10-K 1 fnf12311810-k.htm 10-K Document

 
 
 
 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission File No. 1-32630
 _________________________________
 Fidelity National Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
16-1725106
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
601 Riverside Avenue
Jacksonville, Florida 32204
 (Address of principal executive offices, including zip code)
 
(904) 854-8100
 (Registrant’s telephone number,
including area code) 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
FNF Common Stock, $0.0001 par value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ    No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ    No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
     Accelerated filer o
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ
 
The aggregate market value of the shares of FNF common stock held by non-affiliates of the registrant as of June 30, 2018 was $9,889,644,127 based on the closing price of $37.62 as reported by The New York Stock Exchange.
As of January 31, 2019 there were 275,331,260 shares of FNF common stock outstanding.
  
The information in Part III hereof for the fiscal year ended December 31, 2018, will be filed within 120 days after the close of the fiscal year that is the subject of this Report.
 
 
 
 
 



FIDELITY NATIONAL FINANCIAL, INC.
FORM 10-K
TABLE OF CONTENTS

 
 
Page
Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


i


PART I

Item 1.
Business 
Introductory Note
The following describes the business of Fidelity National Financial, Inc. and its subsidiaries. Except where otherwise noted, all references to "we," "us," "our", the "Company" or "FNF" are to Fidelity National Financial, Inc. and its subsidiaries, taken together.
Overview
We are a leading provider of (i) title insurance, escrow and other title-related services, including trust activities, trustee sales guarantees, recordings and reconveyances and home warranty products and (ii) transaction services to the real estate and mortgage industries. FNF is one of the nation’s largest title insurance companies operating through its title insurance underwriters - Fidelity National Title Insurance Company ("FNTIC"), Chicago Title Insurance Company ("Chicago Title"), Commonwealth Land Title Insurance Company ("Commonwealth Title"), Alamo Title Insurance and National Title Insurance of New York Inc. - which collectively issue more title insurance policies than any other title company in the United States. Through our subsidiary ServiceLink Holdings, LLC ("ServiceLink"), we provide mortgage transaction services including title-related services and facilitation of production and management of mortgage loans.
As of December 31, 2018, we had the following reporting segments:
Title. This segment consists of the operations of our title insurance underwriters and related businesses which provide title insurance and escrow and other title-related services including trust activities, trustee sales guarantees, and home warranty products. This segment also includes our transaction services business, which includes other title-related services used in the production and management of mortgage loans, including mortgage loans that experience default.
Corporate and Other. This segment consists of the operations of the parent holding company, our real estate technology subsidiaries, other smaller, non-title businesses and certain unallocated corporate overhead expenses and eliminations of revenues and expenses between it and our Title segment.
Competitive Strengths
We believe that our competitive strengths include the following:
Corporate principles.  A cornerstone of our management philosophy and operating success is the six fundamental precepts upon which we were founded, which are:
Autonomy and entrepreneurship;
Bias for action;
Customer-oriented and motivated;
Minimize bureaucracy;
Employee ownership; and
Highest standard of conduct.
These six precepts are emphasized to our employees from the first day of employment and are integral to many of our strategies described below.
Competitive cost structure.  We have been able to maintain competitive operating margins in part by monitoring our businesses in a disciplined manner through continual evaluation of title order activity and management of our cost structure. When compared to our industry competitors, we also believe that our structure is more efficiently designed, which allows us to operate with lower overhead costs.
Leading title insurance company.  We are one of the largest title insurance companies in the United States and a leading provider of title insurance and escrow and other title-related services for real estate transactions. Through the third quarter of 2018, our insurance companies had a 33.3% share of the U.S. title insurance market, according to the American Land Title Association ("ALTA").
Established relationships with our customers.  We have strong relationships with the customers who use our title services. Our distribution network, which includes approximately 1,400 direct residential title offices and more than 5,200 agents, is among the largest in the United States. We also benefit from strong brand recognition in our multiple title brands that allows us to access a broader client base than if we operated under a single consolidated brand and provides our customers with a choice among brands.
Strong value proposition for our customers.  We provide our customers with title insurance and escrow and other title-related services that support their ability to effectively close real estate transactions. We help make the real estate closing process more

1


efficient for our customers by offering a single point of access to a broad platform of title-related products and resources necessary to close real estate transactions.
Proven management team.  The managers of our operating businesses have successfully built our title business over an extended period of time, resulting in our business attaining the size, scope and presence in the industry that it has today. Our managers have demonstrated their leadership ability during numerous acquisitions through which we have grown and throughout a number of business cycles and significant periods of industry change.
Commercial title insurance.  While residential title insurance comprises the majority of our business, we are also a significant provider of commercial real estate title insurance in the United States. Our network of agents, attorneys, underwriters and closers that service the commercial real estate markets is one of the largest in the industry. Our commercial network combined with our financial strength makes our title insurance operations attractive to large national lenders that require the underwriting and issuing of larger commercial title policies.
We believe that our competitive strengths position us well to take advantage of future changes to the real estate market.
Strategy
Our strategy in the title business is to maximize operating profits by increasing our market share and managing operating expenses throughout the real estate business cycle. To accomplish our goals, we intend to do the following:
Continue to operate multiple title brands independently.  We believe that in order to maintain and strengthen our title insurance customer base, we must operate our strongest brands in a given marketplace independently of each other. Our national and regional brands include Fidelity National Title, Chicago Title, Commonwealth Land Title, Lawyers Title, Ticor Title, Alamo Title, and National Title of New York. In our largest markets, we operate multiple brands. This approach allows us to continue to attract customers who identify with a particular brand and allows us to utilize a broader base of local agents and local operations than we would have with a single consolidated brand.
Consistently deliver superior customer service.  We believe customer service and consistent product delivery are the most important factors in attracting and retaining customers. Our ability to provide superior customer service and consistent product delivery requires continued focus on providing high quality service and products at competitive prices. Our goal is to continue to improve the experience of our customers, in all aspects of our business.
Manage our operations successfully through business cycles.  We operate in a cyclical industry and our ability to diversify our revenue base within our title insurance business and manage the duration of our investments may allow us to better operate in this cyclical business. Maintaining a broad geographic revenue base, utilizing both direct and independent agency operations and pursuing both residential and commercial title insurance business help diversify our title insurance revenues. We continue to monitor, evaluate and execute upon the consolidation of administrative functions, legal entity structure, and office consolidation, as necessary, to respond to the continually changing marketplace. We maintain shorter durations on our investment portfolio to mitigate our interest rate risk. A more detailed discussion of our investment strategies is included in “Investment Policies and Investment Portfolio.”
Continue to improve our products and technology.  As a national provider of real estate transaction products and services, we participate in an industry that is subject to significant change, frequent new product and service introductions and evolving industry standards. We believe that our future success will depend in part on our ability to anticipate industry changes and offer products and services that meet evolving industry standards. In connection with our service offerings, we are continuing to deploy new information system technologies to our direct and agency operations. We expect to improve the process of ordering title and escrow services and improve the delivery of our products to our customers.
Maintain values supporting our strategy.  We believe that our continued focus on and support of our long-established corporate culture will reinforce and support our business strategy. Our goal is to foster and support a corporate culture where our employees and agents seek to operate independently and maintain profitability at the local level while forming close customer relationships by meeting customer needs and improving customer service. Utilizing a relatively flat managerial structure and providing our employees with a sense of individual ownership support this goal.
Effectively manage costs based on economic factors.  We believe that our focus on our operating margins is essential to our continued success in the title insurance business. Regardless of the business cycle in which we may be operating, we seek to continue to evaluate and manage our cost structure and make appropriate adjustments where economic conditions dictate. This continual focus on our cost structure helps us to better maintain our operating margins.
Acquisitions, Dispositions, Minority Owned Operating Subsidiaries and Financings
Acquisitions have been an important part of our growth strategy and dispositions have been an important aspect of our strategy of returning value to shareholders. On an ongoing basis, with assistance from our advisors, we actively evaluate possible transactions, such as acquisitions and dispositions of business units and operating assets and business combination transactions.

2


In the future, we may seek to sell certain investments or other assets to increase our liquidity. In the past we have obtained majority and minority investments in entities and securities where we see the potential to achieve above market returns. Fundamentally our goal is to acquire quality companies that are run by best in class management teams and that have attractive organic and acquired growth opportunities. We leverage our operational expertise and track record of growing industry-leading companies and also our active interaction with the acquired company's management directly or through our board of directors, to ultimately provide value for our shareholders.
There can be no assurance that any suitable opportunities will arise or that any particular transaction will be completed. We have made a number of acquisitions and dispositions over the past several years to strengthen and expand our service offerings and customer base in our various businesses, to expand into other businesses or where we otherwise saw value, and to monetize investments in assets and businesses.
Refer to discussion under Selected Financial Data and Certain Factors Affecting Comparability included in Item 6 and Item 7 of Part II of this Annual Report on Form 10-K (this "Annual Report"), respectively, which are incorporated by reference into this Item 1 of Part I, for further discussion of material dispositions of businesses.
Pending Acquisition of Stewart
On March 18, 2018, we signed a merger agreement (the "Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"), pursuant to which each share of Stewart common stock issued and outstanding immediately prior to the effective time of the Stewart Merger (other than shares owned by Stewart, its subsidiaries, FNF or the wholly-owned subsidiaries of FNF party to the Merger Agreement and shares in respect of which appraisal rights have been properly exercised and perfected under Delaware law), will be converted into the right to receive, at the election of the holder of such share, (i) $50.00 in cash, (ii) 1.2850 shares of FNF common stock, or (iii) $25.00 in cash and 0.6425 shares of FNF common stock, subject to potential adjustment (as described below) and proration to the extent the option to receive cash or the option to receive stock is oversubscribed.
FNF currently intends to fund the $1.2 billion purchase price, 50% in cash and 50% in FNF common stock, through a combination of cash on hand at FNF, the issuance of FNF common stock to Stewart stockholders, and borrowings under our revolving credit facility, if necessary. Including the assumption of $109 million of Stewart's debt, our pro forma debt to total capital ratio is expected to be no more than approximately 20% at the close of the Stewart Merger.
Under the terms of the Merger Agreement, if the combined company is required to divest assets or businesses for which 2017 annual revenues exceed $75 million, up to a cap of $225 million, in order to receive required regulatory approvals, the purchase price will be adjusted down on a pro-rata basis to a minimum purchase price of $45.50 per share of common stock of Stewart. If the Stewart Merger is not completed for failure to obtain the required regulatory approvals, we would be required to pay a reverse break-up fee of $50 million to Stewart.
On May 31, 2018, we received a request for additional information and documentary material, often referred to as a “Second Request,” from the United States Federal Trade Commission (the “FTC”) in connection with the FTC’s Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), regulatory review of the Stewart Merger.We continue to work through the regulatory process for the Stewart Merger and are currently engaged in responding to the Second Request related to the FTC's HSR Act regulatory review of the transaction. Responses to nearly all the FTC's requests for information and documentation have been submitted. From December 29, 2018 through January 25, 2019, the FTC suspended its review of the Stewart Merger and the materials related thereto due to a lapse in government funding caused by a partial shutdown of the U.S. Federal Government, potentially creating significant backlog when the FTC resumed its operations on January 28, 2019. As such, we are unable to determine the extent of any such delay in the FTC’s review.
On August 1, 2018, our registration statement on Form S-4 related to the Stewart Merger was declared effective by the U.S. Securities and Exchange Commission (the "SEC").
On August 21, 2018, we received a “no-action letter” from the Canadian Competition Bureau (the “Bureau”), indicating that the Bureau does not intend to oppose the completion of the Stewart Merger.
The special meeting of Stewart stockholders to vote on the Stewart Merger was held on September 5, 2018 and a majority of the Stewart stockholders voted to approve the Stewart Merger. More than 99% of the votes cast, representing approximately 79% of the outstanding shares of Stewart common stock as of July 10, 2018, the record date for the special meeting, were cast in favor of adopting the Merger Agreement.
We have filed applications regarding acquisition of control of the Stewart domestic insurers with the states of Texas and New York. The Texas application regarding acquisition of control of Stewart Title Guaranty Company, a Texas domiciled title insurance company licensed in 48 states, is under review by the Texas Department of Insurance.
On January 31, 2019, the New York State Department of Financial Services (“NYDFS”) provided written notice to us of its disapproval of our application to acquire control of Stewart Title Insurance Company, a New York domiciled title insurance company that is licensed only in the State of New York. Receipt of approval from the NYDFS is a condition to closing the Stewart

