The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary results of the title segment are as follows ($ in millions, except pretax margin):
|
| | | | | | | | |
| 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 thirdfirst quarter 20172024 increased $20.4 million, or 33%, compared to the first quarter 2023, primarily driven by higher revenues from credit information and valuation services. Consistent with the higher operating revenues, combined employee costs and other operating expenses in the first quarter 2024 increased $15.1 million, or 27%, compared to the prior year quarter was primarily duequarter. Acquisition intangible asset amortization expenses in the first quarters 2024 and 2023 amounted to $5.6 million and $5.8 million, respectively.
In regard to the divestitures of the loan file review, quality control servicescorporate and government services lines of business at the end of 2016. The segment’sother segment, pretax results improvedwere driven by net expenses attributable to a $6.0corporate operations which decreased to $9.7 million, pretax loss, compared to a pretax loss of $11.5$10.9 million in the prior year quarter. The segment’s results for the thirdfirst quarter 2017 and 2016 included approximately $6 million and $8 million, respectively, of expenses attributable to parent company and corporate operations.2023, primarily driven by management's cost discipline.
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 ninethree months ended September 30, 2017,March 31, 2024, 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 on2023 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 ancillarycentralized support services operations, principally appraisal and valuation services.departments.
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, title premium rates for refinance orders are lower compared to a similarly priced purchase transaction.
RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and nine months ended September 30, 2017March 31, 2024 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, interest rates 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 March 31, 2024. We also use information from our direct operations.
Operating environment. Actual According to NAR, existing home sales inas of March 2024 totaled 4.2 million units (seasonally-adjusted basis), which were 4% lower from both a year ago and February 2024, primarily due to the third quarter 2017 declined approximately 2% fromrelatively unchanged current elevated interest rate environment. Housing affordability continues to limit home sales with the third quarter 2016. September 2017median existing home sales totaled 465,000, which was down 4%price in March 2024 increasing by 5% to $393,500 compared to March 2023, while total existing housing inventory in March 2024 increased 14% and 5% from a year ago and also down 13% from August 2017. According to NAR,February 2024, respectively. Regarding new residential construction, U.S. housing starts (seasonally-adjusted) in March 2024 were 4% and 15% lower home listings, fast-rising home prices and the temporary effect of hurricanes Harvey and Irma were the likely causes of lower existing home sales in the third quarter 2017. September 2017 median and average home prices both rose approximately 4% compared to September 2016 prices. September 2017 housing starts improved 6% fromMarch 2023 and February 2024, respectively, while March 2024 newly-issued building permits were 2% higher than a year ago but were down 5% sequentially from August 2017. Newly issued building permits in September 2017 declined 5% sequentially from August 2017 and 4% from alower compared to February 2024.
On lending activity, total U.S. single family mortgage originations during the first quarter 2024 improved by $16 billion, or 5%, compared to the prior year ago. Accordingquarter, with purchase and refinancing originations increasing by 2% and 17%, respectively, according to Fannie Mae one-to-four family residential lending declinedand MBA (averaged). During the first quarter 2024, the average 30-year fixed interest rate averaged 6.8% compared to $465 billion6.4% in the thirdfirst quarter 2017 from $589 billion2023. For the year 2024, Fannie Mae and MBA expect the interest rate to average 6.5%, lower than the 6.8% average observed in the third quarter 2016, driven by a decrease of approximately $137 billion, or 47%, in refinance originations, partially offset by a $13 billion, or 4%, increase in purchase lending. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction. Per Fannie Mae's forecast,2023, while total originations asfor the year 2024 are expected to be $333 billion, which is 21% higher compared to 2023, primarily due to the third quarter 2017, will decrease 8% to $427 billion inexpected federal interest rate policy loosening towards the fourth quarter 2017.end of 2024.
