Cash and cash equivalents as of December 31, 2018, 2017, 2016, 2015, and 2014 include cash pledged to secured trust deposits of $412 million, $475 million, $331 million, $108 million, and $136 million, respectively.
On March 18, 2018, we signed a merger agreement (the "Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"), pursuant to which each share of Stewart common stock issued and outstanding immediately prior to the effective time of the Stewart Merger (other than shares owned by Stewart, its subsidiaries, FNF or the wholly-owned subsidiaries of FNF party to the Merger Agreement and shares in respect of which appraisal rights have been properly exercised and perfected under Delaware law), will be converted into the right to receive, at the election of the holder of such share, (i) $50.00 in cash, (ii) 1.2850 shares of FNF common stock, or (iii) $25.00 in cash and 0.6425 shares of FNF common stock, subject to potential adjustment (as described below) and proration to the extent the option to receive cash or the option to receive stock is oversubscribed.
On August 21, 2018, we received a “no-action letter” from the Canadian Competition Bureau (the “Bureau”), indicating that the Bureau does not intend to oppose the completion of the Stewart Merger.
We have filed applications regarding acquisition of control of the Stewart domestic insurers with the states of Texas and New York. The Texas application regarding acquisition of control of Stewart Title Guaranty Company, a Texas domiciled title insurance company licensed in 48 states, is under review by the Texas Department of Insurance.
On August 13, 2018, we completed an offering of $450 million in aggregate principal amount of notes due August 2028 with stated interest of 4.50%. See Note E. Notes Payable to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further details.
In 2017, total originations were reflective of a generally improving residential real estate market driven by increasing home prices and historically low mortgage interest rates. Mortgage interest rates increased slightly in 2017 from 2016, but remained low compared to historical rates. In 2018 average interest rates on 30-year, fixed-rate mortgages in the U.S. rose from approximately 4.0% to 4.9% through October, representing an increase of 22%, before retreating to 4.55% in the last week of December according to mortgage buyer Freddie Mac. As a result of the overall upward trend in rates, refinance transactions decreased in both 2017 and 2018 from the historically high levels experienced in preceding years. Existing home sales increased through 2017 and began leveling out in the first half, and decreasing in the second half, of 2018. Coupled with stagnant levels of new home construction over the same time period, the result has been a decline in total housing inventory and increase in average home prices, albeit with decreasing magnitude toward the end of 2018.
The combination of reduced housing inventory, increasing mortgage interest rates and increasing home prices led the MBA to lower mortgage origination forecasts for 2019 and beyond during the second half of 2018. Market volatility and the shift in mortgage interest rates in late 2018 have created uncertainty in forecasts of future mortgage interest rates and originations. As a result, in early 2019 the U.S. Federal Reserve indicated it will slow or stop its pace of increases to the target federal funds rate. Mortgage interest rates are generally expected to remain flat in 2019. In a stagnate interest rate environment, refinance transactions are expected to continue to stagnate. The MBA predicts overall mortgage originations in 2019 and 2020 will remain relatively flat compared to the 2018 period.
Other economic indicators used to measure the health of the U.S. economy, including the unemployment rate and consumer confidence, have continued to indicate the U.S. economy remains on strong footing. According to the U.S. Department of Labor's Bureau of Labor, the unemployment rate was at a historically low 3.9% in December 2018. Additionally, the Conference Board's monthly Consumer Confidence Index has remained at historically high levels through 2018, despite a slight drop in November and December 2018 resulting from market volatility. Toward the end of the fiscal year of 2018 and into 2019, there has been increased global economic uncertainty and stock market volatility. Such market uncertainty could ultimately impact U.S. real estate markets if they continue to worsen. We believe continued strong readings in domestic U.S. economic indicators present potential tailwinds for mortgage originations, despite growing risks from global economic uncertainties.
Because commercial real estate transactions tend to be generally driven by supply and demand for commercial space and occupancy rates in a particular area rather than by interest rate fluctuations, we believe that our commercial real estate title insurance business is less dependent on the industry cycles discussed above than our residential real estate title business. Commercial real estate transaction volume is also often linked to the availability of financing. Factors including U.S. tax reform and a shift in U.S. monetary policy have had, or are expected to have, varying effects on availability of financing in the U.S. Lower corporate and individual tax rates and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate. Conversely, gradual increases in the Fed Funds Rate and the shift in late 2017 by the U.S. Federal Reserve to unwind its balance sheet are generally expected to adversely impact availability of financing by decreasing the overall money supply. In recent years, we have continued to experience strong demand in commercial real estate markets and from 2015 to 2018 experienced historically high volumes and fee-per-file in our commercial business.
Seasonality. Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically also strong due to the desire of commercial entities to complete transactions by year-end. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates.
Our reserve for title claim losses includes reserves for known claims as well as for losses that have been incurred but not yet reported to us (“IBNR”), net of recoupments. We reserve for each known claim based on our review of the estimated amount of the claim and the costs required to settle the claim. Reserves for IBNR claims are estimates that are established at the time the premium revenue is recognized and are based upon historical experience and other factors, including industry trends, claim loss history, legal environment, geographic considerations, and the types of policies written. We also reserve for losses arising from closing and disbursement functions due to fraud or operational error.
