UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☑QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,September 30, 2020
or
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☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-02658
STEWART INFORMATION SERVICES CORPORATIONCORPORATION
(Exact name of registrant as specified in its charter) |
| | | | | | | | | | |
Delaware | | 74-1677330 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1360 Post Oak Blvd., | Suite 100 | |
|
Houston, | Texas | | 77056 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (713) (713) 625-8100
Securities registered pursuant to Section 12(b) of the Act:
|
| | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1 par value per share | STC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
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.
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☑ | Large accelerated filer | | ☐ | Non-accelerated filer | | ☐ | Emerging growth company |
| | | | | | | |
☑☐ | Large accelerated filer | | ☐ | Non-accelerated filer | | ☐ | Emerging growth company |
| | | | | | | |
☐ | Accelerated filer | | ☐ | Smaller reporting company | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On AprilOctober 29, 2020, there were 23,682,91126,719,342 outstanding shares of the issuer's Common Stock.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED MARCH 31,SEPTEMBER 30, 2020
TABLE OF CONTENTS
| | Item | | Page | Item | | Page |
| PART I – FINANCIAL INFORMATION | | | PART I – FINANCIAL INFORMATION | |
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1. | | | 1. | | |
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2. | | | 2. | | |
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3. | | | 3. | | |
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4. | | | 4. | | |
| PART II – OTHER INFORMATION | | | PART II – OTHER INFORMATION | |
1. | | | 1. | | |
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1A. | | | 1A. | | |
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2. | | | 2. | | |
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5. | | | 5. | | |
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6. | | | 6. | | |
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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.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSINCOME AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
| | | | Three Months Ended March 31, | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted, except per share) | | ($000 omitted, except per share) |
Revenues | | | | | Revenues | |
Title revenues: | | | | | Title revenues: | |
Direct operations | | 198,283 |
| | 161,247 |
| Direct operations | 280,114 | | | 245,068 | | | 696,611 | | | 634,198 | |
Agency operations | | 242,030 |
| | 214,863 |
| Agency operations | 282,605 | | | 254,155 | | | 802,022 | | | 699,835 | |
Ancillary services | | 5,461 |
| | 14,282 |
| Ancillary services | 27,957 | | | 8,628 | | | 44,573 | | | 30,708 | |
Operating revenues | | 445,774 |
| | 390,392 |
| Operating revenues | 590,676 | | | 507,851 | | | 1,543,206 | | | 1,364,741 | |
Investment income | | 5,218 |
| | 4,724 |
| Investment income | 5,027 | | | 4,752 | | | 14,530 | | | 14,631 | |
Net realized and unrealized (losses) gains | | (11,091 | ) | | 3,403 |
| Net realized and unrealized (losses) gains | (7) | | | 46,905 | | | (6,035) | | | 50,730 | |
| | 439,901 |
| | 398,519 |
| | 595,696 | | | 559,508 | | | 1,551,701 | | | 1,430,102 | |
Expenses | | | | | Expenses | |
Amounts retained by agencies | | 199,366 |
| | 176,494 |
| Amounts retained by agencies | 231,051 | | | 208,973 | | | 659,138 | | | 576,559 | |
Employee costs | | 135,652 |
| | 129,256 |
| Employee costs | 155,638 | | | 143,815 | | | 428,817 | | | 412,967 | |
Other operating expenses | | 71,858 |
| | 77,155 |
| Other operating expenses | 98,531 | | | 87,826 | | | 245,003 | | | 251,030 | |
Title losses and related claims | | 18,632 |
| | 15,686 |
| Title losses and related claims | 28,427 | | | 21,059 | | | 68,600 | | | 55,532 | |
Depreciation and amortization | | 4,231 |
| | 5,990 |
| Depreciation and amortization | 5,144 | | | 5,694 | | | 13,436 | | | 17,458 | |
Interest | | 892 |
| | 1,164 |
| Interest | 562 | | | 1,080 | | | 2,075 | | | 3,369 | |
| | 430,631 |
| | 405,745 |
| | 519,353 | | | 468,447 | | | 1,417,069 | | | 1,316,915 | |
Income (loss) before taxes and noncontrolling interests | | 9,270 |
| | (7,226 | ) | |
Income tax (expense) benefit | | (1,896 | ) | | 2,442 |
| |
Net income (loss) | | 7,374 |
| | (4,784 | ) | |
Income before taxes and noncontrolling interests | | Income before taxes and noncontrolling interests | 76,343 | | | 91,061 | | | 134,632 | | | 113,187 | |
Income tax expense | | Income tax expense | (16,058) | | | (21,393) | | | (29,293) | | | (25,978) | |
Net income | | Net income | 60,285 | | | 69,668 | | | 105,339 | | | 87,209 | |
Less net income attributable to noncontrolling interests | | 2,197 |
| | 1,982 |
| Less net income attributable to noncontrolling interests | 4,376 | | | 3,560 | | | 10,107 | | | 8,561 | |
Net income (loss) attributable to Stewart | | 5,177 |
| | (6,766 | ) | |
Net income attributable to Stewart | | Net income attributable to Stewart | 55,909 | | | 66,108 | | | 95,232 | | | 78,648 | |
| | | | | | |
Net income (loss) | | 7,374 |
| | (4,784 | ) | |
Other comprehensive (loss) income, net of taxes: | | | | | |
Net income | | Net income | 60,285 | | | 69,668 | | | 105,339 | | | 87,209 | |
Other comprehensive income (loss), net of taxes: | | Other comprehensive income (loss), net of taxes: | |
Foreign currency translation adjustments | | (11,442 | ) | | 4,588 |
| Foreign currency translation adjustments | 3,844 | | | (5,135) | | | (3,404) | | | 1,928 | |
Change in net unrealized gains and losses on investments | | (2,580 | ) | | 9,011 |
| Change in net unrealized gains and losses on investments | 920 | | | 3,603 | | | 15,055 | | | 17,985 | |
Reclassification adjustment for realized gains and losses on investments | | (80 | ) | | 162 |
| Reclassification adjustment for realized gains and losses on investments | (175) | | | (92) | | | (276) | | | 120 | |
Other comprehensive (loss) income, net of taxes: | | (14,102 | ) | | 13,761 |
| |
Comprehensive (loss) income | | (6,728 | ) | | 8,977 |
| |
Other comprehensive income (loss), net of taxes: | | Other comprehensive income (loss), net of taxes: | 4,589 | | | (1,624) | | | 11,375 | | | 20,033 | |
Comprehensive income | | Comprehensive income | 64,874 | | | 68,044 | | | 116,714 | | | 107,242 | |
Less net income attributable to noncontrolling interests | | 2,197 |
| | 1,982 |
| Less net income attributable to noncontrolling interests | 4,376 | | | 3,560 | | | 10,107 | | | 8,561 | |
Comprehensive (loss) income attributable to Stewart | | (8,925 | ) | | 6,995 |
| |
Comprehensive income attributable to Stewart | | Comprehensive income attributable to Stewart | 60,498 | | | 64,484 | | | 106,607 | | | 98,681 | |
| | | | | | |
Basic average shares outstanding (000) | | 23,638 |
| | 23,595 |
| Basic average shares outstanding (000) | 25,148 | | | 23,616 | | | 24,151 | | | 23,608 | |
Basic earnings (loss) per share attributable to Stewart | | 0.22 |
| | (0.29 | ) | |
Basic earnings per share attributable to Stewart | | Basic earnings per share attributable to Stewart | 2.22 | | | 2.80 | | | 3.94 | | | 3.33 | |
Diluted average shares outstanding (000) | | 23,749 |
| | 23,595 |
| Diluted average shares outstanding (000) | 25,297 | | | 23,773 | | | 24,256 | | | 23,780 | |
Diluted earnings (loss) per share attributable to Stewart | | 0.22 |
| | (0.29 | ) | |
Diluted earnings per share attributable to Stewart | | Diluted earnings per share attributable to Stewart | 2.21 | | | 2.78 | | | 3.93 | | | 3.31 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS | | | As of March 31, 2020 (Unaudited) | | As of December 31, 2019 | | As of September 30, 2020 (Unaudited) | | As of December 31, 2019 |
| ($000 omitted) | | ($000 omitted) |
Assets | | | | Assets | |
Cash and cash equivalents | 293,599 |
| | 330,609 |
| Cash and cash equivalents | 381,560 | | | 330,609 | |
Short-term investments | 19,233 |
| | 23,527 |
| Short-term investments | 21,288 | | | 23,527 | |
Investments in debt and equity securities, at fair value | 612,403 |
| | 645,039 |
| Investments in debt and equity securities, at fair value | 650,599 | | | 645,039 | |
| Receivables: | | | | Receivables: | |
Premiums from agencies | 24,591 |
| | 26,405 |
| Premiums from agencies | 32,749 | | | 26,405 | |
Trade and other | 34,515 |
| | 45,962 |
| Trade and other | 47,287 | | | 45,962 | |
Income taxes | 3,131 |
| | 1,641 |
| Income taxes | 2,110 | | | 1,641 | |
Notes | 2,425 |
| | 2,464 |
| Notes | 1,591 | | | 2,464 | |
Allowance for uncollectible amounts | (4,567 | ) | | (4,469 | ) | Allowance for uncollectible amounts | (4,456) | | | (4,469) | |
| 60,095 |
| | 72,003 |
| | 79,281 | | | 72,003 | |
Property and equipment: | | | | Property and equipment: | |
Land | 3,009 |
| | 3,009 |
| Land | 2,964 | | | 3,009 | |
Buildings | 22,193 |
| | 20,519 |
| Buildings | 22,423 | | | 20,519 | |
Furniture and equipment | 168,391 |
| | 178,416 |
| Furniture and equipment | 174,079 | | | 178,416 | |
Accumulated depreciation | (142,301 | ) | | (151,483 | ) | Accumulated depreciation | (148,490) | | | (151,483) | |
| 51,292 |
| | 50,461 |
| | 50,976 | | | 50,461 | |
Operating lease assets | 94,922 |
| | 99,028 |
| Operating lease assets | 110,038 | | | 99,028 | |
Title plants, at cost | 72,627 |
| | 72,627 |
| Title plants, at cost | 72,850 | | | 72,627 | |
Investments on equity method basis | 5,579 |
| | 6,169 |
| Investments on equity method basis | 6,851 | | | 6,169 | |
Goodwill | 249,946 |
| | 248,890 |
| Goodwill | 382,235 | | | 248,890 | |
Intangible assets, net of amortization | 4,495 |
| | 4,623 |
| Intangible assets, net of amortization | 22,002 | | | 4,623 | |
Deferred tax assets | 4,407 |
| | 4,407 |
| Deferred tax assets | 4,451 | | | 4,407 | |
Other assets | 39,268 |
| | 35,402 |
| Other assets | 38,058 | | | 35,402 | |
| 1,507,866 |
| | 1,592,785 |
| | 1,820,189 | | | 1,592,785 | |
Liabilities | | | | Liabilities | |
Notes payable | 102,613 |
| | 110,632 |
| Notes payable | 101,256 | | | 110,632 | |
Accounts payable and accrued liabilities | 84,974 |
| | 126,779 |
| Accounts payable and accrued liabilities | 143,207 | | | 126,779 | |
Operating lease liabilities | 108,333 |
| | 113,843 |
| Operating lease liabilities | 122,475 | | | 113,843 | |
Estimated title losses | 447,582 |
| | 459,053 |
| Estimated title losses | 466,812 | | | 459,053 | |
Deferred tax liabilities | 27,289 |
| | 28,719 |
| Deferred tax liabilities | 35,570 | | | 28,719 | |
| 770,791 |
| | 839,026 |
| | 869,320 | | | 839,026 | |
Contingent liabilities and commitments |
| |
| Contingent liabilities and commitments | |
Stockholders’ equity | | | | Stockholders’ equity | |
Common Stock ($1 par value) and additional paid-in capital | 188,773 |
| | 188,279 |
| Common Stock ($1 par value) and additional paid-in capital | 300,648 | | | 188,279 | |
Retained earnings | 562,445 |
| | 564,392 |
| Retained earnings | 637,223 | | | 564,392 | |
Accumulated other comprehensive income (loss): | | | | Accumulated other comprehensive income (loss): | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | (16,430) | | | (13,027) | |
Net unrealized gains on debt securities investments | 7,668 |
| | 10,328 |
| Net unrealized gains on debt securities investments | 25,106 | | | 10,328 | |
Foreign currency translation adjustments | (24,469 | ) | | (13,027 | ) | |
| Treasury stock – 352,161 common shares, at cost | (2,666 | ) | | (2,666 | ) | Treasury stock – 352,161 common shares, at cost | (2,666) | | | (2,666) | |
Stockholders’ equity attributable to Stewart | 731,751 |
| | 747,306 |
| Stockholders’ equity attributable to Stewart | 943,881 | | | 747,306 | |
Noncontrolling interests | 5,324 |
| | 6,453 |
| Noncontrolling interests | 6,988 | | | 6,453 | |
Total stockholders’ equity (23,679,888 and 23,709,407 shares outstanding) | 737,075 |
| | 753,759 |
| |
Total stockholders’ equity (26,719,342 and 23,709,407 shares outstanding) | | Total stockholders’ equity (26,719,342 and 23,709,407 shares outstanding) | 950,869 | | | 753,759 | |
| 1,507,866 |
| | 1,592,785 |
| | 1,820,189 | | | 1,592,785 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| ($000 omitted) |
Reconciliation of net income to cash provided by operating activities: | | | |
Net income | 105,339 | | | 87,209 | |
Add (deduct): | | | |
Depreciation and amortization | 13,436 | | | 17,458 | |
Provision for bad debt | 363 | | | 889 | |
Net realized and unrealized losses (gains) | 6,035 | | | (730) | |
Amortization of net premium on debt securities investments | 3,280 | | | 3,790 | |
