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STC Stewart Information Services

Filed: 4 May 21, 4:41pm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2021
or
    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 CORPORATION
(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,Texas77056
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (713) 625-8100
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $1 par value per shareSTCNew 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.
Large accelerated filerNon-accelerated filerEmerging growth company
Accelerated filerSmaller 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 27, 2021, there were 26,811,242 outstanding shares of the issuer's Common Stock.



FORM 10-Q QUARTERLY REPORT
QUARTER ENDED MARCH 31, 2021
TABLE OF CONTENTS
 
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 INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
 Three Months Ended 
 March 31,
 20212020
 ($000 omitted, except per share)
Revenues
Title revenues:
Direct operations279,504 198,283 
Agency operations345,932 242,030 
Ancillary services55,931 5,461 
Operating revenues681,367 445,774 
Investment income3,945 5,218 
Net realized and unrealized gains (losses)3,274 (11,091)
688,586 439,901 
Expenses
Amounts retained by agencies283,935 199,366 
Employee costs169,397 135,652 
Other operating expenses125,482 71,858 
Title losses and related claims28,773 18,632 
Depreciation and amortization6,430 4,231 
Interest567 892 
614,584 430,631 
Income before taxes and noncontrolling interests74,002 9,270 
Income tax expense(16,880)(1,896)
Net income57,122 7,374 
Less net income attributable to noncontrolling interests2,886 2,197 
Net income attributable to Stewart54,236 5,177 
Net income57,122 7,374 
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments1,867 (11,442)
Change in net unrealized gains and losses on investments(9,156)(2,580)
Reclassification adjustment for realized gains and losses on investments(145)(80)
Other comprehensive loss, net of taxes:(7,434)(14,102)
Comprehensive income (loss)49,688 (6,728)
Less net income attributable to noncontrolling interests2,886 2,197 
Comprehensive income (loss) attributable to Stewart46,802 (8,925)
Basic average shares outstanding (000)26,736 23,638 
Basic earnings per share attributable to Stewart2.03 0.22 
Diluted average shares outstanding (000)26,984 23,749 
Diluted earnings per share attributable to Stewart2.01 0.22 
See notes to condensed consolidated financial statements.
3


CONDENSED CONSOLIDATED BALANCE SHEETS
As of 
 March 31, 2021 (Unaudited)
As of 
 December 31, 2020
 ($000 omitted)
Assets
Cash and cash equivalents412,763 432,683 
Short-term investments17,855 20,678 
Investments in debt and equity securities, at fair value682,799 684,387 
Receivables:
Premiums from agencies37,713 34,507 
Trade and other63,106 56,054 
Income taxes172 501 
Notes1,531 1,557 
Allowance for uncollectible amounts(5,393)(4,807)
97,129 87,812 
Property and equipment:
Land2,964 2,964 
Buildings22,617 22,598 
Furniture and equipment172,874 168,147 
Accumulated depreciation(144,723)(142,038)
53,732 51,671 
Operating lease assets110,586 106,479 
Title plants, at cost73,113 72,863 
Investments on equity method basis20,537 6,765 
Goodwill480,159 431,477 
Intangible assets, net of amortization38,912 37,382 
Deferred tax assets4,359 4,330 
Other assets50,862 42,048 
2,042,806 1,978,575 
Liabilities
Notes payable125,572 101,773 
Accounts payable and accrued liabilities212,774 225,180 
Operating lease liabilities123,121 119,089 
Estimated title losses509,541 496,275 
Deferred tax liabilities23,900 23,852 
994,908 966,169 
Contingent liabilities and commitments00
Stockholders’ equity
Common Stock ($1 par value) and additional paid-in capital300,978 301,937 
Retained earnings733,973 688,819 
Accumulated other comprehensive income (loss):
Foreign currency translation adjustments(6,371)(8,238)
Net unrealized gains on debt securities investments15,959 25,260 
Treasury stock – 352,161 common shares, at cost(2,666)(2,666)
Stockholders’ equity attributable to Stewart1,041,873 1,005,112 
Noncontrolling interests6,025 7,294 
Total stockholders’ equity (26,806,025 and 26,728,242 shares outstanding)1,047,898 1,012,406 
2,042,806 1,978,575 
See notes to condensed consolidated financial statements.
4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended 
 March 31,
 20212020
 ($000 omitted)
Reconciliation of net income to cash provided by operating activities:
Net income57,122 7,374 
Add (deduct):
Depreciation and amortization6,430 4,231 
Provision for bad debt708 154 
Net realized and unrealized (gains) losses(3,274)11,091 
Amortization of net premium on debt securities investments938 1,144 
Payments for title losses less than (in excess of) provisions12,234 (2,809)
Adjustments for insurance recoveries of title losses(205)173 
(Increase) decrease in receivables – net(3,513)11,542 
Increase in other assets – net(7,869)(3,813)
Decrease in accounts payable and other liabilities – net(20,116)(43,165)
Change in net deferred income taxes2,007 1,495 
Net income from equity method investments(924)(645)
Dividends received from equity method investments764 1,235 
Stock-based compensation expense3,174 887 
Other – net(34)(254)
Cash provided (used) by operating activities47,442 (11,360)
Investing activities:
Proceeds from sales of investments in securities3,051 11,796 
Proceeds from matured investments in debt securities42,836 18,814 
Purchases of investments in securities(47,881)(30,703)
Net sales (purchases) of short-term investments2,648 2,982 
Purchases of property and equipment, and real estate – net(5,721)(4,781)
Cash paid for acquisition of businesses(52,575)(1,449)
Cash paid for acquisition of equity method investment(16,080)
Other – net131 38 
Cash used by investing activities(73,591)(3,303)
Financing activities:
Proceeds from notes payable178,975 204 
Payments on notes payable(154,910)(8,223)
Distributions to noncontrolling interests(3,844)(3,326)
Repurchases of Common Stock(1,935)(393)
Proceeds from stock option exercises61 
Cash dividends paid(8,840)(7,099)
Purchase of remaining interest in consolidated subsidiary(2,570)
Other - net(777)
Cash provided (used) by financing activities6,160 (18,837)
Effects of changes in foreign currency exchange rates69 (3,510)
Change in cash and cash equivalents(19,920)(37,010)
Cash and cash equivalents at beginning of period432,683 330,609 
Cash and cash equivalents at end of period412,763 293,599 
See notes to condensed consolidated financial statements.
5


CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

Common StockAdditional paid-in capitalRetained earningsAccumulated other comprehensive income (loss)Treasury stockNoncontrolling interestsTotal
($000 omitted)
Three Months Ended March 31, 2021
Balance at December 31, 202027,080 274,857 688,819 17,022 (2,666)7,294 1,012,406 
Net income attributable to Stewart— — 54,236 — — — 54,236 
Dividends on Common Stock ($0.33 per share)— — (9,082)— — — (9,082)
Stock-based compensation113 3,061 — — — — 3,174 
Stock repurchases(37)(1,898)— — — — (1,935)
Stock option exercises59 — — — — 61 
Purchase of remaining interest in consolidated subsidiary— (2,259)— — — (311)(2,570)
Change in net unrealized gains and losses on investments, net of taxes— — — (9,156)— — (9,156)
Reclassification adjustment for realized gains and losses on investments, net of taxes— — — (145)— — (145)
Foreign currency translation adjustments, net of taxes— — — 1,867 — — 1,867 
Net income attributable to noncontrolling interests— — — — — 2,886 2,886 
Distributions to noncontrolling interests— — — — — (3,844)(3,844)
Balance at March 31, 202127,158 273,820 733,973 9,588 (2,666)6,025 1,047,898 
Three Months Ended March 31, 2020
Balance at December 31, 201924,062 164,217 564,392 (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, 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)
Balance at March 31, 202024,032 164,741 562,445 (16,801)(2,666)5,324 737,075 
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, 2021 and 2020, and as of March 31, 2021, 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, 2020 filed with the Securities and Exchange Commission on March 1, 2021 (2020 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% 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 current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately $491.3 million and $496.6 million at March 31, 2021 and December 31, 2020, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $25.6 million and $20.0 million at March 31, 2021 and December 31, 2020, 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. Amendment to line of credit agreement. On March 23, 2021, in relation to its line of credit facility (as disclosed in Note 10 of the 2020 Form 10-K), the Company entered into a second amendment and restated credit agreement (Second Amendment), which increased the available unsecured line of credit commitment from $200 million to $350 million, and extended the maturity of the line of credit to March 2026. Other changes that the Second Amendment made effective were: the addition of new lender banks to the lenders group, the increase of the restricted payment limitation from $40 million to $100 million, the increase of the additional unsecured indebtedness provision from $100 million to $250 million, the removal of the annual capital expenditures limit, and the new definitions of EBITDA and fixed charge coverage ratio. The additional $50 million that the Company can request in addition to the line of credit commitment was not changed.
7


NOTE 2

Revenues. The Company's operating revenues, summarized by type, are as follows:
 Three Months Ended 
 March 31,
 20212020
($000 omitted)
Title insurance premiums:
Direct194,993 138,283 
Agency345,932 242,030 
Escrow fees56,649 33,086 
Appraisal management, abstract and other ancillary services68,620 16,077 
Other revenues15,173 16,298 
681,367 445,774 


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:
 March 31, 2021December 31, 2020
($000 omitted)
Investments in:
Debt securities615,445 631,386 
Equity securities67,354 53,001 
682,799 684,387 

As of March 31, 2021 and December 31, 2020, the net unrealized investment gains relating to investments in equity securities held were $9.9 million and $4.4 million, respectively (refer to Note 5).

The amortized costs and fair values of investments in debt securities are as follows:
 March 31, 2021December 31, 2020
 
Amortized
costs
Fair
values
Amortized
costs
Fair
values
 ($000 omitted)
Municipal42,015 44,089 45,138 47,603 
Corporate276,870 289,159 285,962 305,450 
Foreign269,792 275,585 261,748 271,711 
U.S. Treasury Bonds6,567 6,612 6,564 6,622 
595,244 615,445 599,412 631,386 

Foreign debt securities consist of Canadian government and corporate bonds, United Kingdom treasury and corporate bonds, and Mexican government bonds.