Our process for recording our reserves for title claim losses begins with analysis of our loss provision rate. We forecast ultimate losses for each policy year based upon historical policy year loss emergence and development patterns and adjust these to reflect policy year and policy type differences which affect the timing, frequency and severity of claims. We also use a technique that relies on historical loss emergence and on a premium-based exposure measurement. The latter technique is particularly applicable to the most recent policy years, which have few reported claims relative to an expected ultimate claim volume. After considering historical claim losses, reporting patterns and current market information, and analyzing quantitative and qualitative data provided by our legal, claims and underwriting departments, we determine a loss provision rate, which is recorded as a percentage of current title premiums. This loss provision rate is set to provide for losses on current year policies, but due to development of prior years and our long claim duration, it periodically includes amounts of estimated adverse or positive development on prior years' policies. Any significant adjustments to strengthen or release loss reserves resulting from the comparison with our actuarial analysis are made in addition to this loss provision rate. At each quarter end, our recorded reserve for claim losses is initially the result of taking the prior recorded reserve for claim losses, adding the current provision and subtracting actual paid claims, resulting in an amount that management then compares to the range of reasonable estimates provided by the actuarial calculation.
(1) Reserve of $97 million released in 2016 related to improving development on prior year claim trends.
As of December 31, 2018 and 2017, our recorded reserves were $1,488 million and $1,490 million, respectively, which we determined were reasonable and represented our best estimate and these recorded amounts were within a reasonable range of the central estimates provided by our actuaries. Our recorded reserves were $44 million above the mid-point of the provided range of $1.3 billion to $1.6 billion of our actuarial estimates as of December 31, 2018. Our recorded reserves were $30 million above the mid-point of the provided range of our actuarial estimates of $1.3 billion to $1.7 billion as of December 31, 2017.
The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017, respectively:
The following table presents a summary of the changes in the fair values of Level 3 assets, measured on a recurring basis, for the twelve months ended December 31, 2018.
Transfers into or out of the Level 3 fair value category occur when unobservable inputs become more or less significant to the fair value measurement or upon a change in valuation technique. For the twelve months ended December 31, 2018, transfers between Level 2 and Level 3 were based on changes in significance of unobservable inputs used associated with a change in the valuation technique used for certain of the Company’s corporate debt securities and are not considered material to the Company's financial position or results of operations. There were no transfers between Level 2 and Level 3 in the three months ended December 31, 2018. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.
During the years ended December 31, 2018, 2017 and 2016, we incurred impairment charges relating to investments that were determined to be other-than-temporarily impaired of $3 million, $1 million, and $19 million, respectively. Refer to Note D. Investments to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.
Goodwill. We have made acquisitions that have resulted in a significant amount of goodwill. As of December 31, 2018 and 2017, goodwill was $2,726 million and $2,746 million, respectively. The majority of our goodwill as of December 31, 2018 relates to goodwill recorded in connection with the Chicago Title merger in 2000 and our acquisition of ServiceLink in 2014. Refer to Note F Goodwill to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a summary of recent changes in our Goodwill balance.
Title Revenue Recognition. Our direct title insurance premiums are recognized as revenue at the time of closing of the underlying transaction as the earnings process is then considered complete. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each state's respective Department of Insurance. Cash associated with such revenue is typically collected at closing of the underlying real estate transaction. Premium revenues from agency title operations are recognized when the underlying title order and transaction closing, if applicable, are complete and reported to us.
outcome of these final determinations could have a material effect on our income tax provision, net income or cash flows in the period that determination is made.
Refer to Note K Income Taxes to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report for details.
See Note T. Revenue Recognition to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a breakout of our consolidated revenues.
Title premiums from direct operations increased in 2018, primarily due to an increase in the average fee per file, partially offset by a decrease in closed order volumes as compared to the prior year. Closed order volumes were 1,315,000 in the year ended December 31, 2018 compared with 1,428,000 in the year ended December 31, 2017. This represented a decrease of 7.9%. The decrease in closed order volumes was primarily attributable to a decrease in refinance transactions in the year ended December 31, 2018 compared to the 2017 period.
Title premiums from agency operations decreased $33 million, or 1%, in the year ended December 31, 2018 as compared to the 2017 period and increased $97 million, or 4%, in the year ended December 31, 2017 as compared to the 2016 period. The decrease in the 2018 period as compared to the 2017 period reflects a decrease of $51 million related to adjustments to our accrued agent premiums receivable, partially offset by an increase in remittances.
