The following discussion should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Selected Financial Data included elsewhere in this Annual Report. Overview For a description of our business, including descriptions of segments, see the discussion under Business in Item 1 of Part I of this Annual Report, which is incorporated by reference into this Item 7 of Part II of this Annual Report. Recent Developments Termination of Stewart Merger Agreement and Payment of Reverse Termination Fee OnMarch 18, 2018 , we signed a merger agreement (the "Stewart Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"). OnSeptember 9, 2019 , we entered into a mutual Termination Agreement with Stewart (the "Termination Agreement"), pursuant to which the parties agreed to terminate the Stewart Merger Agreement, due to theFederal Trade Commission's issuance of an administrative complaint seeking to block the merger. In connection with the termination of the Stewart Merger Agreement, onSeptember 12, 2019 , we paid to Stewart the Reverse Termination Fee (as defined in the Stewart Merger Agreement) consisting of$50 million in cash, which is included within other operating expenses in the Consolidated Statements of Earnings. Pending Acquisition of FGL OnFebruary 7, 2020 , we signed a merger agreement (the "Merger Agreement") to acquire FGL Holdings ("FGL") (NYSE: FG) (the "FGL Merger"). Subject to the terms and conditions of the Merger Agreement, which has been approved by the board of directors of FNF, at the First Effective Time (as defined in the Merger Agreement), the ordinary shares of FGL (the "Ordinary Shares"), including all restricted Ordinary Shares (whether vested or unvested), issued and outstanding as of immediately prior to the First Effective Time (other than (i) shares owned by FGL and any of its subsidiaries or FNF and any of its subsidiaries and (ii) shares in respect of which dissenters rights have been properly exercised and perfected under Cayman law) will be converted into the right to receive$12.50 in cash or 0.2558 shares ("the Stock Consideration") of common stock of FNF ("FNF Common Stock"), at the election of the holder thereof and subject to the proration mechanics set forth in the Merger Agreement. Pursuant to the Merger Agreement, all Ordinary Shares held by FNF and its subsidiaries will be converted into the right to receive the Stock Consideration. Each Series B Cumulative Preferred Share, all of which are held by FNF and its subsidiaries, will be converted into the right to receive a number of shares of FNF Common Stock that is equal to (i) the Liquidation Preference (as defined in the Merger Agreement) divided by (ii) the Reference Parent Common Stock Price (as defined in the Merger Agreement). Additionally, all options to purchase Ordinary Shares ("FGL Share Option") and phantom unit denominated in Ordinary Shares ("FGL Phantom Unit"), in each case, outstanding immediately prior to the First Effective Time, will be canceled and converted into options to purchase FNF Common Stock and phantom units denominated in FNF Common Stock at the First Effective Time (collectively, the "Rollover Awards"), as applicable. The Rollover Awards will generally be subject to the same terms and conditions as applicable to the applicable canceled FGL Share Option or FGL Phantom Unit immediately prior to the First Effective Time, except that (i) all performance-vesting criteria will be deemed satisfied at the First Effective Time at the levels described in the Merger Agreement and such Rollover Awards will be subject only to time-based vesting conditions after the First Effective Time, and (ii) immediately prior to the First Effective Time, additional time-vesting credits will be provided to holders in respect of FGL Share Options and FGL Phantom Units granted prior toJanuary 1, 2020 , as described in the Merger Agreement. The closing of the transaction is subject to certain closing conditions, including the approval by FGL stockholders, federal and state regulatory approvals, and the satisfaction of other customary closing conditions. Closing is expected in the second or third quarter of 2020. Business Trends and Conditions Our Title segment revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. Declines in the level of real estate activity or the average price of real estate sales will adversely affect our title insurance revenues. We have found that residential real estate activity is generally dependent on the following factors: • mortgage interest rates; • mortgage funding supply;
• housing inventory and home prices; and
• strength of
As ofJanuary 17, 2020 , theMortgage Banker's Association ("MBA") estimated the size ofthe United States ("U.S.") residential mortgage originations market as shown in the following table for 2019 - 2022 in its "Mortgage Finance Forecast" (in trillions, 2018 represents actual originations): 24
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Table of Contents 2022 2021 2020 2019 2018 Purchase transactions$ 1.4 $ 1.3 $ 1.3 $ 1.3 $ 1.2 Refinance transactions 0.4 0.5 0.6 0.8 0.5
Total
In 2018, total originations were reflective of a generally improving residential real estate market driven by increasing home prices and low mortgage interest rates. In 2018 average interest rates on 30-year, fixed-rate mortgages in theU.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 slightly decreased in 2018 from the historically high levels experienced in preceding years. Existing home sales also slightly decreased in 2018. In 2019, concerns over a slowing global economy and the impact of a prolonged trade war resulted in additional interest rate cuts in the second half of the year which significantly increased refinance transactions and slightly increased purchase transactions when compared to 2018. During the second half of 2019, the combination of reduced housing inventory, lower mortgage interest rates and increasing home prices led the MBA to keep purchase transaction forecasts relatively flat for 2020 and beyond. The MBA expects a decrease in refinance transactions in each of the next three years. Mortgage interest rates are generally expected to remain flat in 2020. In a stagnate interest rate environment, refinance transactions are expected to stagnate. The MBA predicts overall residential mortgage originations in 2020 and 2021 will decrease compared to 2019. Other economic indicators used to measure the health of theU.S. economy, including the unemployment rate and consumer confidence, have continued to indicate theU.S. economy remains on strong footing. According to theU.S. Department of Labor's Bureau of Labor , the unemployment rate was at a historically low 3.5% inDecember 2019 . Additionally, theConference Board's monthly Consumer Confidence Index has remained at high levels through 2019, despite a slight decrease in the second half of the year. Toward the end of the fiscal year of 2018 and into 2019, there has been increased global economic uncertainty and stock market volatility as a result of, among other things, the ongoing trade war. Such market uncertainty could ultimately impactU.S. real estate markets if they worsen. We believe continued strong readings in domesticU.S. economic indicators present potential tailwinds for mortgage originations, despite growing risks from global economic uncertainties. We cannot be certain how the positive effects of a generally strongU.S. economy and the negative effects of flat or slightly increasing mortgage interest rates and global economic uncertainty will impact mortgage originations and our future results of operations from our residential business. We continually monitor mortgage origination trends and believe that, based on our ability to produce industry leading operating margins through all economic cycles, we are well positioned to adjust our operations for adverse changes in real estate activity. 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 includingU.S. tax reform and a shift inU.S. monetary policy have had, or are expected to have, varying effects on availability of financing in theU.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, long-term gradual increases in the Fed Funds Rate are generally expected to adversely impact availability of financing. In recent years, we have continued to experience strong demand in commercial real estate markets and from 2017 to 2019 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. Geographic Operations Our direct title operations are divided into approximately 180 profit centers. Each profit center processes title insurance transactions within its geographical area, which is usually identified by a county, a group of counties forming a region, or a state, depending on the management structure in that part of the country. We also transact title insurance business through a network of approximately 5,300 agents, primarily in those areas in which agents are the more prevalent title insurance provider. Substantially all of our revenues are generated inthe United States . 25
