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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 June 30, 2024
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, | Texas | | 77056 |
(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 class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $1 par value per share | STC | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | |
☑ | Large accelerated filer | | ☐ | Non-accelerated filer | | ☐ | Emerging growth company |
| | | | | | | |
☐ | Accelerated filer | | ☐ | Smaller reporting company | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
On July 30, 2024, there were 27,679,051 outstanding shares of the issuer's Common Stock.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2024
TABLE OF CONTENTS
| | | | | | | | |
Item | | Page |
| PART I – FINANCIAL INFORMATION | |
| | |
1. | | |
| | |
2. | | |
| | |
3. | | |
| | |
4. | | |
| PART II – OTHER INFORMATION | |
1. | | |
| | |
1A. | | |
| | |
2. | | |
| | |
5. | | |
| | |
6. | | |
| | |
| | |
As used in this report, “we,” “us,” “our,” "Registrant," the “Company” and “Stewart” mean Stewart Information Services Corporation and our subsidiaries, unless the context indicates otherwise.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted, except per share) |
Revenues | | | | | | | |
Title revenues: | | | | | | | |
Direct operations | 255,480 | | | 257,994 | | | 466,068 | | | 465,864 | |
Agency operations | 240,760 | | | 208,755 | | | 481,532 | | | 457,775 | |
Real estate solutions | 92,198 | | | 71,387 | | | 175,214 | | | 133,978 | |
Operating revenues | 588,438 | | | 538,136 | | | 1,122,814 | | | 1,057,617 | |
Investment income | 14,306 | | | 12,123 | | | 27,207 | | | 18,722 | |
Net realized and unrealized (losses) gains | (514) | | | (1,105) | | | 6,524 | | | (2,883) | |
| 602,230 | | | 549,154 | | | 1,156,545 | | | 1,073,456 | |
Expenses | | | | | | | |
Amounts retained by agencies | 200,126 | | | 171,776 | | | 400,102 | | | 377,514 | |
Employee costs | 179,708 | | | 182,666 | | | 352,125 | | | 353,217 | |
Other operating expenses | 152,291 | | | 129,333 | | | 289,244 | | | 250,073 | |
Title losses and related claims | 21,090 | | | 19,802 | | | 38,472 | | | 37,476 | |
Depreciation and amortization | 15,198 | | | 15,528 | | | 30,582 | | | 30,434 | |
Interest | 4,812 | | | 4,875 | | | 9,869 | | | 9,724 | |
| 573,225 | | | 523,980 | | | 1,120,394 | | | 1,058,438 | |
Income before taxes and noncontrolling interests | 29,005 | | | 25,174 | | | 36,151 | | | 15,018 | |
Income tax expense | (7,940) | | | (5,392) | | | (8,876) | | | (454) | |
Net income | 21,065 | | | 19,782 | | | 27,275 | | | 14,564 | |
Less net income attributable to noncontrolling interests | 3,722 | | | 3,967 | | | 6,802 | | | 6,939 | |
Net income attributable to Stewart | 17,343 | | | 15,815 | | | 20,473 | | | 7,625 | |
| | | | | | | |
Net income | 21,065 | | | 19,782 | | | 27,275 | | | 14,564 | |
Other comprehensive (loss) income, net of taxes: | | | | | | | |
Foreign currency translation adjustments | (1,256) | | | 4,254 | | | (5,726) | | | 4,852 | |
Change in net unrealized gains and losses on investments | 114 | | | (5,765) | | | (2,162) | | | 852 | |
Reclassification adjustments for realized gains and losses on investments | 390 | | | 221 | | | 540 | | | 313 | |
Other comprehensive (loss) income, net of taxes: | (752) | | | (1,290) | | | (7,348) | | | 6,017 | |
Comprehensive income | 20,313 | | | 18,492 | | | 19,927 | | | 20,581 | |
Less net income attributable to noncontrolling interests | 3,722 | | | 3,967 | | | 6,802 | | | 6,939 | |
Comprehensive income attributable to Stewart | 16,591 | | | 14,525 | | | 13,125 | | | 13,642 | |
| | | | | | | |
Basic average shares outstanding (000) | 27,592 | | | 27,255 | | | 27,549 | | | 27,228 | |
Basic earnings per share attributable to Stewart | 0.63 | | | 0.58 | | | 0.74 | | | 0.28 | |
Diluted average shares outstanding (000) | 28,013 | | | 27,444 | | | 28,011 | | | 27,402 | |
Diluted earnings per share attributable to Stewart | 0.62 | | | 0.58 | | | 0.73 | | | 0.28 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| June 30, 2024 (Unaudited) | | December 31, 2023 |
| ($000 omitted) |
Assets | | | |
Cash and cash equivalents | 133,405 | | | 233,365 | |
Short-term investments | 43,341 | | | 39,023 | |
Investments, at fair value: | | | |
Debt securities (amortized cost of $607,696 and $631,294) | 584,585 | | | 610,236 | |
Equity securities | 76,348 | | | 69,700 | |