Title revenues.Direct title revenue information is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2024 | | 2023 | | Change | % Chg | | | | | | | |
| ($ in millions) | | | | |
Non-commercial | | | | | | | | | | | | | |
Domestic | 135.3 | | | 150.3 | | | (15.0) | | (10) | % | | | | | | | |
International | 19.2 | | | 19.2 | | | — | | — | % | | | | | | | |
| 154.5 | | | 169.5 | | | (15.0) | | (9) | % | | | | | | | |
Commercial: | | | | | | | | | | | | | |
Domestic | 49.7 | | | 32.7 | | | 17.0 | | 52 | % | | | | | | | |
International | 6.4 | | | 5.7 | | | 0.7 | | 12 | % | | | | | | | |
| 56.1 | | | 38.4 | | | 17.7 | | 46 | % | | | | | | | |
Total direct title revenues | 210.6 | | | 207.9 | | | 2.7 | | 1 | % | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| 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,Domestic non-commercial revenues decreased $24.3 million, or 10%, and $28.2 million, or 4%, in the thirdfirst quarter 2024, primarily driven by a 5% decline in total residential purchase and refinancing transactions and a lower average fee per file, compared to the prior year quarter. Average residential fee per file in the first nine months of 2017, respectively,quarter 2024 was $2,900, compared to $3,400 in the first quarter 2023, primarily due to a lower purchase transaction mix in the first quarter 2024.
Domestic commercial revenues improved in the first quarter 2024 compared to the same periods in 2016, due to a decline 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%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily due to management and staff departures within certain offices 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, decreased $4.9 million, or 32%, and $11.6 million, or 24%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively, primarily due to decreased refinancing orders 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 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 offset by a decline in commercial orders. Total international revenues increased $2.2 million, or 7%, and $8.5 million, or 10%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively,2023, primarily as a result of increased average transaction volume from our Canada and United Kingdom operations. Direct revenues constituted 45% and 46% of our total title revenuessize (primarily in the third quarters 2017 and 2016, respectively, and 46% and 48% duringenergy sector), partially offset by fewer commercial transactions. Domestic commercial orders closed decreased 9% in the first nine months of 2017 and 2016, respectively.quarter 2024, while average domestic commercial fee per file improved to $13,900 in the first quarter 2024, compared to $8,300 from the prior year quarter.
Orders information for the third quarter and first ninethree months ended September 30March 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | |
| 2024 | 2023 | Change | % Chg | | | | | |
Opened Orders: | | | | | | | | | |
Commercial | 3,693 | | 3,842 | | (149) | | (4) | % | | | | | |
Purchase | 48,024 | | 49,469 | | (1,445) | | (3) | % | | | | | |
Refinance | 16,371 | | 16,129 | | 242 | | 2 | % | | | | | |
Other | 11,247 | | 4,421 | | 6,826 | | 154 | % | | | | | |
Total | 79,335 | | 73,861 | | 5,474 | | 7 | % | | | | | |
| | | | | | | | | |
Closed Orders: | | | | | | | | | |
Commercial | 3,568 | | 3,924 | | (356) | | (9) | % | | | | | |
Purchase | 29,744 | | 31,628 | | (1,884) | | (6) | % | | | | | |
Refinance | 9,353 | | 9,613 | | (260) | | (3) | % | | | | | |
Other | 7,794 | | 2,734 | | 5,060 | | 185 | % | | | | | |
Total | 50,459 | | 47,899 | | 2,560 | | 5 | % | | | | | |
|
| | | | | | | | | | | | | | | | | |
| 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 | )% |
Other opened and closed orders, which are primarily comprised of institutional bulk securitization and reverse mortgage transactions, increased in the first quarter 2024, compared to the prior year quarter, primarily driven by ramp up of acquisitions completed in late 2022.
Gross revenues from independent agency operations decreased $13.7in the first quarter 2024 declined $8.2 million, or 5%, in the third quarter 2017, compared to the third quarter 2016, primarily as a result of revenue decreases 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%3%, compared to the prior year quarter. Gross agencyquarter, primarily consistent with lower residential activity in the market. Agency revenues, fornet of retention, declined $2.5 million, or 6%, in the first nine months of 2017quarter 2024 compared to the prior year quarter, primarily due to geographical transaction mix and lower gross agency revenues. Refer further to the "Retention by agencies" discussion under Expenses below.
Real estate solutions revenues. Real estate solutions revenues in the first quarter 2024 increased $4.0$20.4 million, or approximately 1%33%, compared to the prior year quarter, primarily driven by higher revenues from credit information and valuation services.