3


Merger. FNF and Stewart are evaluating the appropriate course of action in light of the NYDFS’ determination, which may include a discussion with the NYDFS to better understand its concerns and respond to the letter. Through January 31, 2019, we have received 28 Form E state regulatory approvals relating to the Stewart Merger.
The closing of the Stewart Merger is subject to certain closing conditions, including federal and state regulatory approvals and the satisfaction of other customary closing conditions.
Title Insurance
Market for title insurance.  According to Demotech Performance of Title Insurance Companies 2018 Edition, an annual compilation of financial information from the title insurance industry that is published by Demotech Inc. ("Demotech"), an independent firm , total operating income for the entire U.S. title insurance industry has increased over the last five years from approximately $13.4 billion in 2013 to $15.6 billion in 2017, which represents a $0.7 billion increase from 2016. The size of the industry is closely tied to various macroeconomic factors, including, but not limited to, growth in the gross domestic product, inflation, unemployment, the availability of credit, consumer confidence, interest rates, and sales volumes and prices for new and existing homes, as well as the volume of refinancing of previously issued mortgages.
Most real estate transactions consummated in the U.S. require the use of title insurance by a lending institution before the transaction can be completed. Generally, revenues from title insurance policies are directly correlated with the value of the property underlying the title policy, and appreciation or depreciation in the overall value of the real estate market are major factors in total industry revenues. Industry revenues are also driven by factors affecting the volume of real estate closings, such as the state of the economy, the availability of mortgage funding, and changes in interest rates, which affect demand for new mortgage loans and refinancing transactions.
The U.S. title insurance industry is concentrated among a handful of industry participants. According to Demotech, the top four title insurance groups accounted for 85% of net premiums written in 2017. Approximately 35 independent title insurance companies accounted for the remaining 15% of net premiums written in 2017. Consolidation has created opportunities for increased financial and operating efficiencies for the industry’s largest participants and should continue to drive profitability and market share in the industry.
Our Title segment revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. For further discussion of current trends in real estate activity in the United States, see discussion under Business Trends and Conditions included in Item 7 of Part II of this Annual Report, which is incorporated by reference into this Item 1 of Part I.
Title Insurance Policies.  Generally, real estate buyers and mortgage lenders purchase title insurance to insure good and marketable title to real estate and priority of lien. A brief generalized description of the process of issuing a title insurance policy is as follows:
The customer, typically a real estate salesperson or broker, escrow agent, attorney or lender, places an order for a title policy.
Company personnel note the specifics of the title policy order and place a request with the title company or its agents for a preliminary report or commitment.
After the relevant historical data on the property is compiled, the title officer prepares a preliminary report that documents the current status of title to the property, any exclusions, exceptions and/or limitations that the title company might include in the policy, and specific issues that need to be addressed and resolved by the parties to the transaction before the title policy will be issued.
The preliminary report is circulated to all the parties for satisfaction of any specific issues.
After the specific issues identified in the preliminary report are satisfied, an escrow agent closes the transaction in accordance with the instructions of the parties and the title company’s conditions.
Once the transaction is closed and all monies have been released, the title company issues a title insurance policy.
In real estate transactions financed with a mortgage, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made. This lender’s policy insures the lender against any defect affecting the priority of the mortgage in an amount equal to the outstanding balance of the related mortgage loan. An owner’s policy is typically also issued, insuring the buyer against defects in title in an amount equal to the purchase price. In a refinancing transaction, only a lender’s policy is generally purchased because ownership of the property has not changed. In the case of an all-cash real estate purchase, no lender’s policy is issued but typically an owner’s title policy is issued.
Title insurance premiums paid in connection with a title insurance policy are based on (and typically are a percentage of) either the amount of the mortgage loan or the purchase price of the property insured. Applicable state insurance regulations or regulatory practices may limit the maximum, or in some cases the minimum, premium that can be charged on a policy. Title insurance premiums are due in full at the closing of the real estate transaction.

4


The amount of the insured risk or “face amount” of insurance under a title insurance policy is generally equal to either the amount of the loan secured by the property or the purchase price of the property. The title insurer is also responsible for the cost of defending the insured title against covered claims. The insurer’s actual exposure at any given time, however, generally is less than the total face amount of policies outstanding because the coverage of a lender’s policy is reduced and eventually terminated as a result of payments on the mortgage loan. A title insurer also generally does not know when a property has been sold or refinanced except when it issues the replacement coverage. Because of these factors, the total liability of a title underwriter on outstanding policies cannot be precisely determined.
Title insurance companies typically issue title insurance policies directly through branch offices or through affiliated title agencies, or indirectly through independent third party agencies unaffiliated with the title insurance company. Where the policy is issued through a branch or wholly-owned subsidiary agency operation, the title insurance company typically performs or directs the title search, and the premiums collected are retained by the title company. Where the policy is issued through an independent agent, the agent generally performs the title search (in some areas searches are performed by approved attorneys), examines the title, collects the premium and retains a majority of the premium. The remainder of the premium is remitted to the title insurance company as compensation, part of which is for bearing the risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region and is sometimes regulated by the states. The title insurance company is obligated to pay title claims in accordance with the terms of its policies, regardless of whether the title insurance company issues policies through its direct operations or through independent agents.
 Prior to issuing policies, title insurers and their agents attempt to reduce the risk of future claim losses by accurately performing title searches and examinations. A title insurance company’s predominant expense relates to such searches and examinations, the preparation of preliminary title reports, policies or commitments, the maintenance of "title plants,” which are indexed compilations of public records, maps and other relevant historical documents, and the facilitation and closing of real estate transactions. Claim losses generally result from errors made in the title search and examination process, from hidden defects such as fraud, forgery, incapacity, or missing heirs of the property, and from closing-related errors.
Residential real estate business results from the construction, sale, resale and refinancing of residential properties, while commercial real estate business results from similar activities with respect to properties with a business or commercial use. Commercial real estate title insurance policies insure title to commercial real property, and generally involve higher coverage amounts and yield higher premiums. Residential real estate transaction volume is primarily affected by macroeconomic and seasonal factors while commercial real estate transaction volume is affected primarily by fluctuations in local supply and demand conditions for commercial space.
Direct and Agency Operations.  We provide title insurance services through our direct operations and through independent title insurance agents who issue title policies on behalf of our title insurance companies. Our title insurance companies determine the terms and conditions upon which they will insure title to the real property according to our underwriting standards, policies and procedures.
Direct Operations.  Our direct operations include both the operations of our underwriters and those of affiliated agencies. In our direct operations, the title insurer issues the title insurance policy and retains the entire premium paid in connection with the transaction. Our direct operations provide the following benefits:
higher margins because we retain the entire premium from each transaction instead of paying a commission to an independent agent;
continuity of service levels to a broad range of customers; and
additional sources of income through escrow and closing services.
We have approximately 1,400 offices throughout the U.S. primarily providing residential real estate title insurance. We continuously monitor the number of direct offices to make sure that it remains in line with our strategy and the current economic environment. Our commercial real estate title insurance business is operated primarily through our direct operations. We maintain direct operations for our commercial title insurance business in all the major real estate markets including Atlanta, Boston, Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, Phoenix, Seattle and Washington D.C.
Agency Operations.  In our agency operations, the search and examination function is performed by an independent agent or the agent may purchase the search product from us. In either case, the agent is responsible to ensure that the search and examination is completed. The agent thus retains the majority of the title premium collected, with the balance remitted to the title underwriter for bearing the risk of loss in the event that a claim is made under the title insurance policy. Independent agents may select among several title underwriters based upon their relationship with the underwriter, the amount of the premium “split” offered by the underwriter, the overall terms and conditions of the agency agreement and the scope of services offered to the agent. Premium splits vary by geographic region, and in some states are fixed by insurance regulatory requirements. Our relationship with each agent is governed by an agency agreement defining how the agent issues a title insurance policy on our behalf. The agency agreement also sets forth the agent’s liability to us for policy losses attributable to the agent’s errors. An agency agreement is usually terminable without cause upon 30 days notice or immediately for cause. In determining whether to engage or retain an

5


independent agent, we consider the agent’s experience, financial condition and loss history. For each agent with whom we enter into an agency agreement, we maintain financial and loss experience records. We also conduct periodic audits of our agents and strategically manage the number of agents with which we transact business in an effort to reduce future expenses and manage risks. As of December 31, 2018, we transact business with approximately 5,200 agents.
 Fees and Premiums.  One method of analyzing our business is to examine the level of premiums generated by direct and agency operations.
The following table presents the percentages of our title insurance premiums generated by direct and agency operations:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(Dollars in millions)
Direct
$
2,221

 
45.2
%
 
$
2,170

 
44.3
%
 
$
2,097

 
44.4
%
Agency
2,690

 
54.8

 
2,723

 
55.7

 
2,626

 
55.6

     Total title insurance premiums
$
4,911

 
100.0
%
 
$
4,893

 
100.0
%
 
$
4,723

 
100.0
%
The premium for title insurance is due in full when the real estate transaction is closed. We recognize title insurance premium revenues from direct operations upon the closing of the transaction. Premium revenues from agency operations include an accrual based on estimates of the volume of transactions that have closed in a particular period for which premiums have not yet been reported to us. The accrual for agency premiums is necessary because of the lag between the closing of these transactions and the reporting of these policies to us by the agent, and is based on estimates utilizing historical information.
Escrow, Title-Related and Other Fees.  In addition to fees for underwriting title insurance policies, we derive a significant amount of our revenues from escrow and other title-related services including closing and trust activities, trustee sales guarantees, recordings and reconveyances, and home warranty products. The escrow and other services provided by us include all of those typically required in connection with residential and commercial real estate purchases and refinance activities. Escrow, title-related and other fees included in our Title segment represented approximately 30.6%, 30.2%, and 30.5% of total Title segment revenues in 2018, 2017, and 2016, respectively.
Sales and Marketing. We market and distribute our title and escrow products and services to customers in the residential and commercial market sectors of the real estate industry through customer solicitation by sales personnel. Although in many instances the individual homeowner is the beneficiary of a title insurance policy, we do not focus our marketing efforts on the homeowner. We actively encourage our sales personnel to develop new business relationships with persons in the real estate community, such as real estate sales agents and brokers, financial institutions, independent escrow companies and title agents, real estate developers, mortgage brokers and attorneys who order title insurance policies for their clients. While our smaller, local clients remain important, large customers, such as national residential mortgage lenders, real estate investment trusts and developers are an important part of our business. The buying criteria of locally based clients differ from those of large, geographically diverse customers in that the former tend to emphasize personal relationships and ease of transaction execution, while the latter generally place more emphasis on consistent product delivery across diverse geographical regions and the ability of service providers to meet their information systems requirements for electronic product delivery.
Claims. An important part of our operations is the handling of title and escrow claims. We employ a large staff of attorneys in our claims department. Our claims processing centers are located in Omaha, Nebraska and Jacksonville, Florida. In-house claims counsel are also located in other parts of the country.
Claims result from a wide range of causes. These causes generally include, but are not limited to, search and exam errors, forgeries, incorrect legal descriptions, signature and notary errors, unrecorded liens, mechanics’ liens, the failure to pay off existing liens, mortgage lending fraud, mishandling or theft of settlement funds (including independent agency theft), and mistakes in the escrow process. Under our policies, we are required to defend insureds when covered claims are filed against their interest in the property. Some claimants seek damages in excess of policy limits. Those claims are based on various legal theories, including in some cases allegations of negligence or an intentional tort. We occasionally incur losses in excess of policy limits. Experience shows that most policy claims and claim payments are made in the first five years after the policy has been issued, although claims may also be reported and paid many years later.
Title losses due to independent agency defalcations typically occur when the independent agency misappropriates funds from escrow accounts under its control. Such losses are usually discovered when the independent agency fails to pay off an outstanding mortgage loan at closing (or immediately thereafter) from the proceeds of the new loan. Once the previous lender determines that its loan has not been paid off timely, it will file a claim against the title insurer.
Claims can be complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time claims are processed. In our commercial title business, we may issue polices with face amounts

