Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 790K
2: EX-10.1 EX-10.1 Et Investments Asset Purchase and Sale HTML 140K
Agreement
3: EX-31.1 EX-31.1 CEO Section 302 HTML 26K
4: EX-31.2 EX-31.2 CFO Section 302 HTML 26K
5: EX-32.1 EX-32.1 CEO Section 906 HTML 21K
6: EX-32.2 EX-32.2 CFO Section 906 HTML 21K
13: R1 Cover Page HTML 74K
14: R2 Condensed Consolidated Statements of Income and HTML 137K
Comprehensive Income (Unaudited)
15: R3 Condensed Consolidated Balance Sheets HTML 137K
16: R4 Condensed Consolidated Balance Sheets HTML 26K
(Parenthetical)
17: R5 Condensed Consolidated Statements of Cash Flows HTML 112K
(Unaudited)
18: R6 Condensed Consolidated Statements of Equity HTML 89K
(Unaudited)
19: R7 Condensed Consolidated Statement of Equity HTML 21K
(Unaudited) (Parenthetical)
20: R8 Interim financial statements HTML 27K
21: R9 Revenues HTML 38K
22: R10 Investments in debt and equity securities HTML 128K
23: R11 Fair value measurements HTML 48K
24: R12 Net realized and unrealized (losses) gains HTML 128K
25: R13 Goodwill and other intangibles HTML 30K
26: R14 Estimated title losses HTML 37K
27: R15 Share-based payments HTML 23K
28: R16 Earnings per share HTML 41K
29: R17 Contingent liabilities and commitments HTML 23K
30: R18 Regulatory and legal developments HTML 23K
31: R19 Segment information HTML 57K
32: R20 Other comprehensive income (Loss) HTML 55K
33: R21 Interim financial statements (Policies) HTML 32K
34: R22 Revenues (Tables) HTML 35K
35: R23 Investments in debt and equity securities (Tables) HTML 126K
36: R24 Fair value measurements (Tables) HTML 43K
37: R25 Net realized and unrealized (Losses) Gains HTML 77K
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38: R26 Goodwill and other intangibles (Tables) HTML 28K
39: R27 Estimated title losses (Tables) HTML 36K
40: R28 Earnings per share (Tables) HTML 39K
41: R29 Segment information (Tables) HTML 55K
42: R30 Other comprehensive income (Loss) (Tables) HTML 55K
43: R31 Interim financial statements - Narrative (Details) HTML 31K
44: R32 Revenues (Details) HTML 36K
45: R33 Investments in debt and equity securities - HTML 26K
Investments in Debt and Equity Securities
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46: R34 Investments in debt and equity securities - HTML 26K
Additional Information (Details)
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Amortized Costs and Fair Values (Details)
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Unrealized Gains and Losses (Details)
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Securities According to Contractual Terms
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Unrealized Losses on Investments and Fair Values
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Realized and Unrealized Gains and Losses (Details)
53: R41 Net realized and unrealized (losses) gains - Net HTML 27K
Gains on Investments in Equity Securities Still
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54: R42 Net realized and unrealized (losses) gains - HTML 26K
Proceeds from the Sale of Investments (Details)
55: R43 Goodwill and other intangibles (Details) HTML 30K
56: R44 Goodwill and other intangibles - Additional HTML 36K
Information (Details)
57: R45 Estimated title losses (Details) HTML 47K
58: R46 Share-based payments (Details) HTML 59K
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(Details)
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Operations and Income (Loss) Information Related
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(Exact name of registrant as specified in its charter)
iDelaware
i74-1677330
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
i1360 Post Oak Blvd.,
iSuite
100
iHouston,
iTexas
i77056
(Address
of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code:(i713) i625-8100
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $1 par value per share
iSTC
iNew
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.
iYes☑ 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). iYes☑ 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.
☑
iLarge
accelerated filer
☐
Non-accelerated filer
i☐
Emerging growth company
☐
Accelerated filer
i☐
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 i☐ No ☑
On
October 29, 2020, there were i26,719,342 outstanding shares of the issuer's Common Stock.
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)
See
notes to condensed consolidated financial statements.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
i
Interim
financial statements. The financial information contained in this report for the three months ended September 30, 2020 and 2019, and as of September 30, 2020, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission on February 27, 2020 (2019 Form 10-K).
A. iManagement’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. iConsolidation.
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. iRestrictions
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 $i535.7
million and $i483.4 million at September 30, 2020 and December 31, 2019, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $i21.1
million and $i39.7 million at September 30, 2020 and December 31, 2019, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the
Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.
D. Issuance of Common Stock. On August 17, 2020, the Company issued an aggregate of i3,026,340
new shares of its Common Stock ($iii1//
par value), which included shares purchased by the underwriters to the transaction. Proceeds from the Common Stock issuance, net of issuance costs, amounted to $i109.0 million.
E. Impact of the COVID-19 pandemic. In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in a slowdown in the global economy and a U.S. declaration of a national emergency. In response to the pandemic, health and governmental bodies,
including the state of Texas where the Company is headquartered, issued travel restrictions, quarantine orders, temporary closures of non-essential businesses and other restrictive measures. To date, various levels of restrictions are still in place across the U.S. to address the spread of COVID-19. Although the title insurance industry has been deemed essential in the U.S., the pandemic and measures to contain it have caused disruptions in the real estate market and in the Company's business operations. To the extent that the COVID-19 pandemic continues or worsens, it could adversely impact the Company's future operational and financial performance, which may result in impairments of its assets. The
Company is currently unable to determine the effects the COVID-19 pandemic will have on the Company's future financial statements or results of operations.