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The following table sets forth the approximate dollar and percentage volumes of our title insurance premium revenue by state:
Year Ended December 31, 2019 2018 2017 Amount % Amount % Amount % (Dollars in millions) California$ 764 14.3 %$ 681 13.9 %$ 708 14.5 % Texas 734 13.8 707 14.4 693 14.2 Florida 492 9.2 432 8.8 392 8.0 New York 311 5.8 310 6.3 311 6.3 Illinois 273 5.1 271 5.5 283 5.8 All others 2,768 51.8 2,510 51.1 2,506 51.2 Totals$ 5,342 100.0 %$ 4,911 100.0 %$ 4,893 100.0 % Critical Accounting Estimates The accounting estimates described below are those we consider critical in preparing our Consolidated Financial Statements. Management is required to make estimates and assumptions that can affect the reported amounts of assets and liabilities and disclosures with respect to contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. See Note A. Business and Summary of Significant Accounting Policies to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for additional description of the significant accounting policies that have been followed in preparing our Consolidated Financial Statements. Reserve for Title Claim Losses. Title companies issue two types of policies, owner's and lender's policies, since both the new owner and the lender in real estate transactions want to know that their interest in the property is insured against certain title defects outlined in the policy. An owner's policy insures the buyer against such defects for as long as he or she owns the property (as well as against warranty claims arising out of the sale of the property by such owner). A lender's policy insures the priority of the lender's security interest over the claims that other parties may have in the property. The maximum amount of liability under a title insurance policy is generally the face amount of the policy plus the cost of defending the insured's title against an adverse claim; however, occasionally we do incur losses in excess of policy limits. While most non-title forms of insurance, including property and casualty, provide for the assumption of risk of loss arising out of unforeseen future events, title insurance serves to protect the policyholder from risk of loss for events that predate the issuance of the policy. Unlike many other forms of insurance, title insurance requires only a one-time premium for continuous coverage until another policy is warranted due to changes in property circumstances arising from refinance, resale, additional liens, or other events. Unless we issue the subsequent policy, we receive no notice that our exposure under our policy has ended and, as a result, we are unable to track the actual terminations of our exposures. 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. The table below summarizes our reserves for known claims and incurred but not reported claims related to title insurance: December 31, 2019 % December 31, 2018 % (in millions) (in millions) Known claims $ 176 11.7 % $ 173 11.6 % IBNR 1,333 88.3 1,315 88.4 Total Reserve for Title Claim Losses $ 1,509 100.0 % $ 1,488 100.0 % Although claims against title insurance policies can be reported relatively soon after the policy has been issued, claims may be reported many years later. Historically, approximately 60% of claims are paid within approximately five years of the policy being written. By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions, as well as the legal environment existing at the time of settlement of the claims. Estimating future title loss payments 26
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is difficult because of the complex nature of title claims, the long periods of time over which claims are paid, significantly varying dollar amounts of individual claims and other factors. 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. We recorded our loss provision rate at 4.5% for the year endedDecember 31, 2019 . Our average loss provision rate was 4.5%, 4.5% and 4.9% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Of such annual loss provision rates, 4.5%, for each of the years endedDecember 31, 2019 , 2018 and 2017, respectively, related to losses on policies written in the current year, and the remainder, if any related to developments on prior year policies. The provision rate in 2019, 2018, and 2017 is supported by significant payment declines for prior policy years, and qualitative factors that would indicate favorable results, including better lender underwriting standards, extension of credit to higher quality borrowers, a high proportion of refinance activity, better claims expense management, better mechanic's lien underwriting practices, and better fraud awareness by lenders, title insurers and settlement agents. In 2017, adverse development of prior year losses of$19 million or 0.4% of 2017 premium was accounted for in the provision rate. Due to the uncertainty inherent in the process and due to the judgment used by both management and our actuary, our ultimate liability may be greater or less than our carried reserves. If the recorded amount is within the actuarial range but not at the central estimate, we assess the position within the actuarial range by analysis of other factors in order to determine that the recorded amount is our best estimate. These factors, which are both qualitative and quantitative, can change from period to period, and include items such as current trends in the real estate industry (which we can assess, but for which there is a time lag in the development of the data), any adjustments from the actuarial estimates needed for the effects of unusually large or small claims, improvements in our claims management processes, and other cost saving measures. If the recorded amount is not within a reasonable range of our actuary's central estimate, we may have to record a charge or credit and reassess the loss provision rate on a go forward basis. We will continue to reassess the provision to be recorded in future periods consistent with this methodology. The table below presents our title insurance loss development experience for the past three years: 2019 2018 2017 (In millions) Beginning balance$ 1,488 $ 1,490 $ 1,487 Change in reinsurance recoverable 1 - (4 ) Claims loss provision related to: Current year 240 221 219 Prior years - - 19 Total title claim loss provision 240 221 238 Claims paid, net of recoupments related to: Current year (11 ) (10 ) (8 ) Prior years (209 ) (213 ) (223 ) Total title claims paid, net of recoupments (220 ) (223 ) (231 ) Ending balance of claim loss reserve for title insurance$ 1,509 $ 1,488 $ 1,490 Title premiums$ 5,342 $ 4,911 $ 4,893 27
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2019 2018
2017
Provision for title insurance claim losses as a percentage of title insurance premiums: Current year 4.5 % 4.5 % 4.5 % Prior years - - 0.4 Total provision 4.5 % 4.5 % 4.9 %
Actual claims payments consist of loss payments and claims management expenses offset by recoupments and were as follows (in millions):
