The selected historical consolidated financial data for First American Financial Corporation (the “Company”) as of and for each of the five years in the period ended December 31, 2017, have been derived from the Company’s consolidated financial statements. The selected historical consolidated financial data should be read in conjunction with “Item 8. Financial Statements and Supplementary Data,”“Item 1 - Business,” and “
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 an increase or decrease, as the case may be, of $117.8 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 ratios 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 $2.4 million in 2017 from 2016 and increased by $1.5 million in 2016 from 2015 and payments, net of recoveries, related to current year increased by $2.4 million in 2017 from 2016 and increased by $1.2 million in 2016 from 2015, reflecting variability in claims volumes characteristic of a policy year during its first year of development.
The provision related to current year increased by $22.3 million, or 13.1%, in 2016 from 2015. This increase was attributable to a 6.5% increase in title premiums and escrow fees in 2016 from 2015 and a higher current year loss rate in 2016 when compared to 2015. The current year loss rate in 2016 was 4.5% compared to 4.2% in 2015.
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, 2017, 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.
Impairment assessment for goodwill. The Company is required to perform an annual goodwill impairment assessment for each reporting unit. The Company’s four reporting units are title insurance, home warranty, property and casualty insurance and trust and other services. The Company has elected to perform this annual assessment in the fourth quarter of each fiscal year or sooner if circumstances indicate possible impairment. Based on current guidance, the Company has the option to perform a qualitative assessment to determine if the fair value is more likely than not (i.e., a likelihood of greater than 50%) less than the carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test, or may choose to forego the qualitative assessment and perform the quantitative impairment test. The qualitative factors considered in this assessment may include macroeconomic conditions, industry and market considerations, overall financial performance as well as other relevant events and circumstances as determined by the Company. The Company evaluates the weight of each factor to determine whether it is more likely than not that impairment may exist. If the results of the qualitative assessment indicate the more likely than not threshold was not met, the Company may choose not to perform the quantitative impairment test. If, however, the more likely than not threshold is met, the Company performs the quantitative test as required and discussed below.
Impairment assessment for other intangible assets. Management uses estimated future cash flows (undiscounted and excluding interest) to measure the recoverability of intangible assets with finite lives, whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. If the undiscounted cash flow analysis indicates that the carrying amount is not recoverable, an impairment loss is recorded for the excess of the carrying amount over its fair value.
Impairment of equity method investments in affiliates. The carrying value of equity method investments in affiliates 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 in an affiliate 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 Company recognized impairment losses of $1.5 million and $2.0 million for 2017 and 2015, respectively, and did not record any impairment losses related to its equity method investments for 2016.
Weighted-average discount rate assumptions used to determine net periodic benefit costs for 2017 and 2016, were as follows:
During 2016, the Company terminated its funded defined benefit pension plans and, in 2017, transferred all remaining benefit obligations relating to the pension plans to a highly rated insurance company. See Note 13 Employee Benefit Plans to the consolidated financial statements for further discussion of the termination of the Company’s funded defined benefit pension plans.
In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium to shorten the amortization period for the premium to the earliest call date. The updated guidance is intended to more closely align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities, and is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company elected to adopt the new guidance in the fourth quarter of 2017, which did not have a material impact on its consolidated financial statements.
In March 2016, the FASB issued updated guidance intended to simplify the accounting treatment for investments that become qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued updated guidance intended to simplify and improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The updated guidance, which eliminates the intra-entity transfers exception, requires entities to recognize the income tax consequences of intra-entity transfers of assets, other than inventory, when the transfers occur. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
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, with early adoption permitted in certain circumstances. While the Company expects the adoption of this guidance to impact its consolidated statements of income, the materiality of the impact will depend upon the size of, and level of volatility experienced within, the Company’s equity portfolio. Upon adoption of the guidance, cumulative net unrealized gains, net of taxes, of $40.0 million related to the Company’s investments in equity securities, previously classified as available-for-sale, were recognized as a cumulative-effect adjustment to retained earnings on January 1, 2018.
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 August 2015, the FASB issued updated guidance which defers the effective date of this guidance by one year. 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 has elected to adopt the new guidance under the modified retrospective approach and, except for certain disclosure requirements, does not expect the new guidance to have a material impact on its consolidated financial statements.