/
8
NOTE 2
i
Revenues.
iThe Company's operating revenues, summarized by type, are as follows:
As
of September 30, 2020 and December 31, 2019, the net unrealized investment gains relating to investments in equity securities held were $i0.4 million and $i6.9
million, respectively (refer to Note 5).
The amortized costs and fair values of investments in debt securities are as follows:
Debt
securities as of September 30, 2020 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):
Amortized
costs
Fair
values
($000 omitted)
In
one year or less
i68,394
i69,164
After
one year through five years
i299,977
i313,410
After
five years through ten years
i186,766
i201,134
After
ten years
i30,978
i34,187
i586,115
i617,895
/
i
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 September 30, 2020, were:
Less than 12 months
More than 12 months
Total
Losses
Fair values
Losses
Fair values
Losses
Fair values
($000
omitted)
Municipal
i—
i—
i—
i—
i—
i—
Corporate
i345
i22,781
i—
i—
i345
i22,781
Foreign
i1
i4,106
i20
i240
i21
i4,346
U.S.
Treasury Bonds
i—
i—
i24
i1,022
i24
i1,022
i346
i26,887
i44
i1,262
i390
i28,149
/
The
number of specific debt investment holdings held in an unrealized loss position as of September 30, 2020 was i15. Of these securities, i3
were in unrealized loss positions for more than 12 months. During 2020, the overall investment fair values increased, primarily resulting from the effect of lower interest rates which was partially offset by increased credit spreads. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.
10
Gross
unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019, were:
Less than 12 months
More than 12 months
Total
Losses
Fair values
Losses
Fair values
Losses
Fair values
($000
omitted)
Municipal
i2
i53
i—
i—
i2
i53
Corporate
i23
i7,420
i—
i—
i23
i7,420
Foreign
i318
i92,108
i705
i55,875
i1,023
i147,983
U.S.
Treasury Bonds
i—
i—
i41
i2,215
i41
i2,215
i343
i99,581
i746
i58,090
i1,089
i157,671
NOTE
4
ii
Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the Financial Accounting Standards Board's Accounting
Standards Codification (ASC) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible.
The three levels of inputs used to measure fair value are as follows:
•Level 1 – quoted prices in active markets for identical assets or liabilities;
•Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and
•Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
i
As
of September 30, 2020, financial instruments measured at fair value on a recurring basis are summarized below:
Level 1
Level 2
Fair value
measurements
($000
omitted)
Investments in securities:
Debt securities:
Municipal
i—
i48,952
i48,952
Corporate
i—
i320,348
i320,348
Foreign
i—
i241,969
i241,969
U.S.
Treasury Bonds
i—
i6,626
i6,626
Equity
securities
i32,704
i—
i32,704
i32,704
i617,895
i650,599
//
11
As
of December 31, 2019, financial instruments measured at fair value on a recurring basis are summarized below:
Level 1
Level 2
Fair value
measurements
($000
omitted)
Investments in securities:
Debt securities:
Municipal
i—
i53,823
i53,823
Corporate
i—
i309,142
i309,142
Foreign
i—
i236,073
i236,073
U.S.
Treasury Bonds
i—
i6,683
i6,683
Equity
securities
i39,318
i—
i39,318
i39,318
i605,721
i645,039
As
of September 30, 2020, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental, and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. The fair value of the Company's investments in debt and equity securities is primarily determined using a third-party pricing service provider. The third-party pricing service provider
calculates the fair values using both market approach and model valuation methods, as well as pricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with pricing information from the Company's investment manager.
NOTE 5
Net realized and unrealized (losses) gains.iRealized
and unrealized gains and losses are detailed as follows:
Net
unrealized investment (losses) gains recognized on equity securities still held at September 30
(i39)
(i294)
(i6,228)
i2,942
(i7)
i46,905
(i6,035)
i50,730
Net
realized gains for the first nine months of 2020 included $i1.3 million of gains from settlements of equity investments with no previously readily determinable fair values (cost-basis investments), partially offset by net realized losses of $i1.1
million from the sale of investment securities.
Net realized gains during both the third quarter and first nine months of 2019 included a $ii50.0/
million realized gain related to the merger termination fee paid by Fidelity National Financial and a $ii2.7/
million impairment charge on an equity method investment.
12
Investment gains and losses recognized related to investments in equity securities are as follows:
During
the third quarter 2020, the Company recorded total goodwill of $i112.6 million under the title segment in connection with its acquisition of several title offices. This goodwill adjustment was based on management's preliminary purchase accounting, which is expected to be finalized during the fourth quarter 2020.
During the second quarter 2020, the
Company recorded goodwill under the ancillary services and corporate segment, which was based on management's preliminary purchase accounting related to its acquisition of U.S. Appraisals, a national appraisal management company providing residential property appraisals for mortgage lenders. During the third quarter 2020, management completed the purchase accounting, which resulted in goodwill of $i19.7 million. The Company also recognized from the acquisition other intangible
assets of $i19.6 million, primarily related to customer relationships and internally-developed technology, which have estimated useful lives of i10 and i5
years, respectively.
