Washington, D.C. 20549
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.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an 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.
As used in this report, “we,” “us,” “our,” "Registrant," the “Company” and “Stewart” mean Stewart Information Services Corporation and our subsidiaries, unless the context indicates otherwise.
Item 1. Financial Statements
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
See notes to condensed consolidated financial statements.
|
| | | | | |
| Amortized costs | | Fair values |
| ($000 omitted) |
In one year or less | 31,735 |
| | 31,933 |
|
After one year through five years | 304,284 |
| | 309,497 |
|
After five years through ten years | 233,228 |
| | 234,022 |
|
After ten years | 65,246 |
| | 67,951 |
|
| 634,493 |
| | 643,403 |
|
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at SeptemberJune 30, 2017,2023, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 191 | | | 20,666 | | | 134 | | | 4,033 | | | 325 | | | 24,699 | |
Corporate | 1,990 | | | 50,979 | | | 15,131 | | | 165,730 | | | 17,121 | | | 216,709 | |
Foreign | 1,335 | | | 84,849 | | | 14,541 | | | 206,510 | | | 15,876 | | | 291,359 | |
U.S. Treasury Bonds | 656 | | | 28,748 | | | 81 | | | 1,278 | | | 737 | | | 30,026 | |
| | | | | | | | | | | |
| 4,172 | | | 185,242 | | | 29,887 | | | 377,551 | | | 34,059 | | | 562,793 | |
|
| | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Debt securities: | | | | | | | |
Municipal | 55 |
| | 3,771 |
| | 136 |
| | 4,353 |
| | 191 |
| | 8,124 |
|
Corporate | 206 |
| | 39,708 |
| | 56 |
| | 1,638 |
| | 262 |
| | 41,346 |
|
Foreign | 3,191 |
| | 131,992 |
| | 233 |
| | 5,071 |
| | 3,424 |
| | 137,063 |
|
U.S. Treasury Bonds | 128 |
| | 8,293 |
| | — |
| | — |
| | 128 |
| | 8,293 |
|
Equity securities | 255 |
| | 6,350 |
| | 110 |
| | 568 |
| | 365 |
| | 6,918 |
|
| 3,835 |
| | 190,114 |
| | 535 |
| | 11,630 |
| | 4,370 |
| | 201,744 |
|
The number of specific debt investment holdings held in an unrealized loss position as of SeptemberJune 30, 20172023 was 145, 15356. Of these securities, of which216 were in unrealized loss positions for more than 12 months. Total gross unrealized investment losses at June 30, 2023 slightly improved compared to December 31, 2022 primarily due to slower interest rate increases during 2023. Since the Company does not intend to sell and will more-likely-than-notmore likely than not maintain each investment security until its maturity or anticipated recovery in value, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily impaired.
Gross unrealized losses on investments and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2016, were:
|
| | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Debt securities: | | | | | | | |
Municipal | 575 |
| | 32,038 |
| | — |
| | — |
| | 575 |
| | 32,038 |
|
Corporate | 2,189 |
| | 119,965 |
| | — |
| | — |
| | 2,189 |
| | 119,965 |
|
Foreign | 1,427 |
| | 70,012 |
| | 193 |
| | 3,160 |
| | 1,620 |
| | 73,172 |
|
U.S. Treasury Bonds | 186 |
| | 11,847 |
| | — |
| | — |
| | 186 |
| | 11,847 |
|
Equity securities | 424 |
| | 5,950 |
| | 247 |
| | 2,250 |
| | 671 |
| | 8,200 |
|
| 4,801 |
| | 239,812 |
| | 440 |
| | 5,410 |
| | 5,241 |
| | 245,222 |
|
credit-impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2022, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 262 | | | 27,491 | | | 10 | | | 67 | | | 272 | | | 27,558 | |
Corporate | 12,935 | | | 193,239 | | | 5,600 | | | 44,342 | | | 18,535 | | | 237,581 | |
Foreign | 7,608 | | | 186,221 | | | 8,604 | | | 101,294 | | | 16,212 | | | 287,515 | |
U.S. Treasury Bonds | 413 | | | 25,102 | | | 40 | | | 445 | | | 453 | | | 25,547 | |
| | | | | | | | | | | |
| 21,218 | | | 432,053 | | | 14,254 | | | 146,148 | | | 35,472 | | | 578,201 | |
NOTE 34
Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the FASB Accounting Standards Codification (ASC) defines fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 establishesUnder U.S. GAAP, there is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible.
The three levels of inputs used to measure fair value are as follows:
•Level 1 – quoted prices in active markets for identical assets or liabilities;
•Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
•Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of SeptemberJune 30, 2017,2023, financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — | | | 25,949 | | | 25,949 | |
Corporate | — | | | 233,200 | | | 233,200 | |
Foreign | — | | | 311,354 | | | 311,354 | |
U.S. Treasury Bonds | — | | | 31,424 | | | 31,424 | |
Equity securities | 78,226 | | | — | | | 78,226 | |
| 78,226 | | | 601,927 | | | 680,153 | |
|
| | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments available-for-sale: | | | | | |
Debt securities: | | | | | |
Municipal | — |
| | 73,355 |
| | 73,355 |
|
Corporate | — |
| | 342,760 |
| | 342,760 |
|
Foreign | — |
| | 214,567 |
| | 214,567 |
|
U.S. Treasury Bonds | — |
| | 12,721 |
| | 12,721 |
|
Equity securities | 36,279 |
| | — |
| | 36,279 |
|
| 36,279 |
| | 643,403 |
| | 679,682 |
|
As of December 31, 2016,2022, financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — | | | 29,835 | | | 29,835 | |
Corporate | — | | | 254,316 | | | 254,316 | |
Foreign | — | | | 299,137 | | | 299,137 | |
U.S. Treasury Bonds | — | | | 28,646 | | | 28,646 | |
Equity securities | 98,149 | | | — | | | 98,149 | |
| 98,149 | | | 611,934 | | | 710,083 | |
|
| | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments available-for-sale: | | | | | |
Debt securities: | | | | | |
Municipal | — |
| | 72,432 |
| | 72,432 |
|
Corporate | — |
| | 343,047 |
| | 343,047 |
|
Foreign | — |
| | 167,027 |
| | 167,027 |
|
U.S. Treasury Bonds | — |
| | 12,613 |
| | 12,613 |
|
Equity securities | 36,384 |
| | — |
| | 36,384 |
|
| 36,384 |
| | 595,119 |
| | 631,503 |
|
As of SeptemberJune 30, 2017,2023 and December 31, 2022, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental, and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. All municipal, foreign,The fair value of the Company's investments in debt and U.S. Treasury bonds are valuedequity securities is primarily determined using a third-party pricing service andprovider. The third-party pricing service provider calculates the corporate bonds are valuedfair values using theboth market approach which includes three to ten inputs from relevant market sources, including Financial Industry Regulatory Authority’s (FINRA) Trade Reporting and Compliance Engine (TRACE) and independent broker/dealer quotes, bids and offerings,model valuation methods, as well as other relevant market data, such as securitiespricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with similar characteristics (i.e. sector, rating, maturity, etc.). Broker/dealer quotes, bids and offerings mentioned above are gathered (typically three to ten) and a consensus risk premium spread (credit spread) over risk-free Treasury yields is developedpricing information from the inputs obtained, which is then used to calculate the resulting fair value.Company's investment manager.
There were no transfers of investments between levels during the nine months ended September 30, 2017 and 2016.
NOTE 45
Investment income
Net realized and other gainsunrealized gains. Realized and losses. Gross realized investment and otherunrealized gains and losses are detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted) |
Realized gains | 278 | | | 1,683 | | | 339 | | | 3,277 | |
Realized losses | (3,430) | | | (3,671) | | | (4,177) | | | (3,839) | |
Net unrealized investment gains (losses) recognized on equity securities still held at end of period | 2,047 | | | (9,917) | | | 955 | | | (7,258) | |
| (1,105) | | | (11,905) | | | (2,883) | | | (7,820) | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| ($000 omitted) |
Realized gains | 548 |
| | 3,301 |
| | 1,392 |
| | 8,377 |
|
Realized losses | (1,595 | ) | | (48 | ) | | (2,828 | ) | | (3,671 | ) |
| (1,047 | ) | | 3,253 |
| | (1,436 | ) | | 4,706 |
|
Expenses assignable to investment income were insignificant. There were no significant investments as of September 30, 2017 that did not produce incomeRealized losses during the year.
For the ninesecond quarter and first six months ended September 30, 2017, investment and other losses – netof 2023 included $0.8a $3.2 million of net realizedcontingent receivable loss due to an increase in the fair valueadjustment resulting from a previous disposition of a contingent consideration liability related tobusiness, while realized gains and losses during the second quarter and first six months of 2022 included a prior acquisition and $0.5loss of $3.6 million of net realized loss from the salesame disposition of subsidiaries. For the nine months ended September 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to a net decrease in the fair values of contingent consideration liabilities associated with prior year acquisitions, $1.2 million of realized gain on a cost-basis investment transaction and $2.9 million of net realized gains from the sale of investments available-for-sale,business, partially offset by $1.3a $1.0 million of office closure costs.gain from an acquisition contingent liability adjustment.
Investment gains and losses recognized related to investments in equity securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted) |
Net investment gains (losses) recognized on equity securities during the period | 1,988 | | | (9,366) | | | 232 | | | (6,795) | |
Less: Net realized (losses) gains on equity securities sold during the period | (59) | | | 551 | | | (723) | | | 463 | |
Net unrealized investment gains (losses) recognized on equity securities still held at end of period | 2,047 | | | (9,917) | | | 955 | | | (7,258) | |
Proceeds from sales of investments available-for-salein securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted) |
Proceeds from sales of debt securities | 7,433 | | | 11,002 | | | 14,879 | | | 28,282 | |
Proceeds from sales of equity securities | 5,283 | | | 117 | | | 24,609 | | | 487 | |
Total proceeds from sales of investments in securities | 12,716 | | | 11,119 | | | 39,488 | | | 28,769 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| ($000 omitted) |
Proceeds from sales of investments available-for-sale | 5,878 |
| | 16,839 |
| | 55,533 |
| | 49,666 |
|
NOTE 56
Goodwill and other intangibles.
Goodwill. The summary of changes in goodwill is as follows.follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Title | | Real Estate Solutions | | Corporate and Other | | Consolidated Total |
| ($000 omitted) |
Balances at December 31, 2022 | 720,478 | | | 352,504 | | | — | | | 1,072,982 | |
Acquisitions | 4,674 | | | 18,000 | | | — | | | 22,674 | |
Purchase accounting adjustments | (20,978) | | | — | | | — | | | (20,978) | |
| | | | | | | |
Balances at June 30, 2023 | 704,174 | | | 370,504 | | | — | | | 1,074,678 | |
|
| | | | | | | | |
| Title | | Ancillary Services and Corporate | | Consolidated Total |
| | | ($000 omitted) |
| | |
Balances at December 31, 2016 | 211,365 |
| | 5,729 |
| | 217,094 |
|
Acquisitions | 14,419 |
| | — |
| | 14,419 |
|
Disposals | (85 | ) | | — |
| | (85 | ) |
Balances at September 30, 2017 | 225,699 |
| | 5,729 |
| | 231,428 |
|
During the second quarter 2017,first six months of 2023, goodwill recorded in the Company acquired certainreal estate solutions and title businesses primarily funded by borrowings on the Company's unsecured line of credit. The Company completed its purchase price allocationssegments was related to these businesses during the third quarter 2017acquisitions of a financial and as a result, increased its goodwill related to thepersonal information online verification services provider and several title segment by a total of $14.4 million, which is deductible in full for income tax purposes over a period of 15 years. Also, in connection with the acquisitions, the Company identified and recorded $2.6 million of other intangibles,offices, respectively, while title purchase accounting adjustments were primarily related to acquired software to be amortized over 5 years from the dateprovisional recognition of acquisition.