6


well in excess of $100 million, and from time to time claims are submitted with respect to large policies. We believe we are appropriately reserved with respect to all claims (large and small) that we currently face. Occasionally we experience large losses from title policies that have been issued or from our escrow operations, or overall worsening loss payment experience, which require us to increase our title loss reserves. These events are unpredictable and adversely affect our earnings. Claims can result in litigation in which we may represent our insured and/or ourselves. We consider this type of litigation to be an ordinary course aspect of the conduct of our business.
Reinsurance and Coinsurance.  We limit our maximum loss exposure by reinsuring risks with other insurers under excess of loss and case-by-case (“facultative”) reinsurance agreements. Reinsurance agreements generally provide that the reinsurer is liable for loss and loss adjustment expense payments exceeding the amount retained by the ceding company. However, the ceding company remains primarily liable to the insured whether or not the reinsurer is able to meet its contractual obligations. Facultative reinsurance agreements are entered into with other title insurers when the transaction to be insured will exceed state statutory or self-imposed limits. Excess of loss reinsurance coverage protects us from a large loss from a single loss occurrence. Our excess of loss reinsurance coverage is split into four contracts. The first excess of loss reinsurance contract provides an $80 million aggregate limit of coverage from a single loss occurrence for residential and commercial losses in excess of a $20 million retention per single loss occurrence ("First XOL Contract"). The second excess of loss reinsurance contract ("Second XOL Contract") provides an additional $300 million aggregate limit of coverage, with the Company co-participating at approximately 10%.  The third excess of loss reinsurance contract ("Third XOL Contract") provides an additional $80 million aggregate limit of coverage, with the Company co-participating at approximately 10%.  The fourth excess of loss reinsurance contract ("Fourth XOL Contract") provides an additional $220 million aggregate limit of coverage, with the Company co-participating at approximately 10%. Subject to the Company’s retention and co-participation on the Second, Third and Fourth XOL Contracts, the maximum coverage provided under our excess of loss reinsurance coverage is $620 million.
 In addition to reinsurance, we carry errors and omissions insurance and fidelity bond coverage, each of which can provide protection to us in the event of certain types of losses that can occur in our businesses.
Our policy is to be selective in choosing our reinsurers, seeking only those companies that we consider to be financially stable and adequately capitalized. In an effort to minimize exposure to the insolvency of a reinsurer, we periodically review the financial condition of our reinsurers.
We also use coinsurance in our commercial title business to provide coverage in amounts greater than we would be willing or able to provide individually. In coinsurance transactions, each individual underwriting company issues a separate policy and assumes a portion of the overall total risk. As a coinsurer we are only liable for the portion of the risk we assume.
We also earn a small amount of additional income, which is reflected in our direct premiums, by assuming reinsurance for certain risks of other title insurers.
Competition.  Competition in the title insurance industry is based primarily on service and price. The number and size of competing companies varies in the different geographic areas in which we conduct our business. In our principal markets, competitors include other major title underwriters such as First American Financial Corporation, Old Republic International Corporation, Stewart Information Services Corporation, AmTrust Title Insurance Company, Westcor Land Title Insurance Company, and WFG National Title Insurance Company, as well as numerous smaller title insurance companies, underwritten title companies and independent agency operations at the regional and local level. The addition or removal of regulatory barriers might result in changes to competition in the title insurance business. New competitors may include diversified financial services companies that have greater financial resources than we do and possess other competitive advantages. Competition among the major title insurance companies, expansion by smaller regional companies and any new entrants with alternative products could affect our business operations and financial condition.
 Regulation. Our insurance subsidiaries, including title insurers, underwritten title companies and insurance agencies, are subject to extensive regulation under applicable state laws. Each of the insurers is subject to a holding company act in its state of domicile, which regulates, among other matters, the ability to pay dividends and enter into transactions with affiliates. The laws of most states in which we transact business establish supervisory agencies with broad administrative powers relating to issuing and revoking licenses to transact business, regulating trade practices, licensing agents, approving policy forms, accounting practices, financial practices, establishing reserve and capital and surplus as regards policyholders (“capital and surplus”) requirements, defining suitable investments for reserves and capital and surplus and approving rate schedules. The process of state regulation of changes in rates ranges from states which set rates, to states where individual companies or associations of companies prepare rate filings which are submitted for approval, to a few states in which rate changes do not need to be filed for approval.
Since we are governed by both state and federal governments and the applicable insurance laws and regulations are constantly subject to change, it is not possible to predict the potential effects on our insurance operations of any laws or regulations that may become more restrictive in the future or if new restrictive laws will be enacted.
 Pursuant to statutory accounting requirements of the various states in which our title insurers are domiciled, these insurers must defer a portion of premiums as an unearned premium reserve for the protection of policyholders (in addition to their reserves

7


for known claims) and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined by a statutory formula based upon either the age, number of policies, and dollar amount of policy liabilities underwritten, or the age and dollar amount of statutory premiums written. As of December 31, 2018, the combined statutory unearned premium reserve required and reported for our title insurers was $1,412 million. In addition to statutory unearned premium reserves and reserves for known claims, each of our insurers maintains surplus funds for policyholder protection and business operations.
Each of our insurance subsidiaries is regulated by the insurance regulatory authority in its respective state of domicile, as well as that of each state in which it is licensed. The insurance commissioners of their respective states of domicile are the primary regulators of our insurance subsidiaries. Each of the insurers is subject to periodic regulatory financial examination by regulatory authorities.
Under the statutes governing insurance holding companies in most states, insurers may not enter into certain transactions, including sales, reinsurance agreements and service or management contracts, with their affiliates unless the regulatory authority of the insurer’s state of domicile has received notice at least 30 days prior to the intended effective date of such transaction and has not objected to, or has approved, the transaction within the 30-day period.
In addition to state-level regulation, our title insurance and certain other real estate businesses are subject to regulation by federal agencies, including the Consumer Financial Protection Bureau (“CFPB”). The CFPB was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") which also included regulation over financial services and other lending related businesses. The CFPB has broad authority to regulate, among other areas, the mortgage and real estate markets in matters pertaining to consumers. This authority includes the enforcement of the Truth-in-Lending Act ("TILA") and the Real Estate Settlement Procedures Act (individually, "RESPA", and together, "TILA-RESPA Integrated Disclosure" or "TRID") formerly placed with the Department of Housing and Urban Development. 
 As a holding company with no significant business operations of our own, we depend on dividends or other distributions from our subsidiaries as the principal source of cash to meet our obligations, including the payment of interest on and repayment of principal of any debt obligations, and to pay any dividends to our shareholders. The payment of dividends or other distributions to us by our insurers is regulated by the insurance laws and regulations of their respective states of domicile. In general, an insurance company subsidiary may not pay an “extraordinary” dividend or distribution unless the applicable insurance regulator has received notice of the intended payment at least 30 days prior to payment and has not objected to or has approved the payment within the 30-day period. In general, an “extraordinary” dividend or distribution is statutorily defined as a dividend or distribution that, together with other dividends and distributions made within the preceding 12 months, exceeds the greater of:
10% of the insurer’s statutory surplus as of the immediately prior year end; or
the statutory net income of the insurer during the prior calendar year.
The laws and regulations of some jurisdictions also prohibit an insurer from declaring or paying a dividend except out of its earned surplus or require the insurer to obtain prior regulatory approval. During 2019, our directly owned title insurers can pay dividends or make distributions to us of approximately $512 million; however, insurance regulators have the authority to prohibit the payment of ordinary dividends or other payments by our title insurers to us (such as a payment under a tax sharing agreement or for other services) if they determine that such payment could be adverse to our policyholders. There are no restrictions on our retained earnings regarding our ability to pay dividends to shareholders.
The combined statutory capital and surplus of our title insurers was approximately $1,383 million and $1,389 million as of December 31, 2018 and 2017, respectively. The combined statutory earnings of our title insurers were $625 million, $434 million, and $541 million for the years ended December 31, 2018, 2017, and 2016, respectively.
As a condition to continued authority to underwrite policies in the states in which our insurers conduct their business, they are required to pay certain fees and file information regarding their officers, directors and financial condition.
 Pursuant to statutory requirements of the various states in which our insurers are domiciled, such insurers must maintain certain levels of minimum capital and surplus. Required levels of minimum capital and surplus are not significant to the insurers individually or in the aggregate. Each of our insurers has complied with the minimum statutory requirements as of December 31, 2018.
 Our underwritten title companies, primarily those domiciled in California, are also subject to certain regulation by insurance regulatory or banking authorities relating to their net worth and working capital. Minimum net worth and working capital requirements for each underwritten title company is less than $1 million. These companies were in compliance with their respective minimum net worth and working capital requirements at December 31, 2018.
 From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries from multiple governmental agencies. Various governmental entities are studying the title insurance product, market, pricing, and

8


business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities which may require us to pay fines or claims or take other actions. For further discussion, see Item 3, Legal Proceedings.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state in which the insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and management of the applicant’s Board of Directors and executive officers, the acquirer’s plans for the insurer’s Board of Directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of our insurers, the insurance change of control laws would likely apply to such a transaction.
 The National Association of Insurance Commissioners ("NAIC") has adopted an instruction requiring an annual certification of reserve adequacy by a qualified actuary. Because all of the states in which our title insurers are domiciled require adherence to NAIC filing procedures, each such insurer, unless it qualifies for an exemption, must file an actuarial opinion with respect to the adequacy of its reserves.
Title Insurance Ratings. Our title insurance underwriters are regularly assigned ratings by independent agencies designed to indicate their financial condition and/or claims paying ability. The rating agencies determine ratings by quantitatively and qualitatively analyzing financial data and other information. Our title subsidiaries include Alamo Title, Chicago Title, Commonwealth Land Title, Fidelity National Title and National Title of New York. Standard & Poor’s Ratings Group (“S&P”) and Moody’s Investors Service (“Moody’s”) provide ratings for the entire FNF family of companies as a whole as follows:
 
S&P
 
Moody’s
FNF family of companies
A
 
A2

The relative position of each of our ratings among the ratings scale assigned by each rating agency is as follows:
An S&P "A" rating is the third highest rating of 12 ratings for S&P. According to S&P, an insurer rated “A” has strong capacity to meet its financial commitments, but is somewhat more susceptible to adverse effects of changes in circumstances and economic conditions than insurers with "AAA" or "AA" ratings.
A Moody's "A2" rating is the third highest rating of 9 ratings for Moody's. Moody's states that companies rated “A2” are judged to be upper-medium grade and are subject to low credit risk.

Demotech provides financial strength/stability ratings for each of our title insurance underwriters individually, as follows: 
Alamo Title Insurance
A'
Chicago Title Insurance Company
A''
Commonwealth Land Title Insurance Company
A'
Fidelity National Title Insurance Company
A'
National Title Insurance of New York
A'
 Demotech states that its ratings of "A"(A double prime)" and "A' (A prime)" reflect its opinion that the insurer possesses "Unsurpassed" ability to maintain liquidity of invested assets, quality reinsurance, acceptable financial leverage and realistic pricing while simultaneously establishing loss and loss adjustment expense reserves at reasonable levels. The A'' and A' ratings are the two highest ratings of Demotech's six ratings.
The ratings of S&P, Moody’s, and Demotech described above are not designed to be, and do not serve as, measures of protection or valuation offered to investors. These financial strength ratings should not be relied on with respect to making an investment in our securities. See “Item 1A. Risk Factors — If the rating agencies downgrade our Company, our results of operations and competitive position in the title insurance industry may suffer” for further information.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, and copyright and trade secret law to establish and protect our software, technology, and expertise across our businesses. Further, we have developed a number of brands that have accumulated substantial goodwill in the marketplace, and we rely on trademark law to protect our rights in that area. We

9


intend to continue our policy of taking all measures we deem necessary to protect our copyright, trade secret, and trademark rights. These legal protections and arrangements afford only limited protection of our proprietary rights, and there is no assurance that our competitors will not independently develop or license products, services, or capabilities that are substantially equivalent or superior to ours.
Technology and Research and Development
 As a national provider of real estate transaction products and services, we participate in an industry that is subject to significant regulatory requirements, frequent new product and service introductions, and evolving industry standards. We believe that our future success depends in part on our ability to anticipate industry changes and offer products and services that meet evolving industry standards. In connection with our title segment service offerings, we are continuing to deploy new information system technologies to our direct and agency operations. We continue to improve the process of ordering title and escrow services and improve the delivery of our products to our customers. In order to meet new regulatory requirements, we also continue to expand our data collection and reporting abilities.
Investment Policies and Investment Portfolio
 Our investment policy is designed to maximize total return through investment income and capital appreciation consistent with moderate risk of principal, while providing adequate liquidity. Our insurance subsidiaries, including title insurers, underwritten title companies and insurance agencies, are subject to extensive regulation under applicable state laws. The various states in which we operate our underwriters regulate the types of assets that qualify for purposes of capital, surplus, and statutory unearned premium reserves. Our investment policy specifically limits duration and non-investment grade allocations in the FNF fixed-income portfolio. Maintaining shorter durations on the investment portfolio allows for the mitigation of interest rate risk. Equity securities and preferred stock are utilized to take advantage of perceived value or for strategic purposes. Due to the magnitude of the investment portfolio in relation to our claims loss reserves, durations of investments are not specifically matched to the cash outflows required to pay claims.
As of December 31, 2018 and 2017, the carrying amount of total investments, which approximates the fair value, excluding investments in unconsolidated affiliates, was $3.4 billion and $3.2 billion, respectively.
 We purchase investment grade fixed maturity securities, selected non-investment grade fixed maturity securities, preferred stock and equity securities. The securities in our portfolio are subject to economic conditions and normal market risks and uncertainties. 
The following table presents certain information regarding the investment ratings of our fixed maturity securities and preferred stock portfolio at December 31, 2018 and 2017:
 
December 31,
 
2018
 
2017
 
Amortized
 
% of
 
Fair
 
% of
 
Amortized
 
% of
 
Fair
 
% of
Rating(1)
Cost
 
Total
 
Value
 
Total
 
Cost
 
Total
 
Value
 
Total
 
(Dollars in millions)
Aaa/AAA
$
436

 
18.1
%
 
$
430

 
17.9
%
 
$
398

 
18.8
%
 
$
396

 
18.5
%
Aa/AA
260

 
10.8

 
260

 
10.8

 
335

 
15.9

 
337

 
15.8

A
749

 
31.0

 
749

 
31.3

 
575

 
27.3

 
578

 
27.2

Baa/BBB
633

 
26.3

 
630

 
26.3

 
510

 
24.1

 
519

 
24.3

Ba/BB/B
109

 
4.5

 
109

 
4.5

 
155

 
7.3

 
159

 
7.4

Lower
24

 
1.0

 
22

 
0.9

 
45

 
2.1

 
49

 
2.3

Other (2)
200

 
8.3

 
200

 
8.3

 
95

 
4.5

 
97

 
4.5

 
$
2,411

 
100.0
%
 
$
2,400

 
100.0
%
 
$
2,113

 
100.0
%
 
$
2,135

 
100.0
%
______________________________________
(1)
Ratings as assigned by Moody’s Investors Service or Standard & Poor’s Ratings Group if a Moody's rating is unavailable.
(2)
This category is composed of unrated securities.