/
During the first quarter 2020, the Company acquired several title offices which generated a combined goodwill of $i1.0 million under the title segment. Subsequent to September 30, 2020, the
Company acquired a national provider of appraisal management and residential real estate valuation services. Management expects to finalize the purchase accounting for this acquisition during the fourth quarter 2020.
13
NOTE 7
i
Estimated
title losses. iA summary of estimated title losses for the nine months ended September 30 is as follows:
2020
2019
($000
omitted)
Balances at January 1
i459,053
i461,560
Provisions:
Current
year
i68,063
i54,670
Previous
policy years
i537
i863
Total
provisions
i68,600
i55,533
Payments,
net of recoveries:
Current year
(i9,595)
(i11,424)
Previous
policy years
(i49,390)
(i55,375)
Total
payments, net of recoveries
(i58,985)
(i66,799)
Effects
of changes in foreign currency exchange rates
(i1,856)
i2,067
Balances
at September 30
i466,812
i452,361
Loss
ratios as a percentage of title operating revenues:
Current year provisions
i4.5
%
i4.1
%
Total
provisions
i4.6
%
i4.2
%
Provisions
in the first nine months of 2020 increased compared to the same period in 2019, primarily as a result of increased title revenues, higher domestic loss provisioning rates due to the current economic environment, and unfavorable loss development related to certain coverages in the Canadian operations. Claim payments in the first nine months of 2020 decreased compared to the same period in 2019, primarily due to lower payments on large and non-large claims relating to prior policy years; while the effect of changes in foreign currency exchange rates for the first nine months of 2020 and 2019 were primarily influenced by the depreciation and appreciation, respectively, of the Canadian dollar against the U.S. dollar during those periods.
/
NOTE
8
iShare-based payments. Prior to 2020, the Company granted time-based and performance-based restricted stock units to executives and senior management employees. Each restricted stock unit represents a contractual right to receive a share of the Company's common
stock. The time-based units vest on each of the first three anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives over a period of approximately iithree
years/. During the first nine months of 2020, the Company granted time-based restricted stock units and nonqualified stock options, in lieu of performance-based restricted stock units. The stock options vest and may be exercised at a strike price of $i39.76
on each of the first three anniversaries of the grant date at a rate of i20%, i30%
and i50%, chronologically, and expire i10
years after the grant date. /
Awards are made pursuant to the Company’s employee incentive compensation plans and the compensation expense associated with the awards is recognized over the corresponding vesting period. The aggregate grant-date fair values of restricted stock unit and stock option awards during the first nine months of 2020 were $i3.8
million (i96,000 units with an average grant price per unit of $i39.36)
and $i3.4 million (i648,000
options with an average grant price per option of $i5.32), respectively. During the first nine months of 2019, the aggregate grant-date fair value of restricted stock unit awards was $i5.0
million (i119,000 units with an average grant price per unit of $i42.05).
14
NOTE 9
i
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.
i
The
calculation of the basic and diluted EPS is as follows:
Average
number of dilutive shares relating to grants of restricted shares and units
i149
i157
i105
i172
Diluted
average shares outstanding
i25,297
i23,773
i24,256
i23,780
Basic
earnings per share attributable to Stewart
i2.22
i2.80
i3.94
i3.33
Diluted
earnings per share attributable to Stewart
i2.21
i2.78
i3.93
i3.31
//
NOTE
10
iContingent liabilities and commitments. In the ordinary course of business, the Company guarantees the third-party indebtedness of certain of its consolidated subsidiaries. As of September 30, 2020, the maximum potential future payments on the guarantees are not more than the related notes payable recorded
in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related guarantees are not more than the Company’s future lease obligations, as presented on the condensed consolidated balance sheets, plus lease operating expenses. As of September 30, 2020, the Company also had unused letters of credit aggregating $i5.2
million related to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees./
NOTE 11
iRegulatory
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.
15
Additionally,
from time to time, the Company receives various inquiries from governmental regulators concerning practices in the insurance industry. Many of these practices do not concern title insurance. To the extent the Company is in receipt of such inquiries, it believes that, where appropriate, it has adequately reserved for these matters and does not anticipate that the outcome of these inquiries will materially affect its consolidated financial condition or results of operations.
The Company is subject to various other administrative actions and inquiries into its business conduct in certain of the states in which it operates. While the
Company cannot predict the outcome of the various regulatory and administrative matters, it believes that it has adequately reserved for these matters and does not anticipate that the outcome of any of these matters will materially affect its consolidated financial condition or results of operations.