Investment income. Investment income in the first nine months of 2016,quarter 2024 increased $6.3 million, or 96%, compared to the prior year quarter, primarily due to revenue increases in the states of California, Minnesota, Michigan and Ohio, partially offset by revenue decreases in the states of New York, Massachusetts and Florida. Net of agency retention, agency revenueshigher interest income in the first nine monthsquarter 2024 resulting from earned interest from eligible escrow balances, which was an initiative that we started during the late second quarter 2023.
Net realized and unrealized gains (losses). Refer to Note 5 to the condensed consolidated financial statements.
Expenses. An analysis of 2017,expenses is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | |
| 2024 | | 2023 | | Change* | % Chg | | | | | | | |
| ($ in millions) | | | | |
| | | | | | | | | | | | | |
Amounts retained by agencies | 200.0 | | | 205.7 | | | (5.8) | | (3) | % | | | | | | | |
As a % of agency revenues | 83.1 | % | | 82.6 | % | | | | | | | | | | |
Employee costs | 172.4 | | | 170.6 | | | 1.9 | | 1 | % | | | | | | | |
As a % of operating revenues | 32.3 | % | | 32.8 | % | | | | | | | | | | |
Other operating expenses | 137.0 | | | 120.7 | | | 16.2 | | 13 | % | | | | | | | |
As a % of operating revenues | 25.6 | % | | 23.2 | % | | | | | | | | | | |
Title losses and related claims | 17.4 | | | 17.7 | | | (0.3) | | (2) | % | | | | | | | |
As a % of title revenues | 3.9 | % | | 3.9 | % | | | | | | | | | | |
*May not foot due to rounding.
Retention by agencies.Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Amounts retained by independent agencies, as a percentage of revenues generated by them, averaged 83.1% in the first quarter 2024, compared to 82.6% in the sameprior year quarter, primarily as a result of lower revenues from relatively lower retention states and newly added agents with higher retention rates in the first quarter 2024. The average retention percentage may vary from period in 2016, decreased $2.3 million, or 2%, primarilyto period due to revenue increasesthe geographical 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 generally lower remittingstate to state. In addition, a high proportion of our independent agencies are in states while revenues from higher remitting states declined. with retention 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%, in the third quarter and first nine months of 2017 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
Employee costs. Consolidated employee costs in the first quarter 2016, also contributed to the revenue decline during the first nine months of 20172024 increased $1.9 million, or 1%, compared to the first nine months of 2016. These divestituresquarter 2023, primarily resulteddriven by higher medical benefits expense which was partially offset by lower salaries expenses and incentive compensation. Title segment employee costs increased $2.5 million, or 2%, while employee costs in the pretax results improvement of $4.7real estate solutions segment decreased $0.2 million, or 101%2%, and $12.4 million, or 90%, induring the thirdfirst quarter and first nine months of 20172024 compared to the same periods in 2016 for ancillary services.
Investment income. Investment income during the third quarter and first nine months of 2017 was comparable to the investment income during the same periods in 2016.
Investment and other (losses) gains - net. Investment and other losses - net 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 $1.3 million of office closure costs.quarter.
Expenses. An analysis of expenses is shown below:
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 |
| | 2016 |
| | % Change | | 2017 | | 2016 | | % Change |
| ($ 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 third quarter and first nine months of 2017 were 17.5% and 17.8%, respectively, as compared to 18.0% and 18.2% in the same periods in 2016. The decrease in the agency remittance rates during the third quarter 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%, 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.
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 forimproved to 32.3% in the thirdfirst quarter and first nine months of 2017 were 28.1% and 29.6%2024 compared to 28.3% and 31.3%, respectively, for the same periods in 2016.
Employee costs32.8% in the title segment decreased $5.2 million, or 4%, and $14.6 million, or 4%, in the thirdprior year quarter, and first nine months of 2017, respectively, compared to the same periods last year, largelyprimarily due to decreased salarieshigher operating revenues 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, primarily as a result of the reduction inlower average employee count resulting fromin the disposed linesfirst quarter 2024. As of ancillary services businesses mentioned above.March 31, 2024, we had approximately 6,600 employees compared to approximately 6,900 and 6,800 employees as of March 31, 2023 and December 31, 2023, 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 first quarter 2024 increased $16.2 million, or 6%13%, in the third quarter 2017 compared to the thirdfirst quarter 2016,2023, primarily due to a decrease inhigher service expenses and outside search fees resulting from reducedrelated to increased revenues from our ancillary search services, centralized titlereal estate solutions and commercial title operations, which are principal users ofrespectively, partially offset by lower third-party outsourcing and litigation settlement expenses. Total variable costs in the first quarter 2024 increased $18.5 million, or 30%, primarily due to higher real estate solutions service expenses and commercial services outside search servicesfees. Total costs that are primarily fixed in generating revenues. Additionally, consolidated other operating expensesnature decreased $12.6$2.3 million, or 5%, in the first nine months of 2017 compared to the same period last yearquarter 2024, primarily due to lower professional fees, insurancereduced third-party outsourcing and litigation-related expenses. telecommunications expenses, while independent costs were comparable in the first quarters 2024 and 2023.