10


The following table presents certain information regarding contractual maturities of our fixed maturity securities:
 
December 31, 2018
 
Amortized
 
% of
 
Fair
 
% of
Maturity
Cost
 
Total
 
Value
 
Total
 
(Dollars in millions)
One year or less
$
347

 
17.3
%
 
$
344

 
17.2
%
After one year through five years
1,336

 
66.6

 
1,326

 
66.3

After five years through ten years
226

 
11.2

 
227

 
11.4

After ten years
41

 
2.0

 
41

 
2.1

Mortgage-backed/asset-backed securities
59

 
2.9

 
60

 
3.0

 
$
2,009

 
100.0
%
 
$
1,998

 
100.0
%
 Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Because of the potential for prepayment on mortgage-backed and asset-backed securities, they are not categorized by contractual maturity.
Our equity securities at December 31, 2018 and 2017 consisted of investments with a cost basis of $498 million and $517 million, respectively, and fair value of $498 million and $681 million, respectively.
At December 31, 2018 and 2017, we held $137 million and $150 million, respectively, in investments that are accounted for using the equity method of accounting.
 As of December 31, 2018 and 2017, other long-term investments were $135 million and $110 million, respectively. Other long-term investments include other investments carried at fair value and company-owned life insurance policies carried at cash surrender value.
 Short-term investments, which consist primarily of commercial paper and money market instruments which have an original maturity of one year or less, are carried at amortized cost, which approximates fair value. As of December 31, 2018 and 2017, short-term investments amounted to $480 million and $295 million, respectively.
Our investment results for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
 
December 31,
 
 
2018
 
2017
 
2016
 
 
(Dollars in millions)
Net investment income (1)
 
$
169

 
$
139

 
$
141

Average invested assets
 
$
3,291

 
$
3,296

 
$
3,936

Effective return on average invested assets
 
5.1
%
 
4.2
%
 
3.6
%
______________________________________
(1)
Net investment income as reported in our Consolidated Statements of Earnings has been adjusted in the presentation above to provide the tax equivalent yield on tax exempt investments and to exclude interest earned on cash and cash equivalents. Net investment income includes fees earned by holding customer funds in escrow (off-balance sheet) during facilitation of tax-deferred property exchanges. See Note D Investments to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a detail of our interest income.
Loss Reserves
 For information about our loss reserves, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates.
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 5,200 agents, primarily in those areas in which agents are the more prevalent title insurance provider. Substantially all of our revenues are generated in the United States.

11


The following table sets forth the approximate dollar and percentage volumes of our title insurance premium revenue by state:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
Amount
 
%
 
Amount
 
%
 
Amount
 
%
 
(Dollars in millions)
Texas
$
707

 
14.4
%
 
$
693

 
14.2
%
 
$
670

 
14.2
%
California
681

 
13.9

 
708

 
14.5

 
690

 
14.6

Florida
432

 
8.8

 
392

 
8.0

 
364

 
7.7

New York
310

 
6.3

 
311

 
6.3

 
336

 
7.1

Illinois
271

 
5.5

 
283

 
5.8

 
267

 
5.7

All others
2,510

 
51.1

 
2,506

 
51.2

 
2,396

 
50.7

Totals
$
4,911

 
100.0
%
 
$
4,893

 
100.0
%
 
$
4,723

 
100.0
%
Employees
As of February 1, 2019, we had 23,436 full-time equivalent employees, which includes 22,849 in our Title segment and 587 in our Corporate and other segment. We monitor our staffing levels based on current economic activity. None of our employees are subject to collective bargaining agreements. We believe that our relations with employees are generally good.
Financial Information by Operating Segment
For financial information by operating segment, see Note R Segment Information to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report.

 Statement Regarding Forward-Looking Information
 The statements contained in this Form 10-K or in our other documents or in oral presentations or other statements made by our management that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, hopes, intentions, or strategies regarding the future. These statements relate to, among other things, future financial and operating results of the Company. In many cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue,” or the negative of these terms and other comparable terminology. Actual results could differ materially from those anticipated in these statements as a result of a number of factors, including, but not limited to the following:
changes in general economic, business, and political conditions, including changes in the financial markets;
the severity of our title insurance claims;
downgrade of our credit rating by rating agencies;
adverse changes in the level of real estate activity, which may be caused by, among other things, high or increasing interest rates, a limited supply of mortgage funding, increased mortgage defaults, or a weak U.S. economy;
compliance with extensive government regulation of our operating subsidiaries and adverse changes in applicable laws or regulations or in their application by regulators;
inability to obtain without unanticipated conditions or significant delay, if at all, the necessary regulatory approvals to consummate the Stewart Merger;
inability to timely satisfy or obtain waiver any of the closing conditions to the proposed Stewart Merger;
failure to successfully integrate Stewart’s business with that of FNF, that such integration may be more difficult, time-consuming or costly than expected or that the expected benefits of the Stewart Merger will not be realized;
regulatory investigations of the title insurance industry;
loss of key personnel that could negatively affect our financial results and impair our operating abilities;
our business concentration in the States of California and Texas are the source of approximately 13.9% and 14.4%, respectively, of our title insurance premiums;
our potential inability to find suitable acquisition candidates, as well as the risks associated with acquisitions in lines of business that will not necessarily be limited to our traditional areas of focus, or difficulties integrating acquisitions;
our dependence on distributions from our title insurance underwriters as our main source of cash flow;
competition from other title insurance companies; and
other risks detailed in "Risk Factors" below and elsewhere in this document and in our other filings with the SEC.
 We are not under any obligation (and expressly disclaim any such obligation) to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise. You should carefully consider the possibility that actual results may differ materially from our forward-looking statements.

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 Additional Information
 Our website address is www.fnf.com. We make available free of charge on or through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. However, the information found on our website is not part of this or any other report.

Item 1A.      Risk Factors
In addition to the normal risks of business, we are subject to significant risks and uncertainties, including those listed below and others described elsewhere in this Annual Report. Any of the risks described herein could result in a significant or material adverse effect on our results of operations or financial condition.
General
We have recorded goodwill as a result of prior acquisitions, and an economic downturn could cause these balances to become impaired, requiring write-downs that would reduce our operating income.
Goodwill aggregated approximately $2,726 million, or 29.3% of our total assets, as of December 31, 2018. Current accounting rules require that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and market capitalization, and negative industry or economic trends. In the year ended December 31, 2018, we recorded $3 million of goodwill impairment related to a real estate brokerage subsidiary in our Corporate and other segment. For the years ended December 31, 2017 and 2016, no goodwill impairment charge was recorded. However, if there is an economic downturn in the future, the carrying amount of our goodwill may no longer be recoverable, and we may be required to record an impairment charge, which would have a negative impact on our results of operations and financial condition. We will continue to monitor our market capitalization and the impact of the economy to determine if there is an impairment of goodwill in future periods.
Our management has historically sought to grow through acquisitions, both in our current lines of business as well as in lines of business outside of our traditional areas of focus or geographic areas. This expansion of our business subjects us to associated risks, such as risks and uncertainties associated with new companies, the diversion of management’s attention and lack of experience in operating unrelated businesses, and may affect our credit and ability to repay our debt.
Our management has historically sought to grow through acquisitions, both in our current lines of business, as well as lines of business that are not directly tied to or synergistic with our current operations. Accordingly, we have in the past acquired, and may in the future acquire, businesses in industries or geographic areas with which management is less familiar than we are with our current businesses. These activities involve risks that could adversely affect our operating results, due to uncertainties involved with new companies, diversion of management’s attention and lack of substantial experience in operating such businesses. There can be no guarantee that we will not enter into transactions or make acquisitions that will cause us to incur additional debt, increase our exposure to market and other risks and cause our credit or financial strength ratings to decline.
We are a holding company and depend on distributions from our subsidiaries for cash.
We are a holding company whose primary assets are the securities of our operating subsidiaries. Our ability to pay interest on our outstanding debt and our other obligations and to pay dividends is dependent on the ability of our subsidiaries to pay dividends or make other distributions or payments to us. If our operating subsidiaries are not able to pay dividends to us, we may not be able to meet our obligations or pay dividends on our common stock.
Our title insurance subsidiaries must comply with state laws which require them to maintain minimum amounts of working capital, surplus and reserves, and place restrictions on the amount of dividends that they can distribute to us. Compliance with these laws will limit the amounts our regulated subsidiaries can dividend to us. During 2019, our title insurers may pay dividends or make distributions to us of approximately $512 million; however, insurance regulators have the authority to prohibit the payment of ordinary dividends or other payments by our title insurers to us if they determine that such payment could be adverse to our policyholders.
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

13


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.
The loss of key personnel could negatively affect our financial results and impair our operating abilities.
Our success substantially depends on our ability to attract and retain key members of our senior management team and officers. If we lose one or more of these key employees, our operating results and in turn the value of our common stock could be materially adversely affected. Although we have employment agreements with many of our officers, there can be no assurance that the entire term of the employment agreement will be served or that the employment agreement will be renewed upon expiration.
Failure of our information security systems or processes could result in a loss or disclosure of confidential information, damage to our reputation, monetary losses, additional costs and impairment of our ability to conduct business effectively.
Our operations are highly dependent upon the effective operation of our computer systems. We use our computer systems to receive, process, store and transmit sensitive personal consumer data (such as names and addresses, social security numbers, driver's license numbers, credit cards and bank account information) and important business information of our customers. We also electronically manage substantial cash, investment assets and escrow account balances on behalf of ourselves and our customers, as well as financial information about our businesses generally. The integrity of our computer systems and the protection of the information that resides on such systems are important to our successful operation. If we fail to maintain an adequate security infrastructure, adapt to emerging security threats or follow our internal business processes with respect to security, the information or assets we hold could be compromised. Further, even if we, or third parties to which we outsource certain information technology services, maintain a reasonable, industry-standard information security infrastructure to mitigate these risks, the inherent risk that unauthorized access to information or assets remains. This risk is increased by transmittal of information over the internet and the increased threat and sophistication of cyber criminals. While, to date, we believe that we have not experienced a material breach of our computer systems, the occurrence or scope of such events is not always apparent. If additional information regarding an event previously considered immaterial is discovered, or a new event were to occur, it could potentially have a material adverse effect on our operations or financial condition. In addition, some laws and certain of our contracts require notification of various parties, including regulators, consumers or customers, in the event that confidential or personal information has or may have been taken or accessed by unauthorized parties. Such notifications can potentially result, among other things, in adverse publicity, diversion of management and other resources, the attention of regulatory authorities, the imposition of fines, and disruptions in business operations, the effects of which may be material. Any inability to prevent security or privacy breaches, or the perception that such breaches may occur, could inhibit our ability to retain or attract new clients and/or result in financial losses, litigation, increased costs, negative publicity, or other adverse consequences to our business.
Further, our financial institution clients have obligations to safeguard their information technology systems and the confidentiality of customer information. In certain of our businesses, we are bound contractually and/or by regulation to comply with the same requirements. If we fail to comply with these regulations and requirements, we could be exposed to suits for breach of contract, governmental proceedings or the imposition of fines. In addition, future adoption of more restrictive privacy laws, rules or industry security requirements by federal or state regulatory bodies or by a specific industry in which we do business could have an adverse impact on us through increased costs or restrictions on business processes.
If economic and credit market conditions deteriorate, it could have a material adverse impact on our investment portfolio.
Our investment portfolio is exposed to economic and financial market risks, including changes in interest rates, credit markets and prices of marketable equity and fixed-income securities. Our investment policy is designed to maximize total return through investment income and capital appreciation consistent with moderate risk of principal, while providing adequate liquidity and complying with internal and regulatory guidelines. To achieve this objective, our marketable debt investments are primarily investment grade, liquid, fixed-income securities and money market instruments denominated in U.S. dollars. We make investments in certain equity securities and preferred stock in order to take advantage of perceived value and for strategic purposes. In the past, economic and credit market conditions have adversely affected the ability of some issuers of investment securities to repay their obligations and have affected the values of investment securities. If the carrying value of our investments exceeds the fair value, and the decline in fair value is deemed to be other-than-temporary, we will be required to write down the value of our investments, which could have a material negative impact on our results of operations and financial condition.
Failure of our enterprise-wide risk management processes could result in unexpected monetary losses, damage to our reputation, additional costs or impairment of our ability to conduct business effectively.
As a large insurance entity and a publicly traded company, the Company has always had risk management functions, policies and procedures throughout its operations and management. These functions include but are not limited to departments dedicated to enterprise risk management and information technology risk management, information security, business continuity, lender strategy and development, and vendor risk management. These policies and procedures have evolved over the years as we continually reassess our processes both internally and to comply with changes in the regulatory environment. Due to limitations inherent in any internal process, if the Company's risk management processes prove unsuccessful at identifying and responding