NOTE 12
i
Segment
information. The Company reports itwo operating segments: title and ancillary services and corporate. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home
and personal insurance services and Internal Revenue Code Section 1031 tax-deferred exchanges. The ancillary services and corporate segment includes search and valuation services, which are the principal offerings of ancillary services, and expenses of the parent holding company and certain other enterprise-wide overhead costs (net of centralized administrative services costs allocated to respective operating businesses).
i
Selected statement of income information related to these segments is as follows:
Other comprehensive income (loss). iChanges in the balances of each component of
other comprehensive income and the related tax effects are as follows:
Change
in net unrealized gains and losses on investments
i19,056
i4,001
i15,055
i22,766
i4,781
i17,985
Reclassification
adjustment for realized gains and losses on investments
(i349)
(i73)
(i276)
i152
i32
i120
i18,707
i3,928
i14,779
i22,918
i4,813
i18,105
Foreign
currency translation adjustments
(i4,101)
(i697)
(i3,404)
i2,750
i822
i1,928
Other
comprehensive income
i14,606
i3,231
i11,375
i25,668
i5,635
i20,033
/
17
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S OVERVIEW
Third quarter 2020 overview. We reported net income attributable to Stewart of $55.9 million ($2.21 per diluted share) for the third quarter 2020, compared to net income attributable to Stewart of $66.1 million ($2.78 per diluted share) for the third quarter 2019. On an adjusted basis, Stewart’s third quarter 2020 net income of $55.9 million ($2.21 per diluted share) increased 84% from $30.4 million ($1.28 per diluted share) in the third quarter 2019. Third quarter 2020 pretax income before noncontrolling interests was $76.3 million compared to pretax income before noncontrolling interests of $91.1
million for the third quarter 2019.
Third quarter 2019 results included pretax items of:
•$46.9 million of net realized and unrealized gains, primarily composed of a $50.0 million gain recorded in the ancillary services and corporate segment related to the merger termination fee paid by Fidelity National Financial (FNF), and a $2.7 million impairment charge on an equity method investment recorded in the title segment, and
•$1.0 million of third-party advisory expenses related to the terminated FNF merger transaction recorded in other operating expenses within the ancillary services and corporate segment.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
Title segment pretax income grew $32.9 million, or 66%, while pretax margin also improved 460 basis points to 14.5% in the third quarter 2020 compared to the prior year quarter. Title operating revenues increased $63.5 million, or 13%, resulting from increases in direct title revenues of $35.0 million, or 14%, and gross independent agency revenues of $28.5 million, or 11%. The effect of changes in the fair value
of equity securities investments was minimal during the third quarters of 2020 and 2019; however, during the third quarter 2019, the segment recorded a $2.7 million impairment charge on an equity method investment. Excluding the impairment charge, pretax income for the third quarter 2019 would have been $52.3 million (10.4% margin).
Consistent with the increased title revenues in the third quarter 2020, the segment’s overall operating expenses increased $33.6 million, or 7%, as agency retention expenses and combined title employee costs and other operating expenses increased 11% and 3%, respectively, from the third quarter 2019. Our average independent agency remittance rate for the third quarter 2020 improved to 18.2% compared to 17.8% in the prior year quarter; while combined title employee costs and other operating expenses, as percentage of title revenues, was 39.5% in the third quarter 2020 compared
to 43.4% in the prior year quarter. Title loss expense increased in the third quarter 2020 primarily due to increased title revenues, higher domestic loss provisioning rates due to the current economic environment, and unfavorable loss development in our Canadian business. As percentage of title revenues, the title loss expense in the third quarter 2020 was 5.1% compared to 4.2% from the prior year quarter.
Direct title revenues (refer to schedule in Results of Operations - Title Revenues section) in the third quarter 2020 increased from the prior year quarter as a result of improved domestic non-commercial revenues, primarily driven by increased purchase and refinancing residential orders from both existing and newly acquired title offices. This increase was partially
offset by decreased commercial revenues resulting from reduced transaction sizes and volumes. Domestic commercial fee per file in the third quarter 2020 was approximately $9,700, which was 23% lower than the third quarter 2019; while domestic residential fee per file was approximately $1,900, or 11% lower than the third quarter 2019, primarily due to a higher mix of refinancing compared to purchase transactions.
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Summary results of the ancillary services and corporate segment are as follows ($ in millions):
The segment’s results for the third quarter 2019 included a $50.0 million realized gain related to the FNF merger termination fee and $1.0 million of merger expenses. Excluding net realized gains and merger expenses, the segment’s pretax results for the third quarter 2020 improved $1.1 million, or 15%, compared to the prior year quarter. Third quarter segment operating revenues improved, primarily driven
by $24.2 million of revenues generated by U.S. Appraisals, which were partially offset by a $4.8 million decline in search and valuation services’ revenues due to significantly lower customer orders. The segment’s results for the third quarter 2020 and 2019 included approximately $6.3 million and $7.3 million, respectively, of net expenses attributable to parent company and corporate operations, with the higher expenses in the third quarter 2019 being primarily driven by the FNF merger expenses mentioned above.
Consistent with our investment and growth strategy of focusing on attractive businesses and geographies where we can have sustained success and where additional scale can efficiently and effectively improve profitability and margins, we acquired a number of title offices in the states of Alaska, Arizona, Colorado and Nevada during the late third quarter 2020. These acquisitions realign Stewart to strongly
compete in several strategic markets where we have traditionally been underrepresented. As expected, these acquisitions, along with our second quarter acquisition of U.S. Appraisals, were immediately accretive to Stewart, evidenced by positive contributions to our third quarter 2020 pretax results. Subsequent to September 30, 2020, we acquired a national provider of appraisal management and residential real estate valuation services. Along with U.S. Appraisals, we expect this acquisition to further leverage our position in the evolving real estate closing experience and improve scale and synergies within our ancillary services business. We believe our solid operating results and liquidity position will allow us to continue investing and growing to maximize our operational potential.