The Company’s total revenues for 2017 were $5.8 billion, which reflected an increase of $0.2 billion, or 3.5%, when compared with $5.6 billion for 2016. This increase was primarily attributable to an increase in agent premiums of $74.0 million, or 3.2%, an increase in information and other revenues of $52.2 million, or 7.2%, an increase in direct premiums and escrow fees of $45.8 million, or 1.9%, and an increase in net investment income of $36.3 million, or 28.8%. The increase in direct premiums and escrow fees attributable to the title insurance and services segment was $17.7 million, or 0.9%. Direct premiums and escrow fees from residential purchase and commercial transactions in 2017 increased $93.6 million and $35.1 million, or 11.4% and 5.3%, respectively, while direct premiums and escrow fees from residential refinance transactions decreased $110.0 million, or 32.3%, in 2017 when compared to 2016.
According to the Mortgage Bankers Association’s January 20, 2018 Mortgage Finance Forecast (the “MBA Forecast”), residential mortgage originations in the United States (based on the total dollar value of the transactions) decreased 16.6% in 2017 when compared with 2016. According to the MBA Forecast, the dollar amount of purchase originations increased 5.5% and refinance originations decreased 39.9% in 2017 when compared to 2016. 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 11.4% from domestic residential purchase transactions and a 32.3% decrease in direct premiums and escrow fees from domestic refinance transactions in 2017 when compared to 2016.
During 2017, the Company completed acquisitions for an aggregate purchase price of $91.1 million, which are included in the Company’s title insurance and services segment. These acquisitions serve to strengthen the Company’s core title and settlement businesses.
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 amends 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 are broad and complex and will require additional analysis, but the Company expects that the Tax Reform Act will have an overall favorable impact on its effective tax rate and earnings per share in future periods. The Company recorded $114.1 million in estimated net tax benefits to net income for 2017 related to the Tax Reform Act. 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.
Agent premiums increased $74.0 million, or 3.2%, in 2017 from 2016 and $188.4 million, or 9.0%, in 2016 from 2015. Agent premiums are recorded when notice of issuance is received from the agent, which is generally when cash payment is received by the Company. As a result, there is generally a delay between the agent’s issuance of a title policy and the Company’s recognition of agent premiums. Therefore, full year agent premiums typically reflect mortgage origination activity from the fourth quarter of the prior year through the third quarter of the current year. The increase in agent premiums in 2017 from 2016 was generally consistent with the 3.0% increase in the Company’s direct premiums and escrow fees in the twelve months ended September 30, 2017 as compared with the twelve months ended September 30, 2016. The increase in agent premiums in 2016 from 2015 was generally consistent with the 2.9% increase in the Company’s direct premiums and escrow fees in the twelve months ended September 30, 2016 as compared with the twelve months ended September 30, 2015.
Net realized investment gains for the title insurance and services segment totaled $6.7 million for 2017 and were primarily from the sales of debt and equity securities, partially offset by a $6.6 million loss recognized when the Company purchased the remaining equity ownership in an investment in an affiliate during the third quarter of 2017. This investment, which was previously accounted for using the equity method of accounting, is now consolidated for financial reporting purposes. Net realized investment gains were $18.9 million for 2016 and were primarily from the sales of debt and equity securities. Net realized investment losses were $7.4 million for 2015 and were primarily from the impairment of internally developed software and losses from the sales of equity securities, partially offset by gains from the sale of real estate. Net realized investment gains for 2017, 2016 and 2015 included $0.8 million, $3.3 million and $9.3 million, respectively, of gains from the sale of real estate. In addition, net realized investment gains for 2017, 2016 and 2015 included impairment losses of $3.0 million, $5.2 million and $10.9 million, respectively. The impairment losses recorded in 2017 were primarily related to title plants and the impairment losses recorded in 2016 and 2015 were primarily related to internally developed software.
Personnel costs increased $58.2 million, or 3.7%, in 2017 from 2016 and $86.4 million, or 5.8%, in 2016 from 2015. The increases were largely driven by recent acquisitions. Excluding the $57.5 million impact of new acquisitions for the year ended December 31, 2017, personnel costs increased $0.7 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. Excluding the $38.1 million impact of new acquisitions for the year ended December 31, 2016, personnel costs increased $48.3 million, or 3.2%, in 2016 compared to 2015. The increase in 2016 from 2015, adjusted for the impact of new acquisitions, was primarily attributable to higher salary, incentive compensation, share-based compensation, and employee benefits expense. The higher salary cost was due to an increase in average salaries and, to a lesser extent, higher average headcount. The increase in incentive compensation expense was due to higher commissions paid on higher revenues, partially offset by lower 401(k) savings plan matches. The higher share-based compensation cost was due to increased restricted stock units granted to employees during the first quarter of 2016 associated with 2015 performance. The increase in employee benefits expense was primarily due to higher paid medical claims. Personnel costs included severance expense of $10.1 million, $8.3 million and $5.6 million for 2017, 2016 and 2015, respectively.