14


to risks, we could incur unexpected monetary losses, damage to our reputation, additional costs or impairment of our ability to conduct business effectively.
We are the subject of various legal proceedings that could have a material adverse effect on our results of operations.
We are involved from time to time in various legal proceedings, including in some cases class-action lawsuits and regulatory inquiries, investigations or other proceedings. If we are unsuccessful in our defense of litigation matters or regulatory proceedings, we may be forced to pay damages, fines or penalties and/or change our business practices, any of which could have a material adverse effect on our business and results of operations. See Note M Commitments and Contingencies to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further discussion of pending litigation and regulatory matters and our related accrual.
If adverse changes in the levels of real estate activity occur, our revenues may decline.
Title insurance revenue is closely related to the level of real estate activity which includes sales, mortgage financing and mortgage refinancing. The levels of real estate activity are primarily affected by the average price of real estate sales, the availability of funds to finance purchases and mortgage interest rates.
We have found that residential real estate activity generally decreases in the following situations:
when mortgage interest rates are high or increasing;
when the mortgage funding supply is limited; 
when housing inventory is limited or home prices are high or increasing; and
when the United States economy is weak, including high unemployment levels.
Declines in the level of real estate activity or the average price of real estate sales are likely to adversely affect our title insurance revenues. The Mortgage Bankers Association's ("MBA") Mortgage Finance Forecast as of January 17, 2019 calculates an approximately $1.6 trillion mortgage origination market for 2018, which would be a slight decrease from 2017. The decrease is expected to result from a decrease in refinance activity, offset by a slight increase in purchase transactions. The MBA predicts overall mortgage originations in 2019 and 2020 will remain relatively flat compared to the 2018 period. Our revenues in future periods will continue to be subject to these and other factors which are beyond our control and, as a result, are likely to fluctuate. See discussion under 'Business Trends and Conditions' within Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of Part II of this Annual Report for further discussion of current market trends.
If financial institutions at which we hold escrow funds fail, it could have a material adverse impact on our company.
We hold customers' assets in escrow at various financial institutions, pending completion of real estate transactions. These assets are maintained in segregated bank accounts and have not been included in the accompanying Consolidated Balance Sheets. We have a contingent liability relating to proper disposition of these balances for our customers, which amounted to $13.5 billion at December 31, 2018. Failure of one or more of these financial institutions may lead us to become liable for the funds owed to third parties and there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage or otherwise.
If we experience changes in the rate or severity of title insurance claims, it may be necessary for us to record additional charges to our claim loss reserve. This may result in lower net earnings and the potential for earnings volatility.
By their nature, claims are often complex, vary greatly in dollar amounts and are affected by economic and market conditions and the legal environment existing at the time of settlement of the claims. Estimating future title loss payments 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. From time to time, we experience large losses or an overall worsening of our loss payment experience in regard to the frequency or severity of claims that require us to record additional charges to our claims loss reserve. There are currently pending several large claims which we believe can be defended successfully without material loss payments. However, if unanticipated material payments are required to settle these claims, it could result in or contribute to additional charges to our claim loss reserves. These loss events are unpredictable and adversely affect our earnings.
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 to that balance and subtracting actual paid claims from that balance, resulting in an amount that management then compares to our actuary's central estimate provided in the actuarial calculation. Due to the uncertainty and judgment used by both management and our actuary, our ultimate liability may be greater or less than our current reserves and/or our actuary’s calculation. If the recorded amount is within a reasonable range of the actuary’s central estimate, but not at the central estimate, management assesses other factors in order to determine 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 management can assess, but for which there is a time lag in the development of the data used by our actuary), 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. Depending upon our assessment of these factors, we may or may not adjust the recorded reserve. If the

15


recorded amount is not within a reasonable range of the actuary’s central estimate, we would record a charge or credit and reassess the provision rate on a go forward basis.
Our subsidiaries must comply with extensive regulations. These regulations may increase our costs or impede or impose burdensome conditions on actions that we might seek to take to increase the revenues of those subsidiaries.
Our insurance businesses are subject to extensive regulation by state insurance authorities in each state in which they operate. These agencies have broad administrative and supervisory power relating to the following, among other matters:
licensing requirements;
trade and marketing practices;
accounting and financing practices;
disclosure requirements on key terms of mortgage loans;
capital and surplus requirements;
the amount of dividends and other payments made by insurance subsidiaries;
investment practices;
rate schedules;
deposits of securities for the benefit of policyholders;
establishing reserves; and
regulation of reinsurance.
Most states also regulate insurance holding companies like us with respect to acquisitions, changes of control and the terms of transactions with our affiliates. State regulations may impede or impose burdensome conditions on our ability to increase or maintain rate levels or on other actions that we may want to take to enhance our operating results. In addition, we may incur significant costs in the course of complying with regulatory requirements. Further, various state legislatures have in the past considered offering a public alternative to the title industry in their states, as a means to increase state government revenues. Although we think this situation is unlikely, if one or more such takeovers were to occur they could adversely affect our business. We cannot be assured that future legislative or regulatory changes will not adversely affect our business operations. See “Item 1. Business — Regulation” for further discussion of the current regulatory environment.
Our ServiceLink subsidiary provides mortgage transaction services including title-related services and facilitation of production and management of mortgage loans. Certain of these businesses are subject to federal and state regulatory oversight. For example, ServiceLink’s LoanCare business services and subservices mortgage loans secured primarily by residential real estate throughout the United States. LoanCare is subject to extensive federal, state and local regulatory oversight, including federal and state regulatory examinations, information gathering requests, inquiries, and investigations by governmental and regulatory agencies, including the CFPB. In connection with formal and informal inquiries by those agencies, LoanCare receives numerous requests, subpoenas, and orders for documents, testimony and information in connection with various aspects of its or its clients’ regulated activities. The ongoing implementation of the Dodd Frank Act, including the implementation of the originations and servicing rules by the CFPB, could increase our regulatory compliance burden and associated costs and place restrictions on our ability to operate the LoanCare business.
LoanCare is also required to maintain a variety of licenses, both federal and state. License requirements are in a frequent state of renewal and reexamination as regulations change or are reinterpreted. In addition, federal and state statutes establish specific guidelines and procedures that debt collectors must follow when collecting consumer accounts. LoanCare’s failure to comply with any of these laws, should the states take an opposing interpretation, could have an adverse effect on LoanCare in the event and to the extent that they apply to some or all of its servicing activities.
State regulation of the rates we charge for title insurance could adversely affect our results of operations.
Our title insurance subsidiaries are subject to extensive rate regulation by the applicable state agencies in the jurisdictions in which they operate. Title insurance rates are regulated differently in various states, with some states requiring the subsidiaries to file and receive approval of rates before such rates become effective and some states promulgating the rates that can be charged. In general, premium rates are determined on the basis of historical data for claim frequency and severity as well as related production costs and other expenses. In all states in which our title subsidiaries operate, our rates must not be excessive, inadequate or unfairly discriminatory. Premium rates are likely to prove insufficient when ultimate claims and expenses exceed historically projected levels. Premium rate inadequacy may not become evident quickly and may take time to correct, and could adversely affect the Company’s business operating results and financial conditions.
Regulatory investigations of the insurance industry may lead to fines, settlements, new regulation or legal uncertainty, which could negatively affect our results of operations.
From time to time we receive inquiries and requests for information from state insurance departments, attorneys general and other regulatory agencies about various matters relating to our business. Sometimes these take the form of civil investigative demands or subpoenas. We cooperate with all such inquiries and we have responded to or are currently responding to inquiries

16


from multiple governmental agencies. Also, regulators and courts have been dealing with issues arising from foreclosures and related processes and documentation. Various governmental entities are studying the title insurance product, market, pricing, and business practices, and potential regulatory and legislative changes, which may materially affect our business and operations. From time to time, we are assessed fines for violations of regulations or other matters or enter into settlements with such authorities which may require us to pay fines or claims or take other actions.
Because we are dependent upon California and Texas for approximately 13.9% and 14.4% and of our title insurance premiums, respectively, our business may be adversely affected by regulatory conditions in California and/or Texas.
California and Texas are the two largest sources of revenue for our title segment and, in 2018, California-based premiums accounted for approximately 28.2% of premiums earned by our direct operations and 0.7% of our agency premium revenues. Texas-based premiums accounted for 18.6% of premiums earned by our direct operations and 10.8% of our agency premium revenues. In the aggregate, California and Texas accounted for approximately 13.9% and 14.4%, respectively, of our total title insurance premiums for 2018. A significant part of our revenues and profitability are therefore subject to our operations in California and Texas and to the prevailing regulatory conditions in these states. Adverse regulatory developments in California and Texas, which could include reductions in the maximum rates permitted to be charged, inadequate rate increases or more fundamental changes in the design or implementation of the California and Texas title insurance regulatory framework, could have a material adverse effect on our results of operations and financial condition.
If the rating agencies downgrade our insurance companies, our results of operations and competitive position in the title insurance industry may suffer.
Ratings have always been an important factor in establishing the competitive position of insurance companies. Our title insurance subsidiaries are rated by S&P, Moody’s, and Demotech. Ratings reflect the opinion of a rating agency with regard to an insurance company’s or insurance holding company’s financial strength, operating performance and ability to meet its obligations to policyholders and are not evaluations directed to investors. Our ratings are subject to continued periodic review by rating agencies and the continued retention of those ratings cannot be assured. If our ratings are reduced from their current levels by those entities, our results of operations could be adversely affected.
If the Company's claim loss prevention procedures fail, we could incur significant claim losses.
In the ordinary course of our title insurance business, we assume risks related to insuring clear title to residential and commercial properties. The Company has established procedures to mitigate the risk of loss from title claims, including extensive underwriting and risk assessment procedures. We also mitigate the risk of large claim losses by reinsuring risks with other insurers under excess of loss and case-by-case (“facultative”) reinsurance agreements. Reinsurance agreements generally provide that the reinsurer is liable for loss and loss adjustment expense payments exceeding the amount retained by the ceding company. However, the ceding company remains primarily liable to the insured whether or not the reinsurer is able to meet its contractual obligations. If inherent limitations cause our claim loss risk mitigation procedures to fail, we could incur substantial losses having an adverse effect on our results of operations or financial condition.
The Company's use of independent agents for a significant amount of our title insurance policies could adversely impact the frequency and severity of title claims.
In the Company’s agency operations, an independent agent performs the search and examination function or the agent may purchase a search product from the Company. In either case, the agent is responsible for ensuring that the search and examination is completed. The agent thus retains the majority of the title premium collected, with the balance remitted to the title underwriter for bearing the risk of loss in the event that a claim is made under the title insurance policy. The Company’s relationship with each agent is governed by an agency agreement defining how the agent issues a title insurance policy on the Company’s behalf. The agency agreement also sets forth the agent’s liability to the Company for policy losses attributable to the agent’s errors. For each agent with whom the Company enters into an agency agreement, financial and loss experience records are maintained. Periodic audits of our agents are also conducted and the number of agents with which the Company transacts business is strategically managed in an effort to reduce future expenses and manage risks. Despite efforts to monitor the independent agents with which we transact business, there is no guarantee that an agent will comply with their contractual obligations to the Company. Furthermore, we cannot be certain that, due to changes in the regulatory environment and litigation trends, the Company will not be held liable for errors and omissions by agents. Accordingly, our use of independent agents could adversely impact the frequency and severity of title claims.
Failure to respond to rapid changes in technology could adversely affect the Company.
Rapidly evolving technologies and innovations in software and financial technology could drive changes in how real estate transactions are recorded and processed throughout the mortgage life cycle. There is no guarantee that we will be able to effectively adapt to and utilize changing technology.  Existing or new competitors may be able to utilize or create technology more effectively than us, which could result in the loss of market share.


