Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We experienced significant volatility in market conditions during 2020. We ended 2019 and began 2020 in an environment exhibiting strong demand conditions. However, on March 11, 2020, the World Health Organization declared COVID-19 a global pandemic, and the various containment and mitigation measures adopted by governments and institutions globally and in the U.S. began to have a severe economic impact, including causing the U.S. to enter into an economic recession that continues through the date of this report.

In response to the COVID-19 pandemic and various state and local orders, we instituted the following actions in March:

• Placed restrictions on business travel for our employees;

• Closed our sales centers, model homes, and design centers to the general public and shifted to appointment-only interactions with our customers where permitted, following recommended distancing and other health and safety protocols when meeting in person with a customer;

• Enhanced our virtual sales tools to give customers the ability to shop for a new home online;

• Closed the public gathering spaces of our amenity centers as well as community pools and athletic facilities;

• Modified our corporate and division office functions in order to allow all of our employees to work remotely except for essential minimum basic operations which could only be done in an office setting;

• Eliminated non-emergency warranty work in our customers’ homes;

• Modified much of our customer interactions around the mortgage origination and closing process to be virtual and minimize in-person interactions; and

• Modified our construction operations to enforce enhanced safety protocols around social distancing, hygiene, and health screening.

The severity of these restrictions and the date we resumed more normal operations have varied by market based on the reduction in restrictions under "shelter in place" orders and improvement in public health conditions. While all of the above-referenced steps were, and some remain, necessary and appropriate in light of the COVID-19 pandemic, they impacted our ability to operate our business in its ordinary and traditional course. However, residential construction and financial services have been designated as essential services in almost all of our markets, which has allowed us to continue operations.

As the result of the COVID-19 pandemic, our net new orders declined significantly in late March through April. As the pandemic spread and government and business responses expanded, we focused on protecting our liquidity and closely managing our cash flows, including through the following actions:

• Delaying the acquisition of certain land parcels and slowing land development where practical;

• Limiting our investment in house construction, including strictly limiting production of new unsold "speculative" homes, and contacting backlog customers to reconfirm status before beginning construction of sold homes;

• As a precautionary measure, proactively drawing $700.0 million under the Revolving Credit Facility in March;

• Suspending the repurchase of shares under our share repurchase program; and

• Reducing headcount and other overhead expenses.

However, demand began to stabilize in May and then rebounded sharply in June and has remained strong through the date of this report. This resulted in a 17% increase in net new orders for the full year 2020 over 2019, including a 24% increase in net new orders in the fourth quarter of 2020 over the fourth quarter of 2019. We believe the recovery in demand reflects a number of factors, including historically low mortgage interest rates, a limited supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers. In addition to the improved demand, all of our operations are now functioning at effectively full capacity subject to health and safety protocols necessitated by the ongoing pandemic. However, we have experienced periodic disruptions in our supply chain, including the availability of skilled labor as industry demand increases, which have elongated the production cycles in certain markets. We are also facing cost pressures related to labor and materials, especially lumber, although we believe that we will be able to increase pricing to offset the majority of such cost increases.

Despite the volatility in 2020, the resurgence of demand resulted in the second highest annual pre-tax income and the highest year-end backlog (as measured in dollars) in our history. These financial results, combined with the favorable outlook, have allowed us to:

• Fully repay the $700.0 million drawn on the Revolving Credit Facility;

• Reinstate our share repurchase program, including the repurchase of $75.0 million of shares in the fourth quarter of 2020;

• Increase our quarterly dividend by 17% to $0.14 per share in the fourth quarter of 2020;

• Announce a tender offer expected to be completed in March 2021 for $300 million of our senior notes scheduled to mature in 2026 and 2027;

• Increase our investments in new communities via land acquisition and development expenditures; and

• Improve our available liquidity to $3.4 billion, consisting of $2.6 billion of cash and cash equivalents and $750.3 million available under our Revolving Credit Facility as of December 31, 2020.

The following tables and related discussion set forth key operating and financial data for our Homebuilding and Financial Services operations as of and for the fiscal years ended December 31, 2020 and 2019. For similar operating and financial data and discussion of our fiscal 2019 results compared to our fiscal 2018 results, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Part II of our annual report on Form 10-K for the fiscal year ended December 31, 2019, which was filed with the SEC on January 30, 2020.

The following is a summary of our operating results by line of business ($000's omitted, except per share data):

			Years Ended December 31,
			2020						2019
Income before income taxes:
Homebuilding			$	1,542,057					$	1,236,261
Financial Services			186,637						103,315
Income before income taxes			1,728,694						1,339,576
Income tax expense			(321,855)						(322,876)
Net income			$	1,406,839					$	1,016,700
Per share data - assuming dilution:
Net income			$	5.18					$	3.66

• Homebuilding income before income taxes increased 25% in 2020, primarily as the result of higher revenues, improved gross margins, and strong overhead management. Homebuilding results also included a goodwill impairment charge of $20.2 million in 2020 (see Note 1) and net favorable insurance-related adjustments totaling $75.7 million and $26.8 million in 2020 and 2019, respectively (see Note 11).

• The increase in Financial Services income in 2020 compared with 2019 was primarily the result of the Homebuilding volume growth, an improved capture rate of homebuyers from our Homebuilding operations, and a low mortgage interest rate environment. Mortgage interest rates continued at or near historically low levels during 2020, which resulted in higher gains from the sale of mortgages in the secondary market. These improvements were partially offset by $26.4 million of mortgage repurchase reserve charges (see Note 11 ).

• Our effective tax rate was 18.6% and 24.1% for 2020 and 2019, respectively. The lower effective tax rate in 2020 resulted primarily from the extension of federal energy efficient home credits (see Note 8).