8


Gross unrealized gains and losses on investments in debt securities are as follows:
 March 31, 2021December 31, 2020
 GainsLossesGainsLosses
 ($000 omitted)
Municipal2,077 2,465 
Corporate13,124 835 19,594 106 
Foreign6,572 779 10,024 61 
U.S. Treasury Bonds70 25 82 24 
21,843 1,642 32,165 191 

Debt securities as of March 31, 2021 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):
Amortized
costs
Fair
values
 ($000 omitted)
In one year or less58,344 59,145 
After one year through five years311,487 321,937 
After five years through ten years194,553 201,439 
After ten years30,860 32,924 
595,244 615,445 

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, 2021, were:
 Less than 12 monthsMore than 12 monthsTotal
 LossesFair valuesLossesFair valuesLossesFair values
 ($000 omitted)
Municipal130 130 
Corporate835 27,208 835 27,208 
Foreign756 65,568 23 254 779 65,822 
U.S. Treasury Bonds109 24 1,022 25 1,131 
1,595 93,015 47 1,276 1,642 94,291 

The number of specific debt investment holdings held in an unrealized loss position as of March 31, 2021 was 47. Of these securities, 3 were in unrealized loss positions for more than 12 months. 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.

9


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, 2020, were:
 Less than 12 monthsMore than 12 monthsTotal
 LossesFair valuesLossesFair valuesLossesFair values
 ($000 omitted)
Municipal
Corporate106 13,518 106 13,518 
Foreign40 2,912 21 254 61 3,166 
U.S. Treasury Bonds24 1,022 24 1,022 
146 16,430 45 1,276 191 17,706 


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.

As of March 31, 2021, financial instruments measured at fair value on a recurring basis are summarized below:
Level 1Level 2
Fair value
measurements
 ($000 omitted)
Investments in securities:
Debt securities:
Municipal44,089 44,089 
Corporate289,159 289,159 
Foreign275,585 275,585 
U.S. Treasury Bonds6,612 6,612 
Equity securities67,354 67,354 
67,354 615,445 682,799 
10



As of December 31, 2020, financial instruments measured at fair value on a recurring basis are summarized below:
Level 1Level 2
Fair value
measurements
 ($000 omitted)
Investments in securities:
Debt securities:
Municipal47,603 47,603 
Corporate305,450 305,450 
Foreign271,711 271,711 
U.S. Treasury Bonds6,622 6,622 
Equity securities53,001 53,001 
53,001 631,386 684,387 

As of March 31, 2021 and December 31, 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 
 March 31,
 20212020
 ($000 omitted)
Realized gains170 153 
Realized losses(2,469)(690)
Net unrealized investment (losses) gains recognized on equity securities still held at end of period5,573 (10,554)
3,274 (11,091)

Net realized losses for the first quarter 2021 included a $2.5 million loss related to a disposal of an equity method investment.

Investment gains and losses recognized related to investments in equity securities are as follows:
Three Months Ended 
 March 31,
20212020
($000 omitted)
Net investment gains (losses) recognized on equity securities during the period5,582 (11,061)
Less: Net realized gains (losses) on equity securities sold during the period(507)
Net unrealized investment gains (losses) recognized on equity securities still held at end of period5,573 (10,554)

11


Proceeds from sales of investments in securities are as follows: 
 Three Months Ended 
 March 31,
 20212020
 ($000 omitted)
Proceeds from sales of debt securities115 11,503 
Proceeds from sales of equity securities2,936 293 
Total proceeds from sales of investments in securities3,051 11,796 


NOTE 6

Goodwill and other intangibles. The summary of changes in goodwill is as follows.
TitleAncillary Services and CorporateConsolidated Total
($000 omitted)
Balances at December 31, 2020361,433 70,044 431,477 
Acquisitions32,619 20,202 52,821 
Purchase accounting adjustments(4,397)258 (4,139)
Balances at March 31, 2021389,655 90,504 480,159 

During the first quarter 2021, goodwill acquired in the title segment was related to an acquisition of a title search and support services provider, while goodwill acquired in the ancillary services and corporate segment was related to an acquisition of an online notarization and closing solutions provider. The goodwill balances for both acquisitions were based on the Company's preliminary purchase accounting, which is expected to be finalized in the second half of 2021.


NOTE 7

Estimated title losses. A summary of estimated title losses for the three months ended March 31 is as follows:
20212020
 ($000 omitted)
Balances at January 1496,275 459,053 
Provisions:
Current year28,407 18,521 
Previous policy years366 111 
Total provisions28,773 18,632 
Payments, net of recoveries:
Current year(3,606)(2,214)
Previous policy years(12,933)(19,227)
Total payments, net of recoveries(16,539)(21,441)
Effects of changes in foreign currency exchange rates1,032 (8,662)
Balances at March 31509,541 447,582 
Loss ratios as a percentage of title operating revenues:
Current year provisions4.5 %4.2 %
Total provisions4.6 %4.2 %

12


Provisions in the first quarter 2021 increased compared to the first quarter 2020, primarily as a result of increased title revenues. Claim payments in the first quarter 2021 decreased compared to the same period in 2020, primarily due to lower payments on large and non-large claims relating to prior policy years; while the effect of changes in foreign currency exchange rates for the first quarters 2021 and 2020 were primarily influenced by the appreciation and depreciation, respectively, of the Canadian dollar against the U.S. dollar during those periods.