The Company evaluates goodwill for impairment annually based on information as of June 30 of the current year or more frequently if circumstances suggest that an impairment may exist. The Company performed the annual goodwill impairment analysis during the quarter ended September 30, 2017, utilizing the qualitative assessment method for the direct operations, agency operations, international operations and ancillary services reporting units. Based on the qualitative analysis performed, the Company concluded that the goodwillintangible assets (customer relationships) related to all reporting units was not impaired.recent acquisitions.
NOTE 67
Estimated title losses. A summary of estimated title losses for the ninesix months ended SeptemberJune 30 is as follows:
| | | | | | | | | | | |
| 2023 | | 2022 |
| ($000 omitted) |
Balances at January 1 | 549,448 | | | 549,614 | |
Provisions: | | | |
Current year | 36,773 | | | 55,760 | |
Previous policy years | 703 | | | (141) | |
Total provisions | 37,476 | | | 55,619 | |
Payments, net of recoveries: | | | |
Current year | (6,990) | | | (8,927) | |
Previous policy years | (57,954) | | | (29,790) | |
Total payments, net of recoveries | (64,944) | | | (38,717) | |
| | | |
Effects of changes in foreign currency exchange rates | 2,161 | | | (3,835) | |
Balances at June 30 | 524,141 | | | 562,681 | |
Loss ratios as a percentage of title operating revenues: | | | |
Current year provisions | 4.0 | % | | 3.8 | % |
Total provisions | 4.1 | % | | 3.8 | % |
|
| | | | | |
| 2017 | | 2016 |
| ($000 omitted) |
Balances at January 1 | 462,572 |
| | 462,622 |
|
Provisions: | | | |
Current year | 69,067 |
| | 73,380 |
|
Previous policy years | 1,524 |
| | (6,768 | ) |
Total provisions | 70,591 |
| | 66,612 |
|
Payments, net of recoveries: | | | |
Current year | (10,403 | ) | | (13,938 | ) |
Previous policy years | (53,491 | ) | | (57,410 | ) |
Total payments, net of recoveries | (63,894 | ) | | (71,348 | ) |
Effects of changes in foreign currency exchange rates | 6,576 |
| | 2,814 |
|
Balances at September 30 | 475,845 |
| | 460,700 |
|
Loss ratios as a percentage of title operating revenues: | | | |
Current year provisions | 5.0 | % | | 5.3 | % |
Total provisions | 5.1 | % | | 4.8 | % |
There were no significant adjustments to the loss provisioning rates or large claim reserves during the nine months ended September 30, 2017. In 2016, the Company decreased its loss provisioning rates and reserves related to certain existing large claims due to continued favorable policy loss experience. As a result, a $5.4 million net policy loss reserve reduction was recorded during the nine months ended September 30, 2016.
NOTE 78
Share-based payments. During the first nine months As part of 2017 and 2016, the Company grantedits incentive compensation program for executives and senior management shares of restricted common stock, consistingemployees, the Company provides share-based awards, which usually include a combination of time-based shares, whichrestricted stock units, performance-based restricted stock units and stock options. Each restricted stock unit represents a contractual right to receive a share of the Company's common stock. The time-based units generally vest on each of the first three anniversaries of the grant date, andwhile the performance-based shares, whichunits vest upon achievement of certain financial objectives and an employee service requirement over a period of approximately three years. The stock options vest on each of the first three anniversaries of the grant date at a rate of 20%, 30% and 50%, chronologically, and expire 10 years after the grant date. Each vested stock option can be exercised to purchase a share of the Company's common stock at the strike price set by the Company at the grant date. The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the periodcorresponding vesting period.
During the first six months of three years. The2023 and 2022, the Company granted time-based and performance-based restricted stock units with an aggregate grant-date fair values of these awards in 2017 and 2016 were $5.1$12.0 million (120,000 shares(293,000 units with an average grant price per shareunit of $42.55)$41.01) and $3.9$11.2 million (105,000 shares(174,000 units with an average grant price per shareunit of $37.33), respectively. Awards were made pursuant to the Company’s employee incentive compensation plans and the compensation expense associated with restricted stock awards is recognized over the corresponding vesting period.$64.15).
Additionally, during the second quarters 2017 and 2016, the Company granted its board of directors, as a component of annual director retainer compensation, 13,000 and 16,300 shares, respectively, of common stock, which vested immediately. The aggregate fair values of these director awards at the grant dates in 2017 and 2016 were both $0.6 million.
NOTE 89
Earnings per share. The Company’s basic Basic earnings per share (EPS) attributable to Stewart is calculated by dividing net income attributable to Stewart by the weighted-average number of shares of Common Stock outstanding during the reporting periods. Outstanding shares of Common Stock granted to employees that are not yet vested (restricted shares) are excluded from the calculation of the weighted-average number of shares outstanding for calculating basic EPS. To calculate diluted EPS, the number of shares is adjusted forto include the effects of any dilutive shares. The treasury stock method is used to calculate the dilutive number of additional shares related to the Company’s long term incentivethat would have been outstanding if restricted units and shares were vested and stock option plans.options were exercised. In periods of loss, dilutive shares are excluded from the calculation of the diluted EPS and diluted EPS is computed in the same manner as basic EPS.
The calculation of the basic and diluted EPS is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted, except per share) |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to Stewart | 15,815 | | | 61,660 | | | 7,625 | | | 119,557 | |
| | | | | | | |
Denominator (000): | | | | | | | |
Basic average shares outstanding | 27,255 | | | 27,018 | | | 27,228 | | | 26,989 | |
Average number of dilutive shares relating to options | 43 | | | 154 | | | 52 | | | 226 | |
Average number of dilutive shares relating to grants of restricted units and shares | 146 | | | 121 | | | 122 | | | 162 | |
Diluted average shares outstanding | 27,444 | | | 27,293 | | | 27,402 | | | 27,377 | |
| | | | | | | |
Basic earnings per share attributable to Stewart | 0.58 | | | 2.28 | | | 0.28 | | | 4.43 | |
| | | | | | | |
Diluted earnings per share attributable to Stewart | 0.58 | | | 2.26 | | | 0.28 | | | 4.37 | |
|
| | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2017 | 2016 | 2017 | 2016 |
| ($000 omitted, except per share) |
Numerator: | | | | |
Net income attributable to Stewart | 10,944 |
| 26,375 |
| 33,601 |
| 38,778 |
|
Less: Cash paid on Class B Common Shares conversion (a) | — |
| — |
| — |
| (12,000 | ) |
Net income available to common shareholders | 10,944 |
| 26,375 |
| 33,601 |
| 26,778 |
|
| | | | |
Denominator (000): | | | | |
Basic average shares outstanding | 23,448 |
| 23,371 |
| 23,442 |
| 23,362 |
|
Average number of dilutive shares relating to options | — |
| 1 |
| — |
| 1 |
|
Average number of dilutive shares relating to grants of restricted shares | 116 |
| 239 |
| 129 |
| 233 |
|
Diluted average shares outstanding | 23,564 |
| 23,611 |
| 23,571 |
| 23,596 |
|
| | | | |
Basic earnings per share attributable to Stewart | 0.47 |
| 1.13 |
| 1.43 |
| 1.15 |
|
| | | | |
Diluted earnings per share attributable to Stewart | 0.46 |
| 1.12 |
| 1.43 |
| 1.13 |
|
(a) - During 2016, the Company paid $12.0 million as part of the consideration related to the exchange agreement with the holders of the Class B Common Stock. In accordance with the ASC 260, Earnings Per Share, the $12.0 million payment was treated in a manner similar to the treatment of dividends on preferred stock for the purpose of calculating EPS. Accordingly, the $12.0 million payment was deducted from the 2016 net income to arrive at the net income for calculating basic and diluted EPS.
NOTE 910
Contingent liabilities and commitments. In the ordinary course of business, the Company guarantees the third-party indebtedness of certain of its consolidated subsidiaries. As of SeptemberJune 30, 2017,2023, the maximum potential future payments on the guarantees are not more than the related notes payable recorded in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related guaranteesguarantees are not more than the Company’s future minimum lease payments.obligations, as presented on the condensed consolidated balance sheets, plus lease operating expenses. As of SeptemberJune 30, 2017,2023, the Company also had unused letters of credit aggregating $5.6$4.9 million relatedrelated to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees.
NOTE 1011
Regulatory and legal developments. The Company is subject to claims and lawsuits arising in the ordinary course of its business, most of which involve disputed policy claims. In some of these lawsuits, the plaintiff seeksplaintiffs seek exemplary or treble damages in excess of policy limits. The Company does not expect that any of these ordinary course proceedings will have a material adverse effect on its consolidated financial condition or results of operations. In addition, along with the other major title insurance companies, the Company is party to class action lawsuits concerning the title insurance industry. The Company believes that it has adequate reserves for the various litigation matters and contingencies discussedreferred to in this paragraph and that the likely resolution of these matters will not materially affect its consolidated financial condition or results of operations.
The Company is subject to administrative actions and litigation relatingnon-ordinary course of business claims or lawsuits from time to time.To the basisextent the Company is currently the subject of these types of lawsuits, the Company has determined either that a loss is not reasonably possible or that the estimated loss or range of loss, if any, will not have a material adverse effect on which premium taxes are paid in certain states. the Company’s financial condition, results of operations or cash flows.
Additionally, the Company occasionally receives from time to time various other inquiries from governmental regulators concerning practices in the insurance industry. Many of these practices do not concern title insurance. To the extent the Company is in receipt of such inquiries, it believes that, where appropriate, it has adequately reserved for these matters and does not anticipate that the outcome of these inquiries will materially affect its consolidated financial condition or results of operations.
The Company is subject to various other administrative actions, investigations and inquiries into its business conduct in certain of the states in which it operates. While the Company cannot predict the outcome of the various regulatory and administrative matters, it believes that it has adequately reserved for these matters and does not anticipate that the outcome of any of these matters will materially affect its consolidated financial condition or results of operations.
NOTE 1112
Segment information. The Company reports twohas three reportable operating segments: the title segment, the real estate solutions segment, and ancillary servicesthe corporate and corporate.other segment. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, abstracting, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes centralized title services, home and personal insurance services, and Internal Revenue Code Section 1031 tax-deferred exchanges.exchanges, and digital customer engagement platform services. The ancillaryreal estate solutions segment supports the real estate industry and primarily includes credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment historically provided appraisal and valuation services, loan file review, quality control services, government services, document management, recording and call center-related services offered to large mortgage lenders and servicers, mortgage brokers and mortgage investors. Beginning in 2017, the principal offerings of ancillary services are appraisal and valuation services. Also included in the ancillary services and corporate segment are expensesis primarily comprised of the parent holding company and certain other enterprise-wide overhead costs, net of centralized administrative services costs allocated to respective operating businesses.departments.