The 2015 rate of 6.6% reflected an ultimate loss rate of 4.2% for policy year 2015 and a $93.1 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 a change in methodology used by the Company’s internal actuary to estimate total ultimate losses. Previously, the internal actuary’s model did not separate claims experience for large title claims from normal title claims activity. With this change in methodology, the model began to separate claims experience for large title claims from normal title claims activity when developing reserve estimates. As a result, loss reserve estimates for prior policy years increased, primarily for policy years 2004 through 2007. The change in methodology was implemented due to the increased frequency of large title claims experienced over the prior several years and the volatility associated with the timing and severity of large title claims. The Company accounted for this change in methodology as a change in accounting estimate.
As of December 31, 2017, the projected ultimate loss ratios for policy years 2017, 2016 and 2015 were 4.0%, 4.2% and 3.8%, respectively.
Insurers generally are not subject to state income or franchise taxes. However, in lieu thereof, a premium tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of operating revenues. The Company’s noninsurance subsidiaries are subject to state income tax and do not pay premium tax. Accordingly, the Company’s total tax burden at the state level for the title insurance and services segment is composed of a combination of premium taxes and state income taxes. Premium taxes as a percentage of title insurance premiums and escrow fees were 1.4% for the years ended December 31, 2017, 2016 and 2015.
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 this relatively high proportion of fixed costs, title insurance profit margins generally improve as closed order volumes increase. 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 12.1%, 11.7% and 10.2% for the years ended December 31, 2017, 2016 and 2015, respectively.
Direct premiums increased $28.1 million, or 6.8%, in 2017 from 2016 and $31.1 million, or 8.2%, in 2016 from 2015. The increases were due to higher premiums earned in the home warranty business driven by an increase in the number of home warranty residential service contracts issued and an increase in the average price charged per contract.
Information and other revenues increased $0.4 million, or 3.5%, in 2017 from 2016 and $7.7 million, or 242.0%, in 2016 from 2015. The increase in 2016 from 2015 was primarily due to a change in how the Company reports installment fees related to home warranty residential service contracts. Beginning in 2016, the Company reported installment fees in information and other revenues, while prior to 2016, the Company reported installment fees as a reduction in other operating expenses. This change resulted in an increase to information and other revenues and an increase to other operating expenses of $7.5 million in 2016 when compared to 2015.
Personnel costs and other operating expenses increased $9.1 million, or 7.0%, in 2017 from 2016 and $14.9 million, or 12.9%, in 2016 from 2015. The increase in 2017 from 2016 was primarily related 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 which is further discussed above. The increase in 2016 from 2015 was primarily related to the change in how the Company reports installment fees related to home warranty residential service contracts, higher offshore labor expense related to increased customer support activities associated with the increased volume in the home warranty business, higher advertising expense in the home warranty business, and higher salary expense due to higher average salaries. These increases were partially offset by the $3.5 million benefit 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 85.0% in 2017, 63.3% in 2016 and 66.4% in 2015. 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 two separate wildfires during the fourth quarter of 2017 with losses exceeding property and casualty’s reinsurance retention limit of $5.0 million for each event, and rainstorms in the western portion of the United States. The decrease in rate in 2016 from 2015 was primarily attributable to lower weather-related loss events when compared to the prior year.
A large part of the revenues for the specialty insurance businesses are generated by renewals and are not dependent on the level of real estate activity in the year of renewal. With the exception of loss expense, the majority of the expenses for this segment are variable in nature and therefore generally fluctuate consistent with revenue fluctuations. Accordingly, profit margins for this segment (before loss expense) are relatively constant, although as a result of some fixed expenses, profit margins (before loss expense) should nominally improve as premium revenues increase. Pre-tax margins were 7.9%, 9.2% and 10.0% for 2017, 2016 and 2015, respectively.
Net investment income totaled $15.3 million in 2017, $5.9 million in 2016 and a loss of $5.4 million in 2015. The change in net investment income for all three years is primarily attributable to fluctuations in earnings on investments associated with the Company’s deferred compensation plan. Net investment losses for 2015 were impacted by a one-time non-cash charge of $4.0 million, recorded during the first quarter of 2015, related to the investments associated with the Company’s deferred compensation plan.
Corporate personnel costs and other operating expenses were $216.6 million, $137.5 million and $63.3 million in 2017, 2016 and 2015, respectively. The increase in 2017 from 2016 was primarily attributable to pension settlement costs of $152.4 million that the Company recognized during the third quarter of 2017 upon completing the termination of its funded defined benefit pension plans. The increase in 2016 from 2015 was primarily attributable to a $66.3 million settlement expense recorded in the fourth quarter of 2016 related to the termination of the Company’s funded defined benefit pension plans. For further discussion of the pension termination see Note 13 Employee Benefit Plans to the consolidated financial statements.