Homebuilding Operations

The following is a summary of income before income taxes for our Homebuilding operations ($000’s omitted):

			Years Ended December 31,
			2020						FY 2020 vs. FY 2019						2019
Home sale revenues			$	10,579,896					7		%				$	9,915,705
Land sale and other revenues			94,017						50		%				62,821
Total Homebuilding revenues			10,673,913						7		%				9,978,526
Home sale cost of revenues (a)			(8,004,823)						5		%				(7,628,700)
Land sale and other cost of revenues (b)			(77,626)						38		%				(56,098)
Selling, general, and administrative expenses ("SG&A") (c)			(1,011,442)						(3)		%				(1,044,337)
Goodwill impairment			(20,190)						(d)						—
Other expense, net (e)			(17,775)						35		%				(13,130)
Income before income taxes			$	1,542,057					25		%				$	1,236,261
Supplemental data:
Gross margin from home sales (a)			24.3		%				120 bps						23.1		%
SG&A % of home sale revenues (c)			9.6		%				(90) bps						10.5		%
Closings (units)			24,624						6		%				23,232
Average selling price			$	430					1		%				$	427
Net new orders:
Units			29,275						17		%				24,977
Dollars			$	12,837,272					21		%				$	10,615,363
Cancellation rate			14		%										14		%
Average active communities			874						1		%				863
Backlog at December 31:
Units			15,158						44		%				10,507
Dollars			$	6,793,182					50		%				$	4,535,805

*(a)*Includes the amortization of capitalized interest; land inventory impairments of $7.0 million and $8.6 million in 2020 and 2019, respectively (see Note 2**), and warranty charges of $14.8 million related to a closed-out community in 2019 (see Note 11**).

*(b)*Includes net realizable value adjustments on sold or land held for sale of $5.4 million in 2019 (see Note 2**).

*(c)*Includes insurance reserve reversals of $93.4 million and $49.4 million in 2020 and 2019, respectively, partially offset by reserves against insurance receivables of $17.8 million and $22.6 million 2020 and 2019, respectively (see Note 11**).

*(d)*Percentage not meaningful.

*(e)*See "Other expense, net" for a table summarizing significant items (see Note 1**).

Home sale revenues

Home sale revenues for 2020 were higher than 2019 by $664.2 million, or 7%. The increase was attributable to a 6% increase in closings combined with a 1% increase in average selling price. The increase in closings was primarily the result of favorable demand conditions that began in 2019 and continued into the first quarter of 2020, especially among first-time buyers, which provided a large backlog of orders such that production could continue through 2020 despite the disruptions caused by the COVID-19 pandemic. The increased average selling price is reflective of favorable pricing actions related to all customer groups taken starting in the third quarter in response to the significant improvement in demand, partially offset by the increase in the mix of first-time buyer homes, which typically carry a lower sales price.

Home sale gross margins

Home sale gross margins were 24.3% in 2020, compared with 23.1% in 2019. Our results in 2020 and 2019 include the effect of the aforementioned land inventory impairments totaling $7.0 million and $8.6 million, respectively. Excluding such impairments, gross margins remained strong in both 2020 and 2019 relative to historical levels and reflect a combination of factors, including shifts in community mix and the aforementioned warranty charge of $14.8 million in 2019 related to a closed-out community in the Southeast. The low mortgage interest rate environment combined with limited supply of new and existing housing inventory has contributed to our ability to maintain or increase pricing in the majority of our markets, which has allowed us to effectively manage pressure in house and land costs as well as expand margins. Amortized interest costs in 2020 remained roughly equal in dollar terms with 2019 but declined slightly as a percentage of revenue to 1.7% in 2020 compared with 1.8% in 2019.

Land sale and other revenues

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale and other revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales and other revenues contributed income of $16.4 million and $6.7 million in 2020 and 2019, respectively.

SG&A

SG&A as a percentage of home sale revenues was 9.6% and 10.5% in 2020 and 2019, respectively. The gross dollar amount of our SG&A decreased $32.9 million, or 3%, in 2020 compared with 2019 and reflects net favorable insurance-related adjustments totaling $75.7 million (0.7% of revenues) and $26.8 million (0.3% of revenues) in 2020 and 2019, respectively. These adjustments resulted from favorable insurance reserve adjustments partially offset by reserves against insurance receivables. The lower gross SG&A dollars were partially offset by severance expense of $10.3 million recorded in the second quarter of 2020 related to various overhead actions taken as a result of the COVID-19 pandemic as well as higher incentive compensation expense.

Goodwill impairment

As a result of the significant decline in equity market valuations that occurred during the period between our acquisition of Innovative Construction Group ("ICG") in January 2020 and March 31, 2020, we determined that an event-driven goodwill impairment test was appropriate for the ICG goodwill, which resulted in an impairment totaling $20.2 million in the first quarter of 2020. This impairment was not the result of any unique factors specific to ICG's operations but, rather, reflected the broad-based declines in the market capitalizations of publicly-traded construction companies in the short period of time between the acquisition and the March 31, 2020 valuation date.

Other expense, net

Other expense, net includes the following ($000’s omitted):

			2020						2019
Write-offs of deposits and pre-acquisition costs (Note 2)			$	(12,390)					$	(13,116)
Loss on debt retirement (Note 5)			—						(4,927)
Amortization of intangible assets (Note 1)			(19,685)						(14,200)
Interest income			6,837						16,739
Interest expense			(4,248)						(584)
Equity in earnings (loss) of unconsolidated entities (Note 4)			1,880						747
Miscellaneous, net			9,831						2,211
Total other expense, net			$	(17,775)					$	(13,130)

The higher intangible assets amortization in 2020 reflects the ICG acquisition in January 2020. The lower interest income in 2020 resulted from the lower interest rate environment while the higher interest expense reflects the aforementioned short-term borrowing under the Revolving Credit Facility.