Selected statement of income information related to these segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted) |
Title segment: | | | | | | | |
Revenues | 480,825 | | | 759,035 | | | 942,468 | | | 1,488,393 | |
Depreciation and amortization | 8,883 | | | 7,489 | | | 16,986 | | | 13,631 | |
Income before taxes and noncontrolling interest | 35,459 | | | 93,595 | | | 34,794 | | | 176,375 | |
| | | | | | | |
Real estate solutions segment: | | | | | | | |
Revenues | 71,411 | | | 82,864 | | | 134,035 | | | 172,255 | |
Depreciation and amortization | 6,280 | | | 6,381 | | | 12,581 | | | 13,177 | |
Income before taxes | 3,282 | | | 6,095 | | | 4,648 | | | 12,886 | |
| | | | | | | |
Corporate and other segment: | | | | | | | |
Revenues (net realized losses) | (3,082) | | | 2,174 | | | (3,047) | | | 36,340 | |
Depreciation and amortization | 365 | | | 418 | | | 867 | | | 1,229 | |
Loss before taxes | (13,567) | | | (12,911) | | | (24,424) | | | (22,870) | |
| | | | | | | |
Consolidated Stewart: | | | | | | | |
Revenues | 549,154 | | | 844,073 | | | 1,073,456 | | | 1,696,988 | |
Depreciation and amortization | 15,528 | | | 14,288 | | | 30,434 | | | 28,037 | |
Income before taxes and noncontrolling interest | 25,174 | | | 86,779 | | | 15,018 | | | 166,391 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| ($000 omitted) |
Title segment: | | | | | | | |
Revenues | 488,612 |
| | 529,816 |
| | 1,384,857 |
| | 1,410,863 |
|
Depreciation and amortization | 5,534 |
| | 5,120 |
| | 16,081 |
| | 15,642 |
|
Income before taxes and noncontrolling interest | 24,610 |
| | 50,308 |
| | 76,354 |
| | 100,984 |
|
| | | | | | | |
Ancillary services and corporate segment: | | | | | | | |
Revenues | 12,957 |
| | 23,394 |
| | 45,204 |
| | 70,012 |
|
Depreciation and amortization | 1,044 |
| | 1,962 |
| | 3,316 |
| | 7,086 |
|
Loss before taxes and noncontrolling interest | (6,013 | ) | | (11,500 | ) | | (18,742 | ) | | (35,977 | ) |
| | | | | | | |
Consolidated Stewart: | | | | | | | |
Revenues | 501,569 |
| | 553,210 |
| | 1,430,061 |
| | 1,480,875 |
|
Depreciation and amortization | 6,578 |
| | 7,082 |
| | 19,397 |
| | 22,728 |
|
Income before taxes and noncontrolling interest | 18,597 |
| | 38,808 |
| | 57,612 |
| | 65,007 |
|
The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment. During 2022, the corporate and other segment included results of a real estate brokerage company that was sold during the second quarter 2022.
Total revenues generated in the United States and all international operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| ($000 omitted) |
United States | 514,699 | | | 791,447 | | | 1,012,228 | | | 1,600,651 | |
International | 34,455 | | | 52,626 | | | 61,228 | | | 96,337 | |
| 549,154 | | | 844,073 | | | 1,073,456 | | | 1,696,988 | |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| ($000 omitted) |
United States | 464,111 |
| | 518,204 |
| | 1,335,129 |
| | 1,394,228 |
|
International | 37,458 |
| | 35,006 |
| | 94,932 |
| | 86,647 |
|
| 501,569 |
| | 553,210 |
| | 1,430,061 |
| | 1,480,875 |
|
NOTE 1213
Other comprehensive income (loss). income. Changes in the balances of each component of other comprehensive (loss) income (loss) and the related tax effects are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 | | Three Months Ended June 30, 2022 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) |
Net unrealized gains and losses on investments: | | | | | | | |
Change in net unrealized gains and losses on investments | (7,298) | | (1,533) | | (5,765) | | | (16,068) | | (3,374) | | (12,694) | |
Reclassification adjustments for realized gains and losses on investments | 280 | | 59 | | 221 | | | (148) | | (31) | | (117) | |
| (7,018) | | (1,474) | | (5,544) | | | (16,216) | | (3,405) | | (12,811) | |
| | | | | | | |
Foreign currency translation adjustments | 5,102 | | 848 | | 4,254 | | | (9,329) | | (1,148) | | (8,181) | |
| | | | | | | |
Other comprehensive loss | (1,916) | | (626) | | (1,290) | | | (25,545) | | (4,553) | | (20,992) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023 | | Six Months Ended June 30, 2022 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) |
Net unrealized gains and losses on investments: | | | | | | | |
Change in net unrealized gains and losses on investments | 1,078 | | 226 | | 852 | | | (41,256) | | (8,664) | | (32,592) | |
Reclassification adjustment for realized gains and losses on investments | 396 | | 83 | | 313 | | | (382) | | (80) | | (302) | |
| 1,474 | | 309 | | 1,165 | | | (41,638) | | (8,744) | | (32,894) | |
| | | | | | | |
Foreign currency translation adjustments | 5,812 | | 960 | | 4,852 | | | (8,353) | | (792) | | (7,561) | |
| | | | | | | |
Other comprehensive income (loss) | 7,286 | | 1,269 | | 6,017 | | | (49,991) | | (9,536) | | (40,455) | |
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) | | ($000 omitted) |
Unrealized gains on investments - net: | | | | | | | |
Change in net unrealized gains on investments | 95 |
| 32 |
| 63 |
| | (405 | ) | (142 | ) | (263 | ) |
Less: reclassification adjustment for net gains included in net income | (508 | ) | (177 | ) | (331 | ) | | (1,330 | ) | (465 | ) | (865 | ) |
Net unrealized gains | (413 | ) | (145 | ) | (268 | ) | | (1,735 | ) | (607 | ) | (1,128 | ) |
| | | | | | | |
Foreign currency translation adjustments | 5,817 |
| 1,676 |
| 4,141 |
| | (2,363 | ) | (555 | ) | (1,808 | ) |
| | | | | | | |
Other comprehensive income (loss) | 5,404 |
| 1,531 |
| 3,873 |
| | (4,098 | ) | (1,162 | ) | (2,936 | ) |
| | | | | | | |
| Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) | | ($000 omitted) |
Unrealized gains on investments - net: | | | | | | | |
Change in net unrealized gains on investments | 4,438 |
| 1,553 |
| 2,885 |
| | 18,012 |
| 6,304 |
| 11,708 |
|
Less: reclassification adjustment for net gains included in net income | (1,218 | ) | (426 | ) | (792 | ) | | (1,606 | ) | (562 | ) | (1,044 | ) |
Net unrealized gains | 3,220 |
| 1,127 |
| 2,093 |
| | 16,406 |
| 5,742 |
| 10,664 |
|
| | | | | | | |
Foreign currency translation adjustments | 11,831 |
| 3,161 |
| 8,670 |
| | 1,581 |
| 1,797 |
| (216 | ) |
| | | | | | | |
Other comprehensive income | 15,051 |
| 4,288 |
| 10,763 |
| | 17,987 |
| 7,539 |
| 10,448 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S OVERVIEW
Second quarter 2023 overview.We reported net income attributable to Stewart of $10.9$15.8 million ($0.460.58 per diluted share) for the thirdsecond quarter 20172023, compared to a net income attributable to Stewart of $26.4$61.7 million ($1.122.26 per diluted share) for the thirdsecond quarter 2016.2022. Pretax income before noncontrolling interests for the thirdsecond quarter 20172023 was $18.6$25.2 million compared to pretax income before noncontrolling interests of $38.8$86.8 million for the third quarter 2016.
Total revenues for the third quarter 2017 were $501.6 million compared to total revenues of $553.2 million for the third quarter 2016, a decline of 9%. Total operating revenues for the third quarter 2017 were $498.0 million as compared to total operating revenues of $545.4 million for the third quarter 2016, also a decline of 9%. Our third quarter title revenues were adversely affected by business disruptions caused by hurricanes Harvey and Irma, which had a combined impact of approximately $4 million, and the departure of certain retail staff as described in ourprior year quarter. The second quarter earnings release2023 results included $1.1 million of pretax net realized and quarterly report on Form 10-Q. While the revenue impactunrealized losses, primarily composed of the hurricanes was relatively minor, the impact to pretax income was more significant; there was no appreciable offsetting cost reduction as processing costs were largely incurred pre-closing, and we maintained the employeesa contingent receivable loss adjustment resulting from a previous disposition of the affected offices in order to quickly reopen them. On the positive side, our international operations delivered another strong quarter and revenues from the Title365 acquisition and recent new hiresa business, partially offset by net unrealized gains on fair value changes of equity securities investments, while the retail revenue decline. We successfully recruited strong, new revenue-generating associates, which have offset $20-$25second quarter 2022 results included $11.9 million of the $70 million in departed annual revenuespretax net realized and unrealized losses, primarily related to staff departures. The recent acquisitionnet unrealized losses on fair value changes of Title365 generated new business, which we expect to result in $40-$50 million in annual revenue. These combined actions are expected to fully replace the departed revenue by 2018’s selling season, and our ongoing recruiting efforts and targeted acquisitions should further bolster our top line.equity securities investments.
We have announced that John Killea, chief legal officer & chief compliance officer, has been appointed to the additional role of president of Stewart. His deep experience and intimate knowledge of our company uniquely positions him to expand his responsibilities as we execute on our strategic priorities. In addition, we are very pleased to announce that John Magness has joined Stewart as chief corporate development officer. John brings nearly 35 years of leadership experience in the title and real estate industry and will play a key role in ensuring Stewart continues to provide the high quality services our customers have come to expect. Most recently, John served as president of Old Republic Title Companies, Inc.