COVID-19
pandemic. In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in a slowdown in the global economy and a U.S. declaration of a national emergency. In response to the pandemic, health and governmental bodies, including the state of Texas where we are headquartered, issued travel restrictions, quarantine orders, temporary closures of non-essential businesses and other restrictive measures. In response to the pandemic, we deployed our business continuity plan in March and continue to take appropriate measures to protect the safety of all our employees and customers, while monitoring the evolving effects of the COVID-19 pandemic on the national and international fronts. Within the U.S., our business has been deemed an essential business which allows us to continue underwriting and closing real estate transactions for our residential and commercial customers on a daily basis. When possible,
we utilize our digital capabilities, including remote online notarization (RON), remote ink notarization (RIN), electronic signature platforms, virtual underwriting, and mobile earnest money transfer tools to aid our employees in facilitating real estate transactions during this challenging environment.
To date, various levels of restrictions to address the spread of COVID-19 are still in place across the U.S. and the rest of the world, with some economies gradually opening up and efforts to develop vaccines continue. We continue to proactively manage our business through this crisis with the help of our exceptional employees and support of our customers. While the pandemic continues to persist, Stewart is committed to helping people safely navigate the real estate closing process. We believe our strong liquidity position will allow us to facilitate our customers’ purchase and refinance
of real estate should macro-economic conditions become more challenging.
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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 nine months ended September 30, 2020, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2019 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, principally appraisal, and search and valuation services.
Factors affecting revenues. The principal factors that contribute to changes in operating revenues for our title and ancillary services and corporate segments include:
•mortgage interest rates;
•availability of mortgage loans;
•number and average value of mortgage loan originations;
•ability of potential purchasers to qualify for loans;
•inventory of existing homes
available for sale;
•ratio of purchase transactions compared with refinance transactions;
•ratio of closed orders to open orders;
•home prices;
•consumer confidence, including employment trends;
•demand by buyers;
•number of households;
•premium rates;
•foreign currency exchange rates;
•market share;
•ability
to attract and retain highly productive sales associates;
•departure of revenue-attached employees;
•independent agency remittance rates;
•opening of new offices and acquisitions;
•office closures;
•number and value of commercial transactions, which typically yield higher premiums;
•government or regulatory initiatives, including tax incentives and the implementation of the new integrated disclosure requirements;
•acquisitions or divestitures of businesses;
•volume
of distressed property transactions;
•seasonality and/or weather; and
•outbreaks of disease, including the COVID-19 pandemic, and related quarantine orders and restrictions on travel, trade and business operations.
Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. As an overall guideline, a 5% change in median home prices results in an approximately 3.7% change in title premiums. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance
revenues as home buying is generally depressed during winter months. Our second and third quarters are the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of year. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction.
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RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and nine months ended September 30,
2020 with the three and nine months ended September 30, 2019 are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.
Our statements on home sales and loan activity are based on published U.S. industry data from sources including Fannie Mae, the Mortgage Bankers Association (MBA), the National Association of Realtors® (NAR) and the U.S. Census Bureau. We also use information from our direct operations.
Operating environment. Existing home sales grew for the fourth consecutive month in
September, according to NAR, and is attributed to the currently record-low interest rates and an abundance of buyers in the marketplace, despite lower housing inventory levels compared to last year. Actual existing home sales in the third quarter 2020 grew approximately 13% from the third quarter 2019. On a seasonally-adjusted basis, September 2020 existing home sales increased 21% and 9% from a year ago and August 2020, respectively. September 2020 median and average home prices increased approximately 15% and 12%, respectively, compared to September 2019 prices. September 2020 housing starts improved 2% and 11% from August 2020 and a year ago, respectively. Newly issued building permits in September 2020 also improved, up 5% and 8% from August 2020 and September 2019, respectively.
As reported by Fannie Mae and
MBA (averaged), one-to-four family mortgage originations improved 51% to approximately $1.1 trillion in the third quarter 2020 from $702 billion in the third quarter 2019, primarily driven by an approximately 91% increase in refinancing originations resulting from the current lower mortgage interest rate environment. While purchase originations decreased in the second quarter 2020 on a year-on-year basis, third quarter 2020 purchase originations improved 23% sequentially from the second quarter 2020 and also increased 15% compared the third quarter 2019, as the real estate market continues to recover from the effects of the COVID-19 pandemic.
For the fourth quarter 2020, Fannie Mae and MBA are forecasting that existing and new home sales will improve 10% and 35%, respectively, compared to last year's fourth quarter, but consistent with the seasonality of the market, will sequentially decline 1% and 5%, respectively,
compared to the third quarter 2020. Total mortgage originations for the fourth quarter 2020 are expected to improve 17% from last year's fourth quarter, driven by 23% and 13% higher purchase and refinancing lending, respectively. The 30-year mortgage interest rate is expected to average approximately 3.1% for the year 2020, compared to the 2019 average of 3.8%.