Claims Management Net Loss Loss Payments Expenses Recoupments Payments Year ended December 31, 2019 $ 139 $ 112$ (31 ) $ 220 Year ended December 31, 2018 140 118 (35 ) 223 Year ended December 31, 2017 145 121 (35 ) 231 As ofDecember 31, 2019 and 2018, our recorded reserves were$1,509 million and$1,488 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$34 million above the mid-point of the provided range of$1.3 billion to$1.7 billion of our actuarial estimates as ofDecember 31, 2019 . Our recorded reserves were$44 million above the mid-point of the provided range of our actuarial estimates of$1.3 billion to$1.6 billion as ofDecember 31, 2018 . During 2019, 2018, and 2017, payment patterns were consistent with our actuaries' and management's expectations. Also, compared to prior years we have seen a leveling off of the ultimate loss ratios in more mature policy years, particularly 2005-2008. While we still see claims opened on these policy years, the proportion of our claims inventory represented by these policy years has continued to decrease. Additionally, we continued to see positive development relating to the 2009 through 2019 policy years, which we believe is indicative of more stringent underwriting standards by us and the lending industry. Further, we have seen significant positive development in residential owner's policies due to increased payments on residential lender's policies which inherently limit the potential loss on the related owner's policy to the differential in coverage amount between the amount insured under the owner's policy and the amount paid under the residential lender's policy. Also, any residential lender's policy claim paid relating to a property that is in foreclosure negates any potential loss under an owner's policy previously issued on the property as the owner has no equity in the property. Our ending open claim inventory decreased from approximately 12,800 claims atDecember 31, 2018 to approximately 11,800 claims atDecember 31, 2019 . If actual claims loss development varies from what is currently expected and is not offset by other factors, it is possible that our recorded reserves may fall outside a reasonable range of our actuaries' central estimate, which may require additional reserve adjustments in future periods. An approximate$53 million increase (decrease) in our annualized provision for title claim losses would occur if our loss provision rate were 1% higher (lower), based on 2019 title premiums of$5,342 million . A 10% increase (decrease) in our reserve for title claim losses, as ofDecember 31, 2019 , would result in an increase (decrease) in our provision for title claim losses of approximately$151 million . Valuation of Investments. Investments in fixed maturity, equity, and preferred securities are recorded on the balance sheet at fair value. We regularly review our fixed maturity investment portfolio for factors that may indicate that a decline in fair value of an investment is other-than-temporary. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: (i) our intent and need 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. Investments are selected for analysis whenever an unrealized loss is greater than a certain threshold that we determine based on the size of our portfolio or by using other qualitative factors. Fixed maturity investments that have unrealized losses caused by interest rate movements are not at risk as we do not anticipate having the need or intent to sell prior to maturity. Unrealized losses on fixed maturity instruments that are susceptible to credit related declines are evaluated based on the aforementioned factors. Currently available market data is considered and estimates are made as to the duration and prospects for recovery, and the intent or ability to retain the investment until such recovery takes place. These estimates are revisited quarterly and any material degradation in the prospect for recovery will be considered in the other-than-temporary impairment analysis. We believe that our monitoring and analysis has provided for the proper recognition of other-than-temporary impairments over the past three-year period. Any change in estimate in this area will have an impact on the results of operations of the period in which a charge is taken. 28
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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. BeginningJanuary 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 toJanuary 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. The fair value hierarchy established by the standard on fair value includes three levels, which are based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument. In accordance with the standard on fair value, our financial assets and liabilities that are recorded in the Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows: Level 1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that we have the ability to access. Level 2. Financial assets and liabilities whose values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 3. Financial assets and liabilities whose values are based on model inputs that are unobservable. The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as ofDecember 31, 2019 and 2018, respectively: December 31, 2019 Level 1 Level 2 Level 3 Total (In millions) Assets: Fixed-maturity securities available for sale: U.S. government and agencies $ -$ 288 $ -$ 288 State and political subdivisions - 93 - 93 Corporate debt securities - 1,570 17 1,587 Foreign government bonds - 60 - 60 Mortgage-backed/asset-backed securities - 62 - 62 Preferred securities 65 258 - 323 Equity securities 810 - 1 811 Other long-term investments - - 120 120 Total assets$ 875 $ 2,331 $ 138 $ 3,344 29
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Table of Contents December 31, 2018 Level 1 Level 2 Level 3 Total (In millions) Assets: Fixed-maturity securities available for sale: U.S. government and agencies $ -$ 225 $ -$ 225 State and political subdivisions - 148 - 148 Corporate debt securities - 1,486 17 1,503 Foreign government bonds - 62 - 62 Mortgage-backed/asset-backed securities - 60 - 60 Preferred securities 16 285 - 301 Equity securities 498 - - 498 Other long-term investments - - 101 101 Total assets$ 514 $ 2,266 $ 118 $ 2,898 Our Level 2 fair value measures for preferred securities and fixed-maturity securities available for sale are provided by a third-party pricing service. We utilize one firm for our preferred security 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 available and for certain investments, we independently compare the resulting prices to other publicly available measures of fair value and internally developed models. The pricing methodologies used by the relevant third party pricing services are as follows: •U.S. government and agencies: These securities are valued based on data
obtained for similar securities in active markets and from inter-dealer
brokers.
• State and political subdivisions: These securities are valued based on
data obtained for similar securities in active markets and from inter-dealer brokers. Factors considered include relevant trade information, dealer quotes and other relevant market data.
• Corporate debt securities: These securities are valued based on dealer
quotes and related market trading activity. Factors considered include the
bond's yield, its terms and conditions, or any other feature which may
influence its risk and thus marketability, as well as relative credit
information and relevant sector news.
• Foreign government bonds: These securities are valued based on a
discounted cash flow model incorporating observable market inputs such as
available broker quotes and yields of comparable securities.
• Mortgage-backed/asset-backed securities: These securities are comprised of
commercial mortgage-backed securities, agency mortgage-backed securities,
collateralized mortgage obligations, and asset-backed securities. They are
valued based on available trade information, dealer quotes, cash flows,
relevant indices and market data for similar assets in active markets.
• Preferred securities: Preferred securities are valued by calculating the
appropriate spread over a comparable
benchmark quotes and other relevant market data.