Net new orders

Net new orders in units increased 17% in 2020 compared with 2019 while net new orders in dollars increased by 21% compared with 2019. The increased new orders resulted from the strong demand for new housing during the year, not withstanding the impact on demand in the second quarter of the COVID-19 pandemic, which we attribute to a variety of factors, including historically low mortgage interest rates, a restricted supply of new and existing home inventory, an increased appeal for homeownership and single-family living, and a desire among some buyers to exit more densely populated urban centers. While the annual cancellation rate (canceled orders for the period divided by gross new orders for the period) was flat in 2020 with 2019 at 14%, the cancellation rate spiked in the period of mid-March through May as the result of the falloff in demand triggered by the onset of the COVID-19 pandemic before stabilizing and then declining, ending the year with a cancellation rate of 12% in the fourth quarter.

Due to supply chain challenges resulting from both disruptions caused by the COVID-19 pandemic as well as the surge in demand, we have consciously moderated the pace of sales in certain communities in order to better balance pricing, sales pace, lot availability, and production capacity. This has allowed us to increase pricing in the majority of our communities. Despite this moderation, ending backlog units, which represent orders for homes that have not yet closed, increased 44% as measured in units and 50% as measured in dollars at December 31, 2020 compared with December 31, 2019. This represented the highest year-end backlog (as measured in dollars) in our history.

Homes in production

The following is a summary of our homes in production at December 31, 2020 and 2019:

						2020						2019
Sold						10,421						7,423
Unsold
Under construction						1,694						2,672
Completed						255						685
						1,949						3,357
Models						1,287						1,342
Total						13,657						12,122

The number of homes in production at December 31, 2020 was 13% higher compared to December 31, 2019. The increase in homes under production resulted primarily from the higher backlog. Since demand accelerated in June 2020, the new housing supply chain has experienced delays in regard to certain materials and labor as well as with obtaining necessary approvals, permits, and inspections from local municipalities. As a result, our production cycle times have elongated somewhat, which has

also contributed to the higher number of homes in production. The number of unsold, or "speculative", homes has decreased significantly as we have focused our production on completing sold homes consistent with the moderation of sales pace in certain communities discussed above.

Controlled lots

The following is a summary of our lots under control at December 31, 2020 and 2019:

						December 31, 2020																		December 31, 2019
						Owned						Optioned						Controlled						Owned						Optioned						Controlled
Northeast						4,956						4,001						8,957						4,999						4,240						9,239
Southeast						15,051						18,248						33,299						16,174						12,802						28,976
Florida						20,737						24,396						45,133						20,281						17,802						38,083
Midwest						9,728						14,734						24,462						10,016						12,027						22,043
Texas						15,923						17,841						33,764						16,256						10,573						26,829
West						24,968						9,769						34,737						25,633						7,459						33,092
Total						91,363						88,989						180,352						93,359						64,903						158,262
Developed (%)						43		%				16		%				30		%				39		%				22		%				32		%

Of our controlled lots, 91,363 and 93,359 were owned and 88,989 and 64,903 were under land option agreements at December 31, 2020 and 2019, respectively. While competition for well-positioned land is robust, we continue to pursue strategic land investments that we believe can achieve appropriate risk-adjusted returns on invested capital. The remaining purchase price under our land option agreements totaled $3.8 billion at December 31, 2020. These land option agreements generally may be canceled at our discretion and in certain cases extend over several years. Our maximum exposure related to these land option agreements is generally limited to our deposits and pre-acquisition costs, which totaled $291.9 million, of which $16.2 million is refundable, at December 31, 2020.

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a broad product line to meet the needs of homebuyers in our targeted markets. As of December 31, 2020, we conducted our operations in 40 markets located throughout 23 states. For reporting purposes, our Homebuilding operations are aggregated into six reportable segments:

Northeast:						Connecticut, Maryland, Massachusetts, New Jersey, Pennsylvania, Virginia
Southeast:						Georgia, North Carolina, South Carolina, Tennessee
Florida:						Florida
Midwest:						Illinois, Indiana, Kentucky, Michigan, Minnesota, Ohio
Texas:						Texas
West:						Arizona, California, Nevada, New Mexico, Washington

We also have a reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.

The following table presents selected financial information for our reportable Homebuilding segments:

			Operating Data by Segment ($000's omitted)
			Years Ended December 31,
			2020						FY 2020 vs. FY 2019						2019
Home sale revenues:
Northeast			$	845,853					10		%				$	771,349
Southeast			1,687,139						1		%				1,673,670
Florida			2,274,113						10		%				2,068,422
Midwest			1,507,450						1		%				1,485,370
Texas			1,447,715						5		%				1,384,533
West			2,817,626						11		%				2,532,361
			$	10,579,896					7		%				$	9,915,705
Income before income taxes (a)****:
Northeast			$	136,985					18		%				$	116,221
Southeast (b)			258,794						47		%				175,763
Florida			362,276						17		%				309,596
Midwest			213,017						15		%				184,438
Texas			242,383						24		%				195,751
West			424,803						10		%				386,361
Other homebuilding (c)			(96,201)						27		%				(131,869)
			$	1,542,057					25		%				$	1,236,261
Closings (units):
Northeast			1,522						5		%				1,443
Southeast			4,108						3		%				3,982
Florida			5,496						9		%				5,045
Midwest			3,553						(1)		%				3,583
Texas			4,747						5		%				4,528
West			5,198						12		%				4,651
			24,624						6		%				$	23,232
Average selling price:
Northeast			$	556					4		%				$	535
Southeast			411						(2)		%				420
Florida			414						1		%				410
Midwest			424						2		%				415
Texas			305						—		%				306
West			542						—		%				544
			$	430					1		%				$	427

*(a)*Includes land-related charges as summarized in the following land-related charges table (see Note 2**).

*(b)*Southeast includes a warranty charge of $14.8 million in 2019 related to a closed-out community (see Note 11**).

*(c)*Other homebuilding includes the amortization of intangible assets, amortization of capitalized interest, and other items not allocated to the operating segments. Also includes: reserves against insurance receivables of $17.8 million and $22.6 million associated with the resolution of certain insurance matters in 2020 and 2019, respectively; and insurance reserve reversals of $93.4 million and $49.4 million in 2020 and 2019, respectively (see Note 11**).