Title revenues.Direct title revenue information is presented below:
Direct
title revenues improved in the third quarter and first nine months of 2020, compared to the same periods last year, primarily as a result of higher domestic non-commercial revenues driven by increased purchase and refinancing residential orders from existing offices and revenues generated by newly acquired title offices, which were approximately $10.3 million for the third quarter and first nine months of 2020. These increases were partially offset by decreased commercial revenues resulting from reduced transaction sizes and volumes. Total refinancing and purchased closed orders increased 47% and 42% in the third quarter and first nine months of 2020, respectively; while commercial closed orders decreased 4% and 11%, respectively, compared to the same periods in 2019.
Domestic residential fee per file for both the third quarter and first nine months of 2020 was approximately $1,900, lower compared to $2,200
for both the same periods in 2019 primarily as a result of a higher mix of refinancing compared to purchase transactions in 2020. Domestic commercial fee per file in the third quarter and first nine months of 2020 declined to approximately $9,700 and $10,300, respectively, compared to $12,600 and $11,300, respectively, in the same periods in 2019, primarily due to the slowdown in the commercial real estate market resulting from the COVID-19 pandemic. Total international revenues in the third quarter and first nine months of 2020 were comparable to the third quarter and first nine months of 2019, primarily as a result of higher volumes generated by our Canada operations being offset by lower volumes from other international locations.
Orders information for the three and nine months ended September 30 is as follows:
Gross
revenues from independent agency operations increased $28.5 million, or 11%, and $102.2 million, or 15%, in the third quarter and first nine months of 2020, respectively, compared to the same periods last year, which was consistent with the improving real estate market trends and the continued return of agents after the FNF merger termination. Agency revenues, net of retention, increased $6.4 million, or 14%, and $19.6 million, or 16%, in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, 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 for the third quarter and first nine months of 2020 increased $19.3 million, or 224%, and $13.9 million, or 45%, compared
to the same periods in 2019. U.S. Appraisals, which we acquired during the late second quarter 2020, generated revenues of $24.2 million and $31.3 million in the third quarter and first nine months of 2020, respectively. These revenues were partially offset by lower revenues from our existing search and valuation services of $4.9 million and $17.1 million (both 57%) in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily driven by significantly lower orders from several customers.
Investment income. Investment income for both the third quarter and first nine months of 2020 was generally comparable to the same periods in 2019, primarily as a result of increased dividend income offsetting the effect of reduced interest income due to the lower interest rates on our investments in 2020.
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Net
realized and unrealized (losses) gains. Refer to Note 5 to the condensed consolidated financial statements.
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 81.8% and 82.2% in the third quarter and first nine months of 2020, respectively, as compared to 82.2% and 82.4% in the same periods in 2019. The average retention percentage may vary from period to period due to the geographical mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. We continue to focus on increasing profit margins in every state, increasing premium revenue in states where remittance rates are above 20%, and maintaining the quality of our agency network, which we believe to be the industry’s best, in order to mitigate claims risk and drive consistent future performance. While market share is important in our
agency operations channel, it is not as important as margins, risk mitigation and profitability.
Employee costs. Consolidated employee costs increased 8% and 5% in the third quarter and first nine months of 2020, compared to the same periods in 2019, primarily as a result of acquisitions and higher incentive compensation related to improved overall operating results, partially offset by lower salaries expenses resulting from an overall lower average employee count (excluding acquisitions). Employee costs for the first nine months of 2020 were also increased by severance expenses related to cost savings initiatives during the second quarter 2020. Total employee costs for the third quarter and first nine months of 2020 related to new acquisitions were $6.1 million and $6.6 million, respectively.
Excluding acquisitions, employee
costs in the title segment in the third quarter and first nine months of 2020 increased $6.3 million, or 5%, and $11.2 million, or 3%, respectively, primarily due to increased incentive compensation on improved title revenues, partially offset by lower salaries expenses due to a lower average employee count. Severance expenses related to cost savings initiatives during the second quarter 2020 also contributed to the employee cost increase during the first nine months of 2020 for the segment. Excluding U.S. Appraisals, employee costs in the ancillary services and corporate segment decreased $0.6 million and $1.9 million (both 11%) in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to lower salaries expenses resulting from a lower average employee count.
As a percentage of total operating revenues, consolidated employee costs improved to 26.3%
and 27.8% in the third quarter and first nine months of 2020, respectively, compared to 28.3% and 30.3% in the same periods in 2019, which were primarily influenced by our continued focus on managing operating costs.
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Other operating expenses. Other operating expenses include costs that are fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues and costs that fluctuate independently of revenues. Costs that are fixed in nature include attorney and professional fees, third-party outsourcing provider fees, equipment rental, insurance, rent and other occupancy expenses, repairs and maintenance, technology costs, telecommunications and title plant expenses. Costs that follow, to varying degrees,
changes in transaction volumes and revenues include outside search and valuation fees, attorney fee splits, bad debt expenses, copy supplies, delivery fees, postage, premium taxes and title plant maintenance expenses. Costs that fluctuate independently of revenues include general supplies, litigation defense, business promotion and marketing and travel.