In conjunction with our adoption of ASU No. 2016-01, beginningJanuary 1, 2018 , we began recording certain preferred equity investments in other long term investments at fair value which were previously accounted for as cost method investments. Our Level 3 fair value measures for our other long term investment are provided by a third-party pricing service. We utilize one firm to value our Level 3 other long-term investment. The pricing service is a leading global provider of financial market data, analytics and related services to financial institutions. We utilize the income approach and a discounted cash flow analysis in determining the fair value of our Level 3 other long-term investment. The primary unobservable input utilized in this pricing methodology is the discount rate used which is determined based on underwriting yield, credit spreads, yields on benchmark indices, and comparable public company debt. The discount rate used in our determination of the fair value of our Level 3 other long-term investment as ofDecember 31, 2019 was a range of 6.8% - 7.4% and a weighted-average of 7.0%. Based on the total fair value of our Level 3 other long-term investment as ofDecember 31, 2019 , changes in the discount rate utilized will not result in a fair value significantly different than the amount recorded. 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 endedDecember 31, 2019 . 30
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Table of Contents Other long-term Equity Corporate debt investments securities securities Total (In millions) Fair value, December 31, 2017 $ - $ - $ - $ - Fair value of assets associated with the adoption of ASU 2016-01 (1) 100 - - 100 Transfers from Level 2 - - 17 17 Paid-in-kind dividends (2) 7 - - 7 Purchases - - 1 1 Net change in fair value included in earnings (3) (6 ) - - (6 ) Net unrealized loss included in other comprehensive (loss) earnings - - (1 ) (1 ) Fair value, December 31, 2018 $ 101 $ - $ 17$ 118 Transfers to Level 2 - - (6 ) (6 ) Paid-in-kind dividends (2) 8 - 1 9 Purchases - - 7 7 Net change in fair value included in earnings (3) 11 1 (2 ) 10 Fair value, December 31, 2019 $ 120 $ 1
$ 17
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(1) See Note S. Recent Accounting Pronouncements for further discussion. (2) Included in Interest and investment income on the Consolidated Statements of Earnings (3) Included in Realized gains and losses, net on the 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 endedDecember 31, 2019 , transfers between Level 2 and Level 3 are not considered material to the Company's financial position or results of operations. For the year endedDecember 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. 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 endedDecember 31, 2019 , 2018 and 2017, we incurred impairment charges relating to investments that were determined to be other-than-temporarily impaired of$8 million ,$3 million , and$1 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 ofDecember 31, 2019 and 2018, goodwill was$2,727 million and$2,726 million , respectively. The majority of our goodwill as ofDecember 31, 2019 relates to goodwill recorded in connection with the Chicago Title merger in 2000 and our acquisition ofServiceLink 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 ourGoodwill balance. In evaluating the recoverability of goodwill, we perform a qualitative analysis to determine whether it is more likely than not that the fair value of our recorded goodwill exceeds its carrying value. Based on the results of this analysis, an annual goodwill impairment test may be completed based on an analysis of the discounted future cash flows generated by the underlying assets. The process of determining whether or not goodwill is impaired or recoverable relies on projections of future cash flows, operating results and market conditions. Future cash flow estimates are based partly on projections of market conditions such as the volume and mix of refinance and purchase transactions and interest rates, which are beyond our control and are likely to fluctuate. While we believe that our estimates of future cash flows are reasonable, these estimates are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ from what is assumed in our impairment tests. Such analyses are particularly sensitive to changes in estimates of future cash flows and discount rates. Changes to these estimates might result in material changes in fair value and determination of the recoverability of goodwill, which may result in charges against earnings and a reduction in the carrying value of our goodwill in the future. We completed annual goodwill impairment analyses in the fourth quarter of each period presented using aSeptember 30 measurement date. As a result of our analysis,$3 million of goodwill impairment related to a real estate brokerage subsidiary in our Corporate and other segment was recorded in the year endedDecember 31, 2018 . For the years endedDecember 31, 2019 and 2017, we determined there were no events or circumstances 31
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which indicated that the carrying value exceeded the fair value. As ofDecember 31, 2019 , we have determined that our title segment goodwill has a fair value which substantially exceeds its carrying value. Other Intangible Assets. 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 recoverable. In general, customer relationships are amortized over their estimated useful lives, generally ten years, using an accelerated method which takes into consideration expected customer attrition rates. Contractual relationships are generally amortized over their contractual life. Trademarks and tradenames are generally amortized over ten years. Capitalized software includes the fair value of software acquired in business combinations, purchased software and capitalized software development costs. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using straight-line or accelerated methods over its estimated useful life, ranging from five to ten years. For internal-use computer software products, internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred during the application development stage are capitalized and amortized on a product by product basis commencing on the date the software is ready for its intended use. We do not capitalize any costs once the software is ready for its intended use. We recorded no impairment expense to other intangible assets during the year endedDecember 31, 2019 . We recorded$3 million and$1 million in impairment expense to other intangible assets during the years endedDecember 31, 2018 and 2017, 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 atServiceLink . Accounting for Income Taxes. As part of the process of preparing the consolidated financial statements, we are required to determine income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax expense together with assessing temporary differences resulting from differing recognition of items for income tax and accounting purposes. These differences result in deferred income tax assets and liabilities, which are included within the Consolidated Balance Sheets. We must then assess the likelihood that deferred income tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must reflect this increase as expense within Income tax expense in the Consolidated Statement of Earnings. Determination of income tax expense requires estimates and can involve complex issues that may require an extended period to resolve. Further, the estimated level of annual pre-tax income can cause the overall effective income tax rate to vary from period to period. We believe that our tax positions comply with applicable tax law and that we adequately provide for any known tax contingencies. We believe the estimates and assumptions used to support our evaluation of tax benefit realization are reasonable. Final determination of prior-year tax liabilities, either by settlement with tax authorities or expiration of statutes of limitations, could be materially different than estimates reflected in assets and liabilities and historical income tax provisions. The 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. Certain Factors Affecting Comparability Year endedDecember 31, 2017 . As a result of the BK Distribution and the FNFV Split-Off, we have reclassified the results of operations of Black Knight and FNFV to discontinued operations for all periods presented. Refer to Note G Discontinued Operations to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report, which is incorporated by reference into this Item 7 of Part II of this Annual Report for further information on the results of operations of Black Knight and FNFV. 32
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Results of Operations
Consolidated Results of Operations
Net earnings. The following table presents certain financial data for the years indicated: Year Ended December 31, 2019 2018 2017 (Dollars in millions) Revenue: Direct title insurance premiums$ 2,381 $ 2,221 $ 2,170 Agency title insurance premiums 2,961 2,690 2,723 Escrow, title-related and other fees 2,584 2,615 2,637 Interest and investment income 225 177 131 Realized gains and losses, net 318 (109 ) 2 Total revenue 8,469 7,594 7,663 Expenses: Personnel costs 2,696 2,538 2,460 Agent commissions 2,258 2,059 2,089 Other operating expenses 1,681 1,801 1,781 Depreciation and amortization 178 182 183 Provision for title claim losses 240 221 238 Interest expense 47 43 48 Total expenses 7,100 6,844 6,799 Earnings from continuing operations before income taxes and equity in earnings of unconsolidated affiliates 1,369 750 864 Income tax expense on continuing operations 308 120 235 Equity in earnings of unconsolidated affiliates 15 5 10 Net earnings from continuing operations$ 1,076 $
635
Revenues.