| 660,933 | | | 679,936 | |
Receivables: | | | |
Premiums from agencies | 39,974 | | | 38,676 | |
Trade and other | 91,485 | | | 75,706 | |
Income taxes | 4,882 | | | 3,535 | |
Notes | 21,226 | | | 14,570 | |
Allowance for uncollectible amounts | (8,186) | | | (7,583) | |
| 149,381 | | | 124,904 | |
Property and equipment: | | | |
Land | 2,545 | | | 2,545 | |
Buildings | 19,274 | | | 19,219 | |
Furniture and equipment | 251,883 | | | 234,370 | |
Accumulated depreciation | (186,973) | | | (173,799) | |
| 86,729 | | | 82,335 | |
Operating lease assets | 108,653 | | | 115,879 | |
Title plants, at cost | 73,378 | | | 73,359 | |
Goodwill | 1,080,546 | | | 1,072,129 | |
Intangible assets, net of amortization | 177,112 | | | 193,196 | |
Deferred tax assets | 3,673 | | | 3,776 | |
Other assets | 128,335 | | | 84,959 | |
| 2,645,486 | | | 2,702,861 | |
Liabilities | | | |
Notes payable | 445,568 | | | 445,290 | |
Accounts payable and accrued liabilities | 165,382 | | | 190,054 | |
Operating lease liabilities | 127,307 | | | 135,654 | |
Estimated title losses | 512,446 | | | 528,269 | |
Deferred tax liabilities | 23,509 | | | 25,045 | |
| 1,274,212 | | | 1,324,312 | |
Contingent liabilities and commitments | | | |
Stockholders’ equity | | | |
Common Stock ($1 par value) and additional paid-in capital | 345,082 | | | 338,451 | |
Retained earnings | 1,064,870 | | | 1,070,841 | |
Accumulated other comprehensive loss: | | | |
Foreign currency translation adjustments | (24,305) | | | (18,579) | |
Net unrealized losses on debt securities investments | (18,258) | | | (16,636) | |
| | | |
Treasury stock – 352,161 common shares, at cost | (2,666) | | | (2,666) | |
Stockholders’ equity attributable to Stewart | 1,364,723 | | | 1,371,411 | |
Noncontrolling interests | 6,551 | | | 7,138 | |
Total stockholders’ equity (27,605,057 and 27,370,227 shares outstanding) | 1,371,274 | | | 1,378,549 | |
| 2,645,486 | | | 2,702,861 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2024 | | 2023 |
| ($000 omitted) |
Reconciliation of net income to cash used by operating activities: | | | |
Net income | 27,275 | | | 14,564 | |
Add (deduct): | | | |
Depreciation and amortization | 30,582 | | | 30,434 | |
Adjustments for bad debt provisions | 1,155 | | | 1,443 | |
Net realized and unrealized (gains) losses | (6,524) | | | 2,883 | |
Amortization of net (discount) premium on debt securities investments | (168) | | | 387 | |
Payments for title losses in excess of provisions | (11,550) | | | (27,468) | |
Adjustments for insurance recoveries of title losses | 208 | | | — | |
Increase in receivables – net | (19,184) | | | (6,692) | |
Increase in other assets – net | (11,275) | | | (5,859) | |
Decrease in accounts payable and other liabilities – net | (25,971) | | | (34,042) | |
Change in net deferred income taxes | 360 | | | 585 | |
Net income from equity method investments | (507) | | | (378) | |
Dividends received from equity method investments | 613 | | | 876 | |
Stock-based compensation expense | 6,337 | | | 7,043 | |
Other – net | 184 | | | 269 | |
Cash used by operating activities | (8,465) | | | (15,955) | |
Investing activities: | | | |
Proceeds from sales of investments in securities | 20,971 | | | 39,488 | |
Proceeds from matured investments in debt securities | 51,775 | | | 55,250 | |
Purchases of investments in securities | (58,368) | | | (55,461) | |
Net purchases of short-term investments | (4,781) | | | (2,838) | |
Purchases of property and equipment and other long-lived assets | (19,424) | | | (15,495) | |
Proceeds from sale of property and equipment and other assets | 81 | | | 106 | |
Cash paid for acquisition of businesses | (8,247) | | | (22,400) | |
Increase in notes receivable | (7,320) | | | (6,360) | |
Purchases of cost-basis and other investments | (29,879) | | | (29) | |
Other – net | (1,079) | | | 429 | |
Cash used by investing activities | (56,271) | | | (7,310) | |
Financing activities: | | | |
Proceeds from notes payable | 3,387 | | | 3,538 | |
Payments on notes payable | (3,378) | | | (5,776) | |
Distributions to noncontrolling interests | (7,443) | | | (7,549) | |
Contributions from noncontrolling interests | 54 | | | — | |
| | | |
Repurchases of Common Stock | (3,517) | | | (1,353) | |
Proceeds from stock option and employee stock purchase plan exercises | 3,811 | | | 1,991 | |
Cash dividends paid | (26,180) | | | (24,531) | |
Payment of contingent consideration related to acquisitions | (302) | | | (2,000) | |
| | | |