Consolidated other operating expenses increased 12% in the third quarter 2020 and decreased 2% in the first nine months of 2020, compared to the same periods in 2019. Included in other operating expenses were $21.7 million and $27.7 million of expenses related to new acquisitions for the third quarter and first nine months of 2020, respectively, which primarily consisted of outside valuation fees by U.S. Appraisals. Also, during the third quarter and first nine months of 2019, we incurred $1.0 million and $6.7 million, respectively, of third-party advisory
expenses recorded in the ancillary services and corporate segment related to the terminated FNF merger transaction. Excluding acquisitions and non-operating expenses, other operating expenses for the third quarter and first nine months of 2020 decreased $10.0 million, or 12%, and $27.0 million, or 11%, respectively, compared to the same periods in 2019, and as a percentage of operating revenues, were 13.8% and 14.5% in the third quarter and first nine months of 2020, respectively, compared to 17.1% and 17.9% in the same prior year periods.
Total costs that follow, to varying degrees, changes in transaction volumes and revenues increased $17.5 million, or 43%, and $17.6 million, or 16%, in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, mainly due to increased outside search and valuation fees primarily resulting from U.S. Appraisals' revenues and increased
premium taxes consistent with higher direct title revenues. Excluding the non-operating expenses above, total costs that are fixed in nature in the third quarter and first nine months of 2020 decreased $2.1 million, or 6%, and $6.6 million, or 7%, respectively, compared to the same periods in 2019, primarily due to lower rent and occupancy expenses. Total costs that fluctuate independently of revenues decreased $3.6 million, or 31%, and $10.3 million, or 32%, in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to decreased marketing and travel expenses mainly as a result of the COVID-19 pandemic.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 5.1% and 4.6% for the third quarter and first nine months of 2020, respectively, compared to 4.2% for both the third quarter and first
nine months of 2019. Title loss expense increased $7.4 million and $13.1 million in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.
The composition of title policy loss expense is as follows:
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 decreased in the third quarter and first nine months of 2020 compared to the same periods last year, primarily as a result of decreased dollar amounts of claims reported relating to both current and prior policy years. Current year IBNR provisions in the third quarter and first nine months of 2020 increased primarily due to increased title premiums in 2020, higher domestic loss provisioning rates due to the current economic and mortgage forbearance environment which is expected to result in increased defaults and title losses, and unfavorable loss development in certain coverages within our Canadian business. As a percentage of title operating revenues, provisions - IBNR for the current policy year were 4.5% and 4.0% in the third quarter and first nine months of 2020, respectively, compared with 3.3% and 3.5% in the third quarter and first nine months of 2019, respectively.
Cash
claim payments decreased $1.1 million, or 5%, and $7.8 million, or 12%, in the third quarter and first nine months of 2020, respectively, compared to the same periods in 2019, primarily due to lower payments on large and non-large claims relating to prior policy years. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.
In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. These escrow losses typically relate to errors or other miscalculations of amounts to be paid at closing, including timing or amount of a mortgage payoff, payment of property or other taxes and payment of homeowners’ association fees. Escrow losses also arise in cases of fraud, and in those cases, the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. Escrow
losses are recognized as 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. During both the first nine months of 2020 and 2019, we recorded approximately $1.0 million and $1.6 million, respectively, of policy loss expenses relating to escrow losses arising from fraud.
Total title policy loss reserve balances are as follows:
Title claims are generally incurred within the first nine years after policy issuance
and the timing of payments on these claims can significantly impact the balance of known claims, since claims, in many cases, may be open for several years before resolution and payment occur. As a result, the estimate of the ultimate amount to be paid on any claim may be modified over that time period. Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates.
Depreciation and amortization. Depreciation and amortization expenses during the third quarter and first nine months of 2020 decreased $0.6 million, or 10%, and $4.0 million, or 23%, respectively, compared to the same periods in 2019. These decreases were
primarily due to certain information technology assets and fixed assets, which became fully depreciated or were impaired during 2019, partially offset by incremental intangible asset amortization expenses related to our U.S. Appraisals acquisition which approximated $1.1 million for both the third quarter and first nine months of 2020.
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Income taxes. Our effective tax rates for the third quarter and first nine months of 2020 were 22% and 24%, respectively, based on income before taxes and after deducting income attributable to noncontrolling interests, in comparison with effective tax rates of 24% and 25% for the third quarter and first nine months of 2019, respectively. The lower effective tax rates for the third quarter and first
nine months of 2020 primarily resulted from increased year over year annualized pretax income and reductions in expected nondeductible expenses in 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of September 30, 2020, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $1.1 billion ($496.7 million, net of statutory reserves on cash and investments). Of our total cash and investments at September 30,
2020, $747.2 million ($411.5 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 $31.3 million at September 30, 2020. As a holding company, the parent company is funded principally by cash from its subsidiaries in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. The expense reimbursements are paid in accordance with management agreements, approved by the Texas Department of Insurance (TDI), among us and our subsidiaries. In addition to funding operating expenses, cash held at the parent company
is used for dividend payments to common stockholders and for stock repurchases, if any. To the extent such uses exceed cash available, the parent company is dependent on distributions from its regulated title insurance underwriter, Stewart Title Guaranty Company (Guaranty).
A substantial majority of our consolidated cash and investments as of September 30, 2020 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty may use its cash and investments in excess of its
legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including 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 $535.7 million and $483.4 million at September 30, 2020 and December 31, 2019, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $21.1 million and $39.7 million at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, our known claims reserve totaled $61.4 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $405.4 million. In addition to this, we had cash and investments (excluding equity method investments) of $322.7 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 $115.0 million as of December 31, 2019) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and liquidity, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. During the nine months ended September 30, 2020, Guaranty paid a dividend of $30.0 million
to its parent.