17


Our pending acquisition of Stewart may expose us to certain risks.
On March 18, 2018, we signed a merger agreement (the "Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"). The closing of the Stewart Merger is subject to certain closing conditions, federal and state regulatory approvals and the satisfaction of other customary closing conditions. Closing of the Stewart Merger may be delayed in the event that we are unable to obtain, in a timely manner, the necessary regulatory approvals. If the Stewart Merger is not completed for failure to obtain the required regulatory approvals, we would be required to pay a reverse break-up fee of $50 million to Stewart. If the Stewart Merger is completed, we may face challenges in integrating Stewart into our existing infrastructure. These challenges include eliminating redundant operations, facilities and systems, coordinating management and personnel, retaining key employees, managing different corporate cultures, and achieving cost reductions. There can be no assurance that we will be able to fully integrate all aspects of the acquired business successfully, and the process of integrating this acquisition may disrupt our business and divert our resources.

Item 1B.
Unresolved Staff Comments
None.

Item 2.  
Properties
Our corporate headquarters are in Jacksonville, Florida in owned facilities.
The majority of our branch offices are leased from third parties. See Note M Commitments and Contingencies to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further information on our outstanding leases. Our subsidiaries conduct their business operations primarily in leased office space in 45 states, Washington, DC, Canada and India.

Item 3.
Legal Proceedings  
For a description of our legal proceedings see discussion of Legal and Regulatory Contingencies in Note M. Commitments and Contingencies to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report, which is incorporated by reference into this Item 3 of Part I.


18


PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the New York Stock Exchange under the trading symbol "FNF".
On January 31, 2019, the last reported sale price of our common stock on the New York Stock Exchange was $36.16. We had approximately 6,700 shareholders of record.
Refer to Note O. Employee Benefit Plans to our Consolidated Financial Statements included in Item 7 of Part II of this Annual Report, which is incorporated by reference into this Item 5 of Part II, for further information on securities issued for employee stock compensation pursuant to our Omnibus Plan.
Information concerning securities authorized for issuance under our equity compensation plans will be included in Item 12 of Part III of this Annual Report.

19


Performance Graph
Set forth below is a graph comparing cumulative total shareholder return on our FNF common stock against the cumulative total return on the S&P 500 Index and against the cumulative total return of a peer group index consisting of certain companies in the primary industry in which we compete (SIC code 6361 — Title Insurance) for the period ending December 31, 2018. This peer group consists of the following companies: First American Financial Corporation and Stewart Information Services Corp. The peer group comparison has been weighted based on their stock market capitalization. The graph assumes an initial investment of $100.00 on December 31, 2013, with dividends reinvested over the periods indicated.
fnf5yearcumulativetotalretur.jpg
 
 
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
 
 
 
 
 
 
 
 
Fidelity National Financial, Inc.
 
100.00

132.23

136.09

136.78

224.38

185.68

S&P 500
 
100.00

113.69

115.26

129.05

157.22

150.33

Peer Group
 
100.00

130.88

134.70

138.24

216.74

182.69


20


Dividends
Dividends declared on our common stock for the two most recent fiscal years are as follows:
 
Year Ended December 31,
 
2018
 
2017
 
Cash Dividends per Share
First quarter
$
0.30

 
$
0.25

Second quarter
0.30

 
0.25

Third quarter
0.30

 
0.25

Fourth quarter
0.30

 
0.27

On February 13, 2019, our Board of Directors formally declared a $0.31 per FNF share cash dividend that is payable on March 29, 2019 to FNF shareholders of record as of March 15, 2019.
Our current dividend policy anticipates the payment of quarterly dividends in the future. The declaration and payment of dividends will be at the discretion of our Board of Directors and will be dependent upon our future earnings, financial condition and capital requirements. 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. Our ability to declare dividends is subject to restrictions under our existing credit agreement. We do not believe the restrictions contained in our credit agreement will, in the foreseeable future, adversely affect our ability to pay cash dividends at the current dividend rate.
Since we are a holding company, our ability to pay dividends will depend largely on the ability of our subsidiaries to pay dividends to us, and the ability of our title insurance subsidiaries to do so is subject to, among other factors, their compliance with applicable insurance regulations. As of December 31, 2018, $1,518 million of our net assets are restricted from dividend payments without prior approval from the Departments of Insurance in the states where our title insurance subsidiaries are domiciled. During 2019, our directly owned title insurance subsidiaries can pay dividends or make distributions to us of approximately $512 million without prior approval. The limits placed on such subsidiaries’ abilities to pay dividends affect our ability to pay dividends.
Purchases of Equity Securities by the Issuer
On July 17, 2018, our Board of Directors approved a new three-year stock repurchase program effective August 1, 2018 (the "2018 Repurchase Program") under which we can purchase up to 25 million shares of our FNF common stock through July 31, 2021. We may make repurchases from time to time in the open market, in block purchases or in privately negotiated transactions, depending on market conditions and other factors. During the year ended December 31, 2018, we repurchased a total of 660,000 FNF common shares for $21 million or an average of $32.33 per share. Subsequent to December 31, 2018 and through market close on February 14, 2019, we repurchased a total of 60,000 shares for $2 million, or an average of $31.83 per share under this program. Since the original commencement of the 2018 Repurchase Program, we repurchased a total of 720,000 FNF common shares for $23 million, or an average of $32.29 per share.
The following table summarizes repurchases of equity securities by FNF during the year ending December 31, 2018:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (2)
10/1/2018 - 10/31/2018
 
60,000

 
32.64

 
60,000

 
24,940,000

11/1/2018 - 11/30/2018
 
315,000

 
32.97

 
315,000

 
24,625,000

12/1/2018 - 12/31/2018
 
285,000

 
31.55

 
285,000

 
24,340,000

Total
 
660,000

 
$
32.33

 
660,000

 
 
(1)
On July 17, 2018, our Board of Directors approved a three-year stock repurchase program effective August 1, 2018. Under the stock repurchase program, we may repurchase up to 25 million shares of our FNF common stock through July 31, 2021.
(2)
As of the last day of the applicable month.

21


Item 6. 
Selected Financial Data
The information set forth below should be read in conjunction with the consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Certain reclassifications have been made to the prior year amounts to conform with the 2018 presentation.
On November 17, 2017 we completed our previously announced split-off (the “FNFV Split-Off”) of our former wholly-owned subsidiary Cannae Holdings, Inc. (“Cannae”), which consisted of the businesses, assets and liabilities formerly attributed to our FNF Ventures ("FNFV") Group including Ceridian Holding, LLC, American Blue Ribbon Holdings, LLC and T-System Holding LLC. The results of FNFV are presented as discontinued operations in the following tables.
On September 29, 2017 we completed our tax-free distribution to FNF Group shareholders, of all 83.3 million shares of New BKH Corp. ("New BKH") common stock that we previously owned (the “BK Distribution”). The results of Black Knight are presented as discontinued operations in the following tables.
On June 30, 2014, we completed a recapitalization of FNF common stock into two tracking stocks, FNF Group common stock and FNFV Group common stock. Each share of the previously outstanding FNF Class A common stock ("Old FNF common stock") was converted into one share of FNF Group common stock and 0.3333 of a share of FNFV Group common stock.
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in millions, except share data)
Operating Data:
 

 
 

 
 

 
 
 
 
Revenue
$
7,594

 
$
7,663

 
$
7,257

 
$
6,664

 
$
5,647

Expenses:
 
 
 

 
 

 
 

 
 

Personnel costs
2,538

 
2,460

 
2,275

 
2,137

 
1,921

Agent commissions
2,059

 
2,089

 
1,998

 
1,731

 
1,471

Other operating expenses
1,801

 
1,781

 
1,648

 
1,557

 
1,367

Depreciation and amortization
182

 
183

 
160

 
150

 
148

Provision for title claim losses
221

 
238

 
157

 
246

 
228

Interest expense
43

 
48

 
64

 
73

 
91

 
6,844

 
6,799

 
6,302

 
5,894

 
5,226

Earnings before income taxes, equity in earnings of unconsolidated affiliates, and noncontrolling interest
750

 
864

 
955

 
770

 
421

Income tax expense
120

 
235

 
347

 
274

 
175

Earnings before equity in earnings of unconsolidated affiliates
630

 
629

 
608

 
496

 
246

Equity in earnings of unconsolidated affiliates
5

 
10

 
14

 
5

 
3

Earnings from continuing operations, net of tax
635

 
639

 
622

 
501

 
249

Earnings from discontinued operations, net of tax

 
155

 
70

 
60

 
270

Net earnings
635

 
794

 
692

 
561

 
519

Less: net earnings (loss) attributable to noncontrolling interests
7

 
23

 
42

 
34

 
(64
)
Net earnings attributable to FNF common shareholders
$
628

 
$
771

 
$
650

 
$
527

 
$
583


22


 
Year Ended December 31,
 
2018
 
2017
 
2016
 
2015
 
2014
 
(Dollars in millions, except share data)
Per Share Data:
 

 
 

 
 

 
 
 
 
Basic net earnings per share attributable to Old FNF common shareholders
 
 
 
 
 
 
 
 
$
0.33

Basic net earnings per share attributable to FNF Group common shareholders
$
2.30

 
$
2.44

 
$
2.40

 
$
1.95

 
$
0.77

Basic net earnings (loss) per share attributable to FNFV Group common shareholders


 
$
1.68

 
$
(0.06
)
 
$
(0.16
)
 
$
3.04

Weighted average shares outstanding Old FNF, basic basis (1)
 
 
 
 
 
 
 
 
138

Weighted average shares outstanding FNF Group, basic basis (1)
273

 
271

 
272

 
277

 
138

Weighted average shares outstanding FNFV Group, basic basis (1)
 
 
65

 
67

 
79

 
46

Diluted net earnings per share attributable to Old FNF common shareholders
 
 
 
 
 
 
 
 
$
0.32

Diluted net earnings per share attributable to FNF Group common shareholders
$
2.26

 
$
2.38

 
$
2.34

 
$
1.89

 
$
0.75

Diluted net earnings (loss) per share attributable to FNFV Group common shareholders


 
$
1.63

 
$
(0.06
)
 
$
(0.16
)
 
$
3.01

Weighted average shares outstanding Old FNF, diluted basis (1)
 
 
 
 
 
 
 
 
142

Weighted average shares outstanding FNF Group, diluted basis (1)
278

 
278

 
280

 
286

 
142

Weighted average shares outstanding FNFV Group, diluted basis (1)
 
 
67

 
70

 
82

 
47

Dividends declared per share of Old FNF common stock


 
 
 
 
 
 
 
$
0.36

Dividends declared per share of FNF Group common stock
$
1.20

 
$
1.02

 
$
0.88

 
$
0.80

 
$
0.37

Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Investments (2)
$
3,549

 
$
3,371

 
$
3,782

 
$
4,015

 
$
3,694

Cash and cash equivalents (3)
1,257

 
1,110

 
1,049

 
696

 
604

Total assets
9,301

 
9,151

 
14,521

 
14,043

 
13,868

Notes payable
836

 
759

 
987

 
981

 
2,086

Reserve for title claim losses
1,488

 
1,490

 
1,487

 
1,583

 
1,621

Redeemable NCI
344

 
344

 
344

 
344

 
715

Equity
4,628

 
4,467

 
6,898

 
6,588

 
6,073

Book value per share FNF Group (4)
$
18.05

 
$
17.53

 
$
22.81

 
$
21.21

 
$
18.87

Book value per share FNFV Group (4)
 
 
 
 
$
15.54

 
$
15.05

 
$
16.31

Other Data:
 
 
 
 
 
 
 
 
 
Orders opened by direct title operations (in 000's)
1,818

 
1,942

 
2,184

 
2,092

 
1,914

Orders closed by direct title operations (in 000's)
1,315

 
1,428

 
1,575

 
1,472

 
1,319

Provision for title insurance claim losses as a percent of title insurance premiums (5)
4.5
%
 
4.9
%
 
3.3
%
 
5.7
%
 
6.2
%
Title-related revenue (6):
 
 
 
 
 
 
 
 
 
Percentage direct operations
64.3
%
 
63.8
%
 
63.2
%
 
65.1
%
 
64.8
%
Percentage agency operations
35.7
%
 
36.2
%
 
36.8
%
 
34.9
%
 
35.2
%
______________________________________
(1)
Weighted average shares outstanding as of December 31, 2014 includes 25,920,078 FNF shares that were issued as part of the acquisition of LPS on January 2, 2014 and 91,711,237 FNFV shares that were issued as part of the recapitalization completed on June 30, 2014.
(2)
Investments as of December 31, 2018, 2017, 2016, 2015, and 2014, include securities pledged to secured trust deposits of $426 million, $367 million, $544 million, $608 million, and $499 million, respectively.