Escrow, title-related and other fees increased by $8 million, or less than 1%, in the year ended December 31, 2018 from the 2017 period. Escrow fees, which are more directly related to our direct operations, increased $6 million, or 1%, in the year ended December 31, 2018 compared to the 2017 period. The increase is primarily driven by the related increase in direct title premiums. Other fees in the Title segment, excluding escrow fees, increased $2 million, or less than 1%, in the year ended December 31, 2018 compared to the 2017 period. The change in both escrow fees and other fees is directionally consistent with the change in title premiums from direct operations. Escrow, title related and other fees increased by $53 million, or 2%, in the year ended December 31, 2017 from the 2016 period. Escrow fees increased $21 million, or 3%, in the year ended December 31, 2017 compared to the 2016 period. The increase is primarily driven by the related increase in direct title premiums. Other fees in the Title segment, excluding escrow fees, increased $30 million, or 2%, in the year ended December 31, 2017 compared to the 2016 period. The increase in other fees was primarily attributable to revenue growth associated with our home warranty businesses and increased servicing revenue at ServiceLink, offset by decreases at certain other ServiceLink subsidiaries.
Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. The $64 million, or 3% increase in the year ended December 31, 2018 compared to the 2017 period is directionally consistent with and primarily attributable to the increase in revenue and increased mix of purchase to refinance transactions. The $152 million, or 7%, increase in the year ended December 31, 2017 compared to the 2016 period is directionally consistent with and primarily attributable to the increase in revenue. Personnel costs as a percentage of total revenues from direct title premiums and escrow, title-related and other fees was 55% and 54% for years ended December 31, 2018 and 2017, respectively. Average employee count in the Title segment was 23,165 and 23,245 in the years ended December 31, 2018 and 2017, respectively.
Other operating expenses increased $17 million, or 1%, in the year ended December 31, 2018 from the corresponding 2017 period. Other operating expenses as a percentage of total revenue excluding agency premiums, interest and investment income, and realized gains and losses remained flat in the year ended December 31, 2018 from the corresponding 2017 period. Other operating expenses decreased $32 million, or 2% in the year ended December 31, 2017 from the corresponding 2016 period. The decrease in the 2017 period from the 2016 period is primarily attributable to the realignment of Property Insight in January 2017 and a reduction in operating expenses at certain ServiceLink subsidiaries. Other operating expenses as a percentage of total revenue excluding agency premiums, interest and investment income, and realized gains and losses was 32% in the years ended December 31, 2018 and 2017, and 34% in the year ended December 31, 2016.
Net margin from agency title insurance premiums retained as a percentage of total agency premiums in the year ended December 31, 2018 remained relatively consistent with the 2017 and 2016 periods.
Interest expense decreased $5 million, or 10%, in the year ended December 31, 2018 from the corresponding period in 2017 and decreased $16 million, or 25%, in the year ended December 31, 2017 compared to the corresponding 2016 period. The decrease in the 2018 period is primarily attributable to the final settlement of our convertible Notes in August 2018 and 6.6% Senior Notes in the 2017 period, partially offset by interest associated with our 4.50% Notes issued in August 2018. The decrease in the 2017 period is primarily attributable to decreased interest on our convertible Notes resulting from redemptions and the payoff of our 6.6% Senior Notes in the 2017 period. See Note J Notes Payable to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further discussion of our outstanding debt.
As a result of the FNFV Split-off and BK Distribution, the results of operations of FNFV and Black Knight are included in discontinued operations. Earnings from discontinued operations, net of tax, were $155 million, and $70 million in the years ended December 31, 2017 and 2016, respectively. The increase in the 2017 period from the corresponding period in 2016 is primarily
attributable to FNFV's realized gain on the sale of a subsidiary in the 2017 period. Refer to Note G Discontinued Operations to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report for further information, including a breakout of the results of operations of both FNFV and Black Knight.
Cash Requirements. Our current cash requirements include personnel costs; operating expenses; claim payments; taxes; payments of interest and principal on our debt, including any premiums thereon, if any; capital expenditures; business acquisitions; stock repurchases and dividends on our common stock. We paid dividends of $1.20 per share during 2018, or approximately $328 million. On February 13, 2019, our Board of Directors formally declared a $0.31 per share cash dividend that is payable on March 29, 2019 to FNF shareholders of record as of March 15, 2019. There are no restrictions on our retained earnings regarding our ability to pay dividends to shareholders, although there are limits on the ability of certain subsidiaries to pay dividends to us, as described below. The declaration of any future dividends is at the discretion of our Board of Directors. Additional uses of cash flow are expected to include stock repurchases, acquisitions, and debt repayments.
Operating Cash Flow. Our cash flows provided by operations for the years ended December 31, 2018, 2017, and 2016 were $943 million, $737 million and $1,162 million, respectively, inclusive of discontinued operations. Operating cash flows from discontinued operations for the years ended December 31, 2017 and 2016 were $106 million and $407 million, respectively. The increase in cash provided by operations of $206 million in the 2018 period from the 2017 period is primarily attributable to lower realized gains on sales of investments and assets, which are included in earnings but relate to investing activities, and a $128 million decrease in payments for income taxes by continuing operations in the 2018 period, partially offset by the inclusion of cash flows from discontinued operations in the 2017 period. The decrease in cash provided by operations of $425 million in the 2017 period from the 2016 period is primarily attributable to increased cash payments for taxes of $161 million and increased realized gains on sales of investments and assets which are included in earnings of $256 million, but which related to investing activities, in the 2017 period.