The following table present additional selected financial information for our reportable Homebuilding segments:

						Operating Data by Segment ($000's omitted)
						Years Ended December 31,
						2020						FY 2020 vs. FY 2019						2019
Net new orders - units:
Northeast						1,886						21		%				1,562
Southeast						4,583						8		%				4,237
Florida						6,844						25		%				5,462
Midwest						4,212						13		%				3,721
Texas						5,950						22		%				4,886
West						5,800						14		%				5,109
						29,275						17		%				24,977
Net new orders - dollars:
Northeast						$	1,059,479					23		%				$	861,234
Southeast						1,934,579						10		%				1,758,110
Florida						2,923,718						30		%				2,246,631
Midwest						1,846,109						19		%				1,548,927
Texas						1,837,939						23		%				1,489,188
West						3,235,448						19		%				2,711,273
						$	12,837,272					21		%				$	10,615,363
Cancellation rates:
Northeast						10		%										11		%
Southeast						10		%										11		%
Florida						13		%										12		%
Midwest						11		%										12		%
Texas						18		%										17		%
West						18		%										16		%
						14		%										14		%
Unit backlog:
Northeast						953						62		%				589
Southeast						2,340						25		%				1,865
Florida						3,654						58		%				2,306
Midwest						2,199						43		%				1,540
Texas						3,053						65		%				1,850
West						2,959						26		%				2,357
						15,158						44		%				10,507
Backlog dollars:
Northeast						$	561,323					61		%				$	347,696
Southeast						1,030,910						32		%				783,469
Florida						1,627,865						66		%				978,261
Midwest						990,635						52		%				651,977
Texas						981,091						66		%				590,868
West						1,601,358						35		%				1,183,534
						$	6,793,182					50		%				$	4,535,805

The following table presents additional selected financial information for our reportable Homebuilding segments:

						Operating Data by Segment ($000's omitted)
						Years Ended December 31,
						2020												2019
Land-related charges:*
Northeast						$	5,301											$	1,122
Southeast						3,815												15,697
Florida						1,395												2,811
Midwest						2,390												2,581
Texas						4,588												1,151
West						1,936												2,568
Other homebuilding						880												1,171
						$	20,305											$	27,101

** Land-related charges include land impairments, net realizable value adjustments for land held for sale, and write-offs of deposits and pre-acquisition costs. Other homebuilding consists primarily of write-offs of capitalized interest resulting from land-related charges. See* Notes 2 and 3 to the Consolidated Financial Statements for additional discussion of these charges.

Northeast:

For 2020, Northeast home sale revenues increased 10% compared with 2019 due to a 5% increase in closings combined with a 4% increase in average selling price. The increase in closings was primarily attributable to Mid-Atlantic while the increase in average selling price was primarily attributable to Northeast Corridor. The increased income before income taxes resulted primarily due to the higher revenues across all markets. Net new orders increased 21%, which is attributable primarily to Mid-Atlantic.

Southeast:

For 2020, Southeast home sale revenues increased 1% compared with 2019 due to a 3% increase in closings partially offset by a 2% decrease in average selling price. The increase in closings occurred in all markets except Georgia and Tennessee while the decrease in average selling price occurred across the majority of markets. Income before income taxes increased 47% primarily due to higher revenues, improved gross margins, and improved overhead management, which occurred across the majority of markets, and charges related to estimated costs to complete repairs in a closed-out community during 2019. Net new orders increased 8%, which is attributable to a majority of our markets.

Florida:

For 2020, Florida home sale revenues increased 10% compared with 2019 due to a 9% increase in closings combined with a 1% increase in average selling price. The increase in closings and average selling price occurred across the majority of markets. The increased income before income taxes for 2020 resulted primarily from higher revenues and improved gross margin across the majority of markets. Net new orders increased 25%, which is attributable to all of our markets.

Midwest:

For 2020, Midwest home sale revenues increased 1% compared with the prior year period due to a 2% increase in average selling price partially offset by a 1% decrease in closings. The increase in average selling price occurred across all markets while the decrease in closings primarily occurred in Michigan. Income before income taxes increased 15% primarily due to improved overhead management and gross margins. Net new orders increased 13%,which is attributable to the majority of markets.

Texas:

For 2020, Texas home sale revenues increased 5% compared with the prior year period due to an 5% increase in closings partially offset by a slight decrease in the average selling price. The increase in closings occurred in all markets except Dallas while the decrease in average selling price occurred across all markets except Austin. Income before income taxes increased primarily due to increased revenues, improved overhead management and gross margins. Net new orders increased 22%, which is attributable to all of our markets.

West:

For 2020, West home sale revenues increased 11% compared with the prior year period due to a 12% increase in closings partially offset by a slight decrease in the average selling price. Closings were higher in most markets with Las Vegas benefiting from the American West acquisition that occurred in 2019. However, Northern California experienced significantly lower revenues, primarily due to the prior period completion, or near completion, of several high performing communities and an overall moderation of demand in that market. The decrease in average selling prices was mixed among markets. Income before income taxes increased 10% primarily as the result of higher revenues and improved gross margins across the majority of markets. Net new orders increased by 14%, which is attributable to all markets except Arizona.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage banking, title, and insurance brokerage operations, through Pulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds, including funds available pursuant to credit agreements with third parties. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination, generally within 30 days. We also sell the servicing rights for the loans we originate through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the loans and related servicing rights for only a short period of time. Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the business levels of our Financial Services operations are highly correlated to Homebuilding. Our Homebuilding customers continue to account for substantially all loan production. We believe that our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, is an important metric in evaluating the effectiveness of our captive mortgage business model. The following table presents selected financial information for our Financial Services operations ($000’s omitted):