23


(3)
Cash and cash equivalents as of December 31, 2018, 2017, 2016, 2015, and 2014 include cash pledged to secured trust deposits of $412 million, $475 million, $331 million, $108 million, and $136 million, respectively.
(4)
Book value per share is calculated as equity at December 31 of each year presented divided by actual shares outstanding at December 31 of each year presented.
(5)
Includes the effects of the release of $97 million of excess reserves in the quarter ended December 31, 2016.
(6)
Includes title insurance premiums and escrow, title-related and other fees.
Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data is as follows:
 
Quarter Ended
 
March 31,
 
June 30,
 
September 30,
 
December 31,
 
(Dollars in millions, except per share data)
2018
 

 
 

 
 

 
 

Revenue
$
1,693

 
$
2,123

 
$
2,085

 
$
1,693

Earnings from continuing operations before income taxes, equity in earnings of unconsolidated affiliates, and noncontrolling interest
127

 
275

 
287

 
61

Net earnings attributable to FNF common shareholders
97

 
251

 
236

 
44

Basic earnings per share attributable to FNF common shareholders
0.36

 
0.92

 
0.86

 
0.16

Diluted earnings per share attributable to FNF common shareholders
0.35

 
0.90

 
0.85

 
0.16

Dividends paid per share FNF common stock
0.30

 
0.30

 
0.30

 
0.30

2017
 
 
 
 
 
 
 
Revenue
$
1,643

 
$
2,059

 
$
1,986

 
$
1,975

Earnings from continuing operations before income taxes, equity in earnings of unconsolidated affiliates, and noncontrolling interest
128

 
274

 
242

 
220

Net earnings attributable to FNF Group common shareholders
71

 
175

 
170

 
246

Net earnings (loss) attributable to FNFV Group common shareholders
1

 
121

 
(5
)
 
(8
)
Basic earnings per share attributable to FNF Group common shareholders
0.26

 
0.65

 
0.63

 
0.90

Basic earnings (loss) per share attributable to FNFV Group common shareholders
0.02

 
1.83

 
(0.08
)
 
(0.12
)
Diluted earnings per share attributable to FNF Group common shareholders
0.25

 
0.63

 
0.62

 
0.88

Diluted earnings (loss) per share attributable to FNFV Group common shareholders
0.01

 
1.81

 
(0.08
)
 
(0.12
)
Dividends paid per share FNF Group common stock
0.25

 
0.25

 
0.25

 
0.27


24


Item 7.  
Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Form 10-K.
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
Pending Acquisition of Stewart
On March 18, 2018, we signed a merger agreement (the "Merger Agreement") to acquire Stewart Information Services Corporation ("Stewart") (NYSE: STC) (the "Stewart Merger"), pursuant to which each share of Stewart common stock issued and outstanding immediately prior to the effective time of the Stewart Merger (other than shares owned by Stewart, its subsidiaries, FNF or the wholly-owned subsidiaries of FNF party to the Merger Agreement and shares in respect of which appraisal rights have been properly exercised and perfected under Delaware law), will be converted into the right to receive, at the election of the holder of such share, (i) $50.00 in cash, (ii) 1.2850 shares of FNF common stock, or (iii) $25.00 in cash and 0.6425 shares of FNF common stock, subject to potential adjustment (as described below) and proration to the extent the option to receive cash or the option to receive stock is oversubscribed.
FNF currently intends to fund the $1.2 billion purchase price, 50% in cash and 50% in FNF common stock, through a combination of cash on hand at FNF, the issuance of FNF common stock to Stewart stockholders, and borrowings under our revolving credit facility, if necessary. Including the assumption of $109 million of Stewart's debt, our pro forma debt to total capital ratio is expected to be no more than approximately 20% at the close of the Stewart Merger.
Under the terms of the Merger Agreement, if the combined company is required to divest assets or businesses for which 2017 annual revenues exceed $75 million, up to a cap of $225 million, in order to receive required regulatory approvals, the purchase price will be adjusted down on a pro-rata basis to a minimum purchase price of $45.50 per share of common stock of Stewart. If the Stewart Merger is not completed for failure to obtain the required regulatory approvals, we would be required to pay a reverse break-up fee of $50 million to Stewart.
On May 31, 2018, we received a request for additional information and documentary material, often referred to as a “Second Request,” from the United States Federal Trade Commission (the “FTC”) in connection with the FTC’s Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), regulatory review of the Stewart Merger.We continue to work through the regulatory process for the Stewart Merger and are currently engaged in responding to the Second Request related to the FTC's HSR Act regulatory review of the transaction. Responses to nearly all the FTC's requests for information and documentation have been submitted. From December 29, 2018 through January 25, 2019, the FTC suspended its review of the Stewart Merger and the materials related thereto due to a lapse in government funding caused by a partial shutdown of the U.S. Federal Government, potentially creating significant backlog when the FTC resumed its operations on January 28, 2019. As such, we are unable to determine the extent of any such delay in the FTC’s review.
On August 1, 2018, our registration statement on Form S-4 related to the Stewart Merger was declared effective by the U.S. Securities and Exchange Commission (the "SEC").
On August 21, 2018, we received a “no-action letter” from the Canadian Competition Bureau (the “Bureau”), indicating that the Bureau does not intend to oppose the completion of the Stewart Merger.
The special meeting of Stewart stockholders to vote on the Stewart Merger was held on September 5, 2018 and a majority of the Stewart stockholders voted to approve the Stewart Merger. More than 99% of the votes cast, representing approximately 79% of the outstanding shares of Stewart common stock as of July 10, 2018, the record date for the special meeting, were cast in favor of adopting the Merger Agreement.
We have filed applications regarding acquisition of control of the Stewart domestic insurers with the states of Texas and New York. The Texas application regarding acquisition of control of Stewart Title Guaranty Company, a Texas domiciled title insurance company licensed in 48 states, is under review by the Texas Department of Insurance.
On January 31, 2019, the New York State Department of Financial Services (“NYDFS”) provided written notice to us of its disapproval of our application to acquire control of Stewart Title Insurance Company, a New York domiciled title insurance company that is licensed only in the State of New York. Receipt of approval from the NYDFS is a condition to closing the Stewart Merger. FNF and Stewart are evaluating the appropriate course of action in light of the NYDFS’ determination, which may include a discussion with the NYDFS to better understand its concerns and respond to the letter. Through January 31, 2019, we have received 28 Form E state regulatory approvals relating to the Stewart Merger.

25


The closing of the Stewart Merger is subject to certain closing conditions, including federal and state regulatory approvals and the satisfaction of other customary closing conditions. 
Other Developments
On September 24, 2018, we closed on the sale of all of our 62% equity interest in, and notes outstanding from, Pacific Union International, Inc. ("Pacific Union"), a luxury real estate broker based in California, and its subsidiaries to Urban Compass, Inc. ("Compass") for $37 million in cash and up to $21 million in potential earnout payments (the "Pacific Union Sale"). The potential earnout payments range in value from $0 to $21 million, are based on certain gross profit and earnings targets for Pacific Union and are payable in approximately 60% cash and 40% Compass stock annually over the course of the next three years. Compass was not a related party prior to, and is not a related party subsequent to, the Pacific Union Sale.
On August 13, 2018, we completed an offering of $450 million in aggregate principal amount of notes due August 2028 with stated interest of 4.50%. See Note E. Notes Payable to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further details.
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 the United States economy, including employment levels.
As of January 17, 2019, the Mortgage Banker's Association ("MBA") estimated the size of the United States ("U.S.") mortgage originations market as shown in the following table for 2018 - 2021 in its "Mortgage Finance Forecast" (in trillions, 2017 represents actual originations):
 
 
2021
 
2020
 
2019
 
2018
 
2017
Purchase transactions
 
$
1.3

 
$
1.3

 
$
1.2

 
$
1.2

 
$
1.1

Refinance transactions
 
0.4

 
0.4

 
0.4

 
0.4

 
0.6

Total U.S. mortgage originations
 
$
1.7

 
$
1.7

 
$
1.6

 
$
1.6

 
$
1.7

In 2017, total originations were reflective of a generally improving residential real estate market driven by increasing home prices and historically low mortgage interest rates. Mortgage interest rates increased slightly in 2017 from 2016, but remained low compared to historical rates. In 2018 average interest rates on 30-year, fixed-rate mortgages in the U.S. rose from approximately 4.0% to 4.9% through October, representing an increase of 22%, before retreating to 4.55% in the last week of December according to mortgage buyer Freddie Mac. As a result of the overall upward trend in rates, refinance transactions decreased in both 2017 and 2018 from the historically high levels experienced in preceding years. Existing home sales increased through 2017 and began leveling out in the first half, and decreasing in the second half, of 2018. Coupled with stagnant levels of new home construction over the same time period, the result has been a decline in total housing inventory and increase in average home prices, albeit with decreasing magnitude toward the end of 2018.
The combination of reduced housing inventory, increasing mortgage interest rates and increasing home prices led the MBA to lower mortgage origination forecasts for 2019 and beyond during the second half of 2018. Market volatility and the shift in mortgage interest rates in late 2018 have created uncertainty in forecasts of future mortgage interest rates and originations. As a result, in early 2019 the U.S. Federal Reserve indicated it will slow or stop its pace of increases to the target federal funds rate. Mortgage interest rates are generally expected to remain flat in 2019. In a stagnate interest rate environment, refinance transactions are expected to continue to stagnate. The MBA predicts overall mortgage originations in 2019 and 2020 will remain relatively flat compared to the 2018 period.
Other economic indicators used to measure the health of the U.S. economy, including the unemployment rate and consumer confidence, have continued to indicate the U.S. economy remains on strong footing. According to the U.S. Department of Labor's Bureau of Labor, the unemployment rate was at a historically low 3.9% in December 2018. Additionally, the Conference Board's monthly Consumer Confidence Index has remained at historically high levels through 2018, despite a slight drop in November and December 2018 resulting from market volatility. Toward the end of the fiscal year of 2018 and into 2019, there has been increased global economic uncertainty and stock market volatility. Such market uncertainty could ultimately impact U.S. real estate markets if they continue to worsen. We believe continued strong readings in domestic U.S. economic indicators present potential tailwinds for mortgage originations, despite growing risks from global economic uncertainties.

26


We cannot be certain how the positive effects of a generally strong U.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 including U.S. tax reform and a shift in U.S. monetary policy have had, or are expected to have, varying effects on availability of financing in the U.S. Lower corporate and individual tax rates and corporate tax-deductibility of capital expenditures have provided increased capacity and incentive for investments in commercial real estate. Conversely, gradual increases in the Fed Funds Rate and the shift in late 2017 by the U.S. Federal Reserve to unwind its balance sheet are generally expected to adversely impact availability of financing by decreasing the overall money supply. In recent years, we have continued to experience strong demand in commercial real estate markets and from 2015 to 2018 experienced historically high volumes and fee-per-file in our commercial business.
Seasonality. Historically, real estate transactions have produced seasonal revenue fluctuations in the real estate industry. The first calendar quarter is typically the weakest quarter in terms of revenue due to the generally low volume of home sales during January and February. The second and third calendar quarters are typically the strongest quarters in terms of revenue, primarily due to a higher volume of residential transactions in the spring and summer months. The fourth quarter is typically also strong due to the desire of commercial entities to complete transactions by year-end. We have noted short-term fluctuations through recent years in resale and refinance transactions as a result of changes in interest rates.
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.