Investing Cash Flows. Our cash (used in) provided by investing activities for the years ended December 31, 2018, 2017, and 2016 were $(354) million, $79 million and $(191) million, respectively, inclusive of discontinued operations. Cash used in investing activities from discontinued operations for the years ended December 31, 2017 and 2016 were $57 million, and $163 million, respectively. The decrease in cash provided by (increase in cash used in) investing activities of $433 million in the 2018 period from the 2017 period is primarily attributable to $681 million increase in net outflows from purchases of investments and additional investments in unconsolidated investees, net of sales of investments and distributions of and from equity and fixed income investments, partially offset by a $160 million decrease in cash used in acquisitions, net of disposals, and a decrease in capital expenditures in the 2018 period. The decrease in cash used in investing activities of $270 million in the 2017 period from the 2016 period is primarily attributable to the $325 million in proceeds from the sale of a subsidiary by FNFV prior to the FNFV Split-Off, lower cash paid for acquisitions of $75 million and decreased capital expenditures of $141 million, offset by a $380 million decrease in net inflows from the sales and distributions of and from equity and fixed income investments, net of purchases and additional investments in unconsolidated investees.
Capital Expenditures. Total capital expenditures for property and equipment and capitalized software were $83 million, $149 million and $290 million for the years ended December 31, 2018, 2017, and 2016, respectively. The 2018 period primarily consists of capital expenditures in our Title segment and the decrease from the 2017 period is primarily attributable to discontinued operations. The 2017 period consists of capital expenditures of $74 million related to our continuing operations, primarily our Title segment, and $75 million related to discontinued operations. The decrease in the 2017 period from the 2016 period is primarily attributable to the purchase of our corporate headquarters for $71 million in the second quarter of 2016.
As of December 31, 2018, our required annual payments relating to these contractual obligations were as follows:
Off-Balance Sheet Arrangements. We do not engage in off-balance sheet activities other than our escrow operations. In conducting our operations, we routinely hold customers’ assets in escrow, pending completion of real estate transactions, and are responsible for the proper disposition of these balances for our customers. Certain of these amounts are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets, consistent with Generally Accepted Accounting Principles and industry practice. These balances amounted to $13.5 billion and $15.4 billion at December 31, 2018 and 2017, respectively. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks.
Reports of Independent Registered Public Accounting Firms on Consolidated Financial Statements
Consolidated Statements of Comprehensive Earnings for the years ended December 31, 2018, 2017, and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017, and 2016
To the Shareholders and the Board of Directors of Fidelity National Financial, Inc.
We have audited Fidelity National Financial, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Fidelity National Financial, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of Fidelity National Financial, Inc. and subsidiaries as of December 31, 2018, and the related consolidated statements of earnings, comprehensive earnings, equity and cash flows for the year then ended, and the related notes and financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 19, 2019 expressed an unqualified opinion thereon.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2019 expressed an unqualified opinion thereon.
We have audited the accompanying Consolidated Statements of Earnings, Comprehensive Earnings, Equity, and Cash Flows of Fidelity National Financial, Inc. and subsidiaries for the year ended December 31, 2016 (collectively, the Consolidated Financial Statements). In connection with our audit of the Consolidated Financial Statements, we also have audited the Financial Statement Schedule listed in the Index at Item 15. These Consolidated Financial Statements and the Financial Statement Schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements and the Financial Statement Schedule based on our audit.
Net of income tax (benefit) expense of $(4) million, $16 million, and $23 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Net of income tax expense of $1 million, $7 million, and $6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Net of income tax (benefit) expense of $(2) million, $4 million, and $1 million for the years ended December 31, 2018, 2017, and 2016, respectively.
The following describes the business and significant accounting policies of Fidelity National Financial, Inc. and its subsidiaries (collectively, “we,” “us,” “our,” the "Company" or “FNF”) which have been followed in preparing the accompanying Consolidated Financial Statements.
On August 1, 2018, our registration statement on Form S-4 related to the Stewart Merger was declared effective by the U.S. Securities and Exchange Commission (the "SEC").
The special meeting of Stewart stockholders to vote on the Stewart Merger was held on September 5, 2018 and a majority of the Stewart stockholders voted to approve the Stewart Merger. More than 99% of the votes cast, representing approximately 79% of the outstanding shares of Stewart common stock as of July 10, 2018, the record date for the special meeting, were cast in favor of adopting the Merger Agreement.
On September 24, 2018, we closed on the sale of all of our 62% equity interest in, and notes outstanding from, Pacific Union International, Inc. ("Pacific Union"), a luxury real estate broker based in California, and its subsidiaries to Urban Compass, Inc. ("Compass") for $37 million in cash and up to $21 million in potential earnout payments (the "Pacific Union Sale"). The potential earnout payments range in value from $0 to $21 million, are based on certain gross profit and earnings targets for Pacific Union and are payable in approximately 60% cash and 40% Compass stock annually over the course of the next 3 years. Compass was not a related party prior to, and is not a related party subsequent to, the Pacific Union Sale.