As a percentage of total operating revenues, consolidated other operating expenses were 17.8% and 18.0% for the third quarter and first nine months of 2017, respectively, as compared to 17.2% and 18.3%, respectively, for 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 associated 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 revenues2024 were 17.5% and 17.0%25.6% compared to 23.2% in the third quarters 2017 and 2016, respectively, and 17.9% for both the first nine months of 2017 and 2016.quarter 2023, primarily driven by increased real estate solutions service expenses on higher revenues in first quarter 2024.
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 fixed 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.
Title losses. Provisions for title losses, as a percentage of title operating revenues, and including changes in estimateswere 3.9% for certain large claims and escrow losses, were 5.2% and 5.0% for the third quarters 2017 and 2016, respectively, and 5.1% and 4.8% forboth the first nine months of 2017quarters 2024 and 2016, respectively. Title2023, while title loss expense decreased $0.3 million, or 2%, primarily due to lower title premiums in the thirdfirst quarter 2017,2024 compared to the third quarter 2016, decreased $0.9 million, or 4%, 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 $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 due to favorable policy loss experience. Excluding this net reserve reduction, title losses as a percentage of title revenues were 5.2% in the first nine months of 2016.prior year quarter. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.
Cash claim payments in the third quarter and first nine months of 2017 compared to the same periods in the prior year decreased 35% and 10%, respectively, primarily due to a decrease in payments for existing non-large claims.
We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
The composition of title policy loss expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2024 | | 2023 | Change | % Chg | | | | | | |
| ($ in millions) | | | | |
Provisions – known claims: | | | | | | | | | | | |
Current year | 2.3 | | | 2.5 | | (0.2) | | (8) | % | | | | | | |
Prior policy years | 15.0 | | | 18.0 | | (3.0) | | (17) | % | | | | | | |
| 17.3 | | | 20.5 | | (3.2) | | (16) | % | | | | | | |
Provisions – IBNR | | | | | | | | | | | |
Current year | 14.7 | | | 14.7 | | — | | — | % | | | | | | |
Prior policy years | 0.4 | | | 0.5 | | (0.1) | | (20) | % | | | | | | |
| 15.1 | | | 15.2 | | (0.1) | | (1) | % | | | | | | |
Transferred from IBNR to known claims | (15.0) | | | (18.0) | | 3.0 | | 17 | % | | | | | | |
Total provisions | 17.4 | | | 17.7 | | (0.3) | | (2) | % | | | | | | |
|
| | | | | | | | | | | |
| 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 provisionsprovision decreased $1.4$3.2 million or 26%, and $5.0 million, or 38%,16% in the thirdfirst quarter and first nine months of 2017, respectively,2024 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 thirdfirst quarter 2017 and increased $9.0 million, or 17%, in the first nine months of 2017,2023, primarily due to a $5.4 million netlower reported claims related to prior policy loss reserve reduction recorded duringyears. Current year IBNR provisions in the secondfirst quarter 20162024 were comparable to the prior year quarter, while 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 quarterwere 3.3% and first nine months of 2017 compared with 4.0% and 4.3%3.2%, respectively, in the same periods in 2016,first quarters 2024 and 2023, respectively. First quarter 2024 cash claim payments decreased $10.6 million, or 32%, primarily driven by lower knowndue to decreased payments on existing large claims, relatedcompared to the current policy year.first quarter 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 $4.0 million, respectively, during the same periods in 2016.