Interest expense increased $3.1 million in 2017 from 2016 and $2.4 million in 2016 from 2015. The increase in 2017 was due to the Company borrowing $160.0 million under its credit facility during September 2016. Interest expense increased in 2016 primarily due to a change in how the Company reports amortization of deferred debt issuance costs. Beginning in 2016, the Company reported amortization of deferred debt issuance costs in interest expense, while prior to 2016, the Company reported amortization of deferred debt issuance costs in other operating expenses. This change resulted in an increase in interest expense and a decrease in other operating expenses of $2.0 million in 2016 when compared to 2015. Interest expense also increased due to the Company borrowing $160.0 million under its credit facility during September 2016.
The Company’s inter-segment eliminations were not material for the years ended December 31, 2017, 2016 and 2015.
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 $182.4 million remained as of December 31, 2017. 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, 2017, the Company did not repurchase any shares of its common stock and, as of December 31, 2017, had repurchased and retired 3.2 million shares of its common stock under the current authorization for a total purchase price of $67.6 million.
At the Company’s election, borrowings under the credit agreement bear interest at (a) the Alternate Base Rate plus the applicable spread or (b) the Adjusted LIBOR rate plus the applicable spread (in each case as defined in the agreement). The Company may select interest periods of one, two, three or six months or (if agreed to by all lenders) such other number of months for Eurodollar borrowings of loans. The applicable spread varies depending upon the debt rating assigned by Moody’s Investor Service, Inc. and/or Standard & Poor’s Rating Services. The minimum applicable spread for Alternate Base Rate borrowings is 0.625% and the maximum is 1.00%. The minimum applicable spread for Adjusted LIBOR rate borrowings is 1.625% and the maximum is 2.00%. The rate of interest on Incremental Term Loans will be established at or about the time such loans are made and may differ from the rate of interest on revolving loans.
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, 2017, the Company was in compliance with the financial covenants under the credit agreement.
Notes and contracts payable as a percentage of total capitalization was 17.4% and 19.6% at December 31, 2017 and 2016, respectively. Notes and contracts payable are further described in Note 9 Notes and Contracts Payable to the consolidated financial statements.
Investment portfolio. The Company maintains a high quality, liquid investment portfolio that is primarily held at its insurance and banking subsidiaries. As of December 31, 2017, 91% of the Company’s investment portfolio consisted of fixed income securities, of which 59% were United States government-backed or rated AAA and 95% were rated or classified as investment grade. Percentages are based on the estimated fair values of the securities. Credit ratings reflect published ratings obtained from globally recognized securities rating agencies. If a security was rated differently among the rating agencies, the lowest rating was selected. For further information on the credit quality of the Company’s investment portfolio at December 31, 2017, see Note 3 Debt and Equity Securities to the consolidated financial statements.
Capital expenditures. Capital expenditures are primarily related to software development costs and purchases of property and equipment and software licenses. Capital expenditures totaled $136.7 million, $132.3 million and $127.6 million for 2017, 2016 and 2015, respectively. The increase in 2017 from 2016 primarily related to an increase in spending on property and equipment and software licenses in 2017, partially offset by lower spending on software development. The increase in 2016 from 2015 primarily related to the Company’s adoption of the change in accounting treatment for internal-use software licenses in 2016, partially offset by lower spending in property and equipment, software, title plants, and real estate data.
In conducting its operations, the Company often holds customers’ assets in escrow, pending completion of real estate transactions and, as a result, the Company has ongoing programs for realizing economic benefits with various financial institutions. The results from these programs are included in the consolidated financial statements as income or a reduction in expense, as appropriate, based on the nature of the arrangement and benefit received.
I. Summary of Investments-Other than Investments in Related Parties as of December 31, 2017
III. Supplementary Insurance Information as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015
We have audited the accompanying consolidated balance sheets of First American Financial Corporation and its subsidiaries as of December 31, 2017 and 2016, 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, 2017, 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, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
Accounts and accrued income receivable, less allowances of $23,066 and $30,185
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 involving the use of real property related data designed to mitigate risk or otherwise facilitate real estate transactions; 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, 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 and the District of Columbia. 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.
During the fourth quarter of 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 the fourth quarter of 2017, which increased other operating expenses and increased accounts payable and accrued liabilities by $8.5 million.
During the third quarter of 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 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.