Other long-term investments consist of other investments and company-owned life insurance policies. Other investments are carried at fair value. See Note C Fair Value Measurements for further discussion of other investments. Company-owned life insurance policies are carried at cash surrender value.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Beginning January 1, 2018, unrealized gains or losses on equity and preferred securities are included in earnings. Unrealized gains or losses on fixed maturity securities (and equity and preferred
securities prior to January 1, 2018) which are classified as available for sale, net of applicable deferred income tax expenses (benefits), are excluded from earnings and credited or charged directly to a separate component of equity. If any unrealized losses on available for sale securities are determined to be other-than-temporary, such unrealized losses are recognized as realized losses. Unrealized losses on fixed maturity securities are considered other-than-temporary if factors exist that cause us to believe that the value will not increase to a level sufficient to recover our cost basis. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: (i) our need and intent to sell the investment prior to a period of time sufficient to allow for a recovery in value; (ii) the duration and extent to which the fair value has been less than cost; and (iii) the financial condition and prospects of the issuer. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.
Premium revenues from agency title operations are recognized when the underlying title order and transaction closing, if applicable, are complete and reported to us. Premium revenues from agency operations and related commissions include an accrual based on estimates using historical information of the volume of transactions that have closed in a particular period for which premiums have not yet been reported to us from independent agents. Historically, the time lag between the closing of these transactions by our agents and the reporting of these policies, or premiums, to us has been up to 15 months, with 88% - 95% reported within three months following closing, an additional 3% - 8% reported within the next three months and the remainder within seven to fifteen months. In addition to accruing these earned but unreported agency premiums, we also accrue agent commission expense, which was 76.5%, of agent premiums earned in 2018, 76.7% of agent premiums earned in 2017, and 76.1% of agent premiums earned in 2016. The amount due from our agents relating to this accrual, i.e., the agent premium less their contractual retained commission, was approximately $44 million and $55 million at December 31, 2018 and 2017, respectively. Due to the offsetting effects of reversing prior period accruals, the impact of this accrual to our recorded Agency title insurance premiums, Agent commissions and net earnings in any given period is not considered material.
We completed annual goodwill impairment analyses in the fourth quarter of each period presented using a September 30 measurement date. As a result of the analysis, $3 million of goodwill impairment related to a real estate brokerage reporting unit in our Corporate and other segment was recorded in the year ended December 31, 2018. For the years ended December 31, 2017 and 2016, we determined there were no events or circumstances which indicated that the carrying value exceeded the fair value. See Note F. Goodwill.
We have other intangible assets, not including goodwill, which consist primarily of customer relationships and contracts, trademarks and tradenames, and computer software, which are generally recorded in connection with acquisitions at their fair value. Intangible assets with estimable lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
We recorded $3 million, $1 million and $1 million in impairment expense to other intangible assets during the years ended December 31, 2018, 2017 and 2016, respectively. The impairment in 2018 primarily relates to an acquired customer relationship asset in our Title segment. The impairment in 2017 was for computer software at ServiceLink. The impairment in 2016 was for customer relationships and tradenames at our real estate subsidiaries in our Corporate and Other segment.
Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed primarily using the straight-line method based on the estimated useful lives of the related assets: twenty to thirty years for buildings and three to twenty-five years for furniture, fixtures and equipment. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the applicable lease or the estimated useful lives of such assets. Property and equipment are reviewed for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.
In the state of Illinois, a trust company is permitted to commingle and invest customers’ assets with its own assets, pending completion of real estate transactions. Accordingly, our Consolidated Balance Sheets reflect a secured trust deposit liability of $822 million and $830 million at December 31, 2018 and 2017, respectively, representing customers’ assets held by us and corresponding assets including cash and investments pledged as security for those trust balances.
to the years during which temporary differences are expected to be settled and reflected in the financial statements in the period enacted.
On September 29, 2017 we completed our tax-free distribution to FNF shareholders of all 83.3 million shares of New BKH Corp. ("New BKH") common stock that we previously owned (the “BK Distribution”). Immediately following the BK Distribution, New BKH and Black Knight Financial Services, Inc. ("Black Knight") engaged in a series of transactions resulting in the formation of a new publicly traded holding company, Black Knight, Inc. ("New Black Knight"). Holders of FNF common stock received approximately 0.30663 shares of New Black Knight common stock for every one share of FNF common stock held at the close of business on September 20, 2017, the record date for the BK Distribution. New Black Knight's common stock is now listed under the symbol “BKI” on the New York Stock Exchange. The BK Distribution was generally tax-free to FNF shareholders for U.S. federal income tax purposes, except to the extent of any cash received in lieu of New Black Knight's fractional shares. As a result of the BK Distribution, the financial results of Black Knight have been reclassified to discontinued operations for the years ended December 31, 2017 and 2016.