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As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
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 nine months of 2020 improved by $33.6 million, compared to the first nine months of 2019, primarily due to the higher net income generated and lower claim payments. Also included in the net cash provided by operations in 2019 was the $50.0 million FNF merger termination fee. Although our business is labor intensive, we are focused on a cost-effective, scalable business model which includes utilization of technology, centralized back and middle office functions and business process
outsourcing. We are continuing our emphasis on cost management, especially in light of the current economic environment due to the COVID-19 pandemic, specifically focusing on lowering unit costs of production and improving operating margins in our direct title and ancillary services businesses. Our plans to improve margins include additional automation of manual processes, and further consolidation of our various systems and production operations. We are currently investing in the technology necessary to accomplish these goals.
Investing activities. Cash used and provided by investing activities is primarily driven by proceeds from matured and sold investments, purchases of investments, capital expenditures and acquisition of title offices and other businesses. During the first nine months of 2020, total proceeds from securities investments sold and matured were $72.4 million, compared
to $65.6 million during the same period in 2019. Cash used for purchases of securities investments was $75.5 million during the first nine months of 2020, compared to $2.2 million during the same period in 2019, when we invested more in cash equivalents and short-term investments due to favorable interest rates.
During the first nine months of 2020, we used $146.5 million of cash for acquisitions of certain title offices and U.S Appraisals; while during the first nine months of 2020 and 2019, we used $10.5 million and $12.0 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. During
the third quarter 2020, we generated net proceeds of approximately $109.0 million from an issuance of new shares of Common Stock (refer also to Note 1-D to the condensed consolidated financial statements). We used the proceeds primarily for the acquisition of several title offices during the third quarter 2020. During the first nine months of 2020 and 2019, we paid total dividends of $22.2 million and $21.3 million, respectively, or $0.90 per common share for both periods.
Total debt and stockholders’ equity were $101.3 million and $950.9 million, respectively, as of September 30, 2020. Payments on notes payable during the first
nine months of 2020 and 2019 of $10.3 million and $23.9 million, respectively, and notes payable additions of $2.4 million and $23.5 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business. At September 30, 2020, the outstanding balance of our line of credit facility was $98.9 million, while the available balance of the line of credit was $98.6 million, net of an unused $2.5 million letter of credit. At September 30, 2020, our debt-to-equity ratio, excluding our Section 1031 notes, was approximately 10.6%, below the 20% we have set as our unofficial internal limit on leverage.
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Effect
of changes in foreign currency exchange rates. The effect of changes in foreign currency exchange rates on our cash and cash equivalents on the consolidated statements of cash flows was a net decrease of $0.5 million during the first nine months of 2020 and a net increase of $1.2 million during the same period in 2019. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar depreciated in 2020 and improved in 2019.
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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 nine months of 2020, net unrealized investment gains of $14.8 million, net of taxes, which increased our other comprehensive income, were primarily related to a net increase in the fair values of our overall bond securities investment portfolio mainly driven by the effect of lower interest rates and partially offset by higher credit spreads. During the first nine months of 2019, net unrealized investment gains of $18.1 million, net of taxes, which increased our other comprehensive income, were primarily related to increases
in the fair values of our overall bond securities investment portfolio driven by reduced interest rates and credit spreads.
Changes in foreign currency exchange rates, primarily related to our Canadian and United Kingdom operations, decreased our other comprehensive income, net of taxes, by $3.4 million in the first nine months of 2020; while they increased our other comprehensive income, net of taxes, by $1.9 million for the same period in 2019.
Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for
customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 16 in our 2019 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 "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;
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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 2019 Form 10-K, as updated and supplemented in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, and as maybe further updated and supplemented from time to time in our future Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances
that may arise after the date hereof, except as may be required by applicable law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes during the quarter ended September 30, 2020 in our investment strategies, types of financial instruments held or the risks associated with such instruments that would materially alter the market risk disclosures made in our 2019 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 September 30, 2020, and have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required
disclosure.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during the quarter ended September 30, 2020, 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, 2019.
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, 2019 and in Part II, Item 1A. “Risk Factors” in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which could adversely affect our business, financial condition, results of operations, liquidity, and the trading price of our common stock. There have been no material changes to our risk factors during the nine months ended September 30, 2020 since our Annual Report on Form 10-K for the year ended December 31, 2019 or our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
There were no repurchases of our Common Stock during the nine months ended September 30, 2020, except for repurchases of approximately 20,300 shares (aggregate purchase price of approximately $0.8 million) related to the statutory income tax withholding on the vesting of restricted share and unit grants to executives and senior management.
Item 5. Other Information
Book value per share. Our book value per share was $35.33 and $31.52 as of September 30, 2020
and December 31, 2019, respectively. As of September 30, 2020, our book value per share was based on approximately $943.9 million of stockholders’ equity attributable to Stewart and 26,719,342 shares of Common Stock outstanding. As of December 31, 2019, our book value per share was based on approximately $747.3 million of stockholders’ equity attributable to Stewart and 23,709,407 shares of Common Stock outstanding.
XBRL
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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.