We also announced that the Board of Directors has previously formed a strategic committee which has been pursuing the full range of strategic alternatives available to Stewart. These alternatives include, among other things, business combinations, the sale of the Company, and continuing to execute on Stewart’s standalone business plan. The Company has retained and will be assisted in the strategic review process by Citi as financial advisor and Davis Polk & Wardwell LLP as legal advisor. The Board plans to complete this process in an expeditious manner. There can be no assurance that this process will result in a particular outcome. We do not intend to provide updates on its review until it deems further disclosure is appropriate or required.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30 | | |
| 2023 | | 2022 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 466.7 | | | 761.1 | | | (39) | % | | | | | | |
Investment income | 12.1 | | | 6.7 | | | 80 | % | | | | | | |
Net realized and unrealized (losses) gains | 2.0 | | | (8.8) | | | 123 | % | | | | | | |
Pretax income | 35.5 | | | 93.6 | | | (62) | % | | | | | | |
Pretax margin | 7.4 | % | | 12.3 | % | | | | | | | | |
|
| | | | | | | | |
| For the Three Months Ended September 30, |
| 2017 | | 2016 | | % Change |
| | | | | |
Total revenues | 488.6 |
| | 529.8 |
| | (8 | )% |
Pretax income | 24.6 |
| | 50.3 |
| | (51 | )% |
Pretax margin | 5.0 | % | | 9.5 | % | |
|
|
Pretax income duringTitle segment operating revenues for the thirdsecond quarter 2017 declined $25.72023 decreased $294.3 million, or 39%, compared to thirdthe second quarter 2016,2022, as a result of transaction volume declines in our direct and agency title businesses, while total title revenues declined $41.2 million. In addition to the factors mentioned above, title revenues declined due tosegment operating expenses decreased $220.1 million, or 33%, primarily driven by lower commercial revenues, fewer purchase orders closed, and a significant decline in refinancing orders industry-wide. Includedrevenues. Agency retention expenses in the segment’s results forsecond quarter 2023 decreased $168.1 million, or 49%, in line with $201.2 million, or 49%, lower gross agency revenues, while the third quarter 2017 are approximately $1.4 million of Title365 integration costs. Also includedaverage independent agency remittance rate in the thirdsecond quarter 2017 results were $1.3 million of realized losses,2023 slightly improved to 17.7% compared to $2.1 million of realized gains17.1% in the thirdprior year quarter, 2016.primarily as a result of geographic mix.
Non-commercial domestic revenue, as shown under the Results of Operations - Title revenues section, includes revenues from purchase transactionsTotal employee costs and centralized title operations (processing primarily refinancing and default title orders), which decreased 11% and 32%, respectively,other operating expenses in the thirdsecond quarter 20172023 decreased $47.2 million, or 16%, compared to the prior year quarter. As a percentage of operating revenues, these expenses were 52.4% in the second quarter as a result of declines2023 compared to 38.3% in purchase and refinancing orders closed. Commercial revenues declined 10% fromthe second quarter 2022, primarily due to lower second quarter 2023 revenues. Title loss expense decreased $6.6 million, or 25%, in the second quarter 2023 compared to the prior year quarter primarily as a result of lower commercial orders closed, fewer large transactions thantitle revenues. As a percentage of title revenues, title loss expense was 4.2% in the second quarter 2023 compared to 3.5% in the second quarter 2022, which benefited from last year’s favorable claims experience.
The title segment’s net realized and unrealized gains in the second quarter 2023 were primarily driven by $2.0 million of unrealized gains from fair value changes of equity securities investments, while the segment’s net realized and unrealized losses in the prior year quarter and reduced average fee per file. Total international title revenues increased 7%were primarily due to $9.9 million of net unrealized losses on fair value changes of equity securities investments, partially offset by a $1.0 million gain related to an acquisition contingent liability adjustment. Investment income in the thirdsecond quarter 20172023 increased $5.4 million compared to the prior yearsecond quarter mainly2022, primarily due to transaction volume growthhigher interest income resulting from our United Kingdom operationsearned interest from eligible escrow balances and a stronger Canadian dollar relative to the U.S. dollar. Revenues from independent agency operationsincreased interest rates and higher short-term investment balances in the thirdsecond quarter 2017 declined 5% compared to the third quarter 2016.2023. The independent agency remittance rate decreased to 17.5%segment's pretax income included $3.3 million and $2.5 million of acquisition intangible asset amortization and other expenses in the third quarter 2017 from 18.0% in the third quarter 2016 mainly due to geographic mix of our agency business (reduced revenues in higher-remitting statessecond quarters 2023 and increases in lower-remitting states); third quarter 2017 revenues from independent agencies, net of retention, decreased 7% from the prior year quarter. Given our current independent agent geographic footprint, we expect the remittance rate to remain in the mid-to-high 17% range over the near term.2022, respectively.
Summary results of the ancillary services and corporatereal estate solutions segment are as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30 | | |
| 2023 | | 2022 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 71.4 | | | 82.9 | | | (14) | % | | | | | | |
Pretax income | 3.3 | | | 6.1 | | | (46) | % | | | | | | |
Pretax margin | 4.6 | % | | 7.4 | % | | | | | | | | |
|
| | | | | | | | |
| For the Three Months Ended September 30, |
| 2017 | | 2016 | | % Change |
| | | | | |
Total revenues | 13.0 |
| | 23.4 |
| | (45 | )% |
Pretax loss | (6.0 | ) | | (11.5 | ) | | 48 | % |
The decline in the segment’s operating revenues in the thirdsecond quarter 20172023 decreased $11.5 million, or 14%, compared to the prior yearsecond quarter was2022, primarily due to lower transaction volumes resulting from the divestiturescontinuing elevated interest rate environment. Consistent with the revenue decline, combined employee costs and other operating expenses in the second quarter 2023 decreased $8.5 million, or 12%. The segment's pretax income included acquisition intangible asset amortization expenses of $5.8 million and $6.1 million in the loan file review, quality control servicessecond quarters 2023 and government services lines of business at2022, respectively, and a $1.2 million state sales tax assessment expense in the end of 2016. The segment’ssecond quarter 2023 related to an acquisition.
In regard to the corporate and other segment, pretax results improvedfor the second quarter 2023 included net realized losses of $3.1 million, primarily driven by a contingent receivable loss adjustment resulting from a previous disposition of a business, while second quarter 2022 results included net realized losses of $3.2 million primarily resulting from the same disposition of a business. Net expenses attributable to a $6.0corporate operations during the second quarter 2023 were $10.5 million pretax loss, compared to a pretax loss of $11.5$10.2 million in the prior year quarter. The segment’s results for the third quarter 2017 and 2016 included approximately $6 million and $8 million, respectively, of expenses attributable to parent company and corporate operations.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.
Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. During the ninesix months ended SeptemberJune 30, 2017,2023, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the Company’s Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.
Operations. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our ancillaryreal estate solutions operations include credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with our remaining ancillary services operations, principally appraisal and valuation services.other businesses not related to title or real estate solutions operations.
Factors affecting revenues. The principal factors that contribute to changes in our operating revenues for our title and ancillary services and corporate segments include:
mortgage •interest rates;
•availability of mortgage loans;
•number and average value of mortgage loan originations;
•ability of potential purchasers to qualify for loans;
•inventory of existing homes available for sale;
•ratio of purchase transactions compared with refinance transactions;
•ratio of closed orders to open orders;
•home prices;
•consumer confidence, including employment trends;
•demand by buyers;
number of households;
•premium rates;
•foreign currency exchange rates;
•market share;
•ability to attract and retain highly productive sales associates;
•independent agency remittance rates;
•opening and integration of new offices and acquisitions;
•office closures;
•number and value of commercial transactions, which typically yield higher premiums;
•government or regulatory initiatives, including tax incentives and the implementation of the new integrated disclosure requirements;
•acquisitions or divestitures of businesses;
•volume of distressed property transactions; and
•seasonality and/or weather.weather; and
•outbreaks of diseases and related quarantine orders and restrictions on travel, trade and business operations.
Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. As an overall guideline, a 5% change in median home prices results in an approximate 3.6% change in title premiums. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance revenues as home buying is generally depressed during winter months. Our second and third quarters are typically the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of the year. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction.
RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and ninesix months ended SeptemberJune 30, 20172023 with the three and nine months ended September 30, 2016corresponding periods in the prior year are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.
Our statements on home sales and loan activity are based on published U.S. industry data from sources including Fannie Mae, the Mortgage Bankers Association (MBA), the National Association of Realtors® (NAR), and the Mortgage Bankers Association and Freddie Mac.U.S. Census Bureau as of June 30, 2023. We also use information from our direct operations.
Operating environment. Actualenvironment. According to NAR, existing home sales (seasonally-adjusted basis) in the third quarter 2017 declined approximately 2% from the third quarter 2016. September 2017 existing home sales totaled 465,000, which was down 4%June 2023 were 4.2 million units, a decrease of 19% from a year ago and also down 13%3% from August 2017. AccordingMay 2023, primarily due to NAR,the current elevated mortgage interest rate environment. Housing inventory continued to be low and was 14% lower home listings, fast-risingin June 2023 compared to June 2022, while home prices and the temporary effect of hurricanes Harvey and Irma were the likely causes of lowerhave steadily increased. The existing home salesmedian price in June 2023 was $410,200, which was the third quarter 2017. September 2017second highest since 1999, when NAR began tracking the data. The June 2023 median and average home prices both rose approximately 4%price was 3% higher than May 2023, but 1% lower compared to September 2016 prices. September 2017$413,800 observed in June 2022 which was the all-time high. With new residential construction, U.S. housing starts improved 6% from(seasonally-adjusted) in June 2023 were 8% lower compared to both June 2022 and May 2023, while newly-issued building permits in June 2023 were 15% and 4% lower compared to a year ago but were down 5% sequentiallyand May 2023, respectively.
With regard to lending activity, single family mortgage originations during the second quarter 2023 decreased 34% to $450 billion compared to the second quarter 2022, resulting from August 2017. Newly issued building permits in September 2017 declined 5% sequentially from August 201758% and 4% from a year ago. According25% lower refinancing and purchase transactions, respectively, according to Fannie Mae one-to-four family residential lending declinedand MBA (averaged). During the second quarter 2023, the average 30-year fixed interest rate was 6.5% compared to $465 billion in5.3% during the thirdsecond quarter 2017 from $589 billion in2022. For the third quarter 2016, driven by a decrease of approximately $137 billion, or 47%year 2023, Fannie Mae and MBA expect the interest rate to average 6.3%, in refinance originations, partially offset by a $13 billion, or 4%, increase in purchase lending. Onhigher than the 5.4% average refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction. Per Fannie Mae's forecast,observed during 2022, while total originations asfor the year 2023 are expected to decline 27% compared to the third quarter 2017, will decrease 8% to $427 billion in the fourth quarter 2017.2022.