Subsequent to our acquisition of Lender Processing Services, Inc. ("LPS") in January 2014, we issued a 35% ownership interest in ServiceLink to funds affiliated with Thomas H. Lee Partners ("THL" or "the minority interest holder"). THL has an option to put its ownership interests of ServiceLink to us if no public offering of the corresponding business was consummated after four years from the date of FNF's purchase of LPS. The units owned by THL (the "redeemable noncontrolling interests") may be settled in cash or common stock of FNF or a combination of both at our election. As of January 2018, no public offering was made and the redeemable noncontrolling interests were no longer subject to a holding requirement. The redeemable noncontrolling interests will be settled at the current fair value at the time we receive notice of THL's put election as determined by the parties or by a third party appraisal under the terms of the Unit Purchase Agreement. As a result of a recapitalization of ServiceLink in 2015, the ownership interest by the minority interest holder was reduced from 35% to 21%. As of December 31, 2018, the redeemable noncontrolling interests have a fair value of approximately $194 million and we do not believe the exercise of their remaining put right in ServiceLink to be probable. The redeemable noncontrolling interests are recorded at their initial value of $344 million in our consolidated balance sheets and would be adjusted to fair value were such value to rise above the initial value.
Basic and diluted earnings per share attributable to our former FNFV group common stock for the 2017 period were calculated using weighted average shares outstanding through the date of the FNFV Split-off, November 17, 2017.
Certain reclassifications have been made in the 2017 and 2016 Consolidated Financial Statements to conform to classifications used in 2018. These reclassifications have not changed net earnings or total equity, as previously reported.
The results of operations and financial position of the entities acquired during any year are included in the Consolidated Financial Statements from and after the date of acquisition.
We paid total consideration, net of cash received, of $93 million in exchange for 90% of the equity interests of Title Guaranty. The total cash consideration paid was as follows (in millions):
The purchase price has been allocated to Title Guaranty's assets acquired and liabilities assumed based on our best estimates of their fair values as of the acquisition date. Goodwill has been recorded based on the amount that the purchase price exceeds the fair value of the net assets acquired. The goodwill recorded is expected to be deductible for tax purposes.
The following table summarizes the total purchase price consideration and the fair value amounts recognized for the assets acquired and liabilities assumed as of the acquisition date (dollars in millions):
The following table summarizes the total purchase price consideration and the fair value amounts recognized for the assets acquired and liabilities assumed for the Real Estate Technology Acquisitions as of the acquisition date (in millions):
The following table presents our fair value hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2018 and 2017, respectively:
Our Level 2 fair value measures for preferred and fixed-maturity securities available for sale are provided by a third-party pricing service. We utilize one firm for our preferred securities and our bond portfolios. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. We rely on one price for each instrument to determine the carrying amount of the assets on our balance sheet. The inputs utilized in these pricing methodologies include observable measures such as benchmark yields, reported trades, broker dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market research publications. We review the pricing methodologies for all of our Level 2 securities by obtaining an understanding of the valuation models and assumptions used by the third-party. When
(2) Included in Interest and investment income on the Condensed Consolidated Statements of Earnings
Transfers into or out of the Level 3 fair value category occur when unobservable inputs become more or less significant to the fair value measurement or upon a change in valuation technique. For the year ended December 31, 2018, transfers between
Level 2 and Level 3 were based on changes in significance of unobservable inputs used associated with a change in the valuation technique used for certain of the Company’s corporate debt securities and are not considered material to the Company's financial position or results of operations.
Substantially all of the unrealized gain (loss) on investments and other financial instruments, net (excluding investments in unconsolidated affiliates) on our Condensed Consolidated Statements of Comprehensive Income relate to fixed maturity securities which are considered Level 2 fair value measures.
The carrying amounts of short-term investments, accounts receivable and notes receivable approximate fair value due to their short-term nature. The fair value of our notes payable is included in Note J Notes Payable.
Additional information regarding the fair value of our investment portfolio is included in Note D Investments.
The carrying amounts and fair values of our available for sale securities at December 31, 2018 and 2017 are as follows:
Net unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018 and 2017 are as follows (in millions):
Depreciation expense on property and equipment was $46 million, $48 million, and $45 million for the years ended December 31, 2018, 2017, and 2016, respectively.
We have various agreements with Black Knight to provide technology, data and analytics services, as well as corporate shared services and information technology. We are also a party to certain other agreements under which we incur other expenses or receive revenues from Black Knight. We expect to continue utilizing Black Knight to provide technology and data and analytics services for the foreseeable future. Subsequent to the BK Distribution, Black Knight is considered a related party to FNF. The cash inflows and outflows from and to Black Knight as well as revenues and expenses included in continuing operations subsequent to the BK Distribution which were previously eliminated in our consolidated financial statements as intra-entity transactions, are not considered material to our results of operations.
Amortization expense for amortizable intangible assets, which consist primarily of customer relationships and computer software, was $119 million, $130 million, and $110 million for the years ended December 31, 2018, 2017 and 2016, respectively. Estimated amortization expense for the next five years for assets owned at December 31, 2018, is $125 million in 2019, $106 million in 2020, $78 million in 2021, $61 million in 2022 and $43 million in 2023.
At December 31, 2018, the estimated fair value of our unsecured notes payable was approximately $868 million, or $18 million higher than its carrying value, excluding $14 million of net unamortized debt issuance costs and premium/discount. The fair values of our unsecured notes payable are based on established market prices for the securities on December 31, 2018 and are considered Level 2 financial liabilities.