| | | |
Cash used by financing activities | (33,568) | | | (35,680) | |
Effects of changes in foreign currency exchange rates | (1,656) | | | 617 | |
Change in cash and cash equivalents | (99,960) | | | (58,328) | |
Cash and cash equivalents at beginning of period | 233,365 | | | 248,367 | |
Cash and cash equivalents at end of period | 133,405 | | | 190,039 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Six Months Ended June 30, 2024 | | | | | | | | | | | | | |
Balance at December 31, 2023 | 27,723 | | | 310,728 | | | 1,070,841 | | | (35,215) | | | (2,666) | | | 7,138 | | | 1,378,549 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 20,473 | | | — | | | — | | | — | | | 20,473 | |
Dividends on Common Stock ($0.95 per share) | — | | | — | | | (26,444) | | | — | | | — | | | — | | | (26,444) | |
| | | | | | | | | | | | | |
Stock-based compensation | 186 | | | 6,151 | | | — | | | — | | | — | | | — | | | 6,337 | |
Stock repurchases | (57) | | | (3,460) | | | — | | | — | | | — | | | — | | | (3,517) | |
Stock option and employee stock purchase plan exercises | 99 | | | 3,712 | | | — | | | — | | | — | | | — | | | 3,811 | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (2,162) | | | — | | | — | | | (2,162) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | 540 | | | — | | | — | | | 540 | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (5,726) | | | — | | | — | | | (5,726) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 6,802 | | | 6,802 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (7,443) | | | (7,443) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 54 | | | 54 | |
Balance at June 30, 2024 | 27,951 | | | 317,131 | | | 1,064,870 | | | (42,563) | | | (2,666) | | | 6,551 | | | 1,371,274 | |
| | | | | | | | | | | | | |
Six Months Ended June 30, 2023 | | | | | | | | | | | | | |
Balance at December 31, 2022 | 27,483 | | | 296,861 | | | 1,091,816 | | | (51,343) | | | (2,666) | | | 8,114 | | | 1,370,265 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 7,625 | | | — | | | — | | | — | | | 7,625 | |
Dividends on Common Stock ($0.90 per share) | — | | | — | | | (24,983) | | | — | | | — | | | — | | | (24,983) | |
| | | | | | | | | | | | | |
Stock-based compensation | 117 | | | 6,926 | | | — | | | — | | | — | | | — | | | 7,043 | |
Stock repurchases | (32) | | | (1,321) | | | — | | | — | | | — | | | — | | | (1,353) | |
Stock option and employee stock purchase plan exercises | 52 | | | 1,939 | | | — | | | — | | | — | | | — | | | 1,991 | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 852 | | | — | | | — | | | 852 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | 313 | | | — | | | — | | | 313 | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | 4,852 | | | — | | | — | | | 4,852 | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 6,939 | | | 6,939 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (7,549) | | | (7,549) | |
| | | | | | | | | | | | | |
Balance at June 30, 2023 | 27,620 | | | 304,405 | | | 1,074,458 | | | (45,326) | | | (2,666) | | | 7,504 | | | 1,365,995 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive loss | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Three Months Ended June 30, 2024 | | | | | | | | | | | | |
Balance at March 31, 2024 | 27,933 | | | 313,381 | | | 1,060,808 | | | (41,811) | | | (2,666) | | | 6,498 | | | 1,364,143 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 17,343 | | | — | | | — | | | — | | | 17,343 | |
Dividends on Common Stock ($0.48 per share) | — | | | — | | | (13,281) | | | — | | | — | | | — | | | (13,281) | |
| | | | | | | | | | | | | |
Stock-based compensation | 14 | | | 3,653 | | | — | | | — | | | — | | | — | | | 3,667 | |
Stock repurchases | (2) | | | (125) | | | — | | | — | | | — | | | — | | | (127) | |
Stock option and employee stock purchase plan exercises | 6 | | | 222 | | | — | | | — | | | — | | | | | 228 | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | 114 | | | — | | | — | | | 114 | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | 390 | | | — | | | — | | | 390 | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (1,256) | | | — | | | — | | | (1,256) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 3,722 | | | 3,722 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3,723) | | | (3,723) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 54 | | | 54 | |
Balance at June 30, 2024 | 27,951 | | | 317,131 | | | 1,064,870 | | | (42,563) | | | (2,666) | | | 6,551 | | | 1,371,274 | |