			Years Ended December 31,
			2020						FY 2020 vs. FY 2019						2019
Mortgage revenues			$	293,099					72		%				$	169,917
Title services revenues			57,023						10		%				51,836
Insurance brokerage commissions			12,047						(5)		%				12,678
Total Financial Services revenues			362,169						54		%				234,431
Expenses			(175,481)						34		%				(130,770)
Other income, net			(51)						(85)		%				(346)
Income before income taxes			$	186,637					81		%				$	103,315
Total originations:
Loans			18,433						17		%				15,821
Principal			$	6,075,132					22		%				$	4,976,973

			Years Ended December 31,
			2020						2019
Supplemental data:
Capture rate			86.4		%				82.4		%
Average FICO score			751						751
Funded origination breakdown:
Government (FHA, VA, USDA)			21		%				20		%
Other agency			71		%				71		%
Total agency			92		%				90		%
Non-agency			8		%				10		%
Total funded originations			100		%				100		%

Revenues

Total Financial Services revenues during 2020 increased 54% compared with 2019. The increase occurred primarily as the result of the Homebuilding volume growth combined with the low mortgage interest rate environment. Mortgage interest rates continued at or near historically low levels during 2020, which resulted in higher gains from the sale of mortgages in the secondary market and also contributed to an improved capture rate.

Income before income taxes

The increase in income before income taxes for 2020 as compared with 2019 was due primarily to higher volume, higher revenue per loan, and improved expense leverage. These improvements were partially offset by $26.4 million of mortgage repurchase reserve charges (see Note 11).

Income Taxes

Our effective tax rate was 18.6% and 24.1% for 2020 and 2019, respectively. The lower effective tax rate in 2020 resulted primarily from the extension of federal energy efficient home credits (see Note 8).

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations using internally-generated funds supplemented by credit arrangements with third parties and capital market financing. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing available financing sources, including revolving bank credit and securities offerings.

At December 31, 2020, we had unrestricted cash and equivalents of $2.6 billion, restricted cash balances of $50.0 million, and $750.3 million available under our Revolving Credit Facility. We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a broad portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term deposits and investments.

We retired outstanding debt totaling $65.3 million and $310.0 million during 2020 and 2019, respectively. Our ratio of debt-to-total capitalization, excluding our Financial Services debt, was 29.5% at December 31, 2020, which is slightly below our targeted long-term range of 30.0% to 40.0%.

Unsecured senior notes

During 2019, we completed a tender offer to retire $310.0 million of our unsecured senior notes maturing in 2021. At December 31, 2020, we had $2.7 billion of unsecured senior notes outstanding with no repayments due until March 2021 when $426.0 million of notes are scheduled to mature. In January 2021, the Company announced a tender offer expected to be completed in February 2021 for up to $300 million of our senior notes scheduled to mature in 2026 and 2027.

Other notes payable

Certain of our local homebuilding operations are party to non-recourse and limited recourse collateralized notes payable with third parties that totaled $40.1 million at December 31, 2020. These notes have maturities ranging up to three years, are secured by the applicable land positions to which they relate, have no recourse to any other assets, and are classified within notes payable.

Revolving credit facility

We maintain a Revolving Credit Facility, maturing in June 2023 that has a maximum borrowing capacity of $1.0 billion and contains an uncommitted accordion feature that could increase the capacity to $1.5 billion, subject to certain conditions and availability of additional bank commitments. The Revolving Credit Facility also provides for the issuance of letters of credit that reduce the available borrowing capacity under the Revolving Credit Facility, with a sublimit of $500.0 million at December 31, 2020. The interest rate on borrowings under the Revolving Credit Facility may be based on either the London Interbank Offered Rate ("LIBOR") or a base rate plus an applicable margin, as defined therein. In the event that LIBOR is no longer widely available, the agreement contemplates transitioning to an alternative widely available market rate agreeable between the parties. As a precautionary measure during the initial phase of the COVID-19 pandemic, we made the decision in March 2020 to draw $700.0 million under the Revolving Credit Facility. In June 2020, we repaid the full outstanding balance of $700.0 million. We had no borrowings outstanding and $249.7 million and $262.8 million of letters of credit issued under the Revolving Credit Facility at December 31, 2020 and 2019, respectively.

The Revolving Credit Facility contains financial covenants that require us to maintain a minimum Tangible Net Worth, a minimum Interest Coverage Ratio, and a maximum Debt-to-Capitalization Ratio (as each term is defined in the Revolving Credit Facility). As of December 31, 2020, we were in compliance with all covenants. Outstanding balances under the Revolving Credit Facility are guaranteed by certain of our wholly-owned subsidiaries. Our available and unused borrowings under the Revolving Credit Facility, net of outstanding letters of credit, amounted to $750.3 million and $737.2 million as of December 31, 2020 and 2019, respectively.

Financial Services debt

Pulte Mortgage provides mortgage financing for the majority of our home closings by utilizing its own funds and funds made available pursuant to credit agreements with third parties. Pulte Mortgage uses these resources to finance its lending activities until the loans are sold in the secondary market, which generally occurs within 30 days.

Pulte Mortgage maintains a master repurchase agreement with third party lenders (the "Repurchase Agreement") that matures in July 2021. The maximum aggregate commitment was $420.0 million during the seasonally high borrowing period from December 28, 2020 through January 15, 2021. At all other times, the maximum aggregate commitment ranges from $230.0 million to $375.0 million. The purpose of the changes in capacity during the term of the agreement is to lower associated fees during seasonally lower volume periods of mortgage origination activity. Borrowings under the Repurchase Agreement are secured by residential mortgage loans available-for-sale. The Repurchase Agreement contains various affirmative and negative covenants applicable to Pulte Mortgage, including quantitative thresholds related to net worth, net income, and liquidity. Pulte Mortgage had $411.8 million and $326.6 million outstanding under the Repurchase Agreement at December 31, 2020 and 2019, respectively, and was in compliance with its covenants and requirements as of such dates.