The significant components of deferred tax assets and liabilities at December 31, 2018 and 2017 consist of the following:
In the year ended December 31, 2018, we recorded additional benefits to tax expense of $45 million related to a change in tax treatment related to our redomestication of certain of our insurance underwriters. This adjustment has been included in the Tax Reform line of our reconciliation of the federal statutory rate to our effective tax rate.
At December 31, 2018, we have net operating losses ("NOL") on a pretax basis of $31 million available to carryforward and offset future federal taxable income. The net operating losses are US federal net operating losses arising from acquisitions made since 2012, including CINC and ServiceLink. Most of the NOLs are subject to an annual Internal Revenue Code Section 382 limitation. These losses will begin to expire in year 2022 and we fully anticipate utilizing these losses prior to expiration with the exception of $3 million of gross net operating losses that are offset by a $1 million valuation allowance.
As of December 31, 2018 and 2017, we had approximately $9 million and $11 million (including interest of less than $1 million), respectively, of total unrecognized tax benefits that, if recognized, would favorably affect our income tax rate. We record interest and penalties related to income taxes as a component of income tax expense. In 2018, we reversed $8 million of reserves related to a Florida audit that was closed with a favorable result and we increased our reserve by $6 million for potential state tax liabilities.
We review lawsuits and other legal and regulatory matters (collectively “legal proceedings”) on an ongoing basis when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, management bases its decision on its assessment of the ultimate outcome assuming all appeals have been exhausted. For legal proceedings in which it has been determined that a loss is both probable and reasonably estimable, a liability based on known facts and which represents our best estimate has been recorded. Our accrual for legal and regulatory matters was $11 million and $2 million as of December 31, 2018 and 2017, respectively. None of the amounts we have currently recorded are considered to be material to our financial condition individually or in the aggregate. Actual losses may materially differ from the amounts recorded and the ultimate outcome of our pending legal proceedings is generally not yet determinable. While some of these matters could be material to our operating results or cash flows for any particular period if an unfavorable outcome results, at present we do not believe that the ultimate resolution of currently pending legal proceedings, either individually or in the aggregate, will have a material adverse effect on our financial condition.
Accepted Accounting Principles and industry practice. These balances amounted to $13.5 billion at December 31, 2018. As a result of holding these customers’ assets in escrow, we have ongoing programs for realizing economic benefits during the year through favorable borrowing and vendor arrangements with various banks. There were no investments or loans outstanding as of December 31, 2018 and 2017 related to these arrangements.
Our operating leases range in term from one to ten years. Most of our leases include one or more options to renew, with varying renewal terms that can extend the lease term. The exercise of lease renewal options is at our sole discretion.
Rent expense incurred under operating leases during the years ended December 31, 2018, 2017 and 2016 was $150 million, $144 million, and $128 million, respectively.
Statutory-basis financial statements are prepared in accordance with accounting practices prescribed or permitted by the various state insurance regulatory authorities. The National Association of Insurance Commissioners' (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed or permitted practices by each of the states that regulate us. Each of our states of domicile for our title insurance underwriter subsidiaries have adopted a material prescribed accounting practice that differs from that found in NAIC SAP. Specifically, in both years, the timing of amounts released from the statutory unearned premium reserve under NAIC SAP differs from the states' required practice. Statutory surplus at December 31, 2018 and 2017 was lower by approximately $28 million than if we had reported such amounts in accordance with NAIC SAP.
Pursuant to statutory requirements of the various states in which our insurers are domiciled, such insurers must maintain certain levels of minimum capital and surplus. Required levels of minimum capital and surplus are not significant to the insurers individually or in the aggregate. Each of our insurers has complied with the minimum statutory requirements as of December 31, 2018.
On July 17, 2018, our Board of Directors approved a new three-year stock repurchase program effective August 1, 2018 (the "2018 Repurchase Program") under which we can purchase up to 25 million shares of our FNF common stock through July 31, 2021. We may make repurchases from time to time in the open market, in block purchases or in privately negotiated transactions, depending on market conditions and other factors. During the year ended December 31, 2018, we repurchased a total of 660,000 FNF common shares for $21 million or an average of $32.33 per share. Subsequent to December 31, 2018 and through market close on February 14, 2019, we repurchased a total of 60,000 shares for $2 million, or an average of $31.83 per share under this program. Since the original commencement of the 2018 Repurchase Program, we repurchased a total of 720,000 FNF common shares for $23 million, or an average of $32.29 per share.
In 2005, we established the FNT 2005 Omnibus Incentive Plan (the “Omnibus Plan”) authorizing the issuance of up to 8 million shares of common stock, subject to the terms of the Omnibus Plan. On October 23, 2006; May 29, 2008; May 25, 2011; May 22, 2013; and June 15, 2016 the shareholders of FNF approved amendments to increase the number of shares for issuance under the Omnibus Plan by 16 million, 11 million, 6 million, 6 million and 10 million shares, respectively. The primary purpose of the increases were to assure that we had adequate means to provide equity incentive compensation to our employees on a going-forward basis. The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units and performance shares, performance units, other cash and stock-based awards and dividend equivalents. As of December 31, 2018, there were 1,821,238 shares of restricted stock and 7,543,787 stock options outstanding under this plan. Awards granted are approved by the Compensation Committee of the Board of Directors. Options vest over a 3 year period and have a contractual life of 7 years. The exercise price for options granted equals the market price of the underlying stock on the grant date. Stock option grants vest according to certain time based and operating performance criteria. Option exercises by participants are settled on the open market.