Title revenues.Direct title revenue information is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | Change | % Chg | | 2023 | | 2022 | | Change | % Chg |
| ($ in millions) | | | ($ in millions) | |
Non-commercial | | | | | | | | | | | | | |
Domestic | 184.5 | | | 234.4 | | | (49.9) | | (21) | % | | 334.9 | | | 454.8 | | | (119.9) | | (26) | % |
International | 25.9 | | | 41.2 | | | (15.3) | | (37) | % | | 45.0 | | | 72.6 | | | (27.6) | | (38) | % |
| 210.4 | | | 275.6 | | | (65.2) | | (24) | % | | 379.9 | | | 527.4 | | | (147.5) | | (28) | % |
Commercial: | | | | | | | | | | | | | |
Domestic | 41.5 | | | 67.1 | | | (25.6) | | (38) | % | | 74.2 | | | 123.5 | | | (49.3) | | (40) | % |
International | 6.1 | | | 8.4 | | | (2.3) | | (27) | % | | 11.8 | | | 18.1 | | | (6.3) | | (35) | % |
| 47.6 | | | 75.5 | | | (27.9) | | (37) | % | | 86.0 | | | 141.6 | | | (55.6) | | (39) | % |
Total direct title revenues | 258.0 | | | 351.1 | | | (93.1) | | (27) | % | | 465.9 | | | 669.0 | | | (203.1) | | (30) | % |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| ($ in millions) | | | | ($ in millions) | | |
Non-commercial | | | | | | | | | | | |
Domestic | 141.7 |
| | 162.2 |
| | (13 | )% | | 417.8 |
| | 458.1 |
| | (9 | )% |
International | 30.4 |
| | 29.3 |
| | 4 | % | | 75.9 |
| | 68.6 |
| | 11 | % |
| 172.1 |
| | 191.5 |
| | (10 | )% | | 493.7 |
| | 526.7 |
| | (6 | )% |
Commercial: | | | | | | | | | | | |
Domestic | 39.2 |
| | 45.2 |
| | (13 | )% | | 127.4 |
| | 123.8 |
| | 3 | % |
International | 5.5 |
| | 4.4 |
| | 25 | % | | 14.8 |
| | 13.6 |
| | 9 | % |
| 44.7 |
| | 49.6 |
| | (10 | )% | | 142.2 |
| | 137.4 |
| | 3 | % |
Total direct title revenues | 216.8 |
| | 241.1 |
| | (10 | )% | | 635.9 |
| | 664.1 |
| | (4 | )% |
Revenues from direct title operations, which include residential, commercial, international and centralized title services transactions,Non-commercial revenues decreased $24.3 million, or 10%, and $28.2 million, or 4%, in the thirdsecond quarter and first ninesix months of 2017,2023, compared to the same periods in 2022, primarily resulting from lower residential purchase and refinancing transactions influenced by the rising mortgage interest rates during 2023. Combined purchase and refinancing orders closed declined 31% and 41% in the second quarter and first six months of 2023, respectively, compared to the same periods in 2016, due to a decline2022, while average residential fee per file in revenues from our residential, commercial and centralized title operations transactions, partially offset by revenue increases from our international operations. Our residential revenues, which make up about 60% of our total direct revenues, decreased $15.6 million, or 11%, and $28.7 million, or 7%, inboth the thirdsecond quarter and first ninesix months of 2017,2023 increased to $3,300 (or 11% and 19%, respectively), primarily due to the higher mix of purchase transactions.
Commercial revenues in the second quarter and first six months of 2023 were lower compared to the same periods in 2022, as a result of lower transaction volume and average transaction size. Domestic commercial orders closed decreased 30% and 22% in the second quarter and first six months of 2023, respectively, while average domestic commercial fee per file decreased 12% to $11,600 and 23% to $9,900 in the second quarter and first six months of 2023, respectively, compared to the same periods in 2016,2022. Total international revenues in the second quarter and first six months of 2023 declined by $17.6 million, or 35%, and $33.9 million, or 37%, respectively, primarily due to managementlower transaction volumes in our Canadian operations compared to the same periods in 2022.
Orders information for the three and staff departures within certain officessix months ended June 30 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | 2022 | Change | % Chg | | 2023 | 2022 | Change | % Chg |
Opened Orders: | | | | | | | | | |
Commercial | 3,294 | | 5,530 | | (2,236) | | (40) | % | | 7,136 | | 11,572 | | (4,436) | | (38) | % |
Purchase | 58,637 | | 72,084 | | (13,447) | | (19) | % | | 108,106 | | 140,582 | | (32,476) | | (23) | % |
Refinance | 18,642 | | 24,953 | | (6,311) | | (25) | % | | 34,771 | | 65,527 | | (30,756) | | (47) | % |
Other | 4,611 | | 1,079 | | 3,532 | | 327 | % | | 9,032 | | 2,721 | | 6,311 | | 232 | % |
Total | 85,184 | | 103,646 | | (18,462) | | (18) | % | | 159,045 | | 220,402 | | (61,357) | | (28) | % |
| | | | | | | | | |
Closed Orders: | | | | | | | | | |
Commercial | 3,585 | | 5,132 | | (1,547) | | (30) | % | | 7,509 | | 9,563 | | (2,054) | | (21) | % |
Purchase | 43,082 | | 55,354 | | (12,272) | | (22) | % | | 74,710 | | 102,680 | | (27,970) | | (27) | % |
Refinance | 10,674 | | 22,677 | | (12,003) | | (53) | % | | 20,287 | | 57,164 | | (36,877) | | (65) | % |
Other | 2,905 | | 1,719 | | 1,186 | | 69 | % | | 5,639 | | 3,359 | | 2,280 | | 68 | % |
Total | 60,246 | | 84,882 | | (24,636) | | (29) | % | | 108,145 | | 172,766 | | (64,621) | | (37) | % |
Gross revenues from independent agency operations in the second quarter and first six months of 2023 decreased $201.2 million, or 49%, and $356.3 million, or 44%, respectively, compared to the same periods in 2022, primarily influenced by lower commercial and residential market activity. Agency revenues, net of retention, declined $33.1 million, or 47%, and $62.8 million, or 44%, in the second quarter and first six months of 2023 compared to the same periods in 2022, generally in line with the change in gross agency revenues. Refer further to the "Retention by agencies" discussion under Expenses below.
Real estate solutions and other revenues. Real estate solutions and other revenues are comprised of revenues generated by our real estate solutions segment and, for 2022, by a real estate brokerage company which we sold during the second quarter 2017, as well as the impact of hurricanes Harvey and Irma on Texas and Florida, respectively. We estimate the revenue impact of these items to be approximately $25 million, with the majority attributed to the staff attrition. Revenues from our centralized title operations, which primarily process refinancing and default title orders,2022. Real estate solutions revenues decreased $4.9$11.5 million, or 32%14%, and $11.6$38.3 million, or 24%22%, in the thirdsecond quarter and first ninesix months of 2017 compared to the third quarter and first nine months of 2016, respectively,2023, primarily due to the decreased refinancing ordersmarket activity resulting from the continued elevated interest rate environment. The disposed real estate brokerage company generated revenues of $5.3 million and lower demand for default services, which are in line with industry trends.
Our direct operations include local offices and international operations, and we generate commercial revenues both domestically and internationally. U.S. commercial revenues during the third quarter 2017 decreased $6.0$39.2 million or 13%, compared to the third quarter 2016, primarily due to a decline in commercial orders and the average revenue fee per file; while revenues increased $3.6 million, or 3%, in the first nine months of 2017 compared with the same period in 2016, mainly due to certain large transactions during the second quarter 2017, which resulted in an improvement in our commercial revenue fee per file, partially offsetand first six months of 2022, respectively.
Investment income. Investment income increased by a decline in commercial orders. Total international revenues increased $2.2$5.4 million, or 7%80%, and $8.5$8.4 million, or 10%81%, in the thirdsecond quarter and first ninesix months of 20172023, respectively, compared to the third quarter and first nine months of 2016, respectively,same periods in 2022, primarily as a result of higher interest income resulting from earned interest from eligible escrow balances and increased transaction volume frominterest rates and higher short-term investments balances in 2023.
Net realized and unrealized gains. Refer to Note 5 to the condensed consolidated financial statements.
Expenses. An analysis of expenses is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | Change* | % Chg | | 2023 | | 2022 | | Change* | % Chg |
| ($ in millions) | | | ($ in millions) | |
| | | | | | | | | | | | | |
Amounts retained by agencies | 171.8 | | | 339.8 | | | (168.0) | | (49 | %) | | 377.5 | | | 671.0 | | | (293.5) | | (44 | %) |
As a % of agency revenues | 82.3 | % | | 82.9 | % | | | | | 82.5 | % | | 82.4 | % | | | |
Employee costs | 182.7 | | | 210.2 | | | (27.6) | | (13 | %) | | 353.2 | | | 415.2 | | | (62.0) | | (15 | %) |
As a % of operating revenues | 33.9 | % | | 24.8 | % | | | | | 33.4 | % | | 24.5 | % | | | |
Other operating expenses | 129.3 | | | 162.0 | | | (32.7) | | (20 | %) | | 250.1 | | | 351.8 | | | (101.7) | | (29 | %) |
As a % of operating revenues | 24.0 | % | | 19.1 | % | | | | | 23.6 | % | | 20.8 | % | | | |
Title losses and related claims | 19.8 | | | 26.4 | | | (6.6) | | (25 | %) | | 37.5 | | | 55.6 | | | (18.1) | | (33 | %) |
As a % of title revenues | 4.2 | % | | 3.5 | % | | | | | 4.1 | % | | 3.8 | % | | | |
*Amounts change may not foot due to rounding.
Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our Canadatitle underwriters. Amounts retained by independent agencies, as a percentage of revenues generated by them, averaged 82.3% and United Kingdom operations. Direct revenues constituted 45% and 46% of our total title revenues82.5% in the third quarters 2017 and 2016, respectively, and 46% and 48% during the first nine months of 2017 and 2016, respectively.
Orders information for the thirdsecond quarter and first ninesix months ended September 30 is as follows:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| 2017 | 2016 | Change | % Change | | 2017 | 2016 | Change | % Change |
Opened Orders: | | | | | | | | | |
Commercial | 10,685 |
| 11,866 |
| (1,181 | ) | (10 | )% | | 32,923 |
| 35,334 |
| (2,411 | ) | (7 | )% |
Purchase | 59,679 |
| 63,115 |
| (3,436 | ) | (5 | )% | | 188,744 |
| 193,625 |
| (4,881 | ) | (3 | )% |
Refinance | 27,155 |
| 42,851 |
| (15,696 | ) | (37 | )% | | 74,794 |
| 113,819 |
| (39,025 | ) | (34 | )% |
Other | 4,565 |
| 3,423 |
| 1,142 |
| 33 | % | | 13,584 |
| 10,032 |
| 3,552 |
| 35 | % |
Total | 102,084 |
| 121,255 |
| (19,171 | ) | (16 | )% | | 310,045 |
| 352,810 |
| (42,765 | ) | (12 | )% |
| | | | | | | | | |
Closed Orders: | | | | | | | | | |
Commercial | 7,643 |
| 8,149 |
| (506 | ) | (6 | )% | | 23,136 |
| 24,344 |
| (1,208 | ) | (5 | )% |
Purchase | 48,432 |
| 52,937 |
| (4,505 | ) | (9 | )% | | 140,996 |
| 145,829 |
| (4,833 | ) | (3 | )% |
Refinance | 17,965 |
| 28,361 |
| (10,396 | ) | (37 | )% | | 53,471 |
| 78,304 |
| (24,833 | ) | (32 | )% |
Other | 2,872 |
| 4,086 |
| (1,214 | ) | (30 | )% | | 10,205 |
| 12,536 |
| (2,331 | ) | (19 | )% |
Total | 76,912 |
| 93,533 |
| (16,621 | ) | (18 | )% | | 227,808 |
| 261,013 |
| (33,205 | ) | (13 | )% |
Gross revenuesof 2023, respectively, compared to 82.9% and 82.4% in the same periods in 2022. The average retention percentage may vary from independentperiod to period due to the geographical mix of agency operations, decreased $13.7 million,the volume of title revenues and, in some states, laws or 5%, in the third quarter 2017, comparedregulations. Due to the third quarter 2016, primarilyvariety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a resulthigh proportion of revenue decreasesour independent agencies are in the states of Massachusetts, New York, Texas, Florida (there likely was some independent agency revenue impact from the hurricanes in Texas and Florida) and New Jersey, partially offset by increases in the states of California, Illinois and Ohio. As a result of decreased agency revenues, the third quarter 2017 net agency revenues (net of agency retention) decreased $3.6 million, or 7%, compared to the prior year quarter. Gross agency revenues for the first nine months of 2017 increased $4.0 million, or approximately 1%, compared to the first nine months of 2016, primarily due to revenue increases in the states of California, Minnesota, Michigan and Ohio, partially offset by revenue decreases in the states of New York, Massachusetts and Florida. Net of agencywith retention agency revenues in the first nine months of 2017, compared to the same period in 2016, decreased $2.3 million, or 2%, primarily due to revenue increases from generally lower remitting states, while revenues from higher remitting states declined. rates greater than 80%. We continue to focus on increasing profit margins in every state, increasing premium revenue in states where remittance rates are above 20%, and maintaining the quality of our agency network, which we believe to be the industry’s best, in order to mitigate claims risk and drive consistent future performance. While market share is important in our agency operations channel, it is not as important as margins, risk mitigation and profitability.
