American Home Shield 2015 Annual Report Download - page 70

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Long-term debt decreased from prior year levels due to the redemption of the 2020 Notes. See Note 12 to the consolidated
financial statements for more details.
Deferred taxes increased from prior year levels, primarily reflecting the utilization of net operating losses.
Other long-term obligations, primarily self-insured claims increased from prior year levels, primarily reflecting an increase in
accruals for insured claims.
Total shareholders’ equity was $545 million as of December 31, 2015 compared to $359 million as of December 31, 2014.
The increase was primarily driven by the $147 million of comprehensive income in the year ended December 31, 2015. See the
consolidated statements of shareholders’ equity for further information.
Financial Position—Discontinued Operations
The assets and liabilities related to discontinued operations have been classified in a separate caption on the consolidated
statements of financial position.
Off-Balance Sheet Arrangements
As of December 31, 2015, we did not have any significant off-balance sheet arrangements.
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, established for the purpose of facilitating off- balance sheet arrangements or other
contractually narrow or limited purposes. Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk
that could arise if we had engaged in such relationships.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires management to make certain estimates and assumptions
required under GAAP which may differ from actual results. The following are our most critical accounting policies, which are those
that require management’s most difficult, subjective and complex judgments, requiring the need to make estimates about the effect of
matters that are inherently uncertain and may change in subsequent periods. The following discussion is not intended to represent a
comprehensive list of our accounting policies. For a detailed description of the application of these and other accounting policies, see
Note 2 to the consolidated financial statements included in this Annual Report on Form 10-K.
Self-insurance accruals
We carry insurance policies on insurable risks at levels which we believe to be appropriate, including workers’ compensation,
auto and general liability risks. We purchase insurance from third-party insurance carriers. These policies typically incorporate
significant deductibles or self-insured retentions. We are responsible for all claims that fall within the retention limits. In determining
our accrual for self-insured claims, we use historical claims experience to establish both the current year accrual and the underlying
provision for future losses. This actuarially determined provision and related accrual include both known claims, as well as incurred
but not reported claims. We adjust our estimate of accrued self-insured claims when required to reflect changes based on factors such
as changes in health care costs, accident frequency and claim severity. We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magnitude of claims involved and the length of time until the ultimate cost is
known. We believe our recorded obligations for these expenses are consistently measured. Nevertheless, changes in healthcare costs,
accident frequency and claim severity can materially affect the estimates for these liabilities.
Home Warranty Claims Accruals
Home warranty contracts are typically one year in duration. Home warranty claims costs are expensed as incurred. We
recognize revenue over the life of these contracts in proportion to the expected direct costs. Those costs bear a direct relationship to
the fulfillment of our obligations under the contracts and are representative of the relative value provided to the customer (proportional
performance method). Accruals for home warranty claims at American Home Shield are made based on our claims experience and
actuarial projections. The Company’s actuary performs a reserve analysis utilizing generally accepted actuarial methods that
incorporate cumulative historical claims experience and information provided by the Company. We regularly review our estimates of
claims costs and adjust the estimates when appropriate. We believe the use of actuarial methods to account for these liabilities
provides a consistent and effective way to measure these highly judgmental accruals. However, the use of any estimation technique in
this area is inherently sensitive given the magnitude of claims involved. We believe our recorded obligations for these expenses are
consistently measured. Nevertheless, changes in claims costs can materially affect the estimates for these liabilities.
68 2015 Annual Report