Total title policy loss reserve balances:balances are as follows:
| | | | | | | | | | | |
| March 31, 2024 | | December 31, 2023 |
| ($ in millions) |
Known claims | 64.7 | | | 70.2 | |
IBNR | 454.5 | | | 458.1 | |
Total estimated title losses | 519.2 | | | 528.3 | |
|
| | | | | |
| 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 decreasedincreased $0.5 million, or 3%, in the first quarter 2024 compared to $6.6the prior year quarter, primarily due to increased depreciation expenses related to additional internal-use systems placed into operation during late 2023 and in 2024. Acquisition intangible amortization expenses for the first quarter 2024 were $8.1 million and $19.4compared to $8.3 million in the third quarter and first nine months of 2017, respectively, compared to $7.1 million and $22.7 million in the same periods in 2016, primarily due to the lower amortization expense 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 2016.2023.
Income taxes. Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, were 30.0% and 31.6%was 23% in the thirdfirst quarter and first nine months of 2017, respectively, and 25.5% and 30.2%2024, compared to 38% in the thirdfirst quarter and first nine months of 2016, respectively. Included in the tax provision calculation are discrete net income tax benefits of $0.7 million and $2.1 million in the third quarter and first nine 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 the2023 which was primarily driven by discrete tax items, our effective tax rates were 34.3% and 36.0% in the third quarter and first nine monthsadjustments mainly related to increased utilization of 2017, respectively, and 38.6% and 38.3% in the third quarter and first nine months of 2016, respectively.net operating loss carryforwards.
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 September 30, 2017,March 31, 2024, 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).$855.1 million. Of our total cash and investments at September 30, 2017, $605.3March 31, 2024, $452.3 million ($300.2205.6 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 $33.7 million at March 31, 2024) 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 September 30, 2017March 31, 2024 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 $519.9 million and $527.4 million at March 31, 2024 and December 31, 2023, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $26.9$10.3 million and $13.9$10.0 million at September 30, 2017March 31, 2024 and December 31, 2016,2023, 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 September 30, 2017,March 31, 2024, our known claims reserve totaled $69.0$64.7 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $406.8$454.5 million. In addition to this, we had cash and investments (excluding(at amortized cost and excluding equity method investments) of $281.1$264.3 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 $168.7 million as of December 31, 2016)2023) 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. AsDuring the three months ended March 31, 2024, Guaranty paid $20.0 million of September 30, 2017, our statutory liquidity ratio for our principal underwriter was 110%. Our internal objective is to maintain a ratio of at least 100%, as we believe that ratio is crucial to our competitiveness in the market and our insurer financial strength ratings. On an ongoing basis, this ratio will largely guide our decisions as to frequency and magnitude of dividends from Guaranty to the parent company. Further, depending on business and regulatory conditions, we may in the future needcompany, compared to retain cash in Guaranty or even raise cash in the capital markets to contribute to it in order to maintain its ratings or statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse economic environment operating conditions or changes in interpretation of statutory accounting requirements by regulators. No dividend was paid by Guaranty to its parentnone during the ninethree months ended September 30, 2017 and 2016.March 31, 2023.
As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2024 | | 2023 |
| ($ in millions) |
Net cash used by operating activities | (29.6) | | | (51.1) | |
Net cash used by investing activities | (47.4) | | | (4.8) | |
Net cash used by financing activities | (16.8) | | | (17.4) | |
|
| | | | | |
| 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.
Cash providedNet cash used by operations in the first quarter 2024 was $48.0$29.6 million compared to net cash used by operations of $51.1 million in the first nine monthsquarter 2023, primarily as a result of 2017 compared to $64.0 million for the same period in 2016. The decrease in the cash flows from operations was primarily due to theimproved results and lower net income generatedpayments on claims and accounts payable during the thirdfirst quarter 2017, higher payments on accounts payable and an increase in accounts receivable related to certain business units, partially offset by lower claim payments.
2024. 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 quarter 2024, total proceeds from matured and sold investments. Total proceeds from available-for-salesecurities investments sold and matured were $89.4$27.5 million and $75.2compared to $52.1 million during the first quarter 2023, while cash used for purchases of available-for-salesecurities investments approximated $125.4was $23.7 million in the first quarter 2024 compared to $24.0 million in the prior year quarter. Additionally, cash paid for cost-basis and other investments was $29.9 million during the first quarter 2024 compared to $0.1 million during the first quarter 2023.