| | | | | | | | | | | | | |
Three Months Ended June 30, 2023 | | | | | | | | | | | | |
Balance at March 31, 2023 | 27,598 | | | 300,225 | | | 1,071,320 | | | (44,036) | | | (2,666) | | | 7,311 | | | 1,359,752 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 15,815 | | | — | | | — | | | — | | | 15,815 | |
Dividends on Common Stock ($0.45 per share) | — | | | — | | | (12,677) | | | — | | | — | | | — | | | (12,677) | |
| | | | | | | | | | | | | |
Stock-based compensation | 24 | | | 4,260 | | | — | | | — | | | — | | | — | | | 4,284 | |
Stock repurchases | (2) | | | (80) | | | — | | | — | | | — | | | — | | | (82) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (5,765) | | | — | | | — | | | (5,765) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | 221 | | | — | | | — | | | 221 | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | 4,254 | | | — | | | — | | | 4,254 | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 3,967 | | | 3,967 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (3,774) | | | (3,774) | |
| | | | | | | | | | | | | |
Balance at June 30, 2023 | 27,620 | | | 304,405 | | | 1,074,458 | | | (45,326) | | | (2,666) | | | 7,504 | | | 1,365,995 | |
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Interim financial statements. The financial information contained in this report for the three and six months ended June 30, 2024 and 2023, and as of June 30, 2024, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on February 29, 2024 (2023 Form 10-K).
A. Management’s responsibility. The accompanying interim financial statements were prepared by management, which is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with the United States (U.S.) generally accepted accounting principles (GAAP), including management’s best judgments and estimates. In the opinion of management, all adjustments necessary for a fair presentation of this information for all interim periods, consisting only of normal recurring accruals, have been made. The Company’s results of operations for interim periods are not necessarily indicative of results for a full year and actual results could differ.
B. Consolidation. The condensed consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. All significant intercompany amounts and transactions have been eliminated and provisions have been made for noncontrolling interests. Unconsolidated investees, in which the Company typically owns from 20% to 50% of the voting stock, are accounted for using the equity method.
C. Restrictions on cash and investments. The Company maintains investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory reserve funds are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately $518.6 million and $527.4 million at June 30, 2024 and December 31, 2023, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $9.6 million and $10.0 million at June 30, 2024 and December 31, 2023, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.
NOTE 2
Revenues. The Company's operating revenues, summarized by type, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
Title insurance premiums: | | | | | | | |
Direct | 173,813 | | | 170,677 | | | 315,512 | | | 301,494 | |
Agency | 240,760 | | | 208,755 | | | 481,532 | | | 457,775 | |
Escrow fees | 42,195 | | | 42,323 | | | 75,738 | | | 75,250 | |
Real estate solutions and abstract fees | 109,473 | | | 89,811 | | | 206,847 | | | 166,971 | |
Other revenues | 22,197 | | | 26,570 | | | 43,185 | | | 56,127 | |
| 588,438 | | | 538,136 | | | 1,122,814 | | | 1,057,617 | |
NOTE 3
Investments in debt and equity securities. As of June 30, 2024 and December 31, 2023, the net unrealized investment gains relating to investments in equity securities held were $17.8 million and $11.2 million, respectively (refer to Note 5).
The amortized costs and fair values of investments in debt securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| Amortized costs | | Fair values | | Amortized costs | | Fair values |
| ($000 omitted) |
Municipal | 18,117 | | | 17,860 | | | 22,201 | | | 22,031 | |
Corporate | 227,427 | | | 215,470 | | | 242,656 | | | 231,474 | |
Foreign | 326,999 | | | 316,952 | | | 332,723 | | | 323,391 | |
U.S. Treasury Bonds | 35,153 | | | 34,303 | | | 33,714 | | | 33,340 | |
| | | | | | | |
| 607,696 | | | 584,585 | | | 631,294 | | | 610,236 | |
Foreign debt securities consist of Canadian government, provincial and corporate bonds, United Kingdom treasury and corporate bonds, and Mexican government bonds.