Total revenue in 2019 increased$875 million compared to 2018, primarily attributable to increases in both our direct and agency premiums, increases in interest and investment income, and non-cash valuation gains on our equity and preferred investment holdings, partially offset by a decrease in escrow, title-related and other fees. Total revenue in 2018 decreased$69 million compared to 2017, primarily due to a decrease in agent remittances and non-cash valuation losses on our equity and preferred investment holdings, partially offset by an increase in interest income and direct title premiums. 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. Total net earnings from continuing operations increased$441 million in the year endedDecember 31, 2019 , compared to 2018 and decreased$4 million in the year endedDecember 31, 2018 , compared to 2017. The change in revenue and net earnings is discussed in further detail at the segment level below. Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income was$225 million ,$177 million , and$131 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. The increase in 2019 as compared to 2018 is primarily attributable to increased fixed maturity interest income due to an increased average fixed maturity portfolio balance, increased interest income from our tax-deferred property exchange business, and increased interest income from a higher average balance of cash and cash equivalents and short term investments portfolio balance compared to the prior year, partially offset by lower investment yields as a result of declining interest rates year-over-year. The increase in 2018 as compared to 2017 is primarily attributable to increased interest income in our tax-deferred property exchange business and increased yield on our cash and cash equivalents and short term investments. The effective return on average invested assets, excluding realized gains and losses, was 5.5%, 5.1%, and 4.2% for the years endedDecember 31, 2019 , 2018, and 2017, respectively. Net realized gains (losses) totaled$318 million ,$(109) million , and$2 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. Net realized gains for the year endedDecember 31, 2019 are primarily attributable to non-cash valuation gains on equity and preferred security holdings of$316 million , non-cash valuation gains on other long-term investments of$11 million , gains on sales of equity securities of$10 million , partially offset by impairments of lease assets of$8 million , net realized 33
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losses of$5 million on sales and maturities of fixed maturity investment securities, and$7 million of other net realized losses. Net realized losses for the year endedDecember 31, 2018 are primarily attributable to non-cash valuation losses on equity and preferred security holdings of$95 million , losses on sales of equity securities of$21 million , and asset impairments of$7 million , partially offset by net realized gains of$3 million on sales and maturities of preferred and fixed maturity investment securities and$9 million of other realized gains. The net realized gains for the year endedDecember 31, 2017 includes a gain of$9 million on the sale of an other long term investment and a gain of$2 million related to the sale of fixed assets, offset by losses of$6 million on redemptions of convertible debt, net losses on sales and impairment of available for sale investments of$1 million , and$2 million of other miscellaneous losses. See Note D. Investments to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a breakout of our consolidated interest and investment income and realized gains and losses.
Expenses.
Our operating expenses consist primarily of personnel costs; other operating expenses, which in our title business are incurred as orders are received and processed; and agent commissions, which are incurred as revenue is recognized. Title insurance premiums, escrow and title-related fees are generally recognized as income at the time the underlying transaction closes or other service is provided. Direct title operations revenue often lags approximately 45-60 days behind expenses and therefore gross margins may fluctuate. The changes in the market environment, mix of business between direct and agency operations and the contributions from our various business units have historically impacted margins and net earnings. We have implemented programs and have taken necessary actions to maintain expense levels consistent with revenue streams. However, a short time lag exists in reducing variable costs and certain fixed costs are incurred regardless of revenue levels. Personnel costs include base salaries, commissions, benefits, stock-based compensation and bonuses paid to employees, and are one of our most significant operating expenses. Agent commissions represent the portion of premiums retained by our third-party agents pursuant to the terms of their respective agency contracts. Other operating expenses consist primarily of facilities expenses, title plant maintenance, premium taxes (which insurance underwriters are required to pay on title premiums in lieu of franchise and other state taxes), appraisal fees and other cost of sales onServiceLink product offerings and other title-related products, postage and courier services, computer services, professional services, travel expenses, general insurance, and bad debt expense on our trade and notes receivable. The provision for title claim losses includes an estimate of anticipated title and title-related claims, and escrow losses. The change in operating expenses is discussed in further detail at the segment level below. Income tax expense was$308 million ,$120 million , and$235 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. Income tax expense as a percentage of earnings from continuing operations before income taxes for the years endedDecember 31, 2019 , 2018, and 2017 was 22.5%, 16.0%, and 27.2%, respectively. Income tax expense as a percentage of earnings before income taxes fluctuates depending on our estimate of ultimate income tax liability and changes in the characteristics of net earnings, such as the weighting of operating income versus investment income. OnDecember 22, 2017 , theU.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Reform Act"). Among other provisions, the Tax Reform Act reduced the Federal statutory corporate income tax rate from 35% to 21% and limited or eliminated certain deductions. The increase in the effective rate in 2019 compared to 2018 is primarily attributable to the residual impacts of the Tax Reform Act in 2018. The decrease in the effective tax rate in 2018 compared to 2017 period is primarily attributable to the decreased federal tax rate associated with the passage of the Tax Reform Act and a$45 million decrease in tax expense in 2018 regarding the timing of payments for, and tax rate applicable to, our tax liability resulting from the decrease in our statutory premium reserves associated with the redomestication of certain of our title insurance underwriters in 2017. See Note K. Income Taxes to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a breakout of our income tax expense, deferred tax assets and liabilities, and effective tax rate. 34
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Segment Results of Operations
Title
The following table presents the results of our Title segment for the years indicated: Year Ended December 31, 2019 2018 2017 (In millions) Revenues: Direct title insurance premiums$ 2,381 $ 2,221 $ 2,170 Agency title insurance premiums 2,961 2,690
2,723
Escrow, title-related and other fees 2,389 2,204
2,181
Interest and investment income 202 170
131
Realized gains and losses, net 326 (110 ) 6 Total revenue 8,259 7,175 7,211 Expenses: Personnel costs 2,562 2,444 2,366 Other operating expenses 1,509 1,421 1,404 Agent commissions 2,258 2,059 2,089 Depreciation and amortization 154 154
159
Provision for title claim losses 240 221
238
Total expenses 6,723 6,299