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 include time-based restricted 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 vest on each of the first three anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives and employee service requirement over a period of approximately three years. The stock options vest on each of the first three anniversaries of the grant date at a rate of 20%, 30% and 50%, chronologically, and expire 10 years after the grant date. Each vested stock option can be exercised to purchase a share of the Company's common stock at the strike price set by the Company at the grant date. The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the corresponding vesting period.

During the first quarter 2021, the aggregate grant-date fair values of restricted stock unit and stock option awards were $8.3 million (155,000 units with an average grant price per unit of $53.24) and $1.3 million (139,000 options with an average grant price per option of $9.24 and exercise strike price of $53.24). During the first quarter 2020, the aggregate grant-date fair values of restricted stock unit and stock option awards were $2.4 million (60,000 units with an average grant price per unit of $39.76) and $3.4 million (650,000 options with an average grant price per option of $5.32 and exercise strike price of $39.76), respectively.


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. 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.

13


The calculation of the basic and diluted EPS is as follows:
 Three Months Ended 
 March 31,
 20212020
($000 omitted, except per share)
Numerator:
Net income attributable to Stewart54,236 5,177 
Denominator (000):
Basic average shares outstanding26,736 23,638 
Average number of dilutive shares relating to options103 
Average number of dilutive shares relating to grants of restricted units and shares145 111 
Diluted average shares outstanding26,984 23,749 
Basic earnings per share attributable to Stewart2.03 0.22 
Diluted earnings per share attributable to Stewart2.01 0.22 


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, 2021, 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, 2021, the Company also had unused letters of credit aggregating $4.9 million related 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.

14


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 12

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 appraisal management services, search and valuation services, and online notarization and closing solutions, which are the principal offerings of ancillary services, 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 income information related to these segments is as follows:
 Three Months Ended 
 March 31,
 20212020
 ($000 omitted)
Title segment:
Revenues632,585 434,440 
Depreciation and amortization4,314 3,821 
Income before taxes and noncontrolling interest77,089 14,836 
Ancillary services and corporate segment:
Revenues56,001 5,461 
Depreciation and amortization2,116 410 
Loss before taxes and noncontrolling interest(3,087)(5,566)
Consolidated Stewart:
Revenues688,586 439,901 
Depreciation and amortization6,430 4,231 
Income before taxes and noncontrolling interest74,002 9,270 

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 
 March 31,
 20212020
 ($000 omitted)
United States652,582 414,128 
International36,004 25,773 
688,586 439,901 


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NOTE 13
Other comprehensive loss. Changes in the balances of each component of other comprehensive loss and the related tax effects are as follows:
Three Months Ended 
 March 31, 2021
Three Months Ended 
 March 31, 2020
Before-Tax AmountTax Expense (Benefit)Net-of-Tax AmountBefore-Tax AmountTax Expense (Benefit)Net-of-Tax Amount
($000 omitted)
Net unrealized gains and losses on investments:
Change in net unrealized gains and losses on investments(11,589)(2,433)(9,156)(3,267)(687)(2,580)
Reclassification adjustment for realized gains and losses on investments(184)(39)(145)(101)(21)(80)
(11,773)(2,472)(9,301)(3,368)(708)(2,660)
Foreign currency translation adjustments2,351 484 1,867 (13,659)(2,217)(11,442)
Other comprehensive loss(9,422)(1,988)(7,434)(17,027)(2,925)(14,102)
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S OVERVIEW

First quarter 2021 overview. We reported net income attributable to Stewart for the first quarter 2021 of $54.2 million ($2.01 per diluted share), compared to net income attributable to Stewart of $5.2 million ($0.22 per diluted share) for the first quarter 2020. Excluding net realized and unrealized gains and losses, Stewart’s first quarter 2021 net income of $51.7 million ($1.92 per diluted share) increased $38.4 million, or 289%, from $13.3 million ($0.56 per diluted share) in the first quarter 2020. First quarter 2021 pretax income before noncontrolling interests was $74.0 million compared to pretax income before noncontrolling interests of $9.3 million for the first quarter 2020.