Ancillary services revenues. Ancillary services operating revenues decreased $9.4 million, or 43%, and $20.2 million, or 31%,
Employee costs. Consolidated employee costs in the thirdsecond quarter and first ninesix months of 20172023 decreased $27.6 million, or 13%, and $62.0 million, or 15%, respectively, compared to the same periods in 2016, respectively, primarily due to our divestitures of the loan file review, quality control services and government services lines of business at the end of 2016. Our exit of the delinquent loan servicing operations, completed in the first quarter 2016, also contributed to the revenue decline during the first nine months of 2017 compared to the first nine months of 2016. These divestitures primarily resulted in the pretax results improvement of $4.7 million, or 101%, and $12.4 million, or 90%, in the thirdsecond quarter and first ninesix months of 2017 compared2022, primarily resulting from lower salaries expenses, incentive compensation and temporary labor costs related to lower volumes and 11% and 10% lower average employee counts in the same periods in 2016 for ancillary services.
Investment income. Investment income during the thirdsecond quarter and first ninesix months of 2017 was comparable2023, respectively. Compared to the investment income during the samecorresponding periods in 2016.
Investment and other (losses) gains - net. Investment and other losses - netthe prior year, employee costs for the third quarter 2017 included net realized losses of $0.6 million from the sale of investments available-for-sale and $0.3 million from the sale of subsidiaries; while investment and other gains - net for the third quarter 2016 included net realized gains of $2.0 million from the sale of investments available-for-sale and $1.2 million on a cost-basis investment transaction.
For the nine months ended September 30, 2017, investment and other losses – net included $0.8 million of net realized loss due to an increase in the fair value of a contingent consideration liability related to a prior acquisition and $0.5 million of net realized loss from the sale of subsidiaries. For the nine months ended September 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to a net decrease in the fair values of contingent consideration liabilities associated with prior year acquisitions, $1.2 million of realized gain on a cost-basis investment transaction and $2.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.3 million of office closure costs.
Expenses. An analysis of expenses is shown below:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 |
| | 2016 |
| | % Change | | 2017 | | 2016 | | % Change |
| ($ in millions) | | | | | ($ in millions) | | |
| | | | | | | | | | | |
Amounts retained by agencies | 221.5 |
| | 231.6 |
| | (4 | )% | | 605.2 |
| | 598.9 |
| | 1 | % |
As a % of agency revenues | 82.5 | % | | 82.0 | % | | | | 82.2 | % | | 81.8 | % | | |
Employee costs | 140.1 |
| | 154.5 |
| | (9 | )% | | 419.2 |
| | 457.2 |
| | (8 | )% |
As a % of operating revenues | 28.1 | % | | 28.3 | % | | | | 29.6 | % | | 31.3 | % | | |
Other operating expenses | 88.5 |
| | 94.0 |
| | (6 | )% | | 255.6 |
| | 268.2 |
| | (5 | )% |
As a % of operating revenues | 17.8 | % | | 17.2 | % | | | | 18.0 | % | | 18.3 | % | | |
Title losses and related claims | 25.4 |
| | 26.4 |
| | (4 | )% | | 70.6 |
| | 66.6 |
| | 6 | % |
As a % of title revenues | 5.2 | % | | 5.0 | % | |
|
| | 5.1 | % | | 4.8 | % | |
|
|
Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Average independent agency remittance rates (i.e., inverse of retention rates, representing the amount paid to us relative to the amount collected by agents at the closing of the transaction) in the thirdsecond quarter and first ninesix months of 2017 were 17.5%2023 in the title segment decreased $27.9 million, or 14%, and 17.8%$58.6 million, or 15%, respectively, as compared to 18.0% and 18.2%while employee costs in the same periods in 2016. The decrease in the agency remittance rates during the third quarterreal estate solutions segment decreased $0.3 million, or 2%, and first nine months of 2017 was primarily due to revenue declines from higher remitting states (with average remittance rates of 19.8% and 19.4%$1.3 million, or 5%, respectively) accompanied by revenue increases from lower remitting states (with average remittance rates of 15.0% and 16.0%, respectively). We continue to evaluate independent agency relationships with a focus on states that provide higher remittance rates. The average retention percentage may vary from quarter-to-quarter due to the geographic mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. Consequently, we expect our average annual remittance rate to remain in the mid-to-high 17% range over the near term.respectively.
Employee costs.Total employee costs, decreased $14.5 million, or 9%, and $38.0 million, or 8%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, as a result of a reduction in employee counts tied to volume declines, primarily in our ancillary services and centralized title operations, management and staff departures in direct operations during the second quarter 2017, and ongoing cost management efforts. Average employee counts for both the third quarter and first nine months of 2017 decreased approximately 7% and 8% from the third quarter and first nine months of 2016, respectively; as a percentage of total operating revenues, employee costs forwere higher at 33.9% and 33.4% in the thirdsecond quarter and first ninesix months of 2017 were 28.1% and 29.6%2023, respectively, compared to 28.3%24.8% and 31.3%, respectively, for24.5% in the same periods in 2016.
Employee costs in the title segment decreased $5.2 million, or 4%, and $14.6 million, or 4%, in the third quarter and first nine months of 2017, respectively, compared to the same periods last year, largely due to decreased salaries and incentives as a result of reduced employee counts, primarily in direct title operations. These decreases in employee costs were partially offset as we have hired replacement management and employees in offices impacted by the previously discussed departures. In the ancillary services and corporate segment, employee costs decreased $9.3 million, or 55%, and $23.3 million, or 45%, in the third quarter and first nine months of 2017, respectively, compared to the same periods last year,2022, primarily as a result of the reductionlower revenues in average employee count resulting from the disposed lines2023. As of ancillary services businesses mentioned above.June 30, 2023, we had approximately 6,900 employees compared to approximately 7,700 and 7,100 employees as of June 30, 2022 and December 31, 2022, respectively.
Other operating expenses. Other operating expenses include costs that are primarily fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues (variable costs) and costs that fluctuate independently of revenues.revenues (independent costs). Costs that are primarily fixed in nature include attorney and professional fees, third-party-outsourcing provider fees, equipment rental, insurance, rent and other occupancy expenses, equipment rental, insurance, repairs and maintenance, technology costs, telephonetelecommunications and title plant expenses. Costs that follow,Variable costs include appraiser and service expenses related to varying degrees, changes in transaction volumes and revenues includereal estate solutions operations, outside search fees, attorney fee attorney splits, bad debt expenses, ancillary services cost of sales expenses,credit losses (on receivables), copy supplies, delivery fees, outside search fees, postage, premium taxes and title plant maintenance expenses. Costs that fluctuate independently of revenuesIndependent costs include general supplies, litigation defense, business promotion and marketing and travel.
Consolidated other operating expenses decreased $5.6in the second quarter and first six months of 2023 declined $32.7 million, or 6%20%, in the third quarter 2017and $101.7 million, or 29%, respectively, compared to the thirdsecond quarter 2016,and first six months of 2022, primarily due to a decrease in outside search fees resulting from reduced revenues from our ancillary search services, centralizeddecreased costs tied to lower title and commercial operations which are principal usersreal estate solutions revenues. Total variable costs in the second quarter and first six months of outside search services in generating revenues. Additionally, consolidated other operating expenses2023 decreased $12.6$25.7 million, or 5%26%, in the first nine months of 2017 compared to the same period last yearand $90.3 million, or 40%, respectively, primarily due to lower professionalappraisal and outside search expenses and premium taxes. Total costs that are primarily fixed in nature in the second quarter and first six months of 2023 decreased $5.0 million, or 10%, and $7.3 million, or 7%, respectively, primarily due to reduced outsourcing and insurance expenses, while independent costs decreased $2.0 million, or 13%, and $4.1 million, or 14%, respectively, primarily due to lower business promotion and marketing costs and bank fees insurance and litigation-related expenses. expense.
As a percentage of total operating revenues, consolidated other operating expenses were 17.8% and 18.0% forin the thirdsecond quarter and first ninesix months of 2017,2023 increased to 24.0% and 23.6%, respectively, as compared to 17.2%19.1% and 18.3%, respectively, for20.8% in the same periods in 2016. During the third quarter 2017, we incurred $1.4 million of integration expenses related to a recent acquisition, while during the third quarter 2016, we incurred $1.2 million of consulting costs related to shareholder activism. Additionally, during the first quarter 2016, we incurred other operating expenses of $3.6 million for a litigation-related accrual and $2.2 million of expenses associated2022, primarily with a life insurance settlement with a former Class B shareholder. Excluding these non-operating charges, other operating expenses as a percentage of operating revenues were 17.5% and 17.0% in the third quarters 2017 and 2016, respectively, and 17.9% for both the first nine months of 2017 and 2016.
Costs that follow, to varying degrees, changes in transaction volumes and revenues decreased $4.2 million, or 9%, and $2.0 million, or 2%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily as a result of reduced outside search fees driven mainly by decreased search revenues within the ancillary services and centralized title operations. Costs that fluctuate independently of revenues during the third quarter 2017 were comparable to those of the prior year quarter; while excluding the litigation-related accrual mentioned above, these costs decreased $0.8 million, or 3%, during first nine months of 2017 compared to the same period last year due to lower general supplies expenses. Excluding the charges mentioned above, costs that are fixedoperating revenues in nature decreased $1.3 million, or 4%, and $3.2 million, or 3%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, mainly due to lower attorney and professional fees.2023.
Title losses. Provisions for title losses, as a percentagepercentage of title operating revenues, were 4.2% and including changes in estimates for certain large claims and escrow losses, were 5.2% and 5.0%4.1% for the third quarters 2017second quarter and 2016,first six months of 2023, respectively, compared to 3.5% and 5.1% and 4.8%3.8% for the second quarter and first ninesix months of 2017 and 2016,2022, respectively. The slightly higher title loss ratios in 2023 were primarily due to the favorable claims experience during 2022. Title loss expense in the thirdsecond quarter 2017, compared to the third quarter 2016,and first six months of 2023 decreased $0.9$6.6 million, or 4%25%, and $18.1 million, or 33%, respectively, primarily as a result of lower title revenues partially offset by an increase of our Canadian business' provisioning rate; while the title loss expense for the first nine months of 2017, compared to the same period in 2016, increased $4.0 million, or 6%, primarily as a result of a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 due to favorable policy loss experience. Excluding this net reserve reduction, title losses as a percentage of title revenues were 5.2% in the first nine months of 2016.2023. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.