6,256
Earnings before income taxes$ 1,536 $ 876 $ 955 Orders opened by direct title operations (in 000's) 2,066 1,818
1,942
Orders closed by direct title operations (in 000's) 1,448 1,315
1,428
Total revenues in 2019 increased$1,084 million or 15% compared to 2018. Total revenues in 2018 decreased$36 million or less than 1% compared to 2017. The increase in the year endedDecember 31, 2019 is primarily attributable to increases in both our direct and agency premiums, increases in escrow, title-related and other fees, increases in interest and investment income, and non-cash valuation gains on our equity and preferred investment holdings. The decrease in the year endedDecember 31, 2018 is primarily attributable to a decrease in agency remittances and non-cash valuation losses on our equity and preferred investment holdings, partially offset by an increase in investment income and direct title premiums. The following table presents the percentages of title insurance premiums generated by our direct and agency operations: Year Ended December 31, 2019 2018 2017 Amount % Amount % Amount % (Dollars in millions)
Title premiums from direct operations
2,723 55.7 Total title premiums$ 5,342 100.0 %$ 4,911 100.0 %$ 4,893 100.0 % Title premiums increased 9% in the year endedDecember 31, 2019 as compared to 2018. The increase was a result of an increase in premiums from direct operations of$160 million , or 7%, and an increase in premiums from agency operations of$271 million , or 10%. Title premiums increased less than 1% in the year endedDecember 31, 2018 as compared to 2017. 35
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The following table presents the percentages of opened and closed title insurance orders generated by purchase and refinance transactions by our direct operations:
Year ended December 31, 2019 2018 2017 Opened title insurance orders from purchase transactions (1) 56.7 % 68.5 % 63.1 % Opened title insurance orders from refinance transactions (1) 43.3 31.5 36.9 100.0 % 100.0 % 100.0 % Closed title insurance orders from purchase transactions (1) 57.6 % 68.2 % 62.8 % Closed title insurance orders from refinance transactions (1) 42.4 31.8 37.2 100.0 % 100.0 % 100.0 %
_______________________________________
(1) Percentages exclude consideration of an immaterial number of non-purchase and non-refinance orders. Title premiums from direct operations increased in 2019, primarily due to an increase in closed order volumes, partially offset by a decrease in the average fee per file. Closed order volumes were 1,448,000 in the year endedDecember 31, 2019 compared with 1,315,000 in the year endedDecember 31, 2018 . This represented an increase of 10.1%. The increase in closed order volumes was primarily attributable to increased residential refinance activity as a result of lower mortgage interest rates in the year endedDecember 31, 2019 compared to 2018. The average fee per file in our direct operations was$2,511 and$2,585 in the years endedDecember 31, 2019 and 2018, respectively. The decrease in average fee per file year over year reflects the increase in residential refinance activity, partially offset by an increase in the average fee per file in both commercial and residential purchase transactions. The residential fee per file tends to change as the mix of refinance and purchase transactions changes, because purchase transactions involve the issuance of both a lender's policy and an owner's policy, resulting in higher fees, whereas refinance transactions only require a lender's policy, resulting in lower fees. Title premiums from agency operations increased$271 million , or 10%, in the year endedDecember 31, 2019 as compared to 2018 and decreased$33 million , or 1%, in the year endedDecember 31, 2018 as compared to 2017. The increase in 2019 as compared to 2018 reflects an improving residential purchase environment in many markets throughout the country and a concerted effort by management to increase remittances with existing agents as well as cultivate new relationships with potential new agents. In addition, lower mortgage rates have resulted in increased refinance business with agents. The decrease in 2018 as compared to 2017 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$185 million , or 8%, in the year endedDecember 31, 2019 from 2018. Escrow fees, which are more directly related to our direct operations, increased$72 million , or 9%, in the year endedDecember 31, 2019 compared to 2018. The increase is primarily driven by the related increase in direct title premiums. Other fees in the Title segment, excluding escrow fees, increased$113 million , or 8%, in the year endedDecember 31, 2019 compared to 2018. 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$23 million , or 1%, in the year endedDecember 31, 2018 from 2017. Escrow fees increased$6 million , or less than 1%, in the year endedDecember 31, 2018 compared to 2017. The increase is primarily driven by the related increase in direct title premiums. Other fees in the Title segment, excluding escrow fees, increased$17 million , or 1%, in the year endedDecember 31, 2018 compared to 2017. The change in both escrow fees and other fees is directionally consistent with the change in title premiums from direct operations. Interest and investment income levels are primarily a function of securities markets, interest rates and the amount of cash available for investment. Interest and investment income increased$32 million in the year endedDecember 31, 2019 compared to 2018 and increased$39 million in the year endedDecember 31, 2018 compared to 2017. The increase in 2019 was primarily attributable to increased fixed maturity interest income due to an increased average fixed maturity portfolio balance, increased interest income from our tax-deferred property exchange business, and increased yield on our cash and cash equivalents and short term investments.The increase in 2018 was primarily attributable to increased interest income in our tax-deferred property exchange business. 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$118 million , or 5% increase in the year endedDecember 31, 2019 compared to 2018 is directionally consistent with and primarily attributable to the increase in revenue. The$78 million , or 3%, increase in the year endedDecember 31, 2018 compared to 2017 is directionally consistent with and primarily attributable 36
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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 54% and 55% for years endedDecember 31, 2019 and 2018, respectively. Average employee count in the Title segment was 23,484 and 23,165 in the years endedDecember 31, 2019 and 2018, respectively. Other operating expenses increased$88 million , or 6%, in the year endedDecember 31, 2019 compared to 2018. 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 endedDecember 31, 2019 compared to 2018. Other operating expenses increased$17 million , or 1% in the year endedDecember 31, 2018 compared to 2017. Other operating expenses as a percentage of total revenue excluding agency premiums, interest and investment income, and realized gains and losses was 32% in the years endedDecember 31, 2019 , 2018, and 2017. Agent commissions represent the portion of premiums retained by agents pursuant to the terms of their respective agency contracts. Agent commissions and the resulting percentage of agent premiums we retain vary according to regional differences in real estate closing practices and state regulations. The following table illustrates the relationship of agent title premiums and agent commissions: Year Ended December 31, 2019 2018 2017 Amount % Amount % Amount % (Dollars in millions) Agent title premiums$ 2,961 100.0 %$ 2,690 100.0 %$ 2,723 100.0 % Agent commissions 2,258 76.3 2,059 76.5
2,089 76.7
Net retained agent premiums