First quarter 2021 results included $3.3 million of pretax net realized and unrealized gains, primarily related to net unrealized gains on fair value changes of equity securities investments recorded in the title segment. First quarter 2020 results included $11.1 million of pretax net realized and unrealized losses, which included $10.6 million of net unrealized losses on fair value changes of equity securities investments recorded 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,
 20212020% Change
Operating revenues625.4 440.3 42 %
Investment income3.9 5.2 (24)%
Net realized and unrealized gains (losses)3.2 (11.1)129 %
Pretax income77.1 14.8 420 %
Pretax margin12.2 %3.4 %

Title segment pretax income improved by $62.3 million, or 420%, while pretax margin increased 880 basis points to 12.2% in the first quarter 2021 compared to the prior year quarter. Title operating revenues grew $185.1 million, or 42%, as a result of improvements in direct title revenues of $81.2 million, or 41%, and gross independent agency revenues of $103.9 million, or 43%. Consistent with the increased title revenues, overall segment operating expenses increased $135.9 million, or 32%, in the first quarter 2021, with agency retention expenses and combined title employee costs and other operating expenses increasing 42% and 21%, respectively, from the first quarter 2020. Average independent agency remittance rate improved to 17.9% in the first quarter 2021, compared to 17.6% in the prior year quarter, while combined title employee costs and other operating expenses, as a percentage of title revenues, improved to 38.1% in the first quarter 2021, from 44.9% in the first quarter 2020.

Title loss expense increased $10.1 million, or 54%, in the first quarter 2021 compared to the prior year quarter, primarily as a result of increased title revenues. As a percentage of title revenues, the title loss expense in the first quarter 2021 was 4.6% compared to 4.2% from the prior year quarter.

The segment’s investment income decreased $1.3 million, or 24%, primarily as a result of lower interest rates applicable to our short-term and securities investments during the first quarter 2021 compared to the first quarter 2020. Net realized and unrealized gains and losses for the first quarters 2021 and 2020 consisted primarily of net unrealized gains and losses related to fair value changes of equity securities investments, as mentioned above.

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Direct title revenues (refer to schedule in Results of Operations - Title Revenues section) increased in the first quarter 2021, primarily driven by the $92.9 million, or 61%, growth in non-commercial revenues resulting from increased transactions from both existing and recently-acquired title offices. Total residential purchase and refinancing closed orders in the first quarter 2021 increased 35% and 107%, respectively, compared to the prior year quarter. However, the non-commercial revenue increase was partially offset by lower commercial revenues in the first quarter 2021, resulting from lower commercial transaction size and volume compared to the first quarter 2020. Domestic commercial fee per file in the first quarter 2021 was approximately $8,700, compared to $11,400 from the first quarter 2020; while domestic residential fee per file was approximately $1,900, which is 5% lower than the prior year quarter’s average fee per file, primarily due to the higher mix of refinancing compared to purchase transactions in the first quarter 2021. Total international revenues increased $10.2 million, or 42%, primarily due to higher volumes in our Canadian operations.

Summary results of the ancillary services and corporate segment are as follows ($ in millions):
For the Three Months
Ended March 31,
 20212020% Change
Operating revenues55.9 5.5 924 %
Pretax loss(3.1)(5.6)45 %

The segment’s operating revenues increased $50.5 million in the first quarter 2021, compared to the prior year quarter, primarily due to revenues generated by recent acquisitions. The ancillary services operations generated pretax income of $2.7 million (which included $1.7 million of purchased intangibles amortization) in the first quarter 2021, compared to a pretax loss of $0.5 million in the prior year quarter. Net expenses attributable to parent company and corporate operations for the first quarters 2021 and 2020 were approximately $5.7 million and $5.1 million, respectively.

We continue to implement our strategy of improving operational performance through targeted growth, focused management, and broader technology and services offerings. During the first quarter 2021, we acquired A.S.K. Services, Inc., a title search and support services provider, consistent with our plan to strengthen and expand title production resources for our independent agency partners; while our acquisition of Signature Closers, LLC, an online notarization and closing solutions provider, further advances our digital strategy and vision of streamlining closings, while providing a best-in-class customer experience. We expect these acquisitions to further leverage our position in the evolving real estate closing experience and improve scale and synergies within our title and ancillary services businesses. 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. We continue to operate under our business continuity plan that we deployed in March 2020 when the pandemic started. While the distribution of vaccines is ramping up and states and certain businesses have reopened, our employees have not fully transitioned back to the workplace. We continue to take appropriate measures to protect the safety of all our employees and customers in carrying out our business operations, which is generally considered as essential business in the U.S. We are proactively taking advantage of digital tools and innovative solutions in facilitating real estate transactions when possible during this challenging environment. Currently, we are gathering information and insight from our associates, monitoring the evolving effects of the COVID-19 pandemic and guidance from health and governmental bodies, and evaluating the next phase of our return to workplace approach.


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.

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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, 2021, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2020 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 ancillary services and corporate segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with our ancillary services operations, which are principally appraisal management services, online notarization and closing services, 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;
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 diseases and related quarantine orders and restrictions on travel, trade and business operations.

Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. As an overall guideline, a 5% change in median home prices results in an 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.


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RESULTS OF OPERATIONS

Comparisons of our results of operations for the three months ended March 31, 2021 with the three months ended March 31, 2020 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 (seasonally-adjusted basis) in March 2021 fell 4% from February 2021, marking two months of consecutive declines, but grew 12% compared to March 2020. According to NAR, consumers are facing much higher homes prices, rising mortgage rates, and falling affordability and inventory, which all contributed to the lower existing homes sales in March 2021 versus earlier months. On non-seasonally-adjusted basis, existing home sales in the first quarter 2021 improved 14% from the same quarter last year. March 2021 median and average home prices increased approximately 17% and 12%, respectively, compared to March 2020 prices, with March 2021 being the 109th consecutive month of year-over-year median home price increase. In regard to new residential construction, U.S. housing starts in March 2021 improved 37% from March 2020 and 19% sequentially from February 2021, while newly issued building permits in March 2021 also improved 30% and 3% from March 2020 and February 2021, respectively.