Payments for title losses less than (in excess of) provisions | 9,615 | | | (11,266) | |
Adjustment for insurance recoveries of title losses | (73) | | | 175 | |
Increase in receivables – net | (4,290) | | | (8,838) | |
(Increase) decrease in other assets – net | (1,702) | | | 2,910 | |
Decrease in accounts payable and other liabilities – net | 1,301 | | | 6,753 | |
Change in net deferred income taxes | 3,576 | | | 5,563 | |
Net income from equity investees | (2,385) | | | (1,996) | |
Dividends received from equity investees | 2,499 | | | 1,964 | |
Stock-based compensation expense | 4,234 | | | 3,380 | |
Other – net | (367) | | | 28 | |
Cash provided by operating activities | 140,861 | | | 107,289 | |
Investing activities: | | | |
Proceeds from sales of investments in securities | 25,772 | | | 20,899 | |
Proceeds from matured investments in debt securities | 46,677 | | | 44,685 | |
Purchases of investments in securities | (75,487) | | | (2,187) | |
Net sales (purchases) of short-term investments | 2,431 | | | (193) | |
Purchases of property and equipment, and real estate – net | (10,492) | | | (11,957) | |
Cash paid for acquisition of businesses | (146,518) | | | 0 | |
| | | |
Other – net | 1,524 | | | 2,111 | |
Cash (used) provided by investing activities | (156,093) | | | 53,358 | |
Financing activities: | | | |
Proceeds from notes payable | 2,361 | | | 23,514 | |
Payments on notes payable | (11,737) | | | (26,179) | |
Distributions to noncontrolling interests | (9,572) | | | (8,578) | |
| | | |
Issuance of new Common Stock | 108,961 | | | 0 | |
Repurchases of Common Stock | (826) | | | (481) | |
Cash dividends paid | (22,214) | | | (21,257) | |
| | | |
| | | |
| | | |
Other - net | (311) | | | 25 | |
Cash provided (used) by financing activities | 66,662 | | | (32,956) | |
Effects of changes in foreign currency exchange rates | (479) | | | 1,202 | |
Increase in cash and cash equivalents | 50,951 | | | 128,893 | |
Cash and cash equivalents at beginning of period | 330,609 | | | 192,067 | |
Cash and cash equivalents at end of period | 381,560 | | | 320,960 | |
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| | | |
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| | | |
| | | |
| | | |
|
| | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| ($000 omitted) |
Reconciliation of net income (loss) to cash used by operating activities: | | | |
Net income (loss) | 7,374 |
| | (4,784 | ) |
Add (deduct): | | | |
Depreciation and amortization | 4,231 |
| | 5,990 |
|
Provision for bad debt | 154 |
| | 446 |
|
Net realized and unrealized losses (gains) | 11,091 |
| | (3,403 | ) |
Amortization of net premium on debt securities investments | 1,144 |
| | 1,353 |
|
Payments for title losses in excess of provisions | (2,809 | ) | | (7,781 | ) |
Adjustment for insurance recoveries of title losses | 173 |
| | 380 |
|
Decrease (increase) in receivables – net | 11,542 |
| | (5,686 | ) |
Increase in other assets – net | (3,813 | ) | | (815 | ) |
Decrease in accounts payable and other liabilities – net | (43,165 | ) | | (26,212 | ) |
Change in net deferred income taxes | 1,495 |
| | (252 | ) |
Net income from equity investees | (645 | ) | | (374 | ) |
Dividends received from equity investees | 1,235 |
| | 353 |
|
Stock-based compensation expense | 887 |
| | 804 |
|
Other – net | (254 | ) | | 98 |
|
Cash used by operating activities | (11,360 | ) | | (39,883 | ) |
Investing activities: | | | |
Proceeds from sales of investments in securities | 11,796 |
| | 6,958 |
|
Proceeds from matured investments in debt securities | 18,814 |
| | 20,094 |
|
Purchases of investments in securities | (30,703 | ) | | (561 | ) |
Net sales (purchases) of short-term investments | 2,982 |
| | (456 | ) |
Purchases of property and equipment, and real estate – net | (4,781 | ) | | (2,735 | ) |
Cash paid for acquisition of businesses | (1,449 | ) | | — |
|
Other – net | 38 |
| | 1,287 |
|
Cash (used) provided by investing activities | (3,303 | ) | | 24,587 |
|
Financing activities: | | | |
Payments on notes payable | (8,223 | ) | | (7,446 | ) |
Proceeds from notes payable | 204 |
| | 4,454 |
|
Distributions to noncontrolling interests | (3,326 | ) | | (3,177 | ) |
Repurchases of common stock | (393 | ) | | (379 | ) |
Cash dividends paid | (7,099 | ) | | (7,083 | ) |
Cash used by financing activities | (18,837 | ) | | (13,631 | ) |
Effects of changes in foreign currency exchange rates | (3,510 | ) | | 1,367 |
|
Decrease in cash and cash equivalents | (37,010 | ) | | (27,560 | ) |
Cash and cash equivalents at beginning of period | 330,609 |
| | 192,067 |
|
Cash and cash equivalents at end of period | 293,599 |
| | 164,507 |
|
| | | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive (loss) income | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Nine Months Ended September 30, 2020 | | | | | | | | | | | | | |
Balance at December 31, 2019 | 24,062 | | | 164,217 | | | 564,392 | | | (2,699) | | | (2,666) | | | 6,453 | | | 753,759 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 95,232 | | | — | | | — | | | — | | | 95,232 | |
Dividends on Common Stock ($0.90 per share) | — | | | — | | | (22,401) | | | — | | | — | | | — | | | (22,401) | |
Issuance of Common Stock | 3,026 | | | 105,935 | | | — | | | — | | | — | | | — | | | 108,961 | |
Stock-based compensation | 4 | | | 4,230 | | | — | | | — | | | — | | | — | | | 4,234 | |
Stock repurchases | (20) | | | (806) | | | — | | | — | | | — | | | — | | | (826) | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 15,055 | | | — | | | — | | | 15,055 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | (276) | | | — | | | — | | | (276) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (3,404) | | | — | | | — | | | (3,404) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 10,107 | | | 10,107 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (9,572) | | | (9,572) | |
| | | | | | | | | | | | | |
Balance at September 30, 2020 | 27,072 | | | 273,576 | | | 637,223 | | | 8,676 | | | (2,666) | | | 6,988 | | | 950,869 | |
| | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | | | | | | | | | | | | | |
Balance at December 31, 2018 | 24,072 | | | 162,642 | | | 514,248 | | | (24,771) | | | (2,666) | | | 6,312 | | | 679,837 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 78,648 | | | — | | | — | | | — | | | 78,648 | |
Dividends on Common Stock ($0.90 per share) | — | | | — | | | (21,506) | | | — | | | — | | | — | | | (21,506) | |
Stock-based compensation | 4 | | | 3,376 | | | — | | | — | | | — | | | — | | | 3,380 | |
Stock repurchases | (11) | | | (470) | | | — | | | — | | | — | | | — | | | (481) | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 17,985 | | | — | | | — | | | 17,985 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | 120 | | | — | | | — | | | 120 | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | 1,928 | | | — | | | — | | | 1,928 | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 8,561 | | | 8,561 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (8,578) | | | (8,578) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | (10) | | | (10) | |
Balance at September 30, 2019 | 24,065 | | | 165,548 | | | 571,390 | | | (4,738) | | | (2,666) | | | 6,285 | | | 759,884 | |
|
| | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Three Months Ended March 31, 2020: | | | | | | | | | | | | | |
Balances at December 31, 2019 | 24,062 |
| | 164,217 |
| | 564,392 |
| | (2,699 | ) | | (2,666 | ) | | 6,453 |
| | 753,759 |
|
Net income attributable to Stewart | — |
| | — |
| | 5,177 |
| | — |
| | — |
| | — |
| | 5,177 |
|
Dividends on Common Stock ($0.30 per share) | — |
| | — |
| | (7,124 | ) | | — |
| | — |
| | — |
| | (7,124 | ) |
Stock-based compensation | (20 | ) | | 907 |
| | — |
| | — |
| | — |
| | — |
| | 887 |
|
Stock repurchases | (10 | ) | | (383 | ) | | — |
| | — |
| | — |
| | — |
| | (393 | ) |
Change in net unrealized gains and losses on investments, net of taxes | — |
| | — |
| | — |
| | (2,580 | ) | | — |
| | — |
| | (2,580 | ) |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — |
| | — |
| | — |
| | (80 | ) | | — |
| | — |
| | (80 | ) |
Foreign currency translation adjustments, net of taxes | — |
| | — |
| | — |
| | (11,442 | ) | | — |
| | — |
| | (11,442 | ) |
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 2,197 |
| | 2,197 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (3,326 | ) | | (3,326 | ) |
Balances at March 31, 2020 | 24,032 |
| | 164,741 |
| | 562,445 |
| | (16,801 | ) | | (2,666 | ) | | 5,324 |
| | 737,075 |
|
| | | | | | | | | | | | | |
Three Months Ended March 31, 2019: | | | | | | | | | | | | | |
Balances at December 31, 2018 | 24,072 |
| | 162,642 |
| | 514,248 |
| | (24,771 | ) | | (2,666 | ) | | 6,312 |
| | 679,837 |
|
Net loss attributable to Stewart | — |
| | — |
| | (6,766 | ) | | — |
| | — |
| | — |
| | (6,766 | ) |
Dividends on Common Stock ($0.30 per share) | — |
| | — |
| | (7,147 | ) | | — |
| | — |
| | — |
| | (7,147 | ) |
Stock-based compensation | (11 | ) | | 815 |
| | — |
| | — |
| | — |
| | — |
| | 804 |
|
Stock repurchases | (9 | ) | | (370 | ) | | — |
| | — |
| | — |
| | — |
| | (379 | ) |
Change in net unrealized gains and losses on investments, net of taxes | — |
| | — |
| | — |
| | 9,011 |
| | — |
| | — |
| | 9,011 |
|
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — |
| | — |
| | — |
| | 162 |
| | — |
| | — |
| | 162 |
|
Foreign currency translation adjustments, net of taxes | — |
| | — |
| | — |
| | 4,588 |
| | — |
| | — |
| | 4,588 |
|
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 1,982 |
| | 1,982 |
|
Distributions to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | (3,177 | ) | | (3,177 | ) |
Net effect of other changes in ownership | — |
| | — |
| | — |
| | — |
| | — |
| | (11 | ) | | (11 | ) |
Balances at March 31, 2019 | 24,052 |
| | 163,087 |
| | 500,335 |
| | (11,010 | ) | | (2,666 | ) | | 5,106 |
| | 678,904 |
|
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Three Months Ended September 30, 2020 | | | | | | | | | | | | |
Balances at June 30, 2020 | 24,052 | | | 166,208 | | | 589,424 | | | 4,087 | | | (2,666) | | | 6,227 | | | 787,332 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 55,909 | | | — | | | — | | | — | | | 55,909 | |
Dividends on Common Stock ($0.30 per share) | — | | | — | | | (8,110) | | | — | | | — | | | — | | | (8,110) | |
Issuance of Common Stock | 3,026 | | | 105,935 | | | — | | | — | | | — | | | — | | | 108,961 | |
Stock-based compensation | 2 | | | 1,783 | | | — | | | — | | | — | | | — | | | 1,785 | |
Stock repurchases | (8) | | | (350) | | | — | | | — | | | — | | | — | | | (358) | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 920 | | | — | | | — | | | 920 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | (175) | | | — | | | — | | | (175) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | 3,844 | | | — | | | — | | | 3,844 | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 4,376 | | | 4,376 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3,615) | | | (3,615) | |
| | | | | | | | | | | | | |
Balance at September 30, 2020 | 27,072 | | | 273,576 | | | 637,223 | | | 8,676 | | | (2,666) | | | 6,988 | | | 950,869 | |
| | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | | | | | | | | | | | | |
Balances at June 30, 2019 | 24,065 | | | 164,235 | | | 512,467 | | | (3,114) | | | (2,666) | | | 5,840 | | | 700,827 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 66,108 | | | — | | | — | | | — | | | 66,108 | |
Dividends on Common Stock ($0.30 per share) | — | | | — | | | (7,185) | | | — | | | — | | | — | | | (7,185) | |
Stock-based compensation | 0 | | | 1,323 | | | — | | | — | | | — | | | — | | | 1,323 | |
Stock repurchases | 0 | | | (10) | | | — | | | — | | | — | | | — | | | (10) | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 3,603 | | | — | | | — | | | 3,603 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | (92) | | | — | | | — | | | (92) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (5,135) | | | — | | | — | | | (5,135) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 3,560 | | | 3,560 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3,091) | | | (3,091) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | (24) | | | (24) | |
Balance at September 30, 2019 | 24,065 | | | 165,548 | | | 571,390 | | | (4,738) | | | (2,666) | | | 6,285 | | | 759,884 | |
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Interim financial statements. The financial information contained in this report for the three months ended March 31,September 30, 2020 and 2019, and as of March 31,September 30, 2020, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2019 filed with the Securities and Exchange Commission on February 27, 2020 (2019 Form 10-K).
A. Management’s responsibility. The accompanying interim financial statements were prepared by management, who is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with the United States (U.S.) generally accepted accounting principles (GAAP), including management’s best judgments and estimates. In the opinion of management, all adjustments necessary for a fair presentation of this information for all interim periods, consisting only of normal recurring accruals, have been made. The Company’s results of operations for interim periods are not necessarily indicative of results for a full year and actual results could differ.
B. Consolidation. The condensed consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. All significant intercompany amounts and transactions have been eliminated and provisions have been made for noncontrolling interests. Unconsolidated investees, in which the Company typically owns from 20% throughto 50% of the voting stock, are accounted for using the equity method.
C. Restrictions on cash and investments. The Company maintains investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory 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 $497.5$535.7 million and $483.4 million at March 31,September 30, 2020 and December 31, 2019, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $18.3$21.1 million and $39.7 million at March 31,September 30, 2020 and December 31, 2019, 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. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.
D. Recently adopted accounting standard.Issuance of Common Stock. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326). Topic 326 significantly changed the impairment model for financial instruments by introducing the current expected credit loss (CECL) model, which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instrument. The previous GAAP generally required the recognition of credit losses when incurred. Topic 326 also amended certain accounting treatments for available-for-sale debt securities. Effective January 1,On August 17, 2020, the Company adopted Topic 326issued an aggregate of 3,026,340 new shares of its Common Stock ($1 par value), which did not result in any material impact on its consolidated financial statements.included shares purchased by the underwriters to the transaction. Proceeds from the Common Stock issuance, net of issuance costs, amounted to $109.0 million.
E. Impact of the COVID-19 pandemic. In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in a slowdown in the global economy and a U.S. declaration of a national emergency. In response to the pandemic, health and governmental bodies, including the state of Texas where the Company is headquartered, have issued travel restrictions, quarantine orders, temporary closures of non-essential businesses and other restrictive measures. To date, various levels of restrictions are still in place across the U.S. to address the spread of COVID-19. Although the title insurance industry has been deemed essential in the U.S., the pandemic and measures to contain it have caused disruptions in the real estate market and in the Company's business operations. While the Company continues to close transactions on a daily basis, as it works through a pipeline of business from the first quarter, orders opened in the second quarter are expected to be lower. There is near-term uncertainty regarding future real estate market transaction volumes and the impacts to the Company's results of operations. To the extent that the COVID-19 pandemic continues or worsens, it could adversely impact the Company's future operational and financial performance, which may includeresult in impairments of the Company's goodwill, investments and other long-livedits assets. The Company is currently unable to determine the effects the COVID-19 pandemic will have on the Company's future financial statements or results of operations.
NOTE 2
Revenues. The Company's operating revenues, summarized by type, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
Title insurance premiums: | | | | | | | |
Direct | 190,794 | | | 174,635 | | | 478,822 | | | 448,920 | |
Agency | 282,605 | | | 254,155 | | | 802,022 | | | 699,835 | |
Escrow fees | 53,384 | | | 38,666 | | | 127,903 | | | 100,570 | |
Search, abstract and valuation services | 42,627 | | | 20,922 | | | 81,533 | | | 63,109 | |
Other revenues | 21,266 | | | 19,473 | | | 52,926 | | | 52,307 | |
| 590,676 | | | 507,851 | | | 1,543,206 | | | 1,364,741 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
Title insurance premiums: | | | | |
Direct | | 138,283 |
| | 111,918 |
|
Agency | | 242,030 |
| | 214,863 |
|
Escrow fees | | 33,086 |
| | 25,293 |
|
Search, abstract and valuation services | | 16,077 |
| | 22,939 |
|
Other revenues | | 16,298 |
| | 15,379 |
|
| | 445,774 |
| | 390,392 |
|
NOTE 3
Investments in debt and equity securities. The total fair values of the Company's investments in debt and equity securities are as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| ($000 omitted) |
Investments in: | | | |
Debt securities | 617,895 | | | 605,721 | |
Equity securities | 32,704 | | | 39,318 | |
| 650,599 | | | 645,039 | |
|
| | | | | |
| March 31, 2020 | | December 31, 2019 |
| ($000 omitted) |
Investments in: | | | |
Debt securities | 584,153 |
| | 605,721 |
|
Equity securities | 28,250 |
| | 39,318 |
|
| 612,403 |
| | 645,039 |
|
As of March 31,September 30, 2020 and December 31, 2019, the net unrealized investment (losses) gains relating to investments in equity securities held were $(3.8)$0.4 million and $6.9 million, respectively (refer to Note 5).
The amortized costs and fair values of investments in debt securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| Amortized costs | | Fair values | | Amortized costs | | Fair values |
| ($000 omitted) |
Municipal | 46,397 | | | 48,952 | | | 52,176 | | | 53,823 | |
Corporate | 301,297 | | | 320,348 | | | 299,074 | | | 309,142 | |
Foreign | 231,859 | | | 241,969 | | | 234,734 | | | 236,073 | |
U.S. Treasury Bonds | 6,562 | | | 6,626 | | | 6,664 | | | 6,683 | |
| | | | | | | |
| 586,115 | | | 617,895 | | | 592,648 | | | 605,721 | |
|
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Amortized costs | | Fair values | | Amortized costs | | Fair values |
| ($000 omitted) |
Municipal | 48,780 |
| | 50,348 |
| | 52,176 |
| | 53,823 |
|
Corporate | 300,203 |
| | 302,527 |
| | 299,074 |
| | 309,142 |
|
Foreign | 218,918 |
| | 224,681 |
| | 234,734 |
| | 236,073 |
|
U.S. Treasury Bonds | 6,547 |
| | 6,597 |
| | 6,664 |
| | 6,683 |
|
| 574,448 |
| | 584,153 |
| | 592,648 |
| | 605,721 |
|
Foreign debt securities consist of Canadian government and corporate bonds, United Kingdom treasury and corporate bonds, and Mexican government bonds.
Gross unrealized gains and losses on investments in debt securities are as follows:
| | | March 31, 2020 | | December 31, 2019 | | September 30, 2020 | | December 31, 2019 |
| Gains | | Losses | | Gains | | Losses | | Gains | | Losses | | Gains | | Losses |
| ($000 omitted) | | ($000 omitted) |
Municipal | 1,570 |
| | 2 |
| | 1,649 |
| | 2 |
| Municipal | 2,555 | | | 0 | | | 1,649 | | | 2 | |
Corporate | 6,203 |
| | 3,879 |
| | 10,091 |
| | 23 |
| Corporate | 19,396 | | | 345 | | | 10,091 | | | 23 | |
Foreign | 6,407 |
| | 644 |
| | 2,362 |
| | 1,023 |
| Foreign | 10,131 | | | 21 | | | 2,362 | | | 1,023 | |
U.S. Treasury Bonds | 91 |
| | 41 |
| | 60 |
| | 41 |
| U.S. Treasury Bonds | 88 | | | 24 | | | 60 | | | 41 | |
| 14,271 |
| | 4,566 |
| | 14,162 |
| | 1,089 |
| |
| | | 32,170 | | | 390 | | | 14,162 | | | 1,089 | |
Debt securities as of March 31,September 30, 2020 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):
| | | Amortized costs | | Fair values | | Amortized costs | | Fair values |
| ($000 omitted) | | ($000 omitted) |
In one year or less | 77,995 |
| | 78,047 |
| In one year or less | 68,394 | | | 69,164 | |
After one year through five years | 303,007 |
| | 307,426 |
| After one year through five years | 299,977 | | | 313,410 | |
After five years through ten years | 160,301 |
| | 166,107 |
| After five years through ten years | 186,766 | | | 201,134 | |
After ten years | 33,145 |
| | 32,573 |
| After ten years | 30,978 | | | 34,187 | |
| 574,448 |
| | 584,153 |
| | 586,115 | | | 617,895 | |
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 March 31,September 30, 2020, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Corporate | 345 | | | 22,781 | | | 0 | | | 0 | | | 345 | | | 22,781 | |
Foreign | 1 | | | 4,106 | | | 20 | | | 240 | | | 21 | | | 4,346 | |
U.S. Treasury Bonds | 0 | | | 0 | | | 24 | | | 1,022 | | | 24 | | | 1,022 | |
| | | | | | | | | | | |
| 346 | | | 26,887 | | | 44 | | | 1,262 | | | 390 | | | 28,149 | |
|
| | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 2 |
| | 52 |
| | — |
| | — |
| | 2 |
| | 52 |
|
Corporate | 3,879 |
| | 103,187 |
| | — |
| | — |
| | 3,879 |
| | 103,187 |
|
Foreign | 584 |
| | 31,671 |
| | 60 |
| | 4,224 |
| | 644 |
| | 35,895 |
|
U.S. Treasury Bonds | — |
| | — |
| | 41 |
| | 2,105 |
| | 41 |
| | 2,105 |
|
| 4,465 |
| | 134,910 |
| | 101 |
| | 6,329 |
| | 4,566 |
| | 141,239 |
|
The number of specific debt investment holdings held in an unrealized loss position as of March 31,September 30, 2020 was 86.15. Of these securities, 93 were in unrealized loss positions for more than 12 months. During 2020, the overall gross unrealized losses on debt securities increased from the prior year-end due to lower investment fair values increased, primarily resulting from increased credit spreads, partially offset by the effect of lower interest rates.rates which was partially offset by increased credit spreads. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily 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, 2019, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 2 | | | 53 | | | 0 | | | 0 | | | 2 | | | 53 | |
Corporate | 23 | | | 7,420 | | | 0 | | | 0 | | | 23 | | | 7,420 | |
Foreign | 318 | | | 92,108 | | | 705 | | | 55,875 | | | 1,023 | | | 147,983 | |
U.S. Treasury Bonds | 0 | | | 0 | | | 41 | | | 2,215 | | | 41 | | | 2,215 | |
| | | | | | | | | | | |
| 343 | | | 99,581 | | | 746 | | | 58,090 | | | 1,089 | | | 157,671 | |
|
| | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 2 |
| | 53 |
| | — |
| | — |
| | 2 |
| | 53 |
|
Corporate | 23 |
| | 7,420 |
| | — |
| | — |
| | 23 |
| | 7,420 |
|
Foreign | 318 |
| | 92,108 |
| | 705 |
| | 55,875 |
| | 1,023 |
| | 147,983 |
|
U.S. Treasury Bonds | — |
| | — |
| | 41 |
| | 2,215 |
| | 41 |
| | 2,215 |
|
| 343 |
| | 99,581 |
| | 746 |
| | 58,090 |
| | 1,089 |
| | 157,671 |
|
NOTE 4
Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the FASBFinancial Accounting Standards Board's Accounting Standards Codification (ASC) defines fair value 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 establishes 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 March 31,September 30, 2020, 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 | 0 | | | 48,952 | | | 48,952 | |
Corporate | 0 | | | 320,348 | | | 320,348 | |
Foreign | 0 | | | 241,969 | | | 241,969 | |
U.S. Treasury Bonds | 0 | | | 6,626 | | | 6,626 | |
Equity securities | 32,704 | | | 0 | | | 32,704 | |
| 32,704 | | | 617,895 | | | 650,599 | |
|
| | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — |
| | 50,348 |
| | 50,348 |
|
Corporate | — |
| | 302,527 |
| | 302,527 |
|
Foreign | — |
| | 224,681 |
| | 224,681 |
|
U.S. Treasury Bonds | — |
| | 6,597 |
| | 6,597 |
|
Equity securities | 28,250 |
| | — |
| | 28,250 |
|
| 28,250 |
| | 584,153 |
| | 612,403 |
|
As of December 31, 2019, 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 | 0 | | | 53,823 | | | 53,823 | |
Corporate | 0 | | | 309,142 | | | 309,142 | |
Foreign | 0 | | | 236,073 | | | 236,073 | |
U.S. Treasury Bonds | 0 | | | 6,683 | | | 6,683 | |
Equity securities | 39,318 | | | 0 | | | 39,318 | |
| 39,318 | | | 605,721 | | | 645,039 | |
|
| | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — |
| | 53,823 |
| | 53,823 |
|
Corporate | — |
| | 309,142 |
| | 309,142 |
|
Foreign | — |
| | 236,073 |
| | 236,073 |
|
U.S. Treasury Bonds | — |
| | 6,683 |
| | 6,683 |
|
Equity securities | 39,318 |
| | — |
| | 39,318 |
|
| 39,318 |
| | 605,721 |
| | 645,039 |
|
As of March 31,September 30, 2020, 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. The fair value of the Company's investments in debt and equity securities is primarily determined using a third-party pricing service provider. The third-party pricing service provider calculates the fair values using both market approach and model valuation methods, as well as pricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with pricing information from the Company's investment manager.
NOTE 5
Net realized and unrealized (losses) gains. Realized and unrealized gains and losses are detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
Realized gains | 241 | | | 50,237 | | | 1,749 | | | 51,190 | |
Realized losses | (209) | | | (3,038) | | | (1,556) | | | (3,402) | |
Net unrealized investment (losses) gains recognized on equity securities still held at September 30 | (39) | | | (294) | | | (6,228) | | | 2,942 | |
| (7) | | | 46,905 | | | (6,035) | | | 50,730 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
Investment and other gains | | 153 |
| | 162 |
|
Investment and other losses | | (690 | ) | | (305 | ) |
Net unrealized investment (losses) gains recognized on equity securities still held at March 31 | | (10,554 | ) | | 3,546 |
|
| | (11,091 | ) | | 3,403 |
|
Net realized gains for the first nine months of 2020 included $1.3 million of gains from settlements of equity investments with no previously readily determinable fair values (cost-basis investments), partially offset by net realized losses of $1.1 million from the sale of investment securities.
Net realized gains during both the third quarter and first nine months of 2019 included a $50.0 million realized gain related to the merger termination fee paid by Fidelity National Financial and a $2.7 million impairment charge on an equity method investment.
Investment gains and losses recognized during the periods ended March 31, 2020 and 2019 related to investments in equity securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
Net investment (losses) gains recognized on equity securities during the period | (41) | | | (171) | | | (7,136) | | | 3,222 | |
Less: Net realized (losses) gains on equity securities sold during the period | (2) | | | 123 | | | (908) | | | 280 | |
Net unrealized investment (losses) gains recognized on equity securities still held at September 30 | (39) | | | (294) | | | (6,228) | | | 2,942 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
Net investment (losses) gains recognized on equity securities during the period | | (11,061 | ) | | 3,657 |
|
Less: Net realized (losses) gains on equity securities sold during the period | | (507 | ) | | 111 |
|
Net unrealized investment (losses) gains recognized on equity securities still held at March 31 | | (10,554 | ) | | 3,546 |
|
Proceeds from sales of investments in securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
Proceeds from sales of debt securities | 10,218 | | | 10,227 | | | 24,990 | | | 19,279 | |
Proceeds from sales of equity securities | 56 | | | 720 | | | 782 | | | 1,620 | |
Total proceeds from sales of investments in securities | 10,274 | | | 10,947 | | | 25,772 | | | 20,899 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
Proceeds from sales of debt securities | | 11,503 |
| | 6,318 |
|
Proceeds from sales of equity securities | | 293 |
| | 640 |
|
Total proceeds from sales of investments in securities | | 11,796 |
| | 6,958 |
|
NOTE 6
Goodwill and other intangibles. The summary of changes in goodwill is as follows.
| | | | | | | | | | | | | | | | | |
| Title | | Ancillary Services and Corporate | | Consolidated Total |
| | | ($000 omitted) | | |
Balances at December 31, 2019 | 243,161 | | | 5,729 | | | 248,890 | |
Acquisitions | 113,642 | | | 19,703 | | | 133,345 | |
| | | | | |
| | | | | |
Balances at September 30, 2020 | 356,803 | | | 25,432 | | | 382,235 | |
During the third quarter 2020, the Company recorded total goodwill of $112.6 million under the title segment in connection with its acquisition of several title offices. This goodwill adjustment was based on management's preliminary purchase accounting, which is expected to be finalized during the fourth quarter 2020.
During the second quarter 2020, the Company recorded goodwill under the ancillary services and corporate segment, which was based on management's preliminary purchase accounting related to its acquisition of U.S. Appraisals, a national appraisal management company providing residential property appraisals for mortgage lenders. During the third quarter 2020, management completed the purchase accounting, which resulted in goodwill of $19.7 million. The Company also recognized from the acquisition other intangible assets of $19.6 million, primarily related to customer relationships and internally-developed technology, which have estimated useful lives of 10 and 5 years, respectively.
During the first quarter 2020, the Company acquired several title offices which generated a combined goodwill of $1.0 million under the title segment. Subsequent to September 30, 2020, the Company acquired a national provider of appraisal management and residential real estate valuation services. Management expects to finalize the purchase accounting for this acquisition during the fourth quarter 2020.
NOTE 7
Estimated title losses. A summary of estimated title losses for the threenine months ended March 31September 30 is as follows:
| | | | | | | | | | | |
| 2020 | | 2019 |
| ($000 omitted) |
Balances at January 1 | 459,053 | | | 461,560 | |
Provisions: | | | |
Current year | 68,063 | | | 54,670 | |
Previous policy years | 537 | | | 863 | |
Total provisions | 68,600 | | | 55,533 | |
Payments, net of recoveries: | | | |
Current year | (9,595) | | | (11,424) | |
Previous policy years | (49,390) | | | (55,375) | |
Total payments, net of recoveries | (58,985) | | | (66,799) | |
| | | |
Effects of changes in foreign currency exchange rates | (1,856) | | | 2,067 | |
Balances at September 30 | 466,812 | | | 452,361 | |
Loss ratios as a percentage of title operating revenues: | | | |
Current year provisions | 4.5 | % | | 4.1 | % |
Total provisions | 4.6 | % | | 4.2 | % |
|
| | | | | |
| 2020 | | 2019 |
| ($000 omitted) |
Balances at January 1 | 459,053 |
| | 461,560 |
|
Provisions: | | | |
Current year | 18,521 |
| | 15,526 |
|
Previous policy years | 111 |
| | 160 |
|
Total provisions | 18,632 |
| | 15,686 |
|
Payments, net of recoveries: | | | |
Current year | (2,214 | ) | | (2,695 | ) |
Previous policy years | (19,227 | ) | | (20,772 | ) |
Total payments, net of recoveries | (21,441 | ) | | (23,467 | ) |
Effects of changes in foreign currency exchange rates | (8,662 | ) | | 296 |
|
Balances at March 31 | 447,582 |
| | 454,075 |
|
Loss ratios as a percentage of title operating revenues: | | | |
Current year provisions | 4.2 | % | | 4.1 | % |
Total provisions | 4.2 | % | | 4.2 | % |
Provisions in the first nine months of 2020 increased compared to the same period in 2019, primarily as a result of increased title revenues.revenues, higher domestic loss provisioning rates due to the current economic environment, and unfavorable loss development related to certain coverages in the Canadian operations. Claim payments in the first nine months of 2020 decreased compared to the same period in 2019, primarily due to lower payments ofon large and non-large claims comparedrelating to 2019,prior policy years; while the 2020 reduction effect relating toof changes in foreign currency exchange rate changesrates for the first nine months of 2020 and 2019 were primarily influenced by the depreciation and appreciation, respectively, of the Canadian dollar against the U.S. dollar during the three months ended March 31, 2020.those periods.
NOTE 78
Share-based payments. Prior to 2020, the Company granted time-based and performance-based restricted stock units to executives and senior management employees. Each restricted stock unit represents a contractual right to receive a share of the Company's common stock. The time-based units vest on each of the first three anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives over a period of approximately three years. During the first quarternine months of 2020, the Company granted time-based restricted stock units and nonqualified stock options, in lieu of performance-based restricted stock units. The stock options vest and may be exercised at a strike price of $39.76 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.
Awards are made pursuant to the Company’s employee incentive compensation plans and the compensation expense associated with the awards is recognized over the corresponding vesting period. The aggregate grant-date fair values of restricted stock unit and stock option awards during the first threenine months of 2020 were $2.4$3.8 million (60,000(96,000 units with an average grant price per unit of $39.76)$39.36) and $3.4 million (650,000(648,000 options with an average grant price per option of $5.32), respectively. During the first threenine months of 2019, the aggregate grant-date fair value of restricted stock unit awards was $3.7$5.0 million (87,000(119,000 units with an average grant price per unit of $43.06)$42.05).
NOTE 89
Earnings per share. 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 to include the number of additional shares that would have been outstanding if restricted shares and units were vested and stock 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 September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted, except per share) |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to Stewart | 55,909 | | | 66,108 | | | 95,232 | | | 78,648 | |
| | | | | | | |
Denominator (000): | | | | | | | |
Basic average shares outstanding | 25,148 | | | 23,616 | | | 24,151 | | | 23,608 | |
| | | | | | | |
Average number of dilutive shares relating to grants of restricted shares and units | 149 | | | 157 | | | 105 | | | 172 | |
Diluted average shares outstanding | 25,297 | | | 23,773 | | | 24,256 | | | 23,780 | |
| | | | | | | |
Basic earnings per share attributable to Stewart | 2.22 | | | 2.80 | | | 3.94 | | | 3.33 | |
| | | | | | | |
Diluted earnings per share attributable to Stewart | 2.21 | | | 2.78 | | | 3.93 | | | 3.31 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted, except per share) |
Numerator: | | | | |
Net income (loss) attributable to Stewart | | 5,177 |
| | (6,766 | ) |
| | | | |
Denominator (000): | | | | |
Basic average shares outstanding | | 23,638 |
| | 23,595 |
|
Average number of dilutive shares relating to grants of restricted shares and units | | 111 |
| | — |
|
Diluted average shares outstanding | | 23,749 |
| | 23,595 |
|
| | | | |
Basic earnings (loss) per share attributable to Stewart | | 0.22 |
| | (0.29 | ) |
| | | | |
Diluted earnings (loss) per share attributable to Stewart | | 0.22 |
| | (0.29 | ) |
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 March 31,September 30, 2020, 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 guarantees are not more than the Company’s future lease obligations, as presented on the condensed consolidated balance sheets, plus lease operating expenses. As of March 31,September 30, 2020, the Company also had unused letters of credit aggregating $5.2 million related 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. 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.
Additionally, the Company receives from time to time, the Company receives various 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 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 2 operating segments: title and ancillary services and corporate. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home and personal insurance services and Internal Revenue Code Section 1031 tax-deferred exchanges. The ancillary services and corporate segment includes search and valuation services, which are the principal offerings of ancillary services, and expenses of the parent holding company and certain other enterprise-wide overhead costs (net of centralized administrative services costs allocated to respective operating businesses).
Selected statement of operationsincome information related to these segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
Title segment: | | | | | | | |
Revenues | 567,743 | | | 501,199 | | | 1,506,618 | | | 1,349,272 | |
Depreciation and amortization | 3,748 | | | 5,110 | | | 11,302 | | | 15,309 | |
Income before taxes and noncontrolling interest | 82,376 | | | 49,481 | | | 152,003 | | | 88,144 | |
| | | | | | | |
Ancillary services and corporate segment: | | | | | | | |
Revenues | 27,953 | | | 58,309 | | | 45,083 | | | 80,830 | |
Depreciation and amortization | 1,396 | | | 584 | | | 2,134 | | | 2,149 | |
(Loss) income before taxes and noncontrolling interest | (6,033) | | | 41,580 | | | (17,371) | | | 25,043 | |
| | | | | | | |
Consolidated Stewart: | | | | | | | |
Revenues | 595,696 | | | 559,508 | | | 1,551,701 | | | 1,430,102 | |
Depreciation and amortization | 5,144 | | | 5,694 | | | 13,436 | | | 17,458 | |
Income before taxes and noncontrolling interest | 76,343 | | | 91,061 | | | 134,632 | | | 113,187 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
Title segment: | | | | |
Revenues | | 434,440 |
| | 384,437 |
|
Depreciation and amortization | | 3,821 |
| | 5,153 |
|
Income (loss) before taxes and noncontrolling interest | | 14,836 |
| | (379 | ) |
| | | | |
Ancillary services and corporate segment: | | | | |
Revenues | | 5,461 |
| | 14,082 |
|
Depreciation and amortization | | 410 |
| | 837 |
|
Loss before taxes and noncontrolling interest | | (5,566 | ) | | (6,847 | ) |
| | | | |
Consolidated Stewart: | | | | |
Revenues | | 439,901 |
| | 398,519 |
|
Depreciation and amortization | | 4,231 |
| | 5,990 |
|
Income (loss) before taxes and noncontrolling interest | | 9,270 |
| | (7,226 | ) |
The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.
Revenues generated in the United States and all international operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| ($000 omitted) |
United States | 559,057 | | | 522,159 | | | 1,463,129 | | | 1,340,254 | |
International | 36,639 | | | 37,349 | | | 88,572 | | | 89,848 | |
| 595,696 | | | 559,508 | | | 1,551,701 | | | 1,430,102 | |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| ($000 omitted) |
United States | | 414,128 |
| | 376,482 |
|
International | | 25,773 |
| | 22,037 |
|
| | 439,901 |
| | 398,519 |
|
NOTE 1213
Other comprehensive income (loss) income.. Changes in the balances of each component of other comprehensive (loss) income and the related tax effects are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 |
| 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 | 1,164 | | 244 | | 920 | | | 4,560 | | 957 | | 3,603 | |
Reclassification adjustment for realized gains and losses on investments | (221) | | (46) | | (175) | | | (116) | | (24) | | (92) | |
| 943 | | 198 | | 745 | | | 4,444 | | 933 | | 3,511 | |
| | | | | | | |
Foreign currency translation adjustments | 4,384 | | 540 | | 3,844 | | | (6,176) | | (1,041) | | (5,135) | |
| | | | | | | |
Other comprehensive income (loss) | 5,327 | | 738 | | 4,589 | | | (1,732) | | (108) | | (1,624) | |
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| 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 | (3,267 | ) | (687 | ) | (2,580 | ) | | 11,406 |
| 2,395 |
| 9,011 |
|
Reclassification adjustment for realized gains and losses on investments | (101 | ) | (21 | ) | (80 | ) | | 205 |
| 43 |
| 162 |
|
| (3,368 | ) | (708 | ) | (2,660 | ) | | 11,611 |
| 2,438 |
| 9,173 |
|
Foreign currency translation adjustments | (13,659 | ) | (2,217 | ) | (11,442 | ) | | 5,548 |
| 960 |
| 4,588 |
|
Other comprehensive (loss) income | (17,027 | ) | (2,925 | ) | (14,102 | ) | | 17,159 |
| 3,398 |
| 13,761 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 |
| 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 | 19,056 | | 4,001 | | 15,055 | | | 22,766 | | 4,781 | | 17,985 | |
Reclassification adjustment for realized gains and losses on investments | (349) | | (73) | | (276) | | | 152 | | 32 | | 120 | |
| 18,707 | | 3,928 | | 14,779 | | | 22,918 | | 4,813 | | 18,105 | |
| | | | | | | |
Foreign currency translation adjustments | (4,101) | | (697) | | (3,404) | | | 2,750 | | 822 | | 1,928 | |
| | | | | | | |
Other comprehensive income | 14,606 | | 3,231 | | 11,375 | | | 25,668 | | 5,635 | | 20,033 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S OVERVIEW
Third quarter 2020 overview. We reported net income attributable to Stewart of $55.9 million ($2.21 per diluted share) for the third quarter 2020, compared to net income attributable to Stewart of $66.1 million ($2.78 per diluted share) for the third quarter 2019. On an adjusted basis, Stewart’s third quarter 2020 net income of $55.9 million ($2.21 per diluted share) increased 84% from $30.4 million ($1.28 per diluted share) in the third quarter 2019. Third quarter 2020 pretax income before noncontrolling interests was $76.3 million compared to pretax income before noncontrolling interests of $91.1 million for the third quarter 2019.
Third quarter 2019 results included pretax items of:
•$46.9 million of net realized and unrealized gains, primarily composed of a $50.0 million gain recorded in the ancillary services and corporate segment related to the merger termination fee paid by Fidelity National Financial (FNF), and a $2.7 million impairment charge on an equity method investment recorded in the title segment, and
•$1.0 million of third-party advisory expenses related to the terminated FNF merger transaction recorded in other operating expenses within the ancillary services and corporate segment.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | |
| 2020 | | 2019 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 562.7 | | | 499.2 | | | 13 | % | | | | | | |
Investment income | 5.0 | | | 4.8 | | | 6 | % | | | | | | |
Net realized and unrealized gains (losses) | — | | | (2.8) | | | 100 | % | | | | | | |
Pretax income | 82.4 | | | 49.5 | | | 66 | % | | | | | | |
Pretax margin | 14.5 | % | | 9.9 | % | | | | | | | | |
Title segment pretax income grew $32.9 million, or 66%, while pretax margin also improved 460 basis points to 14.5% in the third quarter 2020 compared to the prior year quarter. Title operating revenues increased $63.5 million, or 13%, resulting from increases in direct title revenues of $35.0 million, or 14%, and gross independent agency revenues of $28.5 million, or 11%. The effect of changes in the fair value of equity securities investments was minimal during the third quarters of 2020 and 2019; however, during the third quarter 2019, the segment recorded a $2.7 million impairment charge on an equity method investment. Excluding the impairment charge, pretax income for the third quarter 2019 would have been $52.3 million (10.4% margin).
Consistent with the increased title revenues in the third quarter 2020, the segment’s overall operating expenses increased $33.6 million, or 7%, as agency retention expenses and combined title employee costs and other operating expenses increased 11% and 3%, respectively, from the third quarter 2019. Our average independent agency remittance rate for the third quarter 2020 improved to 18.2% compared to 17.8% in the prior year quarter; while combined title employee costs and other operating expenses, as percentage of title revenues, was 39.5% in the third quarter 2020 compared to 43.4% in the prior year quarter. Title loss expense increased in the third quarter 2020 primarily due to increased title revenues, higher domestic loss provisioning rates due to the current economic environment, and unfavorable loss development in our Canadian business. As percentage of title revenues, the title loss expense in the third quarter 2020 was 5.1% compared to 4.2% from the prior year quarter.
Direct title revenues (refer to schedule in Results of Operations - Title Revenues section) in the third quarter 2020 increased from the prior year quarter as a result of improved domestic non-commercial revenues, primarily driven by increased purchase and refinancing residential orders from both existing and newly acquired title offices. This increase was partially offset by decreased commercial revenues resulting from reduced transaction sizes and volumes. Domestic commercial fee per file in the third quarter 2020 was approximately $9,700, which was 23% lower than the third quarter 2019; while domestic residential fee per file was approximately $1,900, or 11% lower than the third quarter 2019, primarily due to a higher mix of refinancing compared to purchase transactions.
Summary results of the ancillary services and corporate segment are as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | |
| 2020 | | 2019 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 28.0 | | | 8.6 | | | 224 | % | | | | | | |
Net realized gains | — | | | 49.7 | | | (100) | % | | | | | | |
Pretax loss | (6.0) | | | 41.6 | | | (115) | % | | | | | | |
The segment’s results for the third quarter 2019 included a $50.0 million realized gain related to the FNF merger termination fee and $1.0 million of merger expenses. Excluding net realized gains and merger expenses, the segment’s pretax results for the third quarter 2020 improved $1.1 million, or 15%, compared to the prior year quarter. Third quarter segment operating revenues improved, primarily driven by $24.2 million of revenues generated by U.S. Appraisals, which were partially offset by a $4.8 million decline in search and valuation services’ revenues due to significantly lower customer orders. The segment’s results for the third quarter 2020 and 2019 included approximately $6.3 million and $7.3 million, respectively, of net expenses attributable to parent company and corporate operations, with the higher expenses in the third quarter 2019 being primarily driven by the FNF merger expenses mentioned above.
Consistent with our investment and growth strategy of focusing on attractive businesses and geographies where we can have sustained success and where additional scale can efficiently and effectively improve profitability and margins, we acquired a number of title offices in the states of Alaska, Arizona, Colorado and Nevada during the late third quarter 2020. These acquisitions realign Stewart to strongly compete in several strategic markets where we have traditionally been underrepresented. As expected, these acquisitions, along with our second quarter acquisition of U.S. Appraisals, were immediately accretive to Stewart, evidenced by positive contributions to our third quarter 2020 pretax results. Subsequent to September 30, 2020, we acquired a national provider of appraisal management and residential real estate valuation services. Along with U.S. Appraisals, we expect this acquisition to further leverage our position in the evolving real estate closing experience and improve scale and synergies within our ancillary services business. We believe our solid operating results and liquidity position will allow us to continue investing and growing to maximize our operational potential.
COVID-19 pandemic. In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in a slowdown in the global economy and a U.S. declaration of a national emergency. In response to the pandemic, health and governmental bodies, including the state of Texas where we are headquartered, have issued travel restrictions, quarantine orders, temporary closures of non-essential businesses and other restrictive measures. In response to the pandemic, we deployed our business continuity plan during the second week ofin March and continue to take appropriate measures along with health guidance from industry and governmental bodies, to ensureprotect the safety of all our employees and customers.customers, while monitoring the evolving effects of the COVID-19 pandemic on the national and international fronts. Within the U.S., our business has been designated asdeemed an essential business which allows us to continue underwriting and closing real estate transactions for our residential and commercial customers. Wecustomers on a daily basis. When possible, we utilize our digital capabilities, including remote online notarization (RON), remote ink notarization (RIN), electronic signature platforms, virtual underwriting, and mobile earnest money transfer tools to aid our employees in keeping thefacilitating real estate market open and operatingtransactions during this challenging environment.
To date, various levels of restrictions to address the spread of COVID-19 are still in this very challenging time.
Duringplace across the three months ended March 31, 2020, the COVID-19 pandemic did not have a significant impact on our operations as we delivered one of Stewart's strongest first quarter performances in its history. However, we expect the second and third quarters will be challenging for our residential and commercial businesses. While we continue to close transactions on a daily basis, as we work through a pipeline of business from the first quarter, new orders opened so far in the second quarter are lower than orders opened in March 2020. This volume decline is consistent with expectations for the industry as unemployment rates rise, lending standards tighten and capital is constrained. Orders we received during the first three weeks of April 2020 are slightly higher compared to the same period in 2019. However, there are wide-ranging projections of real estate transaction volumes over the next several quarters which is creating near-term uncertainty for our businessU.S. and the real estate market.
rest of the world, with some economies gradually opening up and efforts to develop vaccines continue. We will continue to proactively manage our business through this crisis with the help of our exceptional employees and support of our customers. While the pandemic continues to persist, Stewart is committed to helping people safely navigate the real estate closing process. We have significant cash and investment balances in excess of statutory reserves, borrowing capability onbelieve our line of credit and a strong balance sheet. We are confident we have the financial strengthliquidity position will allow us to work through this challenging period.
First quarter 2020 overview. We reported net income attributable to Stewart of $5.2 million ($0.22 per diluted share) for the first quarter 2020, compared to a net loss attributable to Stewart of $6.8 million ($0.29 per diluted share) for the first quarter 2019. Pretax income before noncontrolling interests for the first quarter 2020 was $9.3 million compared to a pretax loss before noncontrolling interests of $7.2 million for the first quarter 2019.
First quarter 2020 results included $10.6 million of net unrealized losses recorded in the title segment relating to changes in fair value of equity securities investments.
First quarter 2019 results included the following pretax items:
$3.5 million of net unrealized gains recorded in the title segment relating to changes in fair value of equity securities investments,
$2.0 million of third-party advisory expenses related to the terminated Fidelity National Financial (FNF) merger transaction included in other operating expenses within the ancillary services and corporate segment,
$0.8 million of litigation expense related to a 2013 lender services acquisition included in other operating expenses within the ancillary services and corporate segment, and
$0.7 million of office closure costs included in other operating expenses within the title segment.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
|
| | | | | | | | |
| For the Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
| | | | | |
Operating revenues | 440.3 |
| | 376.1 |
| | 17 | % |
Investment income | 5.2 |
| | 4.7 |
| | 10 | % |
Net realized and unrealized (losses) gains | (11.1 | ) | | 3.6 |
| | (408 | )% |
Pretax income (loss) | 14.8 |
| | (0.4 | ) | |
|
|
Pretax margin | 3.4 | % | | (0.1 | )% | |
|
|
Title operating revenues in the first quarter 2020 increased $64.2 million, or 17%, compared to the prior year quarter, direct title revenues increased $37.0 million, or 23%, and gross independent agency revenues increased $27.2 million, or 13%. The higher investment income was due to increased interest income primarily resulting from the higher average cash and cash equivalents balances in the first quarter 2020 versus the prior year quarter. The title segment’s net realized and unrealized losses and gains were primarily due to $10.6 million of net unrealized losses and $3.5 million of net unrealized gains relating to changes to the fair value of equity securities investments during the first quarters 2020 and 2019, respectively.
With higher title operating revenues, the title segment’s overall operating expenses increased $34.8 million, or 9%, in the first quarter 2020 compared to the first quarter 2019, primarily driven by a 13% higher agency retention expense and a 5% increase in combined employee costs and other operating expenses. Our average independent agency remittance rate in the first quarter 2020 was slightly lower at 17.6%, compared to 17.9% in the first quarter 2019. Title loss expense increased 19% in the first quarter 2020; while as a percentage of title revenues, the title loss expense in the first quarter 2020 was 4.2%, which was comparable to the prior year quarter.
Excluding the net realized and unrealized losses and gains, and other non-operating expenses discussed above, the title segment’s first quarter 2020 pretax income would have been $25.9 million (5.8% margin), compared to a pretax loss of $3.3 million (negative 0.9% margin) in the first quarter 2019.
Direct title revenues increased primarily due to a large number of closed orders during the first quarter 2020 compared to the prior year quarter (refer to Results of Operations - Title Revenues section). First quarter 2020 non-commercial domestic revenues improved as totalfacilitate our customers’ purchase and refinancing closed orders increased from the prior year quarter, primarily influenced by the lower interest rate environment. Domestic commercial revenues also benefited from 4% higher commercial closed orders in the first quarter versus the first quarter 2019. Domestic commercial fee per file in the first quarter 2020 was approximately $11,400, an 18% increase versus the first quarter 2019; while domestic residential fee per file was approximately $2,000, an 11% decrease from last year’s quarter, primarily resulting from a higher mixrefinance of refinancing to purchase transactions. Total international title revenues increased $4.0 million, or 20%, primarily driven by increased volumes in our Canada and United Kingdom operations.real estate should macro-economic conditions become more challenging.
Summary results of the ancillary services and corporate segment are as follows ($ in millions):
|
| | | | | | | | |
| For the Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
| | | | | |
Operating revenues | 5.5 |
| | 14.3 |
| | (62 | )% |
Pretax loss | (5.6 | ) | | (6.8 | ) | | 19 | % |
Segment operating revenues declined in the first quarter 2020 versus the prior year’s quarter, primarily driven by lower revenues from the search services business due to significantly lower orders from several customers. The segment’s results for the first quarter 2020 and 2019 included approximately $5.1 million and $5.5 million, respectively, of net 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 threenine months ended March 31,September 30, 2020, 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 on2019 Form 10-K for the year ended December 31, 2019.10-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 ancillary services and corporate segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with our ancillary services operations, principally appraisal, and search and valuation services.
Factors affecting revenues. The principal factors that contribute to changes in 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;
•departure of revenue-attached employees;
•independent agency remittance rates;
•opening 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;
•seasonality and/or weather; and
•outbreaks of disease, including the COVID-19 pandemic, 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 approximately 3.7% 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 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 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 nine months ended March 31,September 30, 2020 with the three and nine months ended March 31,September 30, 2019 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 U.S. Census Bureau. We also use information from our direct operations.
Operating environment. Existing home sales grew for the fourth consecutive month in September, according to NAR, and is attributed to the currently record-low interest rates and an abundance of buyers in the marketplace, despite lower housing inventory levels compared to last year. Actual existing home sales in the firstthird quarter 2020 improvedgrew approximately 7%13% from the firstthird quarter 2019. On a seasonally-adjusted basis, MarchSeptember 2020 existing home sales totaled 415,000, which improved approximately 1%increased 21% and 9% from a year ago but declined 9% from February 2020. Marchand August 2020, respectively. September 2020 median and average home prices increased approximately 8%15% and 6%12%, respectively, compared to MarchSeptember 2019 prices. MarchSeptember 2020 housing starts increased 1%improved 2% and 11% from August 2020 and a year ago, but declined 22% compared to February 2020.respectively. Newly issued building permits in MarchSeptember 2020 werealso improved, up 5% and 8% from a year ago, but decreased 7% sequentially from February 2020. MarchAugust 2020 declines from February 2020 are primarily attributed to the effect of the COVID-19 pandemic.and September 2019, respectively.
As reported by Fannie Mae and MBA (averaged), one-to-four family mortgage originations improved 85%51% to $618approximately $1.1 trillion in the third quarter 2020 from $702 billion in the first quarter 2020 from $334 billion in the firstthird quarter 2019, primarily driven by a $251 billion, or 235%,an approximately 91% increase in refinancing originations. Purchase originations resulting from the current lower mortgage interest rate environment. While purchase originations decreased in the second quarter 2020 on a year-on-year basis, third quarter 2020 purchase originations improved 23% sequentially from the second quarter 2020 and also increased by $34 billion, or 15%, compared the third quarter 2019, as the real estate market continues to recover from the prior year quarter.
However, the housing market is expected to slow down for the resteffects of 2020 as a result of increased consumer caution and financial uncertainty stemming primarily from the COVID-19 pandemic.
For the fourth quarter 2020, Fannie Mae expects totaland MBA are forecasting that existing and new home sales will improve 10% and mortgage originations for35%, respectively, compared to last year's fourth quarter, but consistent with the second through fourth quarters 2020 toseasonality of the market, will sequentially decline by 22%1% and 3%5%, respectively, compared to the same period in 2019. Forthird quarter 2020. Total mortgage originations for the rest of the year, totalfourth quarter 2020 are expected to improve 17% from last year's fourth quarter, driven by 23% and 13% higher purchase originations are forecasted to decline by 20%, partially offset by a 16% improvement inand refinancing originations.lending, respectively. The 30-year mortgage interest rate is expected to trend lower in 2020, averagingaverage approximately 3.3%3.1% for the year 2020, compared to the 2019 average of 3.9%3.8%.
Title revenues. Direct title revenue information is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | Change | % Change | | 2020 | | 2019 | | Change | % Change |
| ($ in millions) | | | ($ in millions) | |
Non-commercial | | | | | | | | | | | | | |
Domestic | 208.2 | | | 160.5 | | | 47.7 | | 30 | % | | 503.8 | | | 416.8 | | | 87.0 | | 21 | % |
International | 30.4 | | | 28.8 | | | 1.6 | | 6 | % | | 70.4 | | | 66.8 | | | 3.6 | | 5 | % |
| 238.6 | | | 189.3 | | | 49.3 | | 26 | % | | 574.2 | | | 483.6 | | | 90.6 | | 19 | % |
Commercial: | | | | | | | | | | | | | |
Domestic | 36.7 | | | 49.7 | | | (13.0) | | (26) | % | | 108.7 | | | 133.7 | | | (25.0) | | (19) | % |
International | 4.8 | | | 6.1 | | | (1.3) | | (21) | % | | 13.7 | | | 16.9 | | | (3.2) | | (19) | % |
| 41.5 | | | 55.8 | | | (14.3) | | (26) | % | | 122.4 | | | 150.6 | | | (28.2) | | (19) | % |
Total direct title revenues | 280.1 | | | 245.1 | | | 35.0 | | 14 | % | | 696.6 | | | 634.2 | | | 62.4 | | 10 | % |
|
| | | | | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 | | % Change |
| | ($ in millions) | | |
Non-commercial | | | | | | |
Domestic | | 132.8 |
| | 107.4 |
| | 24 | % |
International | | 19.1 |
| | 15.6 |
| | 22 | % |
| | 151.9 |
| | 123.0 |
| | 23 | % |
Commercial: | | | | | | |
Domestic | | 41.4 |
| | 33.7 |
| | 23 | % |
International | | 5.0 |
| | 4.5 |
| | 11 | % |
| | 46.4 |
| | 38.2 |
| | 21 | % |
Total direct title revenues | | 198.3 |
| | 161.2 |
| | 23 | % |
% of direct title revenues over total title revenues | | 45 | % | | 43 | % | | |
Revenues from directDirect title operations, which include residential, commercial, international and centralized title services transactions, increased $37.0 million, or 23%,revenues improved in the third quarter and first quarter 2020, primarily due to improved closed orders compared to the first quarter 2019. Residential revenues increased $19.9 million, or 19%, while revenues from centralized title operations (which primarily process refinancing orders) increased $5.5 million, or 115%, in the first quarternine months of 2020, compared to the same periodperiods last year, primarily as a result of higher domestic non-commercial revenues driven by increased purchase and refinancing residential orders from existing offices and revenues generated by newly acquired title offices, which were approximately $10.3 million for the third quarter and first nine months of 2020. These increases were partially offset by decreased commercial revenues resulting from reduced transaction sizes and volumes. Total refinancing and purchased closed orders increased 47% and 42% in 2019. The increasedthe third quarter and first nine months of 2020, respectively; while commercial closed orders were largely influenced by the rise in refinancing transactions during the first quarter 2020decreased 4% and 11%, respectively, compared to the prior year quarter. same periods in 2019.
Domestic residential fee per file for both the third quarter and first quarternine months of 2020 was approximately $2,000, which was an 11% decrease from$1,900, lower compared to $2,200 for both the prior year quartersame periods in 2019 primarily resulting fromas a result of a higher mix of refinancing compared to purchase transactions in the first quarter 2020.
Our direct operations include local offices and international operations, and we generate commercial revenues both domestically and internationally. U.S. commercial revenues improved $7.7 million, primarily due to a 4% increase in commercial transactions and 18% higher domestic Domestic commercial fee per file in the third quarter and first quarternine months of 2020 declined to approximately $9,700 and $10,300, respectively, compared to the first quarter 2019. First quarter 2020 domestic commercial fee per file was approximately $11,400 compared to $9,600$12,600 and $11,300, respectively, in the prior year quarter.same periods in 2019, primarily due to the slowdown in the commercial real estate market resulting from the COVID-19 pandemic. Total international revenues increased $4.0 million, or 20%, in the third quarter and first nine months of 2020 were comparable to the third quarter 2020 compared to last year's quarter, and first nine months of 2019, primarily as a result of higher volumes fromgenerated by our Canada and United Kingdom operations.operations being offset by lower volumes from other international locations.
Orders information for the three and nine months ended March 31September 30 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | 2019 | Change | % Change | | 2020 | 2019 | Change | % Change |
Opened Orders: | | | | | | | | | |
Commercial | 3,703 | | 4,251 | | (548) | | (13) | % | | 11,308 | | 13,209 | | (1,901) | | (14) | % |
Purchase | 73,668 | | 60,579 | | 13,089 | | 22 | % | | 184,240 | | 179,298 | | 4,942 | | 3 | % |
Refinance | 86,823 | | 45,387 | | 41,436 | | 91 | % | | 223,322 | | 101,913 | | 121,409 | | 119 | % |
Other | 1,067 | | 1,128 | | (61) | | (5) | % | | 2,293 | | 3,827 | | (1,534) | | (40) | % |
Total | 165,261 | | 111,345 | | 53,916 | | 48 | % | | 421,163 | | 298,247 | | 122,916 | | 41 | % |
| | | | | | | | | |
Closed Orders: | | | | | | | | | |
Commercial | 3,799 | | 3,956 | | (157) | | (4) | % | | 10,556 | | 11,809 | | (1,253) | | (11) | % |
Purchase | 52,407 | | 46,080 | | 6,327 | | 14 | % | | 123,548 | | 124,994 | | (1,446) | | (1) | % |
Refinance | 56,027 | | 27,834 | | 28,193 | | 101 | % | | 138,909 | | 59,831 | | 79,078 | | 132 | % |
Other | 555 | | 604 | | (49) | | (8) | % | | 1,316 | | 2,555 | | (1,239) | | (48) | % |
Total | 112,788 | | 78,474 | | 34,314 | | 44 | % | | 274,329 | | 199,189 | | 75,140 | | 38 | % |
|
| | | | | | | | |
| 2020 | 2019 | Change | % Change |
Opened Orders: | | | | |
Commercial | 4,153 |
| 4,298 |
| (145 | ) | (3 | )% |
Purchase | 53,636 |
| 53,547 |
| 89 |
| — | % |
Refinance | 64,189 |
| 23,184 |
| 41,005 |
| 177 | % |
Other | 730 |
| 1,591 |
| (861 | ) | (54 | )% |
Total | 122,708 |
| 82,620 |
| 40,088 |
| 49 | % |
| | | | |
Closed Orders: | | | | |
Commercial | 3,628 |
| 3,504 |
| 124 |
| 4 | % |
Purchase | 33,715 |
| 33,318 |
| 397 |
| 1 | % |
Refinance | 31,746 |
| 13,243 |
| 18,503 |
| 140 | % |
Other | 444 |
| 996 |
| (552 | ) | (55 | )% |
Total | 69,533 |
| 51,061 |
| 18,472 |
| 36 | % |
Gross revenues from independent agency operations increased $27.2$28.5 million, or 13%11%, and $102.2 million, or 15%, in the third quarter and first quarternine months of 2020, respectively, compared to the same periods last year’s quarter,year, which was consistent with the improving real estate market trends and the continued return of agents after the FNF merger termination. Agency revenues, net of retention, increased $4.3$6.4 million, or 11%14%, and $19.6 million, or 16%, in the third quarter and first quarternine months of 2020, versusrespectively, compared to the first quartersame periods in 2019, generally in line with the gross agency revenue improvement accompanied by comparable average agency remittance rates.change. Refer further to the "Retention by agencies" discussion under Expenses below.
Ancillary services revenues. Ancillary services operating revenues decreased $8.8for the third quarter and first nine months of 2020 increased $19.3 million, or 62%224%, in the first quarter 2020and $13.9 million, or 45%, compared to the prior yearsame periods in 2019. U.S. Appraisals, which we acquired during the late second quarter primarily driven2020, generated revenues of $24.2 million and $31.3 million in the third quarter and first nine months of 2020, respectively. These revenues were partially offset by lower revenues from our existing search and valuation services of $4.9 million and $17.1 million (both 57%) in the search services business duethird quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily driven by significantly lower orders from several customers.
Investment income. Investment income duringfor both the third quarter and first quarternine months of 2020 was generally comparable to the same periods in 2019, primarily as a result of increased $0.5 million, or 10%,dividend income offsetting the effect of reduced interest income due to increasedthe lower interest income primarily resulting from the higher average cash and cash equivalents balancescompared to the first quarter 2019.rates on our investments in 2020.
Net realized and unrealized (losses) gains. Net realized and unrealized (losses) gains for the first quarters 2020 and 2019, were primarily driven by $10.6 million of net unrealized losses and $3.5 million of net unrealized gains, respectively, relatedRefer to Note 5 to the fair value changes of equity securities investments.condensed consolidated financial statements.
Expenses. An analysis of expenses is shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | Change | % Change | | 2020 | | 2019 | | Change | % Change |
| ($ in millions) | | | ($ in millions) | |
| | | | | | | | | | | | | |
Amounts retained by agencies | 231.1 | | | 209.0 | | | 22.1 | | 11 | % | | 659.1 | | | 576.6 | | | 82.5 | | 15 | % |
As a % of agency revenues | 81.8 | % | | 82.2 | % | | | | | 82.2 | % | | 82.4 | % | | | |
Employee costs | 155.6 | | | 143.8 | | | 11.8 | | 8 | % | | 428.8 | | | 413.0 | | | 15.8 | | 5 | % |
As a % of operating revenues | 26.3 | % | | 28.3 | % | | | | | 27.8 | % | | 30.3 | % | | | |
Other operating expenses | 98.5 | | | 87.8 | | | 10.7 | | 12 | % | | 245.0 | | | 251.0 | | | (6.0) | | (2) | % |
As a % of operating revenues | 16.7 | % | | 17.3 | % | | | | | 15.9 | % | | 18.4 | % | | | |
Title losses and related claims | 28.4 | | | 21.1 | | | 7.4 | | 35 | % | | 68.6 | | | 55.5 | | | 13.1 | | 24 | % |
As a % of title revenues | 5.1 | % | | 4.2 | % | | | | | 4.6 | % | | 4.2 | % | | | |
|
| | | | | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 | | % Change |
| ($ in millions) | | |
| | | | | |
Amounts retained by agencies | 199.4 |
| | 176.5 |
| | 13 | % |
As a % of agency revenues | 82.4 | % | | 82.1 | % | | |
Employee costs | 135.7 |
| | 129.3 |
| | 5 | % |
As a % of operating revenues | 30.4 | % | | 33.1 | % | | |
Other operating expenses | 71.9 |
| | 77.2 |
| | (7 | )% |
As a % of operating revenues | 16.1 | % | | 19.8 | % | | |
Title losses and related claims | 18.6 |
| | 15.7 |
| | 18 | % |
As a % of title revenues | 4.2 | % | | 4.2 | % | | |
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 82.4%81.8% and 82.1%82.2% in the third quarter and first quartersnine months of 2020, respectively, as compared to 82.2% and 2019, respectively.82.4% in the same periods in 2019. The average retention percentage may vary from period to period due to the 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 state to state. In addition, a high proportion of our independent agencies are in states 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.
Employee costs. Consolidated employee costs increased $6.4 million, or8% and 5%, in the third quarter and first quarternine months of 2020, compared to the same periods in 2019, primarily as a result of acquisitions and higher incentive compensation related to improved overall operating results, partially offset by lower salaries expenses resulting from an overall lower average employee count (excluding acquisitions). Employee costs for the first nine months of 2020 were also increased by severance expenses related to cost savings initiatives during the second quarter 2019. Employee2020. Total employee costs for the third quarter and first nine months of 2020 related to new acquisitions were $6.1 million and $6.6 million, respectively.
Excluding acquisitions, employee costs in the title segment in the third quarter and first nine months of 2020 increased $7.6$6.3 million, or 6%5%, and $11.2 million, or 3%, respectively, primarily due to increased incentive compensation on improved title revenues, partially offset by lower salaries expenses due to a lower average employee count. Severance expenses related to increased transaction volumes, whilecost savings initiatives during the second quarter 2020 also contributed to the employee cost increase during the first nine months of 2020 for the segment. Excluding U.S. Appraisals, employee costs in the ancillary services and corporate segmentssegment decreased $1.2$0.6 million or 19%,and $1.9 million (both 11%) in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to lower salaries expenses resulting from a lower average employee counts. count.
As a percentage of total operating revenues, consolidated employee costs improved to 30.4%26.3% and 27.8% in the third quarter and first quarternine months of 2020, respectively, compared to 33.1%28.3% and 30.3% in the first quartersame periods in 2019, which waswere primarily influenced by our continued focus on managing operating costs.
Other operating expenses. Other operating expenses include costs that are fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues and costs that fluctuate independently of revenues. Costs that are fixed in nature include attorney and professional fees, third-party outsourcing provider fees, equipment rental, insurance, rent and other occupancy expenses, repairs and maintenance, technology costs, telecommunications and title plant expenses. Costs that follow, to varying degrees, changes in transaction volumes and revenues include outside search and valuation fees, attorney fee splits, bad debt expenses, ancillary services cost of sales expenses, copy supplies, delivery fees, outside search fees, postage, premium taxes and title plant maintenance expenses. Costs that fluctuate independently of revenues include general supplies, litigation defense, business promotion and marketing and travel.
Consolidated other operating expenses increased 12% in the third quarter 2020 and decreased $5.3 million, or 7%,2% in the first quarternine months of 2020, compared to the same periods in 2019. Included in other operating expenses were $21.7 million and $27.7 million of expenses related to new acquisitions for the third quarter and first nine months of 2020, respectively, which primarily consisted of outside valuation fees by U.S. Appraisals. Also, during the third quarter 2019. During theand first quarternine months of 2019, we incurred $2.0$1.0 million and $6.7 million, respectively, of third-party advisory expenses recorded in the ancillary services and corporate segment related to the terminated FNF merger transaction, $0.8 million of litigation expense related to a prior year lender services acquisition recorded in the ancillary servicestransaction. Excluding acquisitions and corporate segment, and $0.7 million of office closure costs included within the title segment. Excluding these non-operating expenses, other operating expenses for the third quarter and first nine months of 2020 decreased $10.0 million, or 12%, and $27.0 million, or 11%, respectively, compared to the same periods in 2019, and as a percentage of operating revenues, were 16.1%13.8% and 14.5% in the third quarter and first quarternine months of 2020, respectively, compared to 18.9%17.1% and 17.9% in the same prior year quarter.periods.
CostsTotal costs that follow, to varying degrees, changes in transaction volumes and revenues decreased $0.8increased $17.5 million, or 3%43%, and $17.6 million, or 16%, in the third quarter and first quarternine months of 2020, respectively, compared to the first quartersame periods in 2019, primarilymainly due to reducedincreased outside title search and valuation fees primarily resulting from lower volumes in the ancillary services business.U.S. Appraisals' revenues and increased premium taxes consistent with higher direct title revenues. Excluding the non-operating expenses above, total costs that are fixed in nature in the third quarter and first quarternine months of 2020 were comparabledecreased $2.1 million, or 6%, and $6.6 million, or 7%, respectively, compared to the prior year quarter, whilesame periods in 2019, primarily due to lower rent and occupancy expenses. Total costs that fluctuate independently of revenues decreased $0.7$3.6 million, or 8%31%, and $10.3 million, or 32%, in the third quarter and first quarternine months of 2020, respectively, compared to the prior year quarter,same periods in 2019, primarily due to decreased marketing and general supplies expenses.travel expenses mainly as a result of the COVID-19 pandemic.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 5.1% and 4.6% for the third quarter and first nine months of 2020, respectively, compared to 4.2% for both the third quarter and first quarters 2020 andnine months of 2019. Title lossesloss expense increased $2.9$7.4 million or 19%,and $13.1 million in the third quarter and first quarternine months of 2020, respectively, compared to the first quarter 2020, consistent with increased title revenues.same periods in 2019. 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 decreased $2.0 million, or 9%, in the first quarter 2020 compared to the prior year quarter, primarily due to lower payments on large claims relating to prior policy years. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
The composition of title policy loss expense is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | Change | % Change | | 2020 | | 2019 | Change | % Change |
| ($ in millions) | | | ($ in millions) | |
Provisions – known claims: | | | | | | | | | | | |
Current year | 3.0 | | | 4.1 | | (1.1) | | (27) | % | | 7.6 | | | 8.4 | | (0.8) | | (10) | % |
Prior policy years | 16.9 | | | 18.0 | | (1.1) | | (6) | % | | 45.0 | | | 55.7 | | (10.7) | | (19) | % |
| 19.9 | | | 22.1 | | (2.2) | | (10) | % | | 52.6 | | | 64.1 | | (11.5) | | (18) | % |
Provisions – IBNR | | | | | | | | | | | |
Current year | 25.3 | | | 16.7 | | 8.6 | | 51 | % | | 60.5 | | | 46.2 | | 14.3 | | 31 | % |
Prior policy years | 0.1 | | | 0.3 | | (0.2) | | (67) | % | | 0.5 | | | 0.9 | | (0.4) | | (44) | % |
| 25.4 | | | 17.0 | | 8.4 | | 49 | % | | 61.0 | | | 47.1 | | 13.9 | | 30 | % |
Transferred from IBNR to known claims | (16.9) | | | (18.0) | | 1.1 | | (6) | % | | (45.0) | | | (55.7) | | 10.7 | | (19) | % |
Total provisions | 28.4 | | | 21.1 | | 7.4 | | 35 | % | | 68.6 | | | 55.5 | | 13.1 | | 24 | % |
|
| | | | | | |
| | Three Months Ended March 31, |
| | 2020 | | 2019 |
| | ($ in millions) |
Provisions – known claims: | | | | |
Current year | | 1.3 |
| | 1.9 |
|
Prior policy years | | 12.6 |
| | 17.3 |
|
| | 13.9 |
| | 19.2 |
|
Provisions – IBNR | | | | |
Current year | | 17.2 |
| | 13.6 |
|
Prior policy years | | 0.1 |
| | 0.2 |
|
| | 17.3 |
| | 13.8 |
|
Transferred from IBNR to known claims | | (12.6 | ) | | (17.3 | ) |
Total provisions | | 18.6 |
| | 15.7 |
|
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.
KnownTotal known claims provisions decreased $5.3 million, or 28%, in the third quarter and first quarternine months of 2020 compared to the same periods last year's quarter,year, primarily as a result of decreased dollar amounts of claims reported relating to both current and prior policy years. Current year IBNR provisions in the third quarter and first quarternine months of 2020 increased $3.6 million, or 27%p, compared to the first quarter 2019, primarilyrimarily due to increased title premiums.premiums in 2020, higher domestic loss provisioning rates due to the current economic and mortgage forbearance environment which is expected to result in increased defaults and title losses, and unfavorable loss development in certain coverages within our Canadian business. As a percentage of title operating revenues, provisions - IBNR for the current policy year were 3.9%4.5% and 3.6%4.0% in the third quarter and first quartersnine months of 2020, respectively, compared with 3.3% and 3.5% in the third quarter and first nine months of 2019, respectively.
Cash claim payments decreased $1.1 million, or 5%, and $7.8 million, or 12%, in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to lower payments on large and non-large claims relating to prior policy years. 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 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 both the first quartersnine months of 2020 and 2019, we recorded approximately $0.6$1.0 million and $1.6 million, respectively, of policy loss reservesexpenses relating to escrow losses arising from fraud.
Total title policy loss reserve balances are as follows:
| | | | | | | | | | | |
| September 30, 2020 | | December 31, 2019 |
| ($ in millions) |
Known claims | 61.4 | | | 67.8 | |
IBNR | 405.4 | | | 391.3 | |
Total estimated title losses | 466.8 | | | 459.1 | |
|
| | | | | |
| March 31, 2020 | | December 31, 2019 |
| ($ in millions) |
Known claims | 60.2 |
| | 67.8 |
|
IBNR | 387.4 |
| | 391.3 |
|
Total estimated title losses | 447.6 |
| | 459.1 |
|
Title claims are generally incurred within the first sixnine years after policy issuance and the timing of payments on these claims can significantly impact the balance of known claims, since claims, in many cases, may be open for several years before resolution and payment occur. 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 during the third quarter and first quarternine months of 2020 decreased $1.8$0.6 million, or 29%10%, and $4.0 million, or 23%, respectively, compared to the prior year quarter,same periods in 2019. These decreases were primarily due to certain information technology assets and fixed assets, which became fully depreciated or were written offimpaired during 2019.2019, partially offset by incremental intangible asset amortization expenses related to our U.S. Appraisals acquisition which approximated $1.1 million for both the third quarter and first nine months of 2020.
Income taxes. Our effective tax rates for both the third quarter and first quartersnine months of 2020 were 22% and 2019,24%, respectively, based on income (loss) before taxes and after deducting income attributable to noncontrolling interests, were 27%. Additionally, on March 27,in comparison with effective tax rates of 24% and 25% for the third quarter and first nine months of 2019, respectively. The lower effective tax rates for the third quarter and first nine months of 2020 the Coronavirus Aid, Relief,primarily resulted from increased year over year annualized pretax income and Economic Security Act (CARES Act) was enactedreductions in response to the COVID-19 pandemic. The CARES Act, among other things, allows additional carryback opportunities for net operating losses and modifies the depreciable life for tax purposes of qualified improvement property (QIP) from 39 years to 15 years, making QIP eligible for bonus depreciation that can be retroactively applied to the 2018 tax year. We areexpected nondeductible expenses in the process of evaluating the impact of these changes to the consolidated financial statements but do not expect a material impact to the consolidated income statement.2020.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of March 31,September 30, 2020, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $925.2 million$1.1 billion ($409.5496.7 million, net of statutory reserves on cash and investments). Of our total cash and investments at March 31,September 30, 2020, $653.5$747.2 million ($342.2411.5 million, net of statutory reserves) was held in the United States (U.S.) and the rest internationally, principally in Canada.
Cash held at the parent company totaled $54.2$31.3 million at March 31,September 30, 2020. As a holding company, the parent company is funded principally by cash from its subsidiaries 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, cash held at the parent company is used for dividend payments to common stockholders and for stock repurchases, if any. To the extent such uses exceed cash available, the parent company is dependent on distributions from its regulated title insurance underwriter, Stewart Title Guaranty Company (Guaranty).
A substantial majority of our consolidated cash and investments as of March 31,September 30, 2020 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 use 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 claimsclaim payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and ancillary services operations) for their operating and debt service needs.
We maintain investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory 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 $497.5$535.7 million and $483.4 million at March 31,September 30, 2020 and December 31, 2019, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $18.3$21.1 million and $39.7 million at March 31,September 30, 2020 and December 31, 2019, respectively. As of March 31,September 30, 2020, our known claims reserve totaled $60.2$61.4 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $387.4$405.4 million. In addition to this, we had cash and investments (excluding equity method investments) of $269.6$322.7 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 TDI must be notified of any dividend declared, and any dividend in excess of the statutory maximum of 20% of surplus (approximately $115.0 million as of December 31, 2019) 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 liquidity, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. During the threenine months ended March 31,September 30, 2020, Guaranty paid a dividend of $30.0 million to its parent.
As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| ($ in millions) |
Net cash provided by operating activities | 140.9 | | | 107.3 | |
Net cash (used) provided by investing activities | (156.1) | | | 53.4 | |
Net cash provided (used) by financing activities | 66.7 | | | (33.0) | |
|
| | | | | |
| Three Months Ended March 31, |
| 2020 | | 2019 |
| ($ in millions) |
Net cash used by operating activities | (11.4 | ) | | (39.9 | ) |
Net cash (used) provided by investing activities | (3.3 | ) | | 24.6 |
|
Net cash used by financing activities | (18.8 | ) | | (13.6 | ) |
Operating activities. Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, ancillary services 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.
Net cash usedprovided by operations in the first threenine months of 2020 improved to $11.4by $33.6 million, compared to net cash used of $39.9 million in the first threenine months of 2019, primarily due to the higher net income generated in 2020 compared to the net loss results in 2019, higher collections on accounts receivables, and lower claim payments, partially offsetpayments. Also included in the net cash provided by higher payments on accrued liabilities.operations in 2019 was the $50.0 million FNF merger termination fee. 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. We are continuing our emphasis on cost management, especially in light of the current economic environment due to the COVID-19 pandemic, specifically focusing on lowering unit costs of production and improving operating margins in our direct title and ancillary services businesses. Our plans to improve margins include additional automation of manual processes, and further consolidation of our various systems and production operations. We are currently investing in the technology necessary to accomplish these goals.
Investing activities. Cash used and provided by investing activities is primarily driven by proceeds from matured and sold investments, purchases of investments, capital expenditures and acquisition of title offices.offices and other businesses. During the first threenine months of 2020, total proceeds from securities investments sold and matured were $30.6$72.4 million, compared to $27.1$65.6 million during the same period in 2019. Cash used for purchases of securities investments was $30.7$75.5 million during the first threenine months of 2020, compared to $0.6$2.2 million during the same period in 2019.2019, when we invested more in cash equivalents and short-term investments due to favorable interest rates.
During the first threenine months of 2020, we used $146.5 million of cash for acquisitions of certain title offices and U.S Appraisals; while during the first nine months of 2020 and 2019, we used $4.8$10.5 million and $2.7$12.0 million, respectively, of cash for purchases of property and equipment, while we used $1.4 million of cash for acquisitions of title offices during the first three months of 2020.equipment. 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. During the third quarter 2020, we generated net proceeds of approximately $109.0 million from an issuance of new shares of Common Stock (refer also to Note 1-D to the condensed consolidated financial statements). We used the proceeds primarily for the acquisition of several title offices during the third quarter 2020. During the first nine months of 2020 and 2019, we paid total dividends of $22.2 million and $21.3 million, respectively, or $0.90 per common share for both periods.
Total debt and stockholders’ equity were $102.6$101.3 million and $737.1$950.9 million, respectively, as of March 31,September 30, 2020. Payments on notes payable during the first threenine months of 2020 and 2019 of $7.7$10.3 million and $6.6$23.9 million, respectively, and notes payable additions of $0.2$2.4 million and $4.5$23.5 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business. At March 31,September 30, 2020, the outstanding balance of our line of credit facility was $98.9 million, while the available balance of the line of credit was $48.6$98.6 million, net of an unused $2.5 million letter of credit. At March 31,September 30, 2020, our debt-to-equity ratio, excluding our Section 1031 notes, was approximately 13.9%10.6%, below the 20% we have set as our unofficial internal limit on leverage.
During each of the first three months of 2020 and 2019, we paid total dividends of $7.1 million or $0.30 per common share.
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 decrease of $3.5$0.5 million during the first threenine months of 2020 and a net increase of $1.4$1.2 million during the same period in 2019. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar depreciated in 2020 and improved in 2019.
***********
We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations, including in the current economic and real estate environment created by the COVID-19 pandemic. 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) 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. During the first threenine months of 2020, net unrealized investment lossesgains of $2.7$14.8 million, net of taxes, which increased our other comprehensive loss,income, were primarily related to a net decreaseincrease in the fair values of our overall bond securities investment portfolio mainly driven by increasedthe effect of lower interest rates and partially offset by higher credit spreads. During the first threenine months of 2019, net unrealized investment gains of $9.2$18.1 million, net of taxes, which increased our other comprehensive income, were primarily related to increases in the fair values of our overall bond securities investment portfolio driven by reduced interest rates and credit spreads.
Changes in foreign currency exchange rates, primarily related to our Canadian and United Kingdom operations, increaseddecreased our other comprehensive loss,income, net of taxes, by $11.4$3.4 million in the first threenine months of 2020; while they increased our other comprehensive income, net of taxes, by $4.6$1.9 million for the same period in 2019.
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 16 in our Annual Report on2019 Form 10-K for the year ended December 31, 2019.10-K.
Forward-looking statements. Certain statements in this report are "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 "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 volatility of economic conditions, including the duration and effects of the COVID-19 pandemic; 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; 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; 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; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; seasonality and weather; and our ability to respond to the actions of our competitors. These 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 on2019 Form 10-K, for the year ended December 31, 2019, as updated and supplemented in Part II, Item 1A of thisour Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, and as maybe 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. 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 March 31,September 30, 2020 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 on2019 Form 10-K for the year ended December 31, 2019.10-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 March 31,September 30, 2020, 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 March 31,September 30, 2020, 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 on Form 10-K for the year ended December 31, 2019.
Item 1A. Risk Factors
Except as stated below, thereOur operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A. “Risk Factors” in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which could adversely affect our business, financial condition, results of operations, liquidity, and the trading price of our common stock. There have been no material changes to our risk factors during the threenine months ended March 31,September 30, 2020 since our Annual Report on Form 10-K for the year ended December 31, 2019.2019 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
A widespread health outbreak or pandemic, such as the current COVID-19 pandemic, could adversely impact our business operations
In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in decreased economic activity and financial volatility globally. In response to the pandemic, health and governmental bodies have issued travel restrictions, quarantine orders, temporary closures of non-essential businesses, and other restrictive measures. Although the title insurance industry has been deemed essential in the United States, the pandemic and measures to contain it have caused disruptions in the real estate market and on our business operations, which include decrease in volume of orders and other business activity, delay in closing real estate transactions, and decrease in value of investments. Depending on the duration and extent of the disruption caused by COVID-19, as well as the counter-measures enacted by health and governmental bodies and their timing, our future results of operations and financial position could be significantly impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our Common Stock during the threenine months ended March 31,September 30, 2020, except for repurchases of approximately 9,90020,300 shares (aggregate purchase price of approximately $0.4$0.8 million) related to the statutory income tax withholding on the vesting of restricted share and unit grants to executives and senior management.
Item 5. Other Information
Book value per share. Our book value per share was $30.90$35.33 and $31.52 as of March 31,September 30, 2020 and December 31, 2019, respectively. As of March 31,September 30, 2020, our book value per share was based on approximately $731.8$943.9 million of stockholders’ equity attributable to Stewart and 23,679,88826,719,342 shares of Common Stock outstanding. As of December 31, 2019, our book value per share was based on approximately $747.3 million of stockholders’ equity attributable to Stewart and 23,709,407 shares of Common Stock outstanding.
Item 6. Exhibits
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3.1 | | - | | |
3.1 | | - | | |
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3.2 | | - | | |
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10.1†10.1* | | - | | Voluntary SeparationAsset Purchase and Sale Agreement, dated and Release, dated January 15,effective September 1, 2020, by and between the Registrant and Matthew W. Morris (incorporated by reference in this report from Exhibit 10.6Unified Title Company, LLC, Unified Title Company of the Current Report on Form 10-K filed February 27, 2020)Northern Colorado, LLC, Legacy Title Group, LLC, Empire West Title Agency, LLC, Western Title Company, LLC, Colorado Escrow and Title Services, LLC, Empire Title of Colorado Springs, LLC, Western Exchange Services, LLC, El Paso Title Plant, LLC, and ET Production Services, LLC |
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10.2† | | - | | |
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10.3† | | - | | |
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10.4† | | - | | |
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10.5† | | - | | |
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10.6† | | - | | |
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10.7† | | - | | |
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10.8† | | - | | |
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10.9† | | - | |
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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. |
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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 |
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 |