27


The table below summarizes our reserves for known claims and incurred but not reported claims related to title insurance:
 
 
December 31, 2018

 
%
 
December 31, 2017
 
%
 
 
(in millions)
 
 
 
(in millions)
 
 
Known claims
 
$
173

 
11.6
%
 
$
159

 
10.7
%
IBNR
 
1,315

 
88.4

 
1,331

 
89.3

Total Reserve for Title Claim Losses
 
$
1,488

 
100.0
%
 
$
1,490

 
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 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 ended December 31, 2018. Our average loss provision rate was 4.5%, 4.9% and 3.3% for the years ended December 31, 2018, 2017 and 2016, respectively. Our loss provision rate for the year ended December 31, 2016 also included a $97 million adjustment to reduce our prior claim loss reserves. Of such annual loss provision rates, 4.5%, 4.5% and 5.0% for the years ended December 31, 2018, 2017 and 2016, respectively, related to losses on policies written in the current year, and the remainder related to developments on prior year policies. The decrease in the loss provision rate during 2016 through 2018, excluding a one-time adjustment included in the 2016 period, was primarily driven by continued positive development in the more recent policy years. In 2018 and 2017, adverse development of prior year losses of less than $1 million of 2018 premium and $19 million or 0.4% of 2017 premium was accounted for in the provision rate. In 2016, favorable development of prior year losses of $79 million or 1.7% of 2016 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.

During the quarter ended December 31, 2016, we released excess title reserves of $97 million. The release of excess reserves was due to analysis of historical ultimate loss ratios, the reduced volatility of development of those historical ultimate loss ratios and lower policy year loss ratios in recent years. Due to the reduction in volatility of prior year ultimate loss ratios experienced at the time, we felt that actual results were more in line with our actuarial analysis and released excess reserves to bring our recorded position in line with actuarial projections.

28


The table below presents our title insurance loss development experience for the past three years:
 
2018
 
2017
 
2016
 
(In millions)
Beginning balance
$
1,490

 
$
1,487

 
$
1,583

Change in reinsurance recoverable

 
(4
)
 
(8
)
Claims loss provision related to:
 

 
 

 
 

Current year
221

 
219

 
236

Prior years (1)

 
19

 
(79
)
Total title claims loss provision
221

 
238

 
157

Claims paid, net of recoupments related to:
 

 
 

 
 

Current year
(10
)
 
(8
)
 
(10
)
Prior years
(213
)
 
(223
)
 
(235
)
Total title claims paid, net of recoupments
(223
)
 
(231
)
 
(245
)
Ending balance
$
1,488

 
$
1,490

 
$
1,487

Title premiums
$
4,911

 
$
4,893

 
$
4,723

_____________________
(1) Reserve of $97 million released in 2016 related to improving development on prior year claim trends.
 
2018
 
2017
 
2016
Provision for claim losses as a percentage of title insurance premiums:
 

 
 

 
 

Current year
4.5
%
 
4.5
%
 
5.0
 %
Prior years

 
0.4

 
(1.7
)
Total provision
4.5
%
 
4.9
%
 
3.3
 %
Actual claims payments consist of loss payments and claims management expenses offset by recoupments and were as follows (in millions):
 
 
Loss Payments
 
Claims Management Expenses
 
Recoupments
 
Net Loss Payments
Year ended December 31, 2018
 
$
140

 
$
118

 
$
(35
)
 
$
223

Year ended December 31, 2017
 
145

 
121

 
(35
)
 
231

Year ended December 31, 2016
 
179

 
121

 
(55
)
 
245

As of December 31, 2018 and 2017, our recorded reserves were $1,488 million and $1,490 million, respectively, which we determined were reasonable and represented our best estimate and these recorded amounts were within a reasonable range of the central estimates provided by our actuaries. Our recorded reserves were $44 million above the mid-point of the provided range of $1.3 billion to $1.6 billion of our actuarial estimates as of December 31, 2018. Our recorded reserves were $30 million above the mid-point of the provided range of our actuarial estimates of $1.3 billion to $1.7 billion as of December 31, 2017.
During 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 2016 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 14,300 claims at December 31, 2017 to approximately 12,800 claims at December 31, 2018. 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.

29


An approximate $49 million increase (decrease) in our annualized provision for title claim losses would occur if our loss provision rate were 1% higher (lower), based on 2018 title premiums of $4,911 million. A 10% increase (decrease) in our reserve for title claim losses, as of December 31, 2018, would result in an increase (decrease) in our provision for title claim losses of approximately $149 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.
Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold and are credited or charged to income on a trade date basis. Beginning January 1, 2018, unrealized gains or losses on equity and preferred securities are included in earnings. Unrealized gains or losses on fixed maturity securities (and equity and preferred securities prior to January 1, 2018) which are classified as available for sale, net of applicable deferred income tax expenses (benefits), are excluded from earnings and credited or charged directly to a separate component of equity. If any unrealized losses on available for sale securities are determined to be other-than-temporary, such unrealized losses are recognized as realized losses. Unrealized losses on fixed maturity securities are considered other-than-temporary if factors exist that cause us to believe that the value will not increase to a level sufficient to recover our cost basis. Some factors considered in evaluating whether or not a decline in fair value is other-than-temporary include: (i) our need and intent to sell the investment prior to a period of time sufficient to allow for a recovery in value; (ii) the duration and extent to which the fair value has been less than cost; and (iii) the financial condition and prospects of the issuer. Such reviews are inherently uncertain and the value of the investment may not fully recover or may decline in future periods resulting in a realized loss.
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.

30


The following table presents our fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017, respectively:
 
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

 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In millions)
Assets:
 
 
 
 
 
 
 
Fixed-maturity securities available for sale:
 

 
 

 
 

 
 

U.S. government and agencies
$

 
$
195

 
$

 
$
195

State and political subdivisions

 
391

 

 
391

Corporate debt securities

 
1,117

 

 
1,117

Foreign government bonds

 
57

 

 
57

Mortgage-backed/asset-backed securities

 
56

 

 
56

Preferred securities
23

 
296

 

 
319

Equity securities
681

 

 

 
681

     Total assets
$
704

 
$
2,112

 
$

 
$
2,816


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.

31


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 US Treasury security. Inputs include benchmark quotes and other relevant market data.
In conjunction with our adoption of ASU No. 2016-01, beginning January 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 of December 31, 2018 was a range of 8.4% - 8.8% and a weighted-average of 8.6%. Based on the total fair value of our Level 3 other long-term investment as of December 31, 2018, 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 ended December 31, 2018.
 
December 31, 2018
 
Other long-term
 
Corporate debt
 
 
 
investments
 
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
7

 

 
7

Purchases

 
1

 
1

Net valuation loss included in earnings
(6
)
 

 
(6
)
Net unrealized loss included in other comprehensive (loss) earnings

 
(1
)
 
(1
)
Fair value, December 31, 2018
$
101

 
$
17

 
$
118

___________________________________________
(1) See Note S. Recent Accounting Pronouncements to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.

Transfers into or out of the Level 3 fair value category occur when unobservable inputs become more or less significant to the fair value measurement or upon a change in valuation technique.  For the twelve months ended December 31, 2018, transfers between Level 2 and Level 3 were based on changes in significance of unobservable inputs used associated with a change in the valuation technique used for certain of the Company’s corporate debt securities and are not considered material to the Company's financial position or results of operations. There were no transfers between Level 2 and Level 3 in the three months ended December 31, 2018. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period.
As of December 31, 2017 we held no material assets or liabilities measured at fair value using Level 3 inputs.
During the years ended December 31, 2018, 2017 and 2016, we incurred impairment charges relating to investments that were determined to be other-than-temporarily impaired of $3 million, $1 million, and $19 million, respectively. Refer to Note D. Investments to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for further discussion.
Goodwill.  We have made acquisitions that have resulted in a significant amount of goodwill. As of December 31, 2018 and 2017, goodwill was $2,726 million and $2,746 million, respectively. The majority of our goodwill as of December 31, 2018 relates to goodwill recorded in connection with the Chicago Title merger in 2000 and our acquisition of ServiceLink in 2014. Refer to Note F Goodwill to our Consolidated Financial Statements included in Item 8 of Part II of this Annual Report for a summary of recent changes in our Goodwill balance.

32


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 a September 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 ended December 31, 2018. For the years ended December 31, 2017 and 2016, we determined there were no events or circumstances which indicated that the carrying value exceeded the fair value. As of December 31, 2018, 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 $3 million, $1 million and $1 million in impairment expense to other intangible assets during the years ended December 31, 2018, 2017 and 2016, respectively. The impairment in 2018 primarily relates to an acquired customer relationship asset in our Title segment. The impairment in 2017 was for computer software at ServiceLink. The impairment in 2016 was for customer relationships and tradenames at our real estate subsidiaries in our Corporate and Other segment.
Title Revenue Recognition. Our direct title insurance premiums are recognized as revenue at the time of closing of the underlying transaction as the earnings process is then considered complete. Regulation of title insurance rates varies by state. Premiums are charged to customers based on rates predetermined in coordination with each state's respective Department of Insurance. Cash associated with such revenue is typically collected at closing of the underlying real estate transaction. Premium revenues from agency title operations are recognized when the underlying title order and transaction closing, if applicable, are complete and reported to us.
Refer to Note T. Revenue Recognition to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report for further discussion of the accounting for our other revenue streams.
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

33


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 ended December 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.
Results of Operations
 Consolidated Results of Operations
 Net earnings.  The following table presents certain financial data for the years indicated:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars in millions)
Revenue:
 

 
 

 
 

Direct title insurance premiums
$
2,221

 
$
2,170

 
$
2,097

Agency title insurance premiums
2,690

 
2,723

 
2,626

Escrow, title-related and other fees
2,615

 
2,637

 
2,416

Interest and investment income
177

 
131

 
126

Realized gains and losses, net
(109
)
 
2

 
(8
)
Total revenue
7,594

 
7,663

 
7,257

Expenses:
 

 
 

 
 

Personnel costs
2,538

 
2,460

 
2,275

Agent commissions
2,059

 
2,089

 
1,998

Other operating expenses
1,801

 
1,781

 
1,648

Depreciation and amortization
182

 
183

 
160

Provision for title claim losses
221

 
238

 
157

Interest expense
43

 
48

 
64

Total expenses
6,844

 
6,799

 
6,302

Earnings from continuing operations before income taxes and equity in earnings of unconsolidated affiliates
750

 
864

 
955

Income tax expense
120

 
235

 
347

Equity in earnings of unconsolidated affiliates
5

 
10

 
14

Net earnings from continuing operations
$
635

 
$
639

 
$
622

 Revenues.
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. Total revenue in 2017 increased $406 million compared to 2016, primarily due to an increase in fee per file offset by a decrease in closed order volumes in our direct title business and an increase in agent remittances.
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 decreased $4 million in the year ended December 31, 2018, compared to the 2017 period and increased $17 million in the year ended December 31, 2017, compared to the 2016 period.
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 $177 million, $131 million, and $126 million for the years ended December 31, 2018, 2017, and 2016, respectively. 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 increase in 2017 as compared to 2016 is primarily attributable to increased yield on our cash and cash

34


equivalents and short term investments and an increase in other investment income, offset by a decrease in income from our fixed maturity holdings resulting from a decrease in average invested assets. The effective return on average invested assets, excluding realized gains and losses, was 5.1%, 4.2%, and 3.6% for the years ended December 31, 2018, 2017, and 2016, respectively.
Net realized (losses) gains totaled $(109) million, $2 million, and $(8) million for the years ended December 31, 2018, 2017, and 2016, respectively. Net realized losses for the year ended December 31, 2018 are primarily attributable to non-cash valuation losses on equity and preferred security holdings of $93 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. Net realized gains for the year ended December 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. The net realized losses for the year ended December 31, 2016 includes $12 million for net gains on sales of available for sale investments, a gain of $2 million related to the favorable outcome of litigation, and $1 million for other individually insignificant gains. The gains were more than offset by losses of $13 million on impairments of available for sale investments, $3 million for impairment of an equity method investment, $4 million for losses on disposal of fixed assets, a $1 million loss related to the impairments of other intangible assets, and $2 million in realized losses related to other individually insignificant items.
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 on ServiceLink 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 $120 million, $235 million, and $347 million for the years ended December 31, 2018, 2017, and 2016, respectively. Income tax expense as a percentage of earnings from continuing operations before income taxes for the years ended December 31, 2018, 2017, and 2016 was 16.0%, 27.2%, and 36.3%, 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. On December 22, 2017, the U.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 decrease in the effective tax rate in the 2018 period from the comparative 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. The decrease in the effective tax rate in 2017 from 2016 is primarily attributable to Tax Reform. 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.


35


Segment Results of Operations
 Title
The following table presents the results of our Title segment for the years indicated:
 
Year Ended December 31,
 
2018
 
2017
 
2016
 
(In millions)
Revenues:
 

 
 

 
 

Direct title insurance premiums
$
2,221

 
$
2,170

 
$
2,097

Agency title insurance premiums
2,690

 
2,723

 
2,626

Escrow, title-related and other fees
2,189

 
2,181

 
2,128

Interest and investment income
170

 
131

 
127

Realized gains and losses, net
(110
)
 
6