Share repurchase program

We repurchased 4.5 million and 8.4 million shares in 2020 and 2019, respectively, for a total of $170.7 million and $274.3 million in 2020 and 2019, respectively, under this program. In 2018, our Board of Directors authorized a $500.0 million share repurchase program and approved an increase of $500.0 million in May 2019. The repurchase of shares was suspended in March 2020 as a response to the COVID-19 pandemic and was reinstated in October 2020. At December 31, 2020, we had remaining authorization to repurchase $354.9 million of common shares.

Dividends

Our declared quarterly cash dividends totaled $135.1 million and $124.4 million in 2020 and 2019, respectively.

Cash flows

Operating activities

Our net cash provided by operating activities in 2020 was $1.8 billion, compared with net cash provided by operating activities of $1.1 billion in 2019. Generally, the primary drivers of our cash flow from operations are profitability and changes in inventory levels and residential mortgage loans available-for-sale, each of which experiences seasonal fluctuations. Our positive cash flow from operations for 2020 was primarily due to our net income of $1.4 billion, which included various non-cash items, including land-related charges of $20.3 million and $137.6 million of deferred income tax expense. These factors were partially offset by a $56.7 million increase in residential mortgage loans available-for-sale.

Our positive cash flow from operations for 2019 was primarily due to our net income of $1.0 billion, which included non-cash land-related charges of $27.1 million and $105.4 million of deferred income tax expense. These factors were partially offset by a net increase in inventories of $237.7 million and a $48.3 million increase in residential mortgage loans available-for-sale.

Investing activities

Net cash used in investing activities totaled $107.9 million in 2020, compared with $224.7 million in 2019. The 2020 cash outflows primarily reflect our acquisition of ICG in January 2020 for $83.3 million, as well as capital expenditures of $58.4 million related to our ongoing investment in new communities and certain information technology applications. The use of cash in investing activities in 2019 was primarily due to our acquisition of American West in April 2019 for $163.7 million as well as $58.1 million of capital expenditures.

Financing activities

Net cash used in financing activities was $295.6 million in 2020 compared with $733.6 million during 2019. The net cash used in financing activities for 2020 resulted primarily from the repurchase of 4.5 million common shares for $170.7 million under our repurchase authorization, repayments of debt of $65.3 million, and cash dividends of $130.2 million.

Net cash used in financing activities for 2019 resulted primarily from the repurchase of 8.4 million common shares for $274.3 million under our repurchase authorization, repayments of debt of $310.0 million, and cash dividends of $122.4 million.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates affect the affordability of our products to prospective homebuyers. While we attempt to pass on to our customers increases in our costs through increased sales prices, market forces may limit our ability to do so. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income could be adversely affected.

Seasonality

Although significant changes in market conditions have impacted our seasonal patterns in the past and could do so again, we historically experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. We generally experience increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. This seasonal activity increases our working capital requirements in our third and fourth quarters to support our home production and loan origination volumes. As a result of the seasonality of our operations, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year. Additionally, given the

disruption in economic activity caused by the COVID-19 pandemic, our quarterly results in 2020 are not necessarily indicative

of results that may be achieved in the future.

Contractual Obligations and Commercial Commitments

The following table summarizes our payments under contractual obligations as of December 31, 2020:

			Payments Due by Period ($000’s omitted)
			2021						2022-2023						2024-2025						After 2025						Total
Contractual obligations:
Notes payable (a)			$	596,928					$	285,766					$	271,250					$	2,881,229					$	4,035,173
Operating lease obligations			21,154						42,746						23,335						19,432						106,667
Total contractual obligations (b)			$	618,082					$	328,512					$	294,585					$	2,900,661					$	4,141,840

*(a)*Represents principal and interest payments related to our senior notes and limited recourse collateralized financing arrangements.

*(b)*We do not have any payments due in connection with capital lease or long-term purchase obligations.

We are currently under examination by various taxing jurisdictions and anticipate finalizing the examinations with certain jurisdictions within the next twelve months. The final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 2016 to 2020. At December 31, 2020, we had $30.9 million of gross unrecognized tax benefits and $2.8 million of related accrued interest and penalties, which are excluded from the above table.

We are subject to certain obligations associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. At December 31, 2020, we had $291.9 million of deposits and pre-acquisition costs, of which $16.2 million is refundable, relating to option agreements to acquire 88,989 lots with a remaining purchase price of $3.8 billion. We expect to acquire the majority of such land within the next three years.

The following table summarizes our other commercial commitments as of December 31, 2020:

						Amount of Commitment Expiration by Period ($000’s omitted)
						2021						2022-2023						2024-2025						After 2025						Total
Other commercial commitments:
Revolving Credit Facility (a)						$	—					$	1,000,000					$	—					$	—					$	1,000,000
Repurchase Agreement (b)						420,000						—						—						—						420,000
Total commercial commitments (c)						$	420,000					$	1,000,000					$	—					$	—					$	1,420,000

*(a)*The $1.0 billion in 2022-2023 represents the capacity of our Revolving Credit Facility, under which no borrowings were outstanding, and $249.7 million of letters of credit were issued at December 31, 2020.

*(b)*Represents the capacity of the Repurchase Agreement, of which $411.8 million was outstanding at December 31, 2020. The capacity of $420.0 million was effective through January 15, 2021 after which it ranges from $230.0 million to $375.0 million until its expiration in July 2021.

*(c)*The above table excludes an aggregate $1.5 billion of surety bonds, which typically do not have stated expiration dates.

Supplemental Guarantor Financial Information

As of December 31, 2020 PulteGroup, Inc. had outstanding $2.7 billion principal amount of unsecured senior notes due at dates from March 2021 through February 2035 and no amounts outstanding on its Revolving Credit Facility.