During the fourth quarter of 2016, the Company identified certain title plant assets that were no longer being used and should have been previously written off, and certain capitalized software, title plant imaging, real estate data and investments related to title plant assets that were misclassified as title plant assets. As these errors primarily related to reporting periods prior to the Company’s June 2010 spin-off from its prior parent, which subsequently assumed the name CoreLogic, Inc. (“CoreLogic”), the Company corrected for these errors by revising retained earnings at December 31, 2014 and 2015 in the consolidated statements of equity. The impact of this revision, which has been consistently applied to all periods presented, included a decrease to retained earnings of $8.5 million.
The Company classifies its publicly traded debt and equity securities as available-for-sale with unrealized gains or losses recorded as a component of accumulated other comprehensive loss. See Note 14 Fair Value Measurements for additional discussion of the determination of fair value. Interest income, as well as the related amortization of premium and accretion of discount, on debt securities are recognized under the effective yield method and are included in the accompanying consolidated statements of income in net investment income. Realized gains and losses on sales of debt and equity securities are determined on a first-in, first-out basis.
The Company evaluates its debt and equity securities with unrealized losses on a quarterly basis for potential other-than-temporary impairments in value.
As a result of the Company’s security-level review, the Company did not recognize any other-than-temporary impairment losses considered to be credit related for the year ended December 31, 2017 and recognized $0.5 million and $2.2 million of other-than-temporary impairment losses considered to be credit related on its debt securities for the years ended December 31, 2016, and 2015, respectively. It is possible that the Company could recognize additional other-than-temporary impairment losses on securities it owns at December 31, 2017 if future events or information cause it to determine that a decline in fair value is other-than-temporary.
When a decline in the fair value of an equity security, including common and preferred stock, is considered to be other-than-temporary, such security is written down to its fair value. When assessing if a decline in fair value is other-than-temporary, the factors considered by the Company include the length of time and extent to which fair value has been below cost, the probability that the Company will be unable to collect all amounts due under the contractual terms of the security, the seniority of the securities, issuer-specific news and other developments, the financial condition and prospects of the issuer (including credit ratings), macro-economic changes (including the outlook for industry sectors, which includes government policy initiatives) and the Company’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery.
When an equity security has been in an unrealized loss position and its fair value is less than 80% of cost for twelve consecutive months, the Company’s review of the security will include the above noted factors as well as other evidence that might exist supporting the view that the security will recover its value in the foreseeable future. If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded. The Company did not record any other-than-temporary impairment losses related to its equity securities for the years ended December 31, 2017, 2016 and 2015.
The carrying value of investments in affiliates 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 in an affiliate 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 Company recognized impairment losses of $1.5 million and $2.0 million for the years ended December 31, 2017 and 2015, respectively, and did not record any impairment losses related to its equity method investments for the year ended December 31, 2016.
Notes receivable are carried at cost, less reserves for losses. Loss reserves are established for notes receivable based upon an estimate of probable losses for the individual notes. A loss reserve is established on an individual note when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the note. The loss reserve is based upon the Company’s assessment of the borrower’s overall financial condition, resources and payment record; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including the expected future cash flows, estimated fair value of collateral on secured notes, general economic conditions and trends, and other relevant factors, as appropriate. Notes are placed on non-accrual status when management determines that the collectibility of contractual amounts is not reasonably assured.
The valuation of each reporting unit includes the use of assumptions and estimates of many critical factors, including revenue growth rates and operating margins, discount rates and future market conditions, determination of market multiples and the establishment of a control premium, among others. Forecasts of future operations are based, in part, on operating results and the Company’s expectations as to future market conditions. These types of analyses contain uncertainties because they require the Company to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. However, if actual results are not consistent with the Company’s estimates and assumptions, the Company may be exposed to future impairment losses that could be material.
For 2017, the Company chose to perform qualitative assessments for each of its reporting units except for its property and casualty insurance reporting unit, for which it performed a quantitative impairment test. Based on its quantitative impairment test, the Company determined that its property and casualty insurance reporting unit had a fair value that was not substantially in excess of its carrying amount. If the Company subsequently determines that there is impairment to the goodwill related to its property and casualty insurance reporting unit, management does not expect that it would be material to the Company’s consolidated financial statements. The results of the Company’s qualitative assessments for each of its other reporting units supported the conclusion that their fair values were not more likely than not less than their carrying amounts and, therefore, a quantitative impairment test was not considered necessary. For 2016, the Company chose to perform a quantitative impairment test for all of its reporting units and, based on the results, determined that the fair values of its reporting units exceeded their carrying amounts and, therefore, no additional analysis was required. For 2015, the Company chose to perform a qualitative assessment, the results of which supported the conclusion that the fair values of the Company’s reporting units were not more likely than not less than their carrying amounts, and therefore, a quantitative impairment test was not considered necessary. As a result of the Company’s annual goodwill impairment assessments, the Company did not record any goodwill impairment losses for 2017, 2016 or 2015.