According to Fannie Mae and MBA (averaged), one-to-four family mortgage originations improved 77% to approximately $1.2 trillion in the first quarter 2021 from $658 billion in the first quarter 2020, primarily driven by a 115% increase in refinancing originations resulting from the current lower mortgage interest rate environment. Purchase originations increased 24% in the first quarter 2021 compared to the first quarter 2020 as the real estate market continues to recover from the effects of the COVID-19 pandemic.

For the second quarter 2021, Fannie Mae and MBA are forecasting that existing and new home sales will improve 43% and 28%, respectively, compared to last year's second quarter. Total mortgage originations for the second quarter 2021 are expected to decline 3% compared to the second quarter 2020, primarily due to last year's surge in refinancing transactions resulting from lower interest rates and expectations of lower refinancing transactions in 2021 as interest rates are beginning to gradually increase. However, purchase lending transactions are predicted to improve 41% in the second quarter 2021 compared to last year's second quarter, partially offsetting the impact of reduced refinancing lending volumes. Compared to 2.95% in 2020, the average 30-year fixed mortgage interest rate is expected to increase to 3.35% in 2021.

Title revenues. Direct title revenue information is presented below:
 Three Months Ended March 31,
 20212020 Change% Change
 ($ in millions)
Non-commercial
Domestic216.0 132.8 83.2 63 %
International28.8 19.1 9.7 51 %
244.8 151.9 92.9 61 %
Commercial:
Domestic29.2 41.4 (12.2)(29)%
International5.5 5.0 0.5 10 %
34.7 46.4 (11.7)(25)%
Total direct title revenues279.5 198.3 81.2 41 %

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Direct title revenues improved in the first quarter 2021, compared to last year's first quarter, primarily driven by the $92.9 million, or 61%, increase in non-commercial revenues resulting from increased transactions from both existing and recently-acquired title offices. Total residential purchase and refinancing closed orders in the first quarter 2021 increased 35% and 107%, respectively, compared to the prior year quarter. However, the non-commercial revenue increase was partially offset by lower commercial revenues in the first quarter 2021, resulting from lower commercial transaction size and volume compared to the first quarter 2020. Domestic commercial fee per file in the first quarter 2021 was approximately $8,700, compared to $11,400 from the first quarter 2020; while domestic residential fee per file was approximately $1,900, which is 5 percent lower than the prior year quarter’s average fee per file, primarily due to the higher mix of refinancing compared to purchase transactions in the first quarter 2021. Total international revenues increased $10.2 million, or 42%, primarily due to higher volumes in our Canadian operations.

Orders information for the three months ended March 31 is as follows:
Three Months Ended March 31,
20212020Change% Change
Opened Orders:
Commercial3,569 4,153 (584)(14)%
Purchase70,789 53,636 17,153 32 %
Refinance81,750 64,189 17,561 27 %
Other1,810 730 1,080 148 %
Total157,918 122,708 35,210 29 %
Closed Orders:
Commercial3,377 3,628 (251)(7)%
Purchase45,483 33,715 11,768 35 %
Refinance65,666 31,746 33,920 107 %
Other1,175 444 731 165 %
Total115,701 69,533 46,168 66 %


Gross revenues from independent agency operations increased $103.9 million, or 43%, in the first quarter 2021 compared to last year's first quarter, which was consistent with the improved real estate market trends in the first quarter 2021 and the continued return of agents after the termination of the proposed merger in the third quarter 2019. Agency revenues, net of retention, increased $19.3 million, or 45%, in the first quarter 2021 compared to the same period in 2020, generally in line with the gross agency revenue change. Refer further to the "Retention by agencies" discussion under Expenses below.

Ancillary services revenues. Ancillary services operating revenues increased to $55.9 million in the first quarter 2021, compared to $5.5 million in the first quarter 2020. The revenue growth was primarily due to revenues generated by recent acquisitions of appraisal management and online notarization and closing services companies, partially offset by lower valuation services revenues due to reduced capital market customer orders.

Investment income. Investment income for the first quarter 2021 decreased $1.3 million, or 24%, primarily as a result of lower interest rates applicable to our short-term and securities investments during the first quarter 2021 compared to the first quarter 2020.

Net realized and unrealized gains (losses). Refer to Note 5 to the condensed consolidated financial statements.