All of our unsecured senior notes and the Revolving Credit Facility are fully and unconditionally guaranteed, on a joint and several basis, by certain subsidiaries of PulteGroup, Inc. ("Guarantors" or "Guarantor Subsidiaries"). Each of the Guarantor

Subsidiaries is 100% owned, directly or indirectly, by PulteGroup, Inc. Our subsidiaries associated with our financial services operations and certain other subsidiaries do not guarantee the unsecured senior notes or the Revolving Credit Facility (collectively, "Non-Guarantor Subsidiaries"). The guarantees are senior unsecured obligations of each Guarantor and rank equal with all existing and future senior debt of such Guarantor and senior to all subordinated debt of such Guarantor. The guarantees are effectively subordinated to any secured debt of such Guarantor to the extent of the value of the assets securing such debt.

A court could void or subordinate any Guarantor’s guarantee under the fraudulent conveyance laws if existing or future creditors of any such Guarantor were successful in establishing that such Guarantor:

(a) incurred the guarantee with the intent of hindering, delaying or defrauding creditors; or

(b) received less than reasonably equivalent value or fair consideration in return for incurring the guarantee and, in the case of and any one of the following is also true at the time thereof:

• such Guarantor was insolvent or rendered insolvent by reason of the issuance of the incurrence of the guarantee;

• the incurrence of the guarantee left such Guarantor with an unreasonably small amount of capital or assets to carry on its business;

• such Guarantor intended to, or believed that it would, incur debts beyond its ability to pay as they mature;

• such Guarantor was a defendant in an action for money damages, or had a judgment for money damages docketed against it, if the judgment is unsatisfied after final judgment.

The measures of insolvency for purposes of determining whether a fraudulent conveyance occurred would vary depending upon the laws of the relevant jurisdiction and upon the valuation assumptions and methodology applied by the court. However, in general, a court would deem a company insolvent if:

• the sum of its debts, including contingent and unliquidated liabilities, was greater than the fair saleable value of all of its assets;

• the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

• it could not pay its debts as they became due.

The guarantees of the senior notes contain a provision to limit each Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent transfer. However, under recent case law, this provision may not be effective to protect such guarantee from being voided under fraudulent transfer law or otherwise determined to be unenforceable. If a court were to find that the incurrence of a guarantee was a fraudulent transfer or conveyance, the court could void the payment obligations under that guarantee, could subordinate that guarantee to presently existing and future indebtedness of the Guarantor or could require the holders of the senior notes to repay any amounts received with respect to that guarantee. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the senior notes.

Finally, as a court of equity, a bankruptcy court may subordinate the claims in respect of the guarantees to other claims against us under the principle of equitable subordination if the court determines that (1) the holder of senior notes engaged in some type of inequitable conduct, (2) the inequitable conduct resulted in injury to our other creditors or conferred an unfair advantage upon the holders of senior notes and (3) equitable subordination is not inconsistent with the provisions of the bankruptcy code.

On the basis of historical financial information, operating history and other factors, we believe that each of the Guarantors, after giving effect to the issuance of the guarantees when such guarantees were issued, was not insolvent, did not have unreasonably small capital for the business in which it engaged and did not and has not incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.

The following tables present summarized financial information for PulteGroup, Inc. and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among PulteGroup, Inc. and the Guarantor Subsidiaries, as well as their investment in and equity in earnings from the Non-Guarantor Subsidiaries ($000’s omitted):

PulteGroup, Inc. and Guarantor Subsidiaries
Summarized Balance Sheet Data
ASSETS			December 31, 2020
Cash, cash equivalents, and restricted cash			$2,429,639
House and land inventory			7,600,542
Total assets			11,028,911
LIABILITIES
Accounts payable, customer deposits, accrued and other liabilities			$2,101,427
Notes payable			2,752,302
Amount due to Non-Guarantor Subsidiaries			12,208
Total liabilities			4,948,275

			For the year ended
Summarized Statement of Operations Data			December 31, 2020
Revenues			$10,368,616
Cost of revenues			7,839,807
Selling, general, and administrative expenses			966,662
Income before income taxes			1,510,185

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our homebuilding projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At December 31, 2020, we had outstanding letters of credit of $249.7 million. Our surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.5 billion at December 31, 2020, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At December 31, 2020, these agreements had an aggregate remaining purchase price of $3.8 billion. Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 to our Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality.

Revenue recognition

Home sale revenues - Home sale revenues and related profit are generally recognized when title to and possession of the home are transferred to the buyer at the home closing date. Little to no estimation is involved in recognizing such revenues.

Land sale and other revenues - We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sales are generally outright sales of specified land parcels with cash consideration due on the closing date, which is generally when performance obligations are satisfied. Revenues related to our construction services operations are generally recognized as materials are delivered and installation services are provided.

Financial services revenues - Loan origination fees, commitment fees, and direct loan origination costs are recognized as incurred. Expected gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. The determination of fair value for certain of these financial instruments requires the use of estimates and management judgment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned.

Revenues associated with our title operations are recognized as closing services are rendered and title insurance policies are issued, both of which generally occur as each home is closed. Insurance brokerage commissions relate to commissions on home and other insurance policies placed with third party carriers through various agency channels. Our performance obligations for policy renewal commissions are considered satisfied upon issuance of the initial policy, and related contract assets for estimated future renewal commissions are included in other assets and totaled $38.5 million at December 31, 2020. Due to uncertainties in the estimation process and the long duration of renewal policies, which can extend years into the future, actual results could differ from such estimates.

Inventory and cost of revenues

Inventory is stated at cost unless the carrying value is determined to not be recoverable, in which case the affected inventory is written down to fair value. Cost includes land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. The specific identification method is used to accumulate home construction costs.

We capitalize interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the timing of home closings.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and closing costs applicable to the home. Sales commissions are classified within selling, general, and administrative expenses. The construction cost of the home includes amounts paid through the closing date of the home, plus an accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total community land acquisition and development

costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots.