Cash claim payments in the third quarter and first nine months of 2017 compared to the same periods in the prior year decreased 35% and 10%, respectively, primarily due to a decrease in payments for existing non-large claims.
We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
The composition of title policy loss expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | Change | % Chg | | 2023 | | 2022 | Change | % Chg |
| ($ in millions) | | | ($ in millions) | |
Provisions – known claims: | | | | | | | | | | | |
Current year | 3.3 | | | 3.7 | | (0.4) | | (11) | % | | 5.8 | | | 8.4 | | (2.6) | | (31) | % |
Prior policy years | 24.5 | | | 16.7 | | 7.8 | | 47 | % | | 42.5 | | | 31.6 | | 10.9 | | 34 | % |
| 27.8 | | | 20.4 | | 7.4 | | 36 | % | | 48.3 | | | 40.0 | | 8.3 | | 21 | % |
Provisions – IBNR | | | | | | | | | | | |
Current year | 16.3 | | | 23.2 | | (6.9) | | (30) | % | | 31.0 | | | 47.3 | | (16.3) | | (34) | % |
Prior policy years | 0.2 | | | (0.5) | | 0.7 | | (140) | % | | 0.7 | | | (0.1) | | 0.8 | | (800) | % |
| 16.5 | | | 22.7 | | (6.2) | | (27) | % | | 31.7 | | | 47.2 | | (15.5) | | (33) | % |
Transferred from IBNR to known claims | (24.5) | | | (16.7) | | (7.8) | | 47 | % | | (42.5) | | | (31.6) | | (10.9) | | 34 | % |
Total provisions | 19.8 | | | 26.4 | | (6.6) | | (25) | % | | 37.5 | | | 55.6 | | (18.1) | | (33) | % |
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| ($ in millions) | | ($ in millions) |
Provisions – known claims: | | | | | | | |
Current year | 3.9 |
| | 5.3 |
| | 8.1 |
| | 13.1 |
|
Prior policy years | 13.6 |
| | 18.7 |
| | 48.3 |
| | 49.9 |
|
| 17.5 |
| | 24.0 |
| | 56.4 |
| | 63.0 |
|
Provisions – IBNR | | | | | | | |
Current year | 21.3 |
| | 21.0 |
| | 61.0 |
| | 60.3 |
|
Prior policy years | 0.2 |
| | 0.1 |
| | 1.5 |
| | (6.8 | ) |
| 21.5 |
| | 21.1 |
| | 62.5 |
| | 53.5 |
|
Transferred to known claims | (13.6 | ) | | (18.7 | ) | | (48.3 | ) | | (49.9 | ) |
Total provisions | 25.4 |
| | 26.4 |
| | 70.6 |
| | 66.6 |
|
Provisions for known claims arise primarily from prior policy years as claims are not typically reported until several years after policies are issued. Provisions - Incurred But Not Reported (IBNR) are estimates of claims expected to be incurred over the next 20 years; therefore, it is not unusual or unexpected to experience changes to those estimated provisions in both current and prior policy years as additional loss experience on policy years is obtained. This loss experience may result in changes to our estimate of total ultimate losses expected (i.e., the IBNR policy loss reserve). Current year provisions - IBNR are recorded on policies issued in the current year as a percentage of premiums earned (provisioning rate). As claims become known, provisions are reclassified from IBNR to known claims. Adjustments relating to large losses (those individually in excess of $1.0 million) may impact provisions either for known claims or for IBNR.
Current yearTotal known claims provisions decreased $1.4 million, or 26%, and $5.0 million, or 38%,provision increased in the thirdsecond quarter and first ninesix months of 2017,2023, compared to the same periods in 2022, as a result of increases to existing large and non-large claims related to prior policy years, while current year IBNR provisions in the second quarter and first six months of 2023 decreased, primarily due to lower title premiums. As a percentage of title operating revenues, provisions - IBNR for the current policy year were 3.5% and 3.4% in the second quarter and first six months of 2023, respectively, compared to 3.0% and 3.2% in the second quarter and first six months of 2022, respectively. Cash claim payments in the second quarter and first six months of 2023 increased $13.0 million, or 71%, and $26.2 million, or 68%, respectively, compared to the same periods in 2016, primarily as a result of lower claim amounts reported. Compared to the same periods in 2016, total provisions - IBNR was comparable in the third quarter 2017 and increased $9.0 million, or 17%, in the first nine months of 2017,2022, primarily due to a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 as a result of favorable loss experience. As a percentage of title operating revenues, provisions - IBNR for the current policy year increased to 4.4% in both the third quarter and first nine months of 2017 compared with 4.0% and 4.3%, respectively, in the same periods in 2016, primarily driven by lower knownpayments on existing large claims related to the currentprior policy year.years resulting from resolution of those claims in 2023. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. These escrow losses typically relate to errors or other miscalculations of amounts to be paid at closing, including timing or amount of a mortgage payoff, payment of property or other taxes and payment of homeowners’ association fees. Escrow losses also arise in cases of mortgage fraud, and in those cases, the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. Escrow losses are recognized as expenseexpenses when discovered or when contingencies associated with them (such as litigation) are resolved and are typically paid less than 12 months after the loss is recognized. During the third quarter and first nine months of 2017, we recorded approximately $1.5 million and $3.6 million, respectively, of policy loss reserves relating to escrow losses arising from mortgage fraud, as compared to $2.1 million and $4.0 million, respectively, during the same periods in 2016.
Total title policy loss reserve balances:balances are as follows:
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| ($ in millions) |
Known claims | 70.5 | | | 87.3 | |
IBNR | 453.6 | | | 462.1 | |
Total estimated title losses | 524.1 | | | 549.4 | |
|
| | | | | |
| September 30, 2017 | | December 31, 2016 |
| ($ in millions) |
Known claims | 69.0 |
| | 76.5 |
|
IBNR | 406.8 |
| | 386.1 |
|
Total estimated title losses | 475.8 |
| | 462.6 |
|
The amount of the reserve represents the aggregate, non-discounted future payments (net of recoveries) that we expect to incur on policy and escrow losses and in costs to settle claims. Title claims are generally incurred three to five years after policy issuance and theactual timing of estimated title loss payments may vary since claims, by their nature, are complex and paid over long periods of time. Based on these claims can significantly impacthistorical payment patterns, the balance of known claims. In many cases, claims may be open for several years before the resolution and payment of the claims occur; asoutstanding loss reserves are substantially paid out within eight years. As a result, the estimate of the ultimate amount to be paid on any claim may be modified over that time period.
Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates.
Depreciation and amortization. Depreciation and amortization expenses decreased to $6.6increased $1.2 million and $19.4$2.4 million (both 9%) in the thirdsecond quarter and first ninesix months of 2017,2023, respectively, compared to $7.1 million and $22.7 million in the same periods in 2016,2022, primarily due to increased depreciation expenses related to internal-use systems placed into operation starting in the lowersecond quarter 2022. Acquisition intangible amortization expenseexpenses for the second quarter and first six months of 2023 were $8.7 million and $17.0 million, respectively, compared to $8.5 million and $16.9 million, respectively, for the same periods in 2017 as a result of the fourth quarter 2016 disposal of certain intangible assets in connection with the divestitures of several lines of the ancillary services business, and the higher depreciation expense recorded in 2016 resulting from accelerated depreciation charges relating to our exit from the delinquent loan servicing operations, which was completed at the end of the first quarter 2016.2022.
Income taxes. Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, were 30.0%25% and 31.6%6% in the thirdsecond quarter and first ninesix months of 2017,2023, respectively, and 25.5% and 30.2% incompared to 24% for both the thirdsecond quarter and first ninesix months of 2016, respectively. Included in2022. Excluding discrete tax adjustments, primarily recorded during the first quarter 2023 and related to increased utilization of net operating loss carryforwards of prior years' acquisitions, the effective tax provision calculation are discrete net income tax benefits of $0.7 million and $2.1 million inrate for the third quarter and first ninesix months of 2017, respectively, principally relating to previously unrecognized research and development tax credits, compared with discrete net income tax benefits of $4.6 million and $4.5 million, respectively, in the same periods in 2016, principally relating to previously unrecognized research and development tax credits and a goodwill impairment true-up adjustment. Excluding the effect of the discrete tax items, our effective tax rates were 34.3% and 36.0% in the third quarter and first nine months of 2017, respectively, and 38.6% and 38.3% in the third quarter and first nine months of 2016, respectively.2023 would have been 26%.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to stockholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of SeptemberJune 30, 2017,2023, our total cash and investments, including amounts reserved pursuant to statutory requirements aggregated $871.9 million ($369.5 million, net of statutory reserves on cash and investments).$896.8 million. Of our total cash and investments at SeptemberJune 30, 2017, $605.32023, $497.5 million ($300.2244.2 million, net of statutory reserves) was held in the United States and the rest internationally principally Canada.(principally in Canada).
Cash held at the parent company totaled $0.2 million at September 30, 2017. As a holding company, the parent company is funded principally by cash from its subsidiariessubsidiaries' earnings in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. The expense reimbursements are paid in accordance with management agreements, approved by the Texas Department of Insurance (TDI), among us and our subsidiaries. In addition to funding operating expenses, cashCash held at the parent company and its unregulated subsidiaries (which totaled $42.3 million at June 30, 2023) is usedavailable for funding the parent company's operating expenses, interest payments on debt and dividend payments to common stockholders and for stock repurchases, if any. To the extent such uses exceed cash available, thestockholders. The parent company is dependent onalso receives distributions from Stewart Title Guaranty Company (Guaranty), its regulated title insurance underwriter, Stewart Title Guaranty Company (Guaranty).to meet cash requirements for acquisitions and other strategic investments.
A substantial majority of our consolidated cash and investments as of SeptemberJune 30, 20172023 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty may useuses its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and ancillary servicesreal estate solutions operations) for their operating and debt service needs.
We maintain investments in accordance with certain statutory requirements in the states of domicile of our underwriters for the funding of statutory premium reserves. Statutory premium reserves, which approximated $475.4 million and $485.4 million at September 30, 2017 and December 31, 2016, respectively,reserve funds are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately $519.5 million and $544.0 million at June 30, 2023 and December 31, 2022, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $26.9$10.2 million and $13.9$8.6 million at SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. As of SeptemberJune 30, 2017,2023, our known claims reserve totaled $69.0$70.5 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $406.8$453.6 million. In addition to this, we had cash and investments (excluding equity method investments) of $281.1$289.6 million, which are available for underwriter operations, including claims payments.payments, and acquisitions.