Net margin from agency title insurance premiums retained as a percentage of total agency premiums in the year endedDecember 31, 2019 increased due to increased refinance activity when compared to the 2018 and 2017 periods. The provision for title claim losses includes an estimate of anticipated title and title-related claims and escrow losses. The estimate of anticipated title and title-related claims is accrued as a percentage of title premium revenue based on our historical loss experience and other relevant factors. 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. 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. EffectiveOctober 1, 2017 , we revised our loss provision rate to 4.5% from 5%. The revision was attributable to favorable development on more recent policy year claims. No revisions were made to our loss provision in the years endedDecember 31, 2019 or 2018. The claim loss provision for title insurance was$240 million ,$221 million , and$238 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. These amounts reflected average claim loss provision rates of 4.5% for 2019, 4.5% for 2018, and 4.9% for 2017. We will continue to monitor and evaluate our loss provision level, actual claims paid, and the loss reserve position each quarter. 37
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Corporate and Other The following table presents the results of our Corporate and Other segment for the years indicated: Year Ended December 31, 2019 2018 2017 (In millions) Revenues:
Escrow, title-related and other fees
23 7 - Realized gains and losses, net (8 ) 1 (4 ) Total revenue 210 419 452
Expenses:
Personnel costs 134 94 94 Other operating expenses 172 380 377 Depreciation and amortization 24 28 24 Interest expense 47 43 48 Total expenses 377 545 543 Loss before income taxes$ (167 ) $ (126 ) $ (91 ) Total revenue in our Corporate and Other segment decreased$209 million , or 50%, in the year endedDecember 31, 2019 compared to 2018 and decreased$33 million , or 7%, in the year endedDecember 31, 2018 compared to 2017. The decrease in 2019 is primarily attributable to the sale ofPacific Union in the third quarter of 2018, partially offset by increased revenue associated with the valuation of deferred compensation assets. The decrease in 2018 is primarily attributable to a decrease of$74 million associated with lower real estate brokerage revenue resulting from the sale ofPacific Union , partially offset by growth and acquisitions in our real estate technology businesses resulting in increased revenue of$31 million in 2018 and increased interest income on corporate cash holdings of$7 million in 2018. Personnel costs increased$40 million , or 43%, in the year endedDecember 31, 2019 compared to 2018 and remained flat in the year endedDecember 31, 2018 compared to 2017. The increase in 2019 is primarily attributable to increased valuation of deferred compensation plan assets, increased costs resulting from growth of our real estate technology subsidiaries, and increased severance expense related to the departure of certain executives. In 2018 there were increased personnel costs related to acquisitions when compared 2017; however, these increased personnel costs were offset by thePacific Union sale. Other operating expenses decreased$208 million , or 55% in the year endedDecember 31, 2019 from 2018 and increased$3 million , or 1%, in the year endedDecember 31, 2018 from 2017. The decrease in 2019 from 2018 is primarily attributable to thePacific Union sale, which is partially offset by the Reverse Termination Fee of$50 million paid to Stewart onSeptember 12, 2019 . The increase in 2018 from 2017 is primarily attributable to an increase of$13 million attributable to growth in our real estate technology subsidiaries in 2018 and the inclusion of$33 million of expense eliminations (reduction to expense) in 2017 related to elimination of expense with Black Knight, partially offset by decreased expense in 2018 resulting from thePacific Union sale. Interest expense increased$4 million , or 9%, in the year endedDecember 31, 2019 compared to 2018 and decreased$5 million , or 10%, in the year endedDecember 31, 2018 compared to 2017. The increase in 2019 is primarily attributable to interest associated with our 4.50% Notes issued inAugust 2018 . The decrease in 2018 compared to 2017 is primarily attributable to the final settlement of our convertible Notes inAugust 2018 and 6.6% Senior Notes in the 2017 period, partially offset by interest associated with our 4.50% Notes issued inAugust 2018 . 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. Discontinued Operations 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 in the year endedDecember 31, 2017 . 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. 38
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Liquidity and Capital Resources 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$1.26 per share during 2019, or approximately$344 million . OnFebruary 13, 2020 , our Board of Directors formally declared a$0.33 per share cash dividend that is payable onMarch 31, 2020 to FNF shareholders of record as ofMarch 17, 2020 . 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. As ofDecember 31, 2019 , we had cash and cash equivalents of$1,376 million , short term investments of$876 million and available capacity under our Revolving Credit Facility of$800 million . We continually assess our capital allocation strategy, including decisions relating to the amount of our dividend, reducing debt, repurchasing our stock, and/or conserving cash. We believe that all anticipated cash requirements for current operations will be met from internally generated funds, through cash dividends from subsidiaries, cash generated by investment securities, potential sales of non-strategic assets, and borrowings on our Revolving Credit Facility. Our short-term and long-term liquidity requirements are monitored regularly to ensure that we can meet our cash requirements. We forecast the needs of all of our subsidiaries and periodically review their short-term and long-term projected sources and uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying such forecasts. Our insurance subsidiaries generate cash from premiums earned and their respective investment portfolios and these funds are adequate to satisfy the payments of claims and other liabilities. Due to the magnitude of our investment portfolio in relation to our claims loss reserves, we do not specifically match durations of our investments to the cash outflows required to pay claims, but do manage outflows on a shorter time frame. Our two significant sources of internally generated funds are dividends and other payments from our subsidiaries. As a holding company, we receive cash from our subsidiaries in the form of dividends and as reimbursement for operating and other administrative expenses we incur. The reimbursements are paid within the guidelines of management agreements among us and our subsidiaries. Our insurance subsidiaries are restricted by state regulation in their ability to pay dividends and make distributions. Each state of domicile regulates the extent to which our title underwriters can pay dividends or make distributions. As ofDecember 31, 2019 ,$1,868 million of our net assets were restricted from dividend payments without prior approval from the relevant departments of insurance. During 2020, our title insurance subsidiaries can pay or make distributions to us of approximately$518 million . Our underwritten title companies and non-title insurance subsidiaries collect revenue and pay operating expenses. However, they are not regulated to the same extent as our insurance subsidiaries. The maximum dividend permitted by law is not necessarily indicative of an insurer's actual ability to pay dividends, which may be constrained by business and regulatory considerations, such as the impact of dividends on surplus, which could affect an insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends. Further, depending on business and regulatory conditions, we may in the future need to retain cash in our underwriters or even contribute cash to one or more of them in