The Company provides for property and casualty insurance losses when the insured event occurs. The Company provides for claims losses relating to its home warranty business based on the average cost per claim and historical loss experience as applied to the total of new claims incurred. The average cost per home warranty claim is calculated using the average of the most recent 12 months of claims experience adjusted for estimated future increases in costs.
Basic earnings per share is computed by dividing net income available to the Company’s stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and RSUs were vested.
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, 2017. Payments and recoveries on reinsured losses for the Company’s title insurance and property and casualty businesses were immaterial during the years ended December 31, 2017 and 2016.
The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $7.5 billion and $6.8 billion at December 31, 2017 and 2016, respectively, of which $2.9 billion and $2.6 billion, respectively, were held at the Company’s federal savings bank subsidiary, First American Trust, FSB. The escrow deposits held at First American Trust, FSB are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying consolidated balance sheets. The remaining escrow deposits were held at third-party financial institutions.
The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of each such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds held by the Company totaled $2.6 billion and $2.0 billion at December 31, 2017 and 2016, respectively. The like-kind exchange deposits are held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying consolidated balance sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.
In October 2016, the FASB issued updated guidance to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued updated guidance to clarify the definition of a business with the objective of providing guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
Statutory accounting principles differ in some respects from GAAP, and these differences include, but are not limited to, non-admission of certain assets (principally limitations on deferred tax assets, capitalized furniture and other equipment, capitalized software, and premiums and other receivables 90 days past due), reporting of bonds at amortized cost, amortization of goodwill, deferral of premiums received as statutory premium reserve, supplemental reserve (if applicable) and exclusion of the incurred but not reported claims reserve.
Gross unrealized losses on investments in debt and equity securities are as follows:
Based on the Company’s review of its investment securities in an unrealized loss position at December 31, 2017 and 2016, it determined that the losses were primarily the result of changes in interest rates, which were considered to be temporary, rather than a deterioration in credit quality. The Company does not intend to sell and it is not more likely than not that the Company will be required to sell these securities prior to recovering their amortized cost. As such, the Company does not consider these securities to be other-than-temporarily impaired at December 31, 2017 and 2016.
Mortgage-backed securities, which include contractual terms to maturity, are not categorized by contractual maturity because borrowers may have the right to call or prepay obligations with, or without, call or prepayment penalties.
The credit ratings in the above tables reflect published ratings obtained from globally recognized securities rating agencies. If a security was rated differently among the rating agencies, the lowest rating was selected. Governmental agency mortgage-backed securities are not rated by any of the ratings agencies; however, these securities have been included in the above table in the “A- or higher” category because the payments of principal and interest are guaranteed by the governmental agency that issued the security.
A summary of the changes in the carrying amount of goodwill, by operating segment, for the years ended December 31, 2017 and 2016, is as follows:
For further discussion about the Company’s acquisitions in 2017 and 2016, see Note 20 Business Combinations.
Amortization expense for finite-lived intangible assets was $28.1 million, $15.4 million and $9.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, the IBNR claims reserve for the title insurance and services segment was $875.7 million, which reflected management’s best estimate. The Company’s internal actuary determined a range of reasonable estimates of $716.3 million to $910.9 million. The range limits are $159.4 million below and $35.2 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.
Line of credit borrowings due May 14, 2019, weighted-average interest rate of 3.32% and 2.52% at December 31, 2017 and 2016, respectively
Trust deed notes with maturities through 2023, collateralized by land and buildings with net book values of $46,478 and $47,846 at December 31, 2017 and 2016, respectively, weighted-average interest rate of 5.27% and 5.31%, at December 31, 2017 and 2016, respectively
Other notes and contracts payable with maturities through 2032, weighted-average interest rate of 4.70% and 5.26% at December 31, 2017 and 2016, respectively
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 amends the Internal Revenue Code to reduce U.S. tax rates and modify policies, credits and deductions for individuals and businesses. The Company recorded $114.1 million in estimated net tax benefits to net income for 2017 related to the Tax Reform Act, as follows:
Remeasurement of Deferred Taxes. The Tax Reform Act permanently reduces the U.S. federal corporate income tax rate from 35% to 21%, effective for tax years beginning after 2017. GAAP requires an adjustment to deferred taxes as a result of a change in the corporate tax rate in the period that the change is enacted, with the change recorded to the current year tax provision. Accordingly, the Company has remeasured its deferred tax assets and liabilities at the new tax rate and recorded a one-time noncash tax benefit of $130.9 million to deferred income taxes for the year ended December 31, 2017. This benefit is reflected in the Company’s reduced effective tax rate for the year.