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Expenses. An analysis of expenses is shown below:
 Three Months Ended March 31,
 20212020Change% Change
 ($ in millions)
Amounts retained by agencies283.9 199.4 84.6 42 %
As a % of agency revenues82.1 %82.4 %
Employee costs169.4 135.7 33.7 25 %
As a % of operating revenues24.9 %30.4 %
Other operating expenses125.5 71.9 53.6 75 %
As a % of operating revenues18.4 %16.1 %
Title losses and related claims28.8 18.6 10.1 54 %
As a % of title revenues4.6 %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 82.1% for the first quarter 2021, as compared to 82.4% in the first quarter 2020. 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 $33.7 million, or 25%, in the first quarter 2021, compared to the same period in 2020, primarily due to higher salaries expense driven by a 12% higher average employee count, increased incentive compensation on improved overall operating results, and additional employee costs related to higher order volumes. As a percentage of total operating revenues, consolidated employee costs improved to 24.9% in the first quarter 2021 from 30.4% in the prior year quarter, which was primarily influenced by our continued focus on managing operating costs.

Employee costs in the title segment increased $28.8 million, or 22%, the first quarter 2021 compared to the first quarter 2020, primarily due to increased salaries expense driven by a higher average employee count, mostly from recent title office acquisitions, increased incentive compensation on improved title operating results, and additional employee costs related to higher order volumes. Employee costs in the ancillary services and corporate segment increased $4.9 million, or 98%, in the first quarter 2021 compared to the first quarter 2020, primarily due to increased average employee count driven by recent acquisitions in the ancillary services operations.

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 (variable costs) and costs that fluctuate independently of revenues (independent costs). 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. Variable costs include appraiser and notary expenses, outside search and valuation fees, attorney fee splits, bad debt expenses, 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.

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Consolidated other operating expenses increased $53.6 million, or 75%, in the first quarter 2021 compared to last year's first quarter. This increase was primarily due to increased appraisal and notary expenses by recently-acquired ancillary services businesses, higher outside title search and premium tax expenses on higher title revenues, and increased professional fees and rent expenses, partially offset by lower travel and marketing expenses. As a percentage of total operating revenues, consolidated other operating expenses for the first quarter 2021 increased to 18.4% compared to 16.1% in the first quarter 2020, primarily due to appraisal and notary costs related to our recently acquired ancillary services businesses.

Total variable costs increased $45.3 million, or 142%, in the first quarter 2021 compared to the same period in 2020, mainly due to higher appraisal and notary expenses by recently-acquired ancillary services businesses and increased outside search and premium taxes, consistent with higher operating revenues. Total costs that are fixed in nature increased $6.3 million, or 20%, in the first quarter 2021 compared to the same period in 2020, primarily due to increased professional fees, rent expense and technology costs. Independent costs increased $2.0 million, or 25%, in the first quarter 2021 compared to the same period in 2020, primarily due to higher office closures expenses, litigation-related accruals and bank fees, partially offset by lower travel and marketing expenses.

Title losses. Provisions for title losses, as a percentage of title operating revenues, were 4.6% in the first quarter 2021, compared to 4.2% in the first quarter 2020. Title loss expense increased $10.1 million, or 54%, in the first quarter 2021 compared to the prior year quarter, primarily as a result of increased title revenues. 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,
 20212020Change% Change
 ($ in millions)
Provisions – known claims:
Current year2.2 1.3 0.9 69 %
Prior policy years13.3 12.6 0.7 %
15.5 13.9 1.6 12 %
Provisions – IBNR
Current year26.2 17.2 9.0 52 %
Prior policy years0.4 0.1 0.3 300 %
26.6 17.3 9.3 54 %
Transferred from IBNR to known claims(13.3)(12.6)(0.7)%
Total provisions28.8 18.6 10.2 55 %

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 provisions increased $1.6 million, or 12%, in the first quarter 2021 compared to the same period last year, primarily as a result of higher reported claims relating to current and prior year policies. Current year IBNR provisions in the first quarter 2021 increased $9.0 million, or 52%, compared to the first quarter 2020, primarily due to increased title premiums in 2021. As a percentage of title operating revenues, provisions - IBNR for the current policy year were 4.2% in the first quarter 2021, compared to with 3.9% in the first quarter 2020.

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Cash claim payments decreased $4.9 million, or 23%, in the first quarter 2021 compared to the last year's first quarter, 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 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, 2021December 31,
2020
 ($ in millions)
Known claims67.8 68.9 
IBNR441.7 427.4 
Total estimated title losses509.5 496.3 

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 paid out within six 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 $2.2 million, or 52%, in the first quarter 2021 compared to the first quarter 2020, primarily due to incremental intangible asset amortization and fixed asset depreciation expenses related to recent acquisitions.

Income taxes. Our effective tax rate, based on income before taxes and after deducting income attributable to noncontrolling interests, for the first quarter 2021 was 24% compared to 27% for the first quarter 2020. The lower effective tax rate in the first quarter 2021 was primarily due to increased year over year annualized pretax income and reductions in expected nondeductible expenses relative to pretax income in 2021.


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, 2021, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $1.1 billion ($596.5 million, net of statutory reserves on cash and investments). Of our total cash and investments at March 31, 2021, $782.2 million ($518.7 million, net of statutory reserves) was held in the United States and the rest internationally, principally in Canada.

Cash held at the parent company totaled $32.5 million at March 31, 2021. 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).