We used $10.2 million and $122.1 million for the first nine months of 2017 and 2016, respectively. Our purchases of short-term investments, net of sales, aggregated $1.2 million and $0.4 million for the first nine months of 2017 and 2016, respectively.
During 2017, we used $17.8$8.9 million of cash for acquisitions of new subsidiaries, while purchases of property and equipment were $12.4 million and $13.6other long-lived assets during the first quarters 2024 and 2023, respectively, while we used net cash of $21.5 million for acquisitions in the title and real estate solutions segments during the first nine months of 2017 and 2016, respectively.quarter 2023. 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$445.4 million and $672.4 million,$1.36 billion, respectively, as of September 30, 2017. OfMarch 31, 2024. During the totalfirst quarters 2024 and 2023, payments on notes payable activity during the first nine months of 2017 and 2016, proceeds of $32.0$3.4 million and $32.0$5.5 million, respectively, and paymentsnotes payable additions of $16.0$3.4 million and $27.6$3.5 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 March 31, 2024, 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 nine months of 2017 and 2016,quarter 2024, we declared and paid total dividends of $0.90$13.1 million ($0.48 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 monthsquarter 2023 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.$12.3 million ($0.45 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 increasing 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 (loss) income. 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 nine months ended September 30, 2017,first quarter 2024, net unrealized investment gainslosses of $2.1 million, net of taxes, which increased our other comprehensive loss, were primarily related to net decreases in the fair values of our foreign and reclassification adjustment,corporate bond securities investments, primarily influenced by the continued elevated interest rate environment. During the first quarter 2023, net unrealized investment gains of $6.7 million, net of taxes, which increased our other comprehensive income, were primarily related to temporarynet increases in the fair values over costs of our corporate and municipalforeign bond securities available-for-sale investments, partially offsetprimarily driven by temporary decreases in fair values over costs of our foreign securities available-for-sale investments. For the nine months ended September 30, 2016, net unrealized investment gains of $10.7 million, net of taxes and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporary increases inlower interest rates during the fair values over costs of all classes of our securities available-for-sale investments.first quarter 2023.
Changes in foreign currency exchange rates primarilyin the first quarter 2024 and 2023 (primarily related to our Canadian operations, increased ourand United Kingdom operations) resulted in other comprehensive (loss) income, net of taxes, by $8.7of ($4.5) million forand $0.6 million, respectively, primarily due to the nine months ended September 30, 2017, compared to a decrease in other comprehensive income, netdepreciation and appreciation, respectively, of taxes, by $0.2 million forboth the nine months ended September 30, 2016.Canadian dollar and British pound against the U.S. dollar.
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 on2023 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;
•our ability to manage risks associated with potential cybersecurity or other privacy or data security breaches;
•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 on2023 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 September 30, 2017March 31, 2024 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 on2023 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 September 30, 2017,March 31, 2024, 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 September 30, 2017,March 31, 2024, 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 on2023 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 2023 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 on2023 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 quarterthree months ended September 30, 2017.March 31, 2024, except for repurchases of approximately 55,300 shares (aggregate purchase price of approximately $3.4 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$49.22 and $27.69$50.11 as of September 30, 2017March 31, 2024 and December 31, 2016,2023, respectively. As of September 30, 2017,March 31, 2024, our book value per share was based on approximately $672.4 million in$1.36 billion of stockholders’ equity attributable to Stewart and 23,765,80727,580,535 shares of Common Stock outstanding. As of December 31, 2016,2023, our book value per share was based on approximately $648.8 million in$1.37 billion of stockholders’ equity attributable to Stewart and 23,431,27927,370,227 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. | | | | | | | | |
Exhibit | | |
3.1 | — | |
3.2 | — | |
10.1†* | — | |
10.2†* | — | |
31.1* | — | |
31.2* | — | |
32.1* | — | |
32.2* | — | |
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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* Filed herewith |
† Management contract or compensatory plan |
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 Corporation |
| | | Registrant |
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By: | | /s/ David C. Hisey |
| | | David C. Hisey, Chief Financial Officer Secretary and Treasurer |
Index to Exhibits |
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101.INS* | | - | | XBRL Instance Document |
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101.SCH* | | - | | XBRL Taxonomy Extension Schema 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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101.LAB* | | - | | XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* | | - | | XBRL Taxonomy Extension Presentation Linkbase Document |
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* Filed herewith |
† Management contract or compensatory plan |