approximates fair value due to the short-term nature of these assets.
The carrying amount of secured financings payable approximates fair value due to the short-term nature of these liabilities.
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments not measured at fair value as of December 31, 2018 and 2017:
The First American Financial Corporation 2010 Employee Stock Purchase Plan (the “ESPP”) allows eligible employees the option to purchase common stock of the Company at 85% of the lower of the closing price on either the first or last day of each quarterly offering period. There were 363,000 and 390,000 shares issued in connection with this plan for the years ended December 31, 2018 and 2017, respectively. At December 31, 2018, there were 2.0 million shares reserved for future issuances.
In March 2014, the Company’s board of directors approved an increase in the size of the Company’s stock repurchase plan from $150.0 million to $250.0 million, of which $163.6 million remained as of December 31, 2018. Purchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions. During the year ended December 31, 2018, the Company repurchased and retired 425 thousand shares of its common stock for a total purchase price of $18.8 million and as of December 31, 2018, had repurchased and retired 3.6 million shares of its common stock under the current authorization for a total purchase price of $86.4 million.
The following table presents a summary of the changes in each component of AOCI for the years ended December 31, 2018, 2017 and 2016:
Components of AOCI allocated to the Company and noncontrolling interests at December 31, 2018, 2017 and 2016, are as follows:
Total rental expense for all operating leases, including month-to-month rentals, was $89.4 million, $91.0 million and $91.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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 engaged in improper debt collection practices, improperly charged fees for products and services, participated in the conveyance of illusory property interests, failed to pay overtime and provide break periods, 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:
Bartine v. First American Title Insurance Company, et al., filed on August 17, 2018 and pending in the United States District Court for the Middle District of Florida,
Brackens v. First American Home Warranty Corporation, filed on November 28, 2018 and pending in the United States District Court for the District of Arizona,
Lennen v. First American Financial Corporation, et al., filed on May 19, 2016 and pending in the United States District Court for the Middle District of Florida,
Tenefufu vs. First American Specialty Insurance Company, filed on June 1, 2017 and pending in the Superior Court of the State of California, County of Sacramento, and
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 or investigations include inquiries into, among other matters, pricing and rate setting practices in the title insurance industry, competition in the title insurance industry, real estate settlement service, customer acquisition and retention practices and agency relationships. With respect to matters where the Company has determined that a loss is both probable and reasonably estimable, the Company has recorded 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. 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. The Company believes it will receive an assessment related to this matter in the first half of 2019. While the amount of such assessment is not currently known, based on preliminary discussions with the taxing authority, the Company expects the assessment to be in the range of $12.0 million to $12.8 million, plus interest charges. 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 after the assessment is received, and it believes it is reasonably likely that the Company will prevail on the merits. Based on the current facts and circumstances, the Company does not believe a loss is probable, therefore no liability has been recorded.
Selected financial information about the Company’s operations, by segment, for the years ended December 31, 2018, 2017 and 2016, is as follows: