STEWART INFORMATION SERVICES CORP
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
For the quarterly period ended
March 31, 2024
or
For the transition period from
to
Commission file number
001-02658
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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Registrant’s telephone number, including area code:
(
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 | ||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant 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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Non-accelerated filer
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Emerging growth company | ||||||||||||||||||
| ☐ | Accelerated filer |
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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 April 29, 2024, there were
27,580,535
outstanding shares of the issuer's Common Stock.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED MARCH 31, 2024
TABLE OF CONTENTS
| Item | Page | |||||||
| PART I – FINANCIAL INFORMATION | ||||||||
| 1. | ||||||||
| 2. | ||||||||
| 3. | ||||||||
| 4. | ||||||||
| PART II – OTHER INFORMATION | ||||||||
| 1. | ||||||||
| 1A. | ||||||||
| 2. | ||||||||
| 5. | ||||||||
| 6. | ||||||||
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.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
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Three Months Ended
March 31, |
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| 2024 | 2023 | ||||||||||
| ($000 omitted, except per share) | |||||||||||
| Revenues | |||||||||||
| Title revenues: | |||||||||||
| Direct operations |
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| Agency operations |
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Real estate solutions
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| Operating revenues |
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| Investment income |
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Net realized and unrealized gains (losses)
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(
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| Expenses | |||||||||||
| Amounts retained by agencies |
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| Employee costs |
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| Other operating expenses |
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| Title losses and related claims |
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| Depreciation and amortization |
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| Interest |
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Income (loss) before taxes and noncontrolling interests
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Income tax (expense) benefit
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(
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Net income (loss)
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| Less net income attributable to noncontrolling interests |
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Net income (loss) attributable to Stewart
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(
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Net income (loss)
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(
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Other comprehensive (loss) income, net of taxes:
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| Foreign currency translation adjustments |
(
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| Change in net unrealized gains and losses on investments |
(
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| Reclassification adjustments for realized gains and losses on investments |
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Other comprehensive (loss) income, net of taxes:
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(
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Comprehensive (loss) income
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(
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| Less net income attributable to noncontrolling interests |
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Comprehensive loss attributable to Stewart
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(
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(
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| Basic average shares outstanding (000) |
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Basic earnings (loss) per share attributable to Stewart
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(
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| Diluted average shares outstanding (000) |
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Diluted earnings (loss) per share attributable to Stewart
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(
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See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31, 2024 (Unaudited) |
December 31, 2023 |
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| ($000 omitted) | |||||||||||
| Assets | |||||||||||
| Cash and cash equivalents |
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| Short-term investments |
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| Investments, at fair value: | |||||||||||
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Debt securities (amortized cost of $
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| Equity securities |
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| Receivables: | |||||||||||
| Premiums from agencies |
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| Trade and other |
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| Income taxes |
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| Notes |
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| Allowance for uncollectible amounts |
(
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(
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| Property and equipment: | |||||||||||
| Land |
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| Buildings |
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| Furniture and equipment |
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| Accumulated depreciation |
(
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(
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| Operating lease assets |
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| Title plants, at cost |
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| Goodwill |
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| Intangible assets, net of amortization |
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| Deferred tax assets |
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| Other assets |
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| Liabilities | |||||||||||
| Notes payable |
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| Accounts payable and accrued liabilities |
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| Operating lease liabilities |
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| Estimated title losses |
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| Deferred tax liabilities |
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| Contingent liabilities and commitments |
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| Stockholders’ equity | |||||||||||
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Common Stock ($
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| Retained earnings |
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| Accumulated other comprehensive loss: | |||||||||||
| Foreign currency translation adjustments |
(
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(
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| Net unrealized losses on debt securities investments |
(
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(
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Treasury stock –
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(
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(
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| Stockholders’ equity attributable to Stewart |
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| Noncontrolling interests |
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Total stockholders’ equity (
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See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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Three Months Ended
March 31, |
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| 2024 | 2023 | ||||||||||
| ($000 omitted) | |||||||||||
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Reconciliation of net income (loss) to cash used by operating activities:
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Net income (loss)
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(
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| Add (deduct): | |||||||||||
| Depreciation and amortization |
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| Adjustments for bad debt provisions |
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Net realized and unrealized (gains) losses
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(
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Amortization of net (discount) premium on debt securities investments
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(
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Payments for title losses in excess of provisions
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(
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(
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| Adjustments for insurance recoveries of title losses |
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Increase in receivables – net
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(
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(
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| Increase in other assets – net |
(
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(
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| Decrease in accounts payable and other liabilities – net |
(
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(
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| Change in net deferred income taxes |
(
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Net loss (income) from equity method investments
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(
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| Dividends received from equity method investments |
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| Stock-based compensation expense |
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| Other – net |
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Cash used by operating activities
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(
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(
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| Investing activities: | |||||||||||
| Proceeds from sales of investments in securities |
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| Proceeds from matured investments in debt securities |
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| Purchases of investments in securities |
(
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(
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| Net purchases of short-term investments |
(
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(
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Purchases of property and equipment and other long-lived assets
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(
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(
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| Proceeds from sale of property and equipment and other assets |
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| Cash paid for acquisition of businesses |
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(
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| Increase in notes receivable |
(
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(
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Purchases of cost-basis and other investments
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(
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(
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| Other – net |
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| Cash used by investing activities |
(
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(
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| Financing activities: | |||||||||||
| Proceeds from notes payable |
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| Payments on notes payable |
(
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(
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| Distributions to noncontrolling interests |
(
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(
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| Repurchases of Common Stock |
(
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(
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| Proceeds from stock option and employee stock purchase plan exercises |
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| Cash dividends paid |
(
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(
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| Payment of contingent consideration related to acquisitions |
(
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| Cash used by financing activities |
(
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(
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| Effects of changes in foreign currency exchange rates |
(
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(
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| Change in cash and cash equivalents |
(
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(
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
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See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
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Common Stock
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Additional paid-in capital | Retained earnings |
Accumulated other comprehensive loss
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Treasury stock | Noncontrolling interests | Total | |||||||||||||||||||||||||||||||||||
| ($000 omitted) | |||||||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2024 | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2023 |
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(
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(
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| Net income attributable to Stewart | — | — |
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— | — | — |
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Dividends on Common Stock ($
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— | — |
(
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— | — | — |
(
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| Stock-based compensation |
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— | — | — | — |
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| Stock repurchases |
(
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(
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— | — | — | — |
(
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| Stock option and employee stock purchase plan exercises |
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— | — | — | — |
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| Change in net unrealized gains and losses on investments, net of taxes | — | — | — |
(
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— | — |
(
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| Reclassification adjustment for realized gains and losses on investments, net of taxes | — | — | — |
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— | — |
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| Foreign currency translation adjustments, net of taxes | — | — | — |
(
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— | — |
(
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| Net income attributable to noncontrolling interests | — | — | — | — | — |
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| Distributions to noncontrolling interests | — | — | — | — | — |
(
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(
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| Balance at March 31, 2024 |
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(
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(
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| Three Months Ended March 31, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 |
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(
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(
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Net loss attributable to Stewart
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— | — |
(
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— | — | — |
(
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Dividends on Common Stock ($
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— | — |
(
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— | — | — |
(
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| Stock-based compensation |
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— | — | — | — |
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| Stock repurchases |
(
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(
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— | — | — | — |
(
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| Stock option and employee stock purchase plan exercises |
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— | — | — | — |
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| Change in net unrealized gains and losses on investments, net of taxes | — | — | — |
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— | — |
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| Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | — | — |
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— | — |
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| Foreign currency translation adjustments, net of taxes | — | — | — |
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— | — |
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| Net income attributable to noncontrolling interests | — | — | — | — | — |
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| Distributions to noncontrolling interests | — | — | — | — | — |
(
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(
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| Balance at March 31, 2023 |
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(
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(
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See notes to condensed consolidated financial statements.
6
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, 2024 and 2023, and as of March 31, 2024, 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, 2023 filed with the Securities and Exchange Commission on February 28, 2024 (2023 Form 10-K).
A.
Management’s responsibility.
The accompanying interim financial statements were prepared by management, which 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% to 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 c
urrent operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately
$
519.9
million
and $
527.4
million at March 31, 2024 and December 31, 2023, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately
$
10.3
million and $
10.0
million at March 31, 2024 and December 31, 2023, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. 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.
NOTE 2
Revenues.
The Company's operating revenues, summarized by type, are as follows:
|
Three Months Ended
March 31, |
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| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
| Title insurance premiums: | ||||||||||||||
| Direct |
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| Agency |
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| Escrow fees |
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| Real estate solutions and abstract fees |
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| Other revenues |
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7
NOTE 3
Investments in debt and equity securities.
As of March 31, 2024 and December 31, 2023, the net unrealized investment gains relating to investments in equity securitie
s held were $
18.4
million and $
11.2
million, respectively (refer to Note 5).
The amortized costs and fair values of investments in debt securities are as follows:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
|
Amortized
costs
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Fair
values
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Amortized
costs
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Fair
values
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| ($000 omitted) | |||||||||||||||||||||||
| Municipal |
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| Corporate |
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| Foreign |
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| U.S. Treasury Bonds |
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Foreign debt securities consist of Canadian government, provincial 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, 2024 | December 31, 2023 | ||||||||||||||||||||||
| Gains | Losses | Gains | Losses | ||||||||||||||||||||
| ($000 omitted) | |||||||||||||||||||||||
| Municipal |
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| Corporate |
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| Foreign |
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| U.S. Treasury Bonds |
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Debt securities as of March 31, 2024 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):
|
Amortized
costs
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Fair
values
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| ($000 omitted) | |||||||||||
| In one year or less |
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| After one year through five years |
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| After five years through ten years |
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| After ten years |
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8
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, 2024, were:
| Less than 12 months | More than 12 months | Total | |||||||||||||||||||||||||||||||||
| Losses | Fair values | Losses | Fair values | Losses | Fair values | ||||||||||||||||||||||||||||||
| ($000 omitted) | |||||||||||||||||||||||||||||||||||
| Municipal |
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| Corporate |
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| Foreign |
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| U.S. Treasury Bonds |
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The number of specific debt investment holdings held in an unrealized loss position as of March 31, 2024 was
332
. Of these securities,
255
were in unrealized loss positions for more than 12 months. Total gross unrealized investment losses at March 31, 2024 slightly increased compared to December 31, 2023, primarily due to the continuing high interest rate environment which started in late 2022. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery in value, and no significant credit risk is deemed to exist, these investments are not considered as credit-impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023, were:
| Less than 12 months | More than 12 months | Total | |||||||||||||||||||||||||||||||||
| Losses | Fair values | Losses | Fair values | Losses | Fair values | ||||||||||||||||||||||||||||||
| ($000 omitted) | |||||||||||||||||||||||||||||||||||
| Municipal |
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| Corporate |
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| Foreign |
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|||||||||||||||||||||||||||||
| U.S. Treasury Bonds |
|
|
|
|
|
|
|||||||||||||||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||
NOTE 4
Fair value measurements.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Under U.S. GAAP, there is a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible.
The three levels of inputs used to measure fair value are as follows:
•
Level 1 – quoted prices in active markets for identical assets or liabilities;
•
Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
•
Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
9
As of March 31, 2024, 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 |
|
|
|
||||||||||||||
| Corporate |
|
|
|
||||||||||||||
| Foreign |
|
|
|
||||||||||||||
| U.S. Treasury Bonds |
|
|
|
||||||||||||||
| Equity securities |
|
|
|
||||||||||||||
|
|
|
|
|||||||||||||||
As of December 31, 2023, financial instruments measured at fair value on a recurring basis are summarized below:
| Level 1 | Level 2 |
Fair value
measurements
|
|||||||||||||||
| ($000 omitted) | |||||||||||||||||
| Investments in securities: | |||||||||||||||||
| Debt securities: | |||||||||||||||||
| Municipal |
|
|
|
||||||||||||||
| Corporate |
|
|
|
||||||||||||||
| Foreign |
|
|
|
||||||||||||||
| U.S. Treasury Bonds |
|
|
|
||||||||||||||
| Equity securities |
|
|
|
||||||||||||||
|
|
|
|
|||||||||||||||
As of March 31, 2024 and December 31, 2023, 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 gains (losses).
Realized and unrealized gains and losses are detailed as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
| Realized gains |
|
|
||||||||||||
| Realized losses |
(
|
(
|
||||||||||||
|
Net unrealized investment gains (losses) recognized on equity securities still held
|
|
(
|
||||||||||||
|
|
(
|
|||||||||||||
Realized losses during the first quarters 2024 and 2023 were primarily related to sales of securities investments.
10
Investment gains and losses recognized related to investments in equity securities are as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
|
Net investment gains (losses) recognized on equity securities during the period
|
|
(
|
||||||||||||
|
Less: Net realized gains (losses) on equity securities sold during the period
|
|
(
|
||||||||||||
|
Net unrealized investment gains (losses) recognized on equity securities still held
|
|
(
|
||||||||||||
Proceeds from sales of investments in securities are as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
| Proceeds from sales of debt securities |
|
|
||||||||||||
| Proceeds from sales of equity securities |
|
|
||||||||||||
| Total proceeds from sales of investments in securities |
|
|
||||||||||||
NOTE 6
Goodwill.
The summary of changes in goodwill is as follows:
| Title | Real Estate Solutions | Consolidated Total | |||||||||||||||
| ($000 omitted) | |||||||||||||||||
|
Balances at December 31, 2023
|
|
|
|
||||||||||||||
| Purchase accounting adjustments |
|
|
|
||||||||||||||
|
Balances at March 31, 2024
|
|
|
|
||||||||||||||
NOTE 7
Estimated title losses.
A summary of estimated title losses for the three months ended March 31 is as follows:
| 2024 | 2023 | ||||||||||
| ($000 omitted) | |||||||||||
| Balances at January 1 |
|
|
|||||||||
| Provisions: | |||||||||||
| Current year |
|
|
|||||||||
| Previous policy years |
|
|
|||||||||
| Total provisions |
|
|
|||||||||
| Payments, net of recoveries: | |||||||||||
| Current year |
(
|
(
|
|||||||||
| Previous policy years |
(
|
(
|
|||||||||
| Total payments, net of recoveries |
(
|
(
|
|||||||||
| Effects of changes in foreign currency exchange rates |
(
|
(
|
|||||||||
|
Balances at March 31
|
|
|
|||||||||
| Loss ratios as a percentage of title operating revenues: | |||||||||||
| Current year provisions |
|
% |
|
% | |||||||
| Total provisions |
|
% |
|
% | |||||||
11
NOTE 8
Share-based payments.
As part of its incentive compensation program for executives and senior management employees, the Company provides share-based awards, which usually include a combination of time-based restricted stock units, performance-based restricted stock units and stock options. Each restricted stock unit represents a contractual right to receive a share
of the Company's Common Stock. The time-based units generally vest on each of the first
anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives and an employee service requirement over a period of approximately
three years
. The Company has not granted stock options since 2021 and all outstanding stock option awards are fully vested at March 31, 2024.
The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the corresponding vesting period.
NOTE 9
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. To calculate diluted EPS, the number of shares is adjusted to include the number of additional shares that would have been outstanding if restricted units were vested and issued and stock options were exercised. In periods of net losses, 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
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted, except per share) | ||||||||||||||
| Numerator: | ||||||||||||||
|
Net income (loss) attributable to Stewart
|
|
(
|
||||||||||||
| Denominator (000): | ||||||||||||||
| Basic average shares outstanding |
|
|
||||||||||||
| Average number of dilutive shares relating to options |
|
|
||||||||||||
|
Average number of dilutive shares relating to restricted units
|
|
|
||||||||||||
| Diluted average shares outstanding |
|
|
||||||||||||
|
Basic earnings (loss) per share attributable to Stewart
|
|
(
|
||||||||||||
|
Diluted earnings (loss) per share attributable to Stewart
|
|
(
|
||||||||||||
12
NOTE 10
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, 2024, 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 guaran
tees 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, 2024, the Company also had unused letters of credit aggregating $
4.9
million r
elated to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees.
NOTE 11
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 plaintiffs 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 referred to in this paragraph and that the likely resolution of these matters will not materially affect its consolidated financial condition or results of operations.
The Company is subject to non-ordinary course of business claims or lawsuits from time to time.
To the extent the Company is currently the subject of these types of lawsuits, the Company has determined either that a loss is not reasonably possible or that the estimated loss or range of loss, if any, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Additionally, the Company occasionally 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.
NOTE 12
Segment information.
The Company has
three
reportable operating segments: the title segment, the real estate solutions segment, and the corporate and other segment. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, abstracting, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home and personal insurance services, Internal Revenue Code Section 1031 tax-deferred exchanges, and digital customer engagement platform services. The real estate solutions segment supports the real estate industry and primarily includes credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment is primarily comprised of the parent holding company and centralized support services departments.
13
Selected statement of operations information related to these segments is as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
| Title segment: | ||||||||||||||
| Revenues |
|
|
||||||||||||
| Depreciation and amortization |
|
|
||||||||||||
|
Income (loss) before taxes and noncontrolling interest
|
|
(
|
||||||||||||
| Real estate solutions segment: | ||||||||||||||
| Revenues |
|
|
||||||||||||
| Depreciation and amortization |
|
|
||||||||||||
| Income before taxes |
|
|
||||||||||||
| Corporate and other segment: | ||||||||||||||
| Revenues (net realized losses) |
(
|
|
||||||||||||
| Depreciation and amortization |
|
|
||||||||||||
| Loss before taxes |
(
|
(
|
||||||||||||
| Consolidated Stewart: | ||||||||||||||
| Revenues |
|
|
||||||||||||
| Depreciation and amortization |
|
|
||||||||||||
|
Income (loss) before taxes and noncontrolling interest
|
|
(
|
||||||||||||
The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.
Total revenues generated in the United States and all international operations are as follows:
|
Three Months Ended
March 31, |
||||||||||||||
| 2024 | 2023 | |||||||||||||
| ($000 omitted) | ||||||||||||||
| United States |
|
|
||||||||||||
| International |
|
|
||||||||||||
|
|
|
|||||||||||||
14
NOTE 13
Other comprehensive (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
March 31, 2024 |
Three Months Ended
March 31, 2023 |
||||||||||||||||||||||
| 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 |
(
|
(
|
(
|
|
|
|
|||||||||||||||||
| Reclassification adjustments for realized gains and losses on investments |
|
|
|
|
|
|
|||||||||||||||||
|
(
|
(
|
(
|
|
|
|
||||||||||||||||||
| Foreign currency translation adjustments |
(
|
(
|
(
|
|
|
|
|||||||||||||||||
|
Other comprehensive (loss) income
|
(
|
(
|
(
|
|
|
|
|||||||||||||||||
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S OVERVIEW
First quarter 2024 overview
.
We reported net income attributable to Stewart of $3.1 million ($0.11 per diluted share) for the first quarter 2024, compared to net loss attributable to Stewart of $8.2 million ($(0.30) per diluted share) for the first quarter 2023. Pretax income before noncontrolling interests for the first quarter 2024 was $7.1 million compared to pretax loss before noncontrolling interests of $10.2 million for the prior year quarter. The first quarter 2024 and 2023 results included $7.0 million and ($1.8 million), respectively, of pretax net realized and unrealized gains (losses) primarily driven by fair value changes of equity securities investments in the title segment.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
|
For the Three Months
Ended March 31 |
|||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||
| Operating revenues | 451.4 | 456.9 | (1) | % | |||||||||||||
| Investment income | 12.9 | 6.6 | 96 | % | |||||||||||||
|
Net realized and unrealized gains (losses)
|
7.1 | (1.8) | 492 | % | |||||||||||||
|
Pretax income (loss)
|
10.2 | (0.7) | 1,633 | % | |||||||||||||
| Pretax margin | 2.2 | % | (0.1) | % | |||||||||||||
Title segment operating revenues in the first quarter 2024 decreased $5.5 million, or 1%, compared to the first quarter 2023, primarily as a result of residential volume declines in the direct and agency title operations, partially offset by increased commercial revenues. Total segment operating expenses in the first quarter 2024 decreased $1.1 million, which was less than 1%, compared to the prior year quarter. Agency retention expenses in the first quarter 2024 decreased $5.8 million, or 3%, in line with lower gross agency revenues of $8.2 million, or 3%, while the average independent agency remittance rate in the first quarter 2024 was approximately 17%, compared to 17.4% during the first quarter 2023.
Total title segment employee costs and other operating expenses in the first quarter 2024 increased $4.3 million, or 2%, compared to the prior year quarter, primarily due to increased outside search expenses related to higher commercial revenues. As a percentage of operating revenues, these expenses were 52.0% in the first quarter 2024 compared to 50.4% in the first quarter 2023. Title loss expense in the first quarter 2024 decreased $0.3 million, or 2%, compared to the prior year quarter, primarily due to lower title revenues. As a percentage of title revenues, title loss expense was 3.9% in both the first quarters 2024 and 2023.
Investment income improved $6.3 million in the first quarter 2024, compared to the prior year quarter, primarily due to higher interest income resulting from earned interest from eligible escrow balances in the first quarter 2024. Acquisition intangible asset amortization expenses in the first quarters 2024 and 2023 amounted to $2.9 million and $2.8 million, respectively.
Summary results of the real estate solutions segment are as follows ($ in millions, except pretax margin):
|
For the Three Months
Ended March 31 |
|||||||||||||||||
| 2024 | 2023 | % Change | |||||||||||||||
| Operating revenues | 83.0 | 62.6 | 33 | % | |||||||||||||
| Pretax income | 6.7 | 1.4 | 393 | % | |||||||||||||
| Pretax margin | 8.1 | % | 2.2 | % | |||||||||||||
16
The segment’s operating revenues in the first quarter 2024 increased $20.4 million, or 33%, compared to the first quarter 2023, primarily driven by higher revenues from credit information and valuation services. Consistent with the higher operating revenues, combined employee costs and other operating expenses in the first quarter 2024 increased $15.1 million, or 27%, compared to the prior year quarter. Acquisition intangible asset amortization expenses in the first quarters 2024 and 2023 amounted to $5.6 million and $5.8 million, respectively.
In regard to the corporate and other segment, pretax results were driven by net expenses attributable to corporate operations which decreased to $9.7 million, compared to $10.9 million in the first quarter 2023, primarily driven by management's cost discipline.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.
Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. During the three months ended March 31, 2024, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2023 Form 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 real estate solutions operations include credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment includes our parent holding company and centralized support services departments.
Factors affecting revenues.
The principal factors that contribute to changes in our operating revenues include:
•
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;
•
premium rates;
•
foreign currency exchange rates;
•
market share;
•
ability to attract and retain highly productive sales associates;
•
independent agency remittance rates;
•
opening and integration of new offices and acquisitions;
•
office closures;
•
number and value of commercial transactions, which typically yield higher premiums;
•
government or regulatory initiatives, including tax incentives and the implementation of the integrated disclosure requirements;
•
acquisitions or divestitures of businesses;
•
volume of distressed property transactions;
•
seasonality and/or weather; and
•
outbreaks of diseases and related quarantine orders and restrictions on travel, trade and business operations.
17
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. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance revenues as home buying is generally depressed during winter months. Our second and third quarters are typically the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of the year. On average, title premium rates for refinance orders are lower compared to a similarly priced purchase transaction.
RESULTS OF OPERATIONS
Comparisons of our results of operations for the three months ended March 31, 2024 with the corresponding periods in the prior year are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.
Our statements on home sales, interest rates and loan activity are based on published U.S. industry data from sources including Fannie Mae, the Mortgage Bankers Association (MBA), the National Association of Realtors
®
(NAR) and the U.S. Census Bureau as of March 31, 2024. We also use information from our direct operations.
Operating environment.
According to NAR, existing home sales as of March 2024 totaled 4.2 million units (seasonally-adjusted basis), which were 4% lower from both a year ago and February 2024, primarily due to the relatively unchanged current elevated interest rate environment. Housing affordability continues to limit home sales with the median existing home price in March 2024 increasing by 5% to $393,500 compared to March 2023, while total existing housing inventory in March 2024 increased 14% and 5% from a year ago and February 2024, respectively. Regarding
new residential construction, U.S.
housing starts
(
seasonally-adjusted) in March 2024 were 4% and 15% lower compared to March 2023 and February 2024, respectively, while March 2024 newly-issued building permits were 2% higher than a year ago and 4% lower compared to February 2024.
On lending activity, total U.S. single family mortgage originations during the first quarter 2024 improved by $16 billion, or 5%, compared to the prior year quarter, with purchase and refinancing originations increasing by 2% and 17%, respectively, according to Fannie Mae and MBA (averaged). During the first quarter 2024, the average 30-year fixed interest rate averaged 6.8% compared to 6.4% in the first quarter 2023. For the year 2024, Fannie Mae and MBA expect the interest rate to average 6.5%, lower than the 6.8% average observed in 2023, while total originations for the year 2024 are expected to be $333 billion, which is 21% higher compared to 2023, primarily due to the expected federal interest rate policy loosening towards the end of 2024.
Title revenues.
Direct title revenue information is presented below:
|
Three Months Ended March 31,
|
|||||||||||||||||||||||
| 2024 | 2023 | Change | % Chg | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Non-commercial | |||||||||||||||||||||||
| Domestic | 135.3 | 150.3 | (15.0) | (10) | % | ||||||||||||||||||
| International | 19.2 | 19.2 | — | — | % | ||||||||||||||||||
| 154.5 | 169.5 | (15.0) | (9) | % | |||||||||||||||||||
| Commercial: | |||||||||||||||||||||||
| Domestic | 49.7 | 32.7 | 17.0 | 52 | % | ||||||||||||||||||
| International | 6.4 | 5.7 | 0.7 | 12 | % | ||||||||||||||||||
| 56.1 | 38.4 | 17.7 | 46 | % | |||||||||||||||||||
| Total direct title revenues | 210.6 | 207.9 | 2.7 | 1 | % | ||||||||||||||||||
18
Domestic non-commercial revenues decreased in the first quarter 2024, primarily driven by a 5% decline in total residential purchase and refinancing transactions and a lower average fee per file, compared to the prior year quarter. Average residential fee per file in the first quarter 2024 was $2,900, compared to $3,400 in the first quarter 2023, primarily due to a lower purchase transaction mix in the first quarter 2024.
Domestic commercial revenues improved in the first quarter 2024 compared to the same period in 2023, primarily as a result of increased average transaction size (primarily in the energy sector), partially offset by fewer commercial transactions. Domestic commercial orders closed decreased 9% in the first quarter 2024, while average domestic commercial fee per file improved to $13,900 in the first quarter 2024, compared to $8,300 from the prior year quarter.
Orders information for the three months ended March 31 is as follows:
|
2024
|
2023
|
Change | % Chg | ||||||||||||||
| Opened Orders: | |||||||||||||||||
| Commercial | 3,693 | 3,842 | (149) | (4) | % | ||||||||||||
| Purchase | 48,024 | 49,469 | (1,445) | (3) | % | ||||||||||||
| Refinance | 16,371 | 16,129 | 242 | 2 | % | ||||||||||||
| Other | 11,247 | 4,421 | 6,826 | 154 | % | ||||||||||||
| Total | 79,335 | 73,861 | 5,474 | 7 | % | ||||||||||||
| Closed Orders: | |||||||||||||||||
| Commercial | 3,568 | 3,924 | (356) | (9) | % | ||||||||||||
| Purchase | 29,744 | 31,628 | (1,884) | (6) | % | ||||||||||||
| Refinance | 9,353 | 9,613 | (260) | (3) | % | ||||||||||||
| Other | 7,794 | 2,734 | 5,060 | 185 | % | ||||||||||||
| Total | 50,459 | 47,899 | 2,560 | 5 | % | ||||||||||||
Other opened and closed orders, which are primarily comprised of institutional bulk securitization and reverse mortgage transactions, increased in the first quarter 2024, compared to the prior year quarter, primarily driven by ramp up of acquisitions completed in late 2022.
Gross revenues from independent agency operations in the first quarter 2024 declined $8.2 million, or 3%, compared to the prior year quarter, primarily consistent with lower residential activity in the market. Agency revenues, net of retention, declined $2.5 million, or 6%, in the first quarter 2024 compared to the prior year quarter, primarily due to geographical transaction mix and lower
gross agency revenues. Refer further to the "Retention by agencies" discussion under Expenses below.
Real estate solutions revenues.
Real estate solutions revenues in the first quarter 2024 increased $20.4 million, or 33%, compared to the prior year quarter, primarily driven by higher revenues from credit information and valuation services.
Investment income.
Investment income in the first quarter 2024 increased $6.3 million, or 96%, compared to the prior year quarter, primarily due to higher interest income in the first quarter 2024 resulting from earned interest from eligible escrow balances, which was an initiative that we started during the late second quarter 2023.
Net realized and unrealized gains (losses).
Refer to
Note 5
to the condensed consolidated financial statements.
19
Expenses.
An analysis of expenses is shown below:
|
Three Months Ended March 31
|
|||||||||||||||||||||||
| 2024 | 2023 | Change* | % Chg | ||||||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||
| Amounts retained by agencies | 200.0 | 205.7 | (5.8) | (3) | % | ||||||||||||||||||
| As a % of agency revenues | 83.1 | % | 82.6 | % | |||||||||||||||||||
| Employee costs | 172.4 | 170.6 | 1.9 | 1 | % | ||||||||||||||||||
| As a % of operating revenues | 32.3 | % | 32.8 | % | |||||||||||||||||||
| Other operating expenses | 137.0 | 120.7 | 16.2 | 13 | % | ||||||||||||||||||
| As a % of operating revenues | 25.6 | % | 23.2 | % | |||||||||||||||||||
| Title losses and related claims | 17.4 | 17.7 | (0.3) | (2) | % | ||||||||||||||||||
| As a % of title revenues | 3.9 | % | 3.9 | % | |||||||||||||||||||
*M
ay not foot due to rounding.
Retention by agencies.
Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Amounts retained by independent agencies, as a percentage of revenues generated by them, averaged 83.1% in the first quarter 2024, compared to 82.6% in the prior year quarter, primarily as a result of lower revenues from relatively lower retention states and newly added agents with higher retention rates in the first quarter 2024. The average retention percentage may vary from period 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 in the first quarter 2024 increased $1.9 million, or 1%, compared to the first quarter 2023, primarily driven by higher medical benefits expense which was partially offset by lower salaries expenses and incentive compensation. Title segment employee costs increased $2.5 million, or 2%, while employee costs in the real estate solutions segment decreased $0.2 million, or 2%, during the first quarter 2024 compared to the prior year quarter.
Total employee costs, as a percentage of total operating revenues, improved to 32.3% in the first quarter 2024 compared to 32.8% in the prior year quarter, primarily due to higher operating revenues and lower average employee count in the first quarter 2024. As of March 31, 2024, we had approximately 6,600 employees compared to approximately 6,900 and 6,800 employees as of March 31, 2023 and December 31, 2023, respectively.
Other operating expenses
. Other operating expenses include costs that are primarily fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues (variable costs) and costs that fluctuate independently of revenues (independent costs). Costs that are primarily fixed in nature include rent and other occupancy expenses, equipment rental, insurance, repairs and maintenance, technology costs, telecommunications and title plant expenses. Variable costs include appraiser and service expenses related to real estate solutions operations, outside search fees, attorney fee splits, credit losses (on receivables), copy supplies, delivery fees, postage, premium taxes and title plant maintenance expenses. Independent costs include general supplies, litigation defense, business promotion and marketing and travel.
20
Consolidated other operating expenses in the first quarter 2024 increased $16.2 million, or 13%, compared to the first quarter 2023, primarily due to higher service expenses and outside search fees related to increased revenues from real estate solutions and commercial title operations, respectively, partially offset by lower third-party outsourcing and litigation settlement expenses. Total variable costs in the first quarter 2024 increased $18.5 million, or 30%, primarily due to higher real estate solutions service expenses and commercial services outside search fees. Total costs that are primarily fixed in nature decreased $2.3 million, or 5%, in the first quarter 2024, primarily due to reduced third-party outsourcing and telecommunications expenses, while independent costs were comparable in the first quarters 2024 and 2023.
As a percentage of total operating revenues, consolidated other operating expenses in the first quarter 2024 were 25.6% compared to 23.2% in the first quarter 2023, primarily driven by increased real estate solutions service expenses on higher revenues in first quarter 2024.
Title losses.
Provisions for title losses, as a percentage of title operating revenues, were 3.9% for both the first quarters 2024 and 2023, while title loss expense decreased $0.3 million, or 2%, primarily due to lower title premiums in the first quarter 2024 compared to the prior year quarter. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.
The composition of title policy loss expense is as follows:
|
Three Months Ended March 31,
|
||||||||||||||||||||
| 2024 | 2023 | Change | % Chg | |||||||||||||||||
| ($ in millions) | ||||||||||||||||||||
| Provisions – known claims: | ||||||||||||||||||||
| Current year | 2.3 | 2.5 | (0.2) | (8) | % | |||||||||||||||
| Prior policy years | 15.0 | 18.0 | (3.0) | (17) | % | |||||||||||||||
| 17.3 | 20.5 | (3.2) | (16) | % | ||||||||||||||||
| Provisions – IBNR | ||||||||||||||||||||
| Current year | 14.7 | 14.7 | — | — | % | |||||||||||||||
| Prior policy years | 0.4 | 0.5 | (0.1) | (20) | % | |||||||||||||||
| 15.1 | 15.2 | (0.1) | (1) | % | ||||||||||||||||
| Transferred from IBNR to known claims | (15.0) | (18.0) | 3.0 | 17 | % | |||||||||||||||
| Total provisions | 17.4 | 17.7 | (0.3) | (2) | % | |||||||||||||||
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.
Total known claims provision decreased $3.2 million or 16% in the first quarter 2024 compared to the first quarter 2023, primarily due to lower reported claims related to prior policy years. Current year IBNR provisions in the first quarter 2024 were comparable to the prior year quarter, while as a percentage of title operating revenues, provisions - IBNR for the current policy year were 3.3% and 3.2%, in the first quarters 2024 and 2023, respectively. First quarter 2024 cash claim payments decreased $10.6 million, or 32%, primarily due to decreased payments on existing large claims, compared to the first quarter 2023. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
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In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. These escrow losses typically relate to errors or other miscalculations of amounts to be paid at closing, including timing or amount of a mortgage payoff, payment of property or other taxes and payment of homeowners’ association fees. Escrow losses also arise in cases of fraud, and in those cases, the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. Escrow losses are recognized as expenses when discovered or when contingencies associated with them (such as litigation) are resolved and are typically paid less than 12 months after the loss is recognized.
Total title policy loss reserve balances are as follows:
| March 31, 2024 | December 31, 2023 | ||||||||||
| ($ in millions) | |||||||||||
| Known claims | 64.7 | 70.2 | |||||||||
| IBNR | 454.5 | 458.1 | |||||||||
| Total estimated title losses | 519.2 | 528.3 | |||||||||
The actual timing of estimated title loss payments may vary since claims, by their nature, are complex and paid over long periods of time. Based on historical payment patterns, the outstanding loss reserves are substantially paid out within eight years. As a result, the estimate of the ultimate amount to be paid on any claim may be modified over that time period. Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates.
Depreciation and amortization
. Depreciation and amortization expenses increased $0.5 million, or 3%, in the first quarter 2024 compared to the prior year quarter, primarily due to increased depreciation expenses related to additional internal-use systems placed into operation during late 2023 and in 2024. Acquisition intangible amortization expenses for the first quarter 2024 were $8.1 million compared to $8.3 million in the first quarter 2023.
Income taxes.
Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, was 23% in the first quarter 2024, compared to 38% in the first quarter 2023 which was primarily driven by discrete tax adjustments mainly related to increased utilization of net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to stockholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of March 31, 2024, our total cash and investments, including amounts reserved pursuant to statutory requirements aggregated $855.1 million. Of our total cash and investments at March 31, 2024, $452.3 million ($205.6 million, net of statutory reserves) was held in the United States and the rest internationally (principally in Canada).
As a holding company, the parent company is funded principally by cash from its subsidiaries' earnings in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. Cash held at the parent company and its unregulated subsidiaries (which totaled $33.7 million at March 31, 2024) is available for funding the parent company's operating expenses, interest payments on debt and dividend payments to common stockholders. The parent company also receives distributions from Stewart Title Guaranty Company (Guaranty), its regulated title insurance underwriter, to meet cash requirements for acquisitions and other strategic investments.
22
A substantial majority of our consolidated cash and investments as of March 31, 2024 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty uses its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and real estate solutions 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 $519.9 million and $527.4 million at March 31, 2024 and December 31, 2023, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $10.3 million and $10.0 million at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, our known claims reserve totaled $64.7 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $454.5 million. In addition to this, we had cash and investments (at amortized cost and excluding equity method investments) of $264.3 million, which are available for underwriter operations, including claims payments, and acquisitions.
The ability of Guaranty to pay dividends to its parent is governed by Texas insurance law. The Texas Department of Insurance (TDI) must be notified of any dividend declared, and any dividend in excess of the greater of the statutory net operating income or 20% of surplus (which was approximately $168.7 million as of December 31, 2023) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and 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 three months ended March 31, 2024, Guaranty paid $20.0 million of dividends to the parent company, compared to none during the three months ended March 31, 2023.
As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
| Three Months Ended March 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| ($ in millions) | |||||||||||
|
Net cash used by operating activities
|
(29.6) | (51.1) | |||||||||
| Net cash used by investing activities | (47.4) | (4.8) | |||||||||
| Net cash used by financing activities | (16.8) | (17.4) | |||||||||
Operating activities.
Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, real estate solutions and other operations. Our independent agencies remit cash to us net of their contractual retention. Our principal cash expenditures for operations are employee costs, operating costs and title claims payments.
23
Net cash used by operations in the first quarter 2024 was $29.6 million compared to net cash used by operations of $51.1 million in the first quarter 2023, primarily as a result of improved results and lower payments on claims and accounts payable during the first quarter 2024. Although our business is labor intensive, we are focused on a cost-effective, scalable business model which includes utilization of technology, centralized back and middle office functions and business process outsourcing. We are continuing our emphasis on cost management, especially in light of the current economic environment due to elevated mortgage interest rates, specifically focusing on lowering unit costs of production and improving operating margins in our direct title and real estate solutions operations. Our plans to improve margins include additional automation of manual processes, further consolidation of our various systems and production operations, and full integration of acquisitions. We continue to invest in the technology necessary to accomplish these goals.
Investing activities.
Net cash used by investing activities is primarily driven by proceeds from matured and sold investments, purchases of investments, capital expenditures and acquisition of businesses. During the first quarter 2024, total proceeds from securities investments sold and matured were $27.5 million compared to $52.1 million during the first quarter 2023, while cash used for purchases of securities investments was $23.7 million in the first quarter 2024 compared to $24.0 million in the prior year quarter. Additionally, cash paid for cost-basis and other investments was $29.9 million during the first quarter 2024 compared to $0.1 million during the first quarter 2023.
We used $10.2 million and $8.9 million of cash for purchases of property and equipment and other long-lived assets during the first quarters 2024 and 2023, respectively, while we used net cash of $21.5 million for acquisitions in the title and real estate solutions segments during the first quarter 2023. We maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies and to pursue growth in key markets.
Financing activities and capital resources.
Total debt and stockholders’ equity were $445.4 million and $1.36 billion, respectively, as of March 31, 2024. During the first quarters 2024 and 2023, payments on notes payable of $3.4 million and $5.5 million, respectively, and notes payable additions of $3.4 million and $3.5 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, 2024, our line of credit facility was fully available, while our debt-to-equity and debt-to-capitalization ratios, excluding our Section 1031 notes, were approximately 33% and 25%, respectively. During the first quarter 2024, we paid total dividends of $13.1 million ($0.48 per common share), compared to the total dividends paid in the first quarter 2023 of $12.3 million ($0.45 per common share).
We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations, including consideration of the current economic and real estate environment created by the increasing mortgage interest rates. However, we may determine that additional debt or equity funding is warranted to provide liquidity for achievement of strategic goals or acquisitions or for unforeseen circumstances. Other than scheduled maturities of debt, operating lease payments and anticipated claims payments, we have no material contractual commitments. We expect that cash flows from operations and cash available from our underwriters, subject to regulatory restrictions, will be sufficient to fund our operations, including claims payments. However, to the extent that these funds are not sufficient, we may be required to borrow funds on terms less favorable than we currently have or seek funding from the equity market, which may not be successful or may be on terms that are dilutive to existing stockholders.
Contingent liabilities and commitments
. See discussion of contingent liabilities and commitments in
Note 10
to the condensed consolidated financial statements.
Other comprehensive (loss) income.
Unrealized gains and losses on available-for-sale debt securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders’ equity, until they are realized. During the first quarter 2024, net unrealized investment losses of $2.1 million, net of taxes, which increased our other comprehensive loss, were primarily related to net decreases in the fair values of our foreign and corporate bond securities investments, primarily influenced by the continued elevated interest rate environment. During the first quarter 2023, net unrealized investment gains of $6.7 million, net of taxes, which increased our other comprehensive income, were primarily related to net increases in the fair values of our corporate and foreign bond securities investments, primarily driven by the lower interest rates during the first quarter 2023.
24
Changes in foreign currency exchange rates in the first quarter 2024 and 2023 (primarily related to our Canadian and United Kingdom operations) resulted in other comprehensive (loss) income, net of taxes, of ($4.5) million and $0.6 million, respectively, primarily due to the depreciation and appreciation, respectively, of both the Canadian dollar and British pound against the U.S. dollar.
Off-balance sheet arrangements
. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 15 in our 2023 Form 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 “may,” "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the following:
•
the volatility of economic conditions;
•
adverse changes in the level of real estate activity;
•
changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing;
•
our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems;
•
our ability to prevent and mitigate cyber risks;
•
the impact of unanticipated title losses or the need to strengthen our policy loss reserves;
•
any effect of title losses on our cash flows and financial condition;
•
the ability to attract and retain highly productive sales associates;
•
the impact of vetting our agency operations for quality and profitability;
•
independent agency remittance rates;
•
changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products;
•
regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees;
•
our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services;
•
our ability to realize anticipated benefits of our previous acquisitions;
•
the outcome of pending litigation;
•
our ability to manage risks associated with potential cybersecurity or other privacy or data security breaches;
•
the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services;
•
our dependence on our operating subsidiaries as a source of cash flow;
•
our ability to access the equity and debt financing markets when and if needed;
•
effects of seasonality and weather; and
•
our ability to respond to the actions of our competitors.
The above risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including in Part I, Item 1A "Risk Factors" in our 2023 Form 10-K, and as may be further updated and supplemented from time to time in our future Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K filed subsequently. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes during the quarter ended March 31, 2024 in our investment strategies, types of financial instruments held or the risks associated with such instruments that would materially alter the market risk disclosures made in our 2023 Form 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, 2024, and have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting.
There was no change in our internal control over financial reporting during the quarter ended March 31, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
26
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See discussion of legal proceedings in
Note 11
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 2023 Form 10-K.
Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A. “Risk Factors” in our 2023 Form 10-K. There have been no material changes to our risk factors since our 2023 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our Common Stock during the three months ended March 31, 2024, except for repurchases of approximately 55,300 shares (aggregate purchase price of approximately $3.4 million) related to the statutory income tax withholding on the vesting of restricted unit grants to executives and senior management employees.
Item 5. Other Information
Book value per share.
Our book value per share was $49.22 and $50.11 as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, our book value per share was based on approximately $1.36 billion of stockholders’ equity attributable to Stewart and 27,580,535 shares of Common Stock outstanding. As of December 31, 2023, our book value per share was based on approximately $1.37 billion of stockholders’ equity attributable to Stewart and 27,370,227 shares of Common Stock outstanding.
27
Item 6. Exhibits
| Exhibit | ||||||||
| 3.1 | — | |||||||
| 3.2 | — | |||||||
| 10.1†* | — | |||||||
| 10.2†* | — | |||||||
| 31.1* | — | |||||||
| 31.2* | — | |||||||
| 32.1* | — | |||||||
| 32.2* | — | |||||||
| 101.INS* | — | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||
| 101.SCH* | — | XBRL Taxonomy Extension Schema Document | ||||||
| 101.CAL* | — | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||
| 101.DEF* | — | XBRL Taxonomy Extension Definition Linkbase Document | ||||||
| 101.LAB* | — | XBRL Taxonomy Extension Label Linkbase Document | ||||||
| 101.PRE* | — | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||
| 104* | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||
| * 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.
| May 7, 2024 | ||
| Date | ||
| Stewart Information Services Corporation | ||||||||
| Registrant | ||||||||
| By: | /s/ David C. Hisey | |||||||
| David C. Hisey, Chief Financial Officer and Treasurer | ||||||||
28
TABLE OF CONTENTS
Part I - Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 5. Other InformationprintItem 6. Exhibitsprint