Immediate Expensing of Assets. The Tax Reform Act allows taxpayers to immediately expense the entire cost of qualified tangible property placed in service after September 27, 2017. As a result, the Company has recorded a tax benefit of $4.7 million for the year ended December 31, 2017 (included in the Remeasurement of Deferred Taxes discussed above), and expects to continue to expense qualified property in future years. This provision will be phased out from 2023 through 2026.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 on December 22, 2017, which provides for a one-year measurement period that allows businesses time to evaluate the financial statement implications of the Tax Reform Act. Companies are required to disclose in financial filings whether their accounting for the income tax effects of the Tax Reform Act is complete, incomplete but reasonably estimated, or incomplete with no estimate provided. The measurement period allows businesses to gather the information necessary to prepare and analyze the income tax accounting effects of the Tax Reform Act on financial statements issued during the measurement period. During the measurement period, an entity may need to reflect adjustments to provisional amounts previously recorded after obtaining, preparing, or analyzing additional information about facts and circumstances that existed as of the enactment date that, if known, would have affected the income tax effects initially reported as provisional amounts. Such adjustments to provisional amounts included in an entity’s financial statements during the measurement period would be included in income from continuing operations as an adjustment to income tax expense or benefit in the reporting period the amounts are determined. As noted above, the Company has recorded in income tax expense for 2017 the estimated impact of various provisions of the Tax Reform Act. The ultimate impact of the Tax Reform Act on the Company’s consolidated financial statements may differ materially from the amounts estimated herein due to further refinement of the Company’s calculations, changes in interpretations and assumptions that the Company has made, guidance that may be issued by income taxing authorities and regulatory bodies, and actions the Company may take as a result of the Tax Reform Act. The Company anticipates completing its tax accounting for the Tax Reform Act during the one-year measurement period, and will record and disclose any adjustments made to its initial estimates during that time frame.
For the years ended December 31, 2017, 2016 and 2015, domestic and foreign pretax income from continuing operations before noncontrolling interests were $391.4 million and $53.9 million, $416.5 million and $61.1 million, and $383.5 million and $49.3 million, respectively.
The Company’s effective income tax rates (income tax expense as a percentage of income before income taxes) were 5.3% for 2017, 28.1% for 2016 and 33.3% for 2015. The differences in the effective tax rates 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 2017 also 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. In addition, the Company’s effective tax rate for 2017 reflects 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 impact to the Company of adopting this guidance was a reduction in income tax expense of $3.4 million. See Note 1 Basis of Presentation and Significant Accounting Policies for further discussion of the new guidance. The Company’s effective tax rate for 2016 reflects the resolution of certain tax authority examinations and tax credits claimed in 2016 and prior years. The Company’s effective tax rate for 2015 includes a benefit for the release of valuation allowances previously provided against certain foreign net operating losses and other deferred tax assets.
The decrease in net deferred tax liability is primarily a result of applying the recently enacted U.S. corporate tax rate of 21% to deferred tax balances as of December 31, 2017. Balances as of December 31, 2016 were computed using the 35% rate then in effect.
In connection with the Company’s June 2010 spin-off from CoreLogic, it entered into a tax sharing agreement which governs the Company’s and CoreLogic’s respective rights, responsibilities and obligations for certain tax-related matters. At December 31, 2017 and 2016, the Company had a net payable to CoreLogic of $15.0 million and $16.3 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 decrease during the current year was primarily due to payments made for tax matters prior to the spin-off.
At December 31, 2017, the Company had available net operating loss carryforwards for income tax purposes totaling $101.6 million, consisting of federal, state and foreign losses of $0.1 million, $57.5 million and $44.0 million, respectively. Of the aggregate net operating losses, $29.9 million has an indefinite expiration and the remaining $71.7 million expires at various times beginning in 2018. The Company carries a valuation allowance of $10.3 million against its deferred tax assets. Of this amount, $9.3 million relates to net operating losses; the remaining $1.0 million relates to other foreign deferred tax assets. The year-over-year increase in the overall valuation allowance is primarily due to additional state and foreign net operating losses incurred in 2017 that are not expected to be realized.