order to maintain their ratings or their statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse operating conditions in the current economic environment or changes in interpretation of statutory accounting requirements by regulators. Cash flow from FNF's operations is expected to be used for general corporate purposes including to reinvest in operations, repay debt, pay dividends, repurchase stock, other strategic initiatives or conserving cash. Operating Cash Flow. Our cash flows provided by operations for the years endedDecember 31, 2019 , 2018, and 2017 were$1,121 million ,$943 million and$737 million , respectively, inclusive of discontinued operations. Operating cash flows from discontinued operations for the year endedDecember 31, 2017 was$106 million . The increase in cash provided by operations of$178 million in the 2019 period from the 2018 period is primarily attributable to the increase in pre-tax earnings and the timing of receipts and payments of payables, partially offset by the timing of receipts and payments of prepaid assets, receivables and income taxes. Included in net earnings in the 2019 period is our payment to Stewart of the Reverse Termination Fee of$50 million . 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$128 million decrease in payments for income taxes by continuing operations in the 2018 period, partially offset by the inclusion of cash flows from discontinued operations in the 2017 period. Investing Cash Flows. Our cash (used in) provided by investing activities for the years endedDecember 31, 2019 , 2018, and 2017 were$(520) million ,$(354) million and$79 million , respectively, inclusive of discontinued operations. Cash used in investing activities from discontinued operations for the year endedDecember 31, 2017 was$57 million . The decrease in cash provided by 39
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(increase in cash used in) investing activities of$(166) million in the 2019 period from the 2018 period is primarily attributable to a decrease in net cash inflow from proceeds from calls and maturities of investment securities, partially offset by reduced purchases of investment securities. 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. Capital Expenditures. Total capital expenditures for property and equipment and capitalized software were$96 million ,$83 million and$149 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. The 2019 period primarily consists of capital expenditures in our Title segment. 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. Financing Cash Flows. Our cash used in financing activities for the years endedDecember 31, 2019 , 2018, and 2017 were$482 million ,$442 million and$1,029 million , respectively, inclusive of discontinued operations. The increase in cash used in financing activities of$40 million in the 2019 period from the 2018 period is primarily attributable to increased purchases of treasury stock of$66 million , a decrease in the change in net borrowing activity of$72 million , a decrease in net change of secured trust deposits of$23 million , increased dividends paid of$16 million , and increased other financing activities of$25 million , partially offset by increased exercise of stock options of$20 million and the payment of the equity portion of debt conversions settled in cash of$142 million in the 2018 period. The decrease in cash used in financing activities of$587 million in the 2018 period from the 2017 period is primarily attributable to a$458 million decrease in net debt service payments, net of borrowings, in the 2018 period,$109 million in cash transferred in the BK Distribution and FNFV Split-off in the 2017 period, repurchases of BKFS stock by Black Knight of$47 million in the 2017 period, and a$22 million decrease in change in secured trust deposits, partially offset by an increase in cash dividends paid of$50 million in the 2018 period. Financing. For a description of our financing arrangements see Note J Notes Payable to the Consolidated Financial Statements included in Item 8 of Part II of this Annual Report, which is incorporated by reference into this Item 7 of Part II. Contractual Obligations. Our long term contractual obligations generally include our loss reserves, our credit agreements and other debt facilities and operating lease payments on certain of our premises and equipment. As ofDecember 31, 2019 , our required annual payments relating to these contractual obligations were as follows: 2020 2021 2022 2023
2024 Thereafter Total
(In
millions)
Notes payable principal repayment $ - $ -
-$ 450 $ 850 Operating lease payments 145 121 93 64 37 23 483
Pension and other benefit payments 15 14 13 12 12
95 161
Title claim loss estimated payments 220 218 173 138 97
663 1,509 Interest on fixed rate notes payable 42 42 35 20 20 102 261 Total$ 422 $ 395 $ 714 $ 234 $ 166 $ 1,333 $ 3,264 As ofDecember 31, 2019 , we had title insurance reserves of$1,509 million . The amounts and timing of these obligations are estimated and are not set contractually. While we believe that historical loss payments are a reasonable source for projecting future claim payments, there is significant inherent uncertainty in this payment pattern estimate because of the potential impact of changes in: • future mortgage interest rates, which will affect the number of real estate and refinancing transactions and, therefore, the rate at which title insurance claims will emerge;
• the legal environment whereby court decisions and reinterpretations of
title insurance policy language to broaden coverage could increase total obligations and influence claim payout patterns;
• events such as fraud, escrow theft, multiple property title defects,
foreclosure rates and individual large loss events that can substantially
and unexpectedly cause increases in both the amount and timing of estimated title insurance loss payments; and
• loss cost trends whereby increases or decreases in inflationary factors
(including the value of real estate) will influence the ultimate amount of
title insurance loss payments. 40
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Based on historical title insurance claim experience, we anticipate the above payment patterns. The uncertainty and variation in the timing and amount of claim payments could have a material impact on our cash flows from operations in a particular period. We sponsor certain frozen pension and other post-retirement benefit plans. See Note O. Employee Benefit Plans to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further information. Capital Stock Transactions. OnJuly 17, 2018 , our Board of Directors approved a new three-year stock repurchase program effectiveAugust 1, 2018 (the "2018 Repurchase Program") under which we can purchase up to 25 million shares of our FNF common stock throughJuly 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 endedDecember 31, 2019 , we repurchased a total of 2,120,000 FNF common shares for an aggregate of$85 million or an average of$40.09 per share. Since the original commencement of the 2018 Repurchase Program, we have repurchased a total of 2,780,000 FNF common shares for an aggregate of$106 million , or an average of$38.24 per share. Equity and Preferred Security Investments. Our equity and preferred security investments may be subject to significant volatility. Currently prevailing accounting standards require us to record the change in fair value of equity and preferred security investments held as of any given period end within earnings. Our results of operations in future periods will be subject to such volatility. 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$18.7 billion and$13.5 billion atDecember 31, 2019 and 2018, 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. Recent Accounting Pronouncements For a description of recent accounting pronouncements, see Note S Recent Accounting Pronouncements to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.
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