The ability of Guaranty to pay dividends to its parent is governed by Texas insurance law. The TDITexas Department of Insurance (TDI) must be notified of any dividend declared, and any dividend in excess of the greater of the statutory maximum ofnet operating income or 20% of surplus (approximately $102.0(which was approximately $158.1 million as of December 31, 2016)2022) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and the liquidity, ratio, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. As of SeptemberDuring the six months ended June 30, 2017, our statutory liquidity ratio for our principal underwriter was 110%. Our internal objective is to maintain a ratio of at least 100%, as we believe that ratio is crucial to our competitiveness in the market2023 and our insurer financial strength ratings. On an ongoing basis, this ratio will largely guide our decisions as to frequency and magnitude of2022, no dividends fromhave been paid by Guaranty to the parent company. Further, depending on business and regulatory conditions, we may in the future need to retain cash in Guaranty or even raise cash in the capital markets to contribute to it in order to maintain its ratings or statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse economic environment operating conditions or changes in interpretation of statutory accounting requirements by regulators. No dividend was paid by Guaranty to its parent during the nine months ended September 30, 2017 and 2016.
As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| ($ in millions) |
Net cash (used) provided by operating activities | (16.0) | | | 118.2 | |
Net cash used by investing activities | (7.3) | | | (111.1) | |
Net cash used by financing activities | (35.7) | | | (84.3) | |
|
| | | | | |
| For the Nine Months Ended September 30, |
| 2017 | | 2016 |
| (dollars in millions) |
Net cash provided by operating activities | 48.0 |
| | 64.0 |
|
Net cash used by investing activities | (66.4 | ) | | (60.3 | ) |
Net cash used by financing activities | (2.6 | ) | | (22.8 | ) |
Operating activities. Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, ancillary servicesreal estate solutions and other operations. Our independent agencies remit cash to us net of their contractual retention. Our principal cash expenditures for operations are employee costs, operating costs and title claims payments.
CashNet cash used by operations in the first six months of 2023 was $16.0 million compared to net cash provided by operations was $48.0of $118.2 million in the first nine months of 2017 compared to $64.0 million for the same period in 2016. The decrease in the cash flows from operations was2022, primarily due to thedriven by lower net income generatedand higher claims payments during the third quarter 2017, higher payments on accounts payable and an increase in accounts receivable related to certain business units, partially offset by lower claim payments.
2023. Although our business is labor intensive, we are focused on a cost-effective, scalable business model which includes utilization of technology, centralized back and middle office functions and business process outsourcing. Our approach allows us to adjust more easily to seasonal and cyclical fluctuations in transaction volumes. We are continuing our emphasis on cost management, especially in light of the current economic environment due to elevated mortgage interest rates, specifically focusing on lowering unit costs of production which will resultand improving operating margins in improved margins.our direct title and real estate solutions operations. Our plans to improve margins also include further outsourcing, additional automation of manual processes, and further consolidation of our various systems and production operations.operations, and full integration of acquisitions. We are currently investingcontinue to invest in the technology necessary to accomplish these goals.
Investing activities. CashNet cash used by investing activities wasis primarily driven by proceeds from matured and sold investments, purchases of investments, capital expenditures and acquisition of subsidiaries, offset bybusinesses. During the first six months of 2023, total proceeds from matured and sold investments. Total proceeds from available-for-salesecurities investments sold and matured were $89.4$94.7 million, and $75.2compared to $52.3 million while cashduring the first six months of 2022. Cash used for purchases of available-for-salesecurities investments approximated $125.4was $55.5 million during the first six months of 2023 compared to $117.9 million during the same period in 2022.
We used $22.4 million and $122.1$23.3 million of net cash for acquisitions in the title and real estate solutions segments during the first ninesix months of 20172023 and 2016, respectively. Our purchases2022, respectively, while we received $6.6 million during the first six months of short-term investments, net2022 from the sale of sales, aggregated $1.2a subsidiary. We used $15.5 million and $0.4 million for the first nine months of 2017 and 2016, respectively.
During 2017, we used $17.8$26.2 million of cash for acquisitions of new subsidiaries, while purchases of property and equipment were $12.4 million and $13.6 million forduring the first ninesix months of 20172023 and 2016,2022, respectively. We maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies and to pursue growth in key markets.
Financing activities and capital resources. Total debt and stockholders’ equity were $138.6$445.0 million and $672.4 million,$1.37 billion, respectively, as of SeptemberJune 30, 2017. Of2023. During the totalfirst six months of 2023 and 2022, payments on notes payable activity during the first nine months of 2017 and 2016, proceeds of $32.0$5.7 million and $32.0$42.9 million, respectively, and paymentsnotes payable additions of $16.0$3.5 million and $27.6$5.7 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business. Also during the first nine months of 2017 and 2016, we drew $16.0 million and $20.0 million, respectively, from
At June 30, 2023, our $125.0 million line of credit facility. At September 30, 2017, the outstanding balance of the line of creditfacility was $108.9 million,fully available, while the remaining balance of the line of credit available for use was $13.6 million, net of an unused $2.5 million letter of credit. Ourour debt-to-equity ratio at September 30, 2017,and debt-to-capitalization ratios, excluding our Section 1031 notes, waswere approximately 17.4%33% and 25%, below the 20% we have set as our unofficial internal limit on leverage.
respectively. During the first ninesix months of 2017 and 2016,2023, we declared and paid total dividends of $0.90$24.5 million ($0.90 per common share, which aggregated $21.1 million and $20.8 million, respectively. As previously disclosed in our 2016 Form 10-K, we paid $12.0 million in cash as part of the consideration in exchange for the retirement of the outstanding Class B Common Stock shares in relationshare), compared to the Class B Exchange Agreement approved by our stockholders during the second quarter 2016.
Effect of changes in foreign currency exchange rates. The effect of changes in foreign currency exchange rates on our cash and cash equivalents on the consolidated statements of cash flows was a net increase of $4.0 million and $1.8 milliontotal dividends paid in the first nine monthssame period in 2022 of 2017 and 2016, respectively. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar appreciated during the nine months ended September 30, 2017 and 2016.$20.3 million ($0.75 per common share).
***********
We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations.operations, including consideration of the current economic and real estate environment created by the higher mortgage interest rates. However, we may determine that additional debt or equity funding is warranted to provide liquidity for achievement of strategic goals or acquisitions or for unforeseen circumstances. Other than scheduled maturities of debt, operating lease payments and anticipated claims payments, we have no material contractual commitments. We expect that cash flows from operations and cash available from our underwriters, subject to regulatory restrictions, will be sufficient to fund our operations, including claims payments. However, to the extent that these funds are not sufficient, we may be required to borrow funds on terms less favorable than we currently have or seek funding from the equity market, which may not be successful or may be on terms that are dilutive to existing stockholders.
Contingent liabilities and commitments. See discussion of contingent liabilities and commitments in Note 910 to the condensed consolidated financial statements included in Item 1 of Part I of this Report.statements.
Other comprehensive income.loss. Unrealized gains and losses on available-for-sale debt securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders’ equity, until they are realized. ForDuring the ninefirst six months ended September 30, 2017,of 2023, net unrealized investment gains of $2.1$1.2 million, net of taxes, and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporarynet increases in the fair values over costs of our corporate and municipal bond securities available-for-sale investments, partially offset by temporary decreases in fair values over costsinvestments. During the first six months of our foreign securities available-for-sale investments. For the nine months ended September 30, 2016,2022, net unrealized investment gainslosses of $10.7$32.9 million, net of taxes, and reclassification adjustment, which increased our other comprehensive income,loss, were primarily related to temporary increasesnet decreases in the fair values over costs of all classes of our corporate and foreign bond securities available-for-sale investments.investments, primarily driven by the effect of higher interest rates and credit spreads.
Changes in foreign currency exchange rates, primarily related to our Canadian and United Kingdom operations, increased our other comprehensive income, net of taxes, by $8.7$4.9 million forin the ninefirst six months ended September 30, 2017, compared to a decrease inof 2023, while they increased our other comprehensive income,loss, net of taxes, by $0.2$7.6 million forin the ninefirst six months ended September 30, 2016.of 2022.
Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 1715 in our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.
Forward-looking statements.Certain statements in this report are “forward-looking statements”"forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as “may,” "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the challengingfollowing:
•the volatility of economic conditions;
•adverse changes in the level of real estate activity;
•changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing;
•our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems;
•our ability to prevent and mitigate cyber risks;
•the impact of unanticipated title losses or the need to strengthen our policy loss reserves;
•any effect of title losses on our cash flows and financial condition;
•the ability to attract and retain highly productive sales associates;
•the impact of vetting our agency operations for quality and profitability;
•independent agency remittance rates;
•changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products;
•regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees;
•our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services;
•our ability to realize anticipated benefits of our previous acquisitions;
•the outcome of pending litigation;
•the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services;
•our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expense savings from our cost management program; our ability to successfully integrate acquired businesses;
•our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations;
•effects of seasonality and weather; and
•our ability to respond to the actions of our competitors. These
The above risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including in Part I, Item 1A "Risk Factors" in our Annual Report on2022 Form 10-K, for the year ended December 31, 2016, and if applicable,as may be further updated and supplemented from time to time in our future Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K.8-K filed subsequently. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes during the quarter ended SeptemberJune 30, 20172023 in our investment strategies, types of financial instruments held or the risks associated with such instruments that would materially alter the market risk disclosures made in our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer are responsible for establishing and maintaining disclosure controls and procedures. They evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of SeptemberJune 30, 2017,2023, and have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2017,2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of legal proceedings in Note 1011 to the condensed consolidated financial statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part II, Item 1, as well as Item 3. Legal Proceedings, in our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in our 2022 Form 10-K. There have been no material changes during the first nine months ended September 30, 2017 to our risk factors as listed insince our Annual Report on2022 Form 10-K for the year ended December 31, 2016.10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our Common Stock during the quartersix months ended SeptemberJune 30, 2017.2023, except for repurchases of approximately 32,200 shares (aggregate purchase price of approximately $1.4 million) related to the statutory income tax withholding on the vesting of restricted unit grants to executives and senior management employees.
Item 5. Other Information
Book value per share. Our book value per share was $28.29$49.82 and $27.69$50.21 as of SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. As of SeptemberJune 30, 2017,2023, our book value per share was based on approximately $672.4 million in$1.36 billion of stockholders’ equity attributable to Stewart and 23,765,80727,266,830 shares of Common Stock outstanding. As of December 31, 2016,2022, our book value per share was based on approximately $648.8 million in$1.36 billion of stockholders’ equity attributable to Stewart and 23,431,27927,130,412 shares of Common Stock outstanding.
Item 6. Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference. | | | | | | | | |
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101.INS* | — | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | — | XBRL Taxonomy Extension Schema Document |
101.CAL* | — | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF* | — | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB* | — | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE* | — | XBRL Taxonomy Extension Presentation Linkbase Document |
104* | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | Stewart Information Services CorporationAugust 8, 2023 |
| | Registrant |
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By: | | /s/ David C. Hisey |
| | David C. Hisey, Chief Financial Officer, Secretary and TreasurerDate |
Index to Exhibits | | Registrant |
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By: | | /s/ David C. Hisey |
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101.INS* | | - | | XBRL Instance Document |
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101.CAL* | | - | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* | | - | | XBRL Taxonomy Extension Definition Linkbase Document |
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* Filed herewith |
† Management contract or compensatory plan |