As of December 31, 2017, 2016 and 2015, the liability for income taxes associated with uncertain tax positions was $12.8 million, $18.1 million and $23.8 million, respectively. The net decreases in the liabilities during 2017, 2016 and 2015 were primarily attributable to activity related to examinations conducted by various taxing authorities. The liabilities could be reduced by $3.7 million, $5.7 million and $3.4 million as of December 31, 2017, 2016, and 2015, respectively, due to offsetting tax benefits associated with the correlative effects of potential adjustments, including timing adjustments and state income taxes. The net amounts of $9.1 million, $12.4 million and $20.4 million as of December 31, 2017, 2016 and 2015, respectively, if recognized, would favorably affect the Company’s effective tax rate.
The Company’s continuing practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense. As of December 31, 2017, 2016 and 2015, the Company had accrued $5.3 million, $4.1 million and $9.7 million, respectively, of interest and penalties (net of tax benefits of $1.4 million, $1.8 million and $4.1 million, respectively) related to uncertain tax positions.
The Company maintains a deferred compensation plan for certain employees that allows participants to defer up to 100% of their salary, commissions and certain bonuses. Participants can allocate their deferrals among a variety of investment crediting options (known as “deemed investments”). The term deemed investments means that the participant has no ownership interest in the funds they select; the funds are only used to measure the gains or losses that will be attributed to each participant’s deferral account over time. Participants can elect to have their deferral balance paid out while they are still employed or after their employment ends. The deferred compensation plan is exempt from most provisions of the Employee Retirement Income Security Act (“ERISA”) because it is only available to a select group of management and highly compensated employees and is not a qualified employee benefit plan. To preserve the tax-deferred savings advantages of a nonqualified deferred compensation plan, federal law requires that it be unfunded or informally funded. Participant deferrals, and any earnings on those deferrals, are general unsecured obligations of the Company. The Company informally funds the deferred compensation plan through a tax-advantaged investment known as variable universal life insurance. Deferred compensation plan assets are held as an asset of the Company within a special trust, known as a “Rabbi Trust.” At December 31, 2017 and 2016, the value of the assets in the Rabbi Trust of $92.7 million and $78.9 million, respectively, and the unfunded liabilities of $97.2 million and $82.5 million, respectively, were included in the consolidated balance sheets in other assets and pension costs and other retirement plans, respectively.
Net periodic costs related to the Company’s funded defined benefit pension and unfunded supplemental benefit plans included the following components:
Net actuarial loss and prior service credit for the unfunded supplemental benefit plans expected to be amortized from accumulated other comprehensive loss into net periodic cost over the next fiscal year include an expense of $4.8 million and a credit of $4.2 million, respectively.
Weighted-average discount rate assumptions used to determine net periodic benefit costs for the years ended December 31, 2017 and 2016, were 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 value 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, 2017 and 2016:
There were no transfers between Levels 1 and 2 during the years ended December 31, 2017 and 2016. Transfers into or out of the Level 3 category occur when unobservable inputs become more or less significant to the fair value measurement. For the years ended December 31, 2017 and 2016, transfers between Level 2 and Level 3 were based on market liquidity and related transparency of pricing and associated observable inputs for certain of the Company’s corporate debt securities. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.
The carrying values of escrow and other deposit accounts approximate fair value due to the short-term nature of these liabilities.
The fair value of notes and contracts payable is estimated based on current rates offered to the Company for debt of similar remaining maturities.
As of December 31, 2017, there was $26.6 million of total unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a weighted-average period of 2.2 years. The fair value of RSUs is generally based on the market value of the Company’s shares on the date of grant. The total fair value of shares vested and not distributed for the years ended December 31, 2017, 2016 and 2015 was $33.7 million, $25.9 million and $20.3 million, respectively.
The following table summarizes stock option activity for the year ended December 31, 2017:
As of December 31, 2017, there was no unrecognized compensation cost related to unvested stock options of the Company.
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 $182.4 million remained as of December 31, 2017. Purchases may be made from time to time by the Company in the open market at prevailing market prices or in privately negotiated transactions. The Company did not repurchase any shares of its common stock during the year ended December 31, 2017 and, as of December 31, 2017, had repurchased and retired 3.2 million shares of its common stock under the current authorization for a total purchase price of $67.6 million.
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, one of its subsidiaries and/or one of its agents overcharged or improperly charged fees for products and services, conspired to fix prices, participated in the conveyance of illusory property interests, improperly handled property and casualty claims, and gave items of value to brokers and others 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
All of these lawsuits, except Kaufman and Sjobring, are putative class actions for which a class has not been certified. For the reasons described above, the Company has not yet been able to assess the probability of loss or estimate the possible loss or the range of loss or, where the Company has been able to make an estimate, the Company believes the amount is not material to the consolidated financial statements as a whole.
The holding company received cash dividends from subsidiaries of $87.4 million, $46.4 million and $142.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.