FNF restricted stock transactions under the Omnibus Plan in 2018, 2017, and 2016 are as follows:
The following table summarizes information related to stock options outstanding and exercisable as of December 31, 2018:
We account for stock-based compensation plans in accordance with GAAP on share-based payments, which requires that compensation cost relating to share-based payments be recognized in the consolidated financial statements based on the fair value of each award. Using the fair value method of accounting, compensation cost is measured based on the fair value of the award at the grant date and recognized over the service period. Fair value of restricted stock awards and units is based on the grant date value of the underlying stock derived from quoted market prices. The total fair value of restricted stock awards granted in the years ended December 31, 2018, 2017 and 2016 was $29 million, $31 million, and $29 million, respectively. The total fair value of restricted stock awards which vested in the years ended December 31, 2018, 2017 and 2016 was $29 million, $38 million, and $25 million, respectively. Option awards are measured at fair value on the grant date using the Black Scholes Option Pricing Model. The intrinsic value of options exercised in the years ended December 31, 2018, 2017 and 2016 was $19 million, $25 million, and $46 million, respectively. Net earnings attributable to FNF Shareholders reflects stock-based compensation expense amounts of $31 million for the year ended December 31, 2018, $44 million for the year ended December 31, 2017, and $58 million for the year ended December 31, 2016, which are included in personnel costs in the reported financial results of each period.
At December 31, 2018, the total unrecognized compensation cost related to non-vested stock option grants and restricted stock grants is $54 million, which is expected to be recognized in pre-tax income over a weighted average period of 1.62 years.
Corporate and Other. This segment consists of the operations of the parent holding company, our real estate technology subsidiaries, other smaller, non-title businesses and certain unallocated corporate overhead expenses and eliminations of revenues and expenses between it and our Title segment. This segment also includes the results of operations of Pacific Union through the date of the Pacific Union Sale and the assets of discontinued operations, Black Knight and FNFV, as of December 31, 2016. Refer to Note G. Discontinued Operations for further information.
We adopted this ASU on January 1, 2018 and have retrospectively restated our Consolidated Statements of Cash Flows included herein. The adoption of this ASU resulted in the following retrospective changes to our Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016, respectively: an increase (decrease) in the net change in cash and cash equivalents of $144 million and $223 million, respectively, due to the inclusion of the change in our cash pledged against secured trust deposits; an increase (decrease) in cash provided by (used in) investing activities of $174 million and $63 million, respectively, related to the movement of cash paid/received for investments pledged against secured trust deposits from operating to investing activities; and an (increase) decrease in cash used in financing activities of $(30) million and $160 million, respectively, related to the movement of the change in secured trust deposits from operating to financing activities.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842). The amendments in this ASU introduce broad changes to the accounting and reporting for leases by lessees. The main provisions of the new standard include: clarifications to the definitions of a lease, components of leases, and criteria for determining lease classification; requiring virtually all leased assets, including operating leases and related liabilities resulting from applying the fair value measurement, to be reflected on the lessee's balance sheet; and expanding and adding to the required disclosures for lessees. This update is effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the standard is permitted. The ASU allows for a modified retrospective approach to transitioning which allows for the use of practical expedients to effectively account for leases commenced prior to the effective date in accordance with previous GAAP. In July 2018, the FASB issued ASU 2018-11 Leases (Topic 842): Targeted Improvements which allows entities the option to adopt this standard prospectively with a cumulative-effect adjustment to opening equity and include required disclosures for prior periods.
The adoption of ASC Topic 606 did not have an impact on the recognition of our primary sources of revenue, direct and agency title premiums, as those revenue streams are subject to the accounting and reporting requirements under ASC Topic 944. Timing of recognition of substantially all of our remaining revenue was also not impacted and we therefore did not record any cumulative effect adjustment to opening equity.
Our Direct title insurance premiums are recognized as revenue at a point-in-time upon of closing of the underlying real estate transaction as the earnings process is then considered complete. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each state's respective Department of Insurance. Cash associated with such revenue is typically collected at closing of the underlying real estate transaction.
Premium revenues from agency title operations are recognized when the underlying title order and real estate transaction closing, if applicable, are complete and reported to us.
Revenues from ServiceLink, excluding its title premiums, escrow fees, and loan subservicing fees, primarily include revenues from real estate appraisal services and foreclosure processing and facilitation services. Revenues from real estate appraisal services are recognized at a point-in-time when all appraisal work is complete, a final report is issued to the client and the client is billed. Revenues from foreclosure processing and facilitation services are primarily recognized upon completion of the services and when billing to the client is complete.
Real estate brokerage revenues are primarily comprised of commission revenues earned in association with the facilitation of real estate transactions and are recognized upon closing of the sale of the underlying real estate transaction.