We test inventory for impairment when events and circumstances indicate that the undiscounted cash flows estimated to be generated by the community may be less than its carrying amount. Such indicators include gross margins or sales paces significantly below expectations, construction costs or land development costs significantly in excess of budgeted amounts, significant delays or changes in the planned development for the community, and other known qualitative factors. Communities that demonstrate potential impairment indicators are tested for impairment by comparing the expected undiscounted cash flows for the community to its carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we determine the fair value of the community and impairment charges are recorded if the fair value of the community’s inventory is less than its carrying value.

We generally determine the fair value of each community using a combination of discounted cash flow models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices, expected sales paces, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. The assumptions used in the discounted cash flow models are specific to each community. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, the long life cycles of many communities, and potential changes in our strategy related to certain communities, actual results could differ significantly from such estimates.

Generally, a community must have projected gross margin percentages in the mid-single digits or lower to potentially fail the undiscounted cash flow step and proceed to the fair value step. Our overall gross margin realized during 2020 and our average gross margin in backlog at December 31, 2020 both exceeded 20%, and we have only a small minority of communities with gross margins below 10%. However, in the event of an extended economic slowdown that leads to moderate or significant decreases in the price of new homes in certain geographic or buyer submarkets, we could have a larger number of communities that begin to approach these levels such that more detailed impairment analyses would be necessary, and the resulting impairments could be material. Additionally, we have $291.9 million of deposits and pre-acquisition costs at December 31, 2020 related to option agreements to acquire additional land. In the event of an extended economic slowdown, we could elect to cancel a large portion of such land option agreements, which would generally result in the write-off of the related deposits and pre-acquisition costs.

Residential mortgage loans available-for-sale

In accordance with Accounting Standards Codification ("ASC") 825, “Financial Instruments” (“ASC 825”), we use the fair value option for our residential mortgage loans available-for-sale. Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Changes in the fair value of these loans are reflected in revenues as they occur.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to (and in limited instances exceeding) 10 years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and the projected cost of claims. We periodically assess the adequacy of our recorded warranty liability for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from our estimates.

Income taxes

We evaluate our deferred tax assets each period to determine if a valuation allowance is required based on whether it is "more likely than not" that some portion of the deferred tax assets would not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of sufficient taxable income during future periods. We conduct our evaluation by considering all available positive and negative evidence. This evaluation considers, among other factors, historical operating results, forecasts of future profitability, the duration of statutory carryforward periods, and the outlooks for the U.S. housing

industry and broader economy. The accounting for deferred taxes is based upon estimates of future results. Differences between estimated and actual results could result in changes in the valuation of our deferred tax assets that could have a material impact on our consolidated results of operations or financial position. Changes in existing tax laws could also affect actual tax results and the realization of deferred tax assets over time.

Unrecognized tax benefits represent the difference between tax positions taken or expected to be taken in a tax return and the benefits recognized for financial statement purposes. We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Significant judgment is required to evaluate uncertain tax positions. Our evaluations of tax positions consider a variety of factors, including relevant facts and circumstances, applicable tax law, correspondence with taxing authorities, and effective settlements of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense (benefit) in the period in which the change is made. Interest and penalties related to income taxes and unrecognized tax benefits are recognized as a component of income tax expense (benefit).

Self-insured risks

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and periodically evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate estimates of the ultimate cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims.

Our recorded reserves for all such claims totaled $641.8 million and $709.8 million at December 31, 2020 and 2019, respectively, the vast majority of which relate to general liability claims. The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 68% of the total general liability reserves at both December 31, 2020 and 2019. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third-party recovery rates and claims management expenses. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs. Based on the actuarial analyses performed, we believe the range of reasonably possible losses related to these claims is $550 million to $750 million. While this range represents our best estimate of our ultimate liability related to these claims, due to a variety of factors, including those factors described above, there can be no assurance that the ultimate costs realized by us will fall within this range.

Volatility in both national and local housing market conditions can affect the frequency and cost of construction defect claims. Additionally, IBNR estimates comprise the majority of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. Changes in the frequency and timing of reported claims and estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves. Additionally, the amount of insurance coverage available for each policy period also impacts our recorded reserves. Because of the inherent uncertainty in estimating future losses and the timing of such losses related to these claims, actual costs could differ significantly from estimated costs.

Adjustments to reserves are recorded in the period in which the change in estimate occurs. During 2020 and 2019, we reduced general liability reserves by $93.4 million and $49.4 million, respectively, as a result of changes in estimates resulting from actual claim experience observed being less than anticipated in previous actuarial projections. The changes in actuarial estimates were driven by changes in actual claims experience that, in turn, impacted actuarial estimates for potential future claims. These changes in actuarial estimates did not involve any changes in actuarial methodology but did impact the development of estimates for future periods, which resulted in adjustments to the IBNR portion of our recorded liabilities. There were no material adjustments to individual claims. Rather, the adjustments reflect an overall lower level of losses related to construction defect claims in recent years as compared with our previous experience. We attribute this favorable experience to a variety of factors, including improved construction techniques, rising home values, and increased participation from our subcontractors in resolving claims.

In certain instances, we have the ability to recover a portion of our costs under various insurance policies or from subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable. Our receivables from insurance carriers totaled $69.5 million and $118.4 million at December 31, 2020 and 2019, respectively. The insurance receivables relate to costs incurred or to be incurred to perform corrective repairs, settle claims with customers, and other costs related to the continued progression of both known and anticipated future construction defect claims that we believe to be insured related to previously closed homes. We believe collection of these insurance receivables is probable based on various factors, including the legal merits of our positions after review by legal counsel, favorable legal rulings received to date, the credit quality of our carriers, and our long history of collecting significant amounts of insurance reimbursements under similar insurance policies related to similar claims, including significant amounts funded by the above carriers under different policies.

While the outcome of these matters cannot be predicted with certainty, we do not believe that the resolution of such matters will have a material adverse impact on our results of operations, financial position, or cash flows.