24


A substantial majority of our consolidated cash and investments as of March 31, 2021 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 claim 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 $491.3 million and $496.6 million at March 31, 2021 and December 31, 2020, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $25.6 million and $20.0 million at March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, our known claims reserve totaled $67.8 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $441.7 million. In addition to this, we had cash and investments (excluding equity method investments) of $421.3 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 TDI must be notified of any dividend declared, and any dividend in excess of the statutory maximum of 20% of surplus (approximately $158.9 million as of December 31, 2020) 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, 2021 and 2020, Guaranty paid dividends of $40.0 million and $30.0 million, respectively, to its parent.

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,
 20212020
 ($ in millions)
Net cash provided (used) by operating activities47.4 (11.4)
Net cash used by investing activities(73.6)(3.3)
Net cash provided (used) by financing activities6.2 (18.8)

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 provided by operations in the first quarter 2021 was $47.4 million, compared to net cash used by operations of $11.4 million in the prior year quarter. The improvement in cash from operations was primarily driven by the higher net income and lower payments of claims and accounts payables. 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 continue to invest in the technology necessary to accomplish these goals.

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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 title offices and other businesses. During the first quarter 2021, total proceeds from securities investments sold and matured were $45.9 million, compared to $30.6 million during the same period in 2020. Cash used for purchases of securities investments was $47.9 million during the first quarter 2021, compared to $30.7 million during the first quarter 2020.

We used $52.6 million and $1.4 million of cash for several acquisitions of businesses during the first quarter 2021 and 2020, respectively, and also used $16.0 million of cash during the first quarter 2021 in acquiring an equity method investment in a title company. During the first quarters 2021 and 2020, we used $5.7 million and $4.8 million, respectively, of cash for purchases of property and 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. Total debt and stockholders’ equity were $125.6 million and $1,047.9 million, respectively, as of March 31, 2021. Payments on notes payable during the first quarters 2021 and 2020 of $154.7 million and $7.7 million, respectively, and notes payable additions of $154.0 million and $0.2 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business. During the first quarter 2021, we amended our line of credit agreement, resulting in an increase in the total line of credit commitment from our lenders from $200 million to $350 million (refer to Note 1-D for additional details on the amendment). At March 31, 2021, the outstanding balance of our line of credit facility was $125.6 million, which included the $25.0 million we drew from the facility during the first quarter 2021; while the available balance of the line of credit was $223.6 million, net of an unused $2.5 million letter of credit. At March 31, 2021, our debt-to-equity ratio, excluding our Section 1031 notes, was approximately 12.0%.

During the first quarter 2021, we paid total dividends of $8.8 million ($0.33 per common share), compared to the total dividends paid in the first quarter 2020 of $7.1 million ($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 minimal during the first quarter 2021, compared to a net decrease of $3.5 million during the first quarter 2020. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar did not significantly change in 2021, while it depreciated in 2020.

***********
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 10 to the condensed consolidated financial statements.

Other comprehensive income (loss). Unrealized gains and losses on available-for-sale debt securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders’ equity, until they are realized. During the first quarter 2021, net unrealized investment losses of $9.3 million, net of taxes, which increased our other comprehensive loss, were primarily related to a net decrease in the fair values of our overall bond securities investment portfolio mainly driven by the effect of rising interest rates. During the first quarter 2020, net unrealized investment losses of $2.7 million, net of taxes, which increased our other comprehensive loss, were primarily related to a net decrease in the fair values of our overall bond securities investment portfolio mainly driven by increased credit spreads.
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Changes in foreign currency exchange rates, primarily related to our Canadian and United Kingdom operations, reduced our other comprehensive loss, net of taxes, by $1.9 million in the first quarter 2021; while they increased our other comprehensive loss, net of taxes, by $11.4 million for the same period in 2020.

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 2020 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 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 2020 Form 10-K, 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 filed subsequently. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.


Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes during the quarter ended March 31, 2021 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 2020 Form 10-K.


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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, 2021, 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, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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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 Annual Report on Form 10-K for the year ended December 31, 2020.


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 Annual Report on Form 10-K for the year ended December 31, 2020. There have been no material changes to our risk factors during the three months ended March 31, 2021 since our Annual Report on Form 10-K for the year ended December 31, 2020.


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, 2021, except for repurchases of approximately 37,300 shares (aggregate purchase price of approximately $1.9 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 $38.87 and $37.60 as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, our book value per share was based on approximately $1,041.9 million of stockholders’ equity attributable to Stewart and 26,806,025 shares of Common Stock outstanding. As of December 31, 2020, our book value per share was based on approximately $1,005.1 million of stockholders’ equity attributable to Stewart and 26,728,242 shares of Common Stock outstanding.


Item 6. Exhibits
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Exhibit  
10.7†*
10.8†*
10.9†*
10.10†*
10.11†*
10.12†*
10.13†*
10.14†*
10.15†*
10.16†*
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
* Filed herewith
† Management contract or compensatory plan


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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 4, 2021
Date
 Stewart Information Services Corporation
 Registrant
By: /s/ David C. Hisey
 David C. Hisey, Chief Financial Officer, Secretary and Treasurer
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