Gross unrealized gains and losses on investments in debt securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2024 | | December 31, 2023 |
| Gains | | Losses | | Gains | | Losses |
| ($000 omitted) |
Municipal | 2 | | | 259 | | | — | | | 170 | |
Corporate | 417 | | | 12,374 | | | 764 | | | 11,946 | |
Foreign | 740 | | | 10,787 | | | 1,765 | | | 11,097 | |
U.S. Treasury Bonds | 3 | | | 853 | | | 106 | | | 480 | |
| | | | | | | |
| 1,162 | | | 24,273 | | | 2,635 | | | 23,693 | |
Debt securities as of June 30, 2024 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 | 72,579 | | | 75,528 | |
After one year through five years | 325,691 | | | 311,733 | |
After five years through ten years | 197,013 | | | 186,303 | |
After ten years | 12,413 | | | 11,021 | |
| 607,696 | | | 584,585 | |
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 June 30, 2024, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 31 | | | 1,422 | | | 228 | | | 14,186 | | | 259 | | | 15,608 | |
Corporate | 136 | | | 10,580 | | | 12,238 | | | 188,316 | | | 12,374 | | | 198,896 | |
Foreign | 1,032 | | | 67,940 | | | 9,755 | | | 186,773 | | | 10,787 | | | 254,713 | |
U.S. Treasury Bonds | 139 | | | 10,540 | | | 714 | | | 23,113 | | | 853 | | | 33,653 | |
| | | | | | | | | | | |
| 1,338 | | | 90,482 | | | 22,935 | | | 412,388 | | | 24,273 | | | 502,870 | |
The number of specific debt investment holdings held in an unrealized loss position as of June 30, 2024 was 334. Of these securities, 278 were in unrealized loss positions for more than 12 months. Total gross unrealized investment losses at June 30, 2024 slightly increased compared to December 31, 2023, primarily due to the continuing high interest rate environment which started in late 2022. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery in value, and no significant credit risk is deemed to exist, these investments are not considered as credit-impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.
Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 50 | | | 13,022 | | | 120 | | | 8,383 | | | 170 | | | 21,405 | |
Corporate | 68 | | | 4,808 | | | 11,878 | | | 208,971 | | | 11,946 | | | 213,779 | |
Foreign | 472 | | | 31,918 | | | 10,625 | | | 216,135 | | | 11,097 | | | 248,053 | |
U.S. Treasury Bonds | 327 | | | 20,895 | | | 153 | | | 4,815 | | | 480 | | | 25,710 | |
| | | | | | | | | | | |
| 917 | | | 70,643 | | | 22,776 | | | 438,304 | | | 23,693 | | | 508,947 | |
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 June 30, 2024, financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — | | | 17,860 | | | 17,860 | |
Corporate | — | | | 215,470 | | | 215,470 | |
Foreign | — | | | 316,952 | | | 316,952 | |
U.S. Treasury Bonds | — | | | 34,303 | | | 34,303 | |
Equity securities | 76,348 | | | — | | | 76,348 | |
| 76,348 | | | 584,585 | | | 660,933 | |
As of December 31, 2023, financial instruments measured at fair value on a recurring basis are summarized below:
| | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Fair value measurements |
| ($000 omitted) |
Investments in securities: | | | | | |
Debt securities: | | | | | |
Municipal | — | | | 22,031 | | | 22,031 | |
Corporate | — | | | 231,474 | | | 231,474 | |
Foreign | — | | | 323,391 | | | 323,391 | |
U.S. Treasury Bonds | — | | | 33,340 | | | 33,340 | |
Equity securities | 69,700 | | | — | | | 69,700 | |
| 69,700 | | | 610,236 | | | 679,936 | |
As of June 30, 2024 and December 31, 2023, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental, and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. The fair value of the Company's investments in debt and equity securities is primarily determined using a third-party pricing service provider. The third-party pricing service provider calculates the fair values using both market approach and model valuation methods, as well as pricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with pricing information from the Company's investment manager.
NOTE 5
Net realized and unrealized (losses) gains. Realized and unrealized gains and losses are detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
Realized gains | 116 | | | 278 | | | 218 | | | 339 | |
Realized losses | (89) | | | (3,430) | | | (380) | | | (4,177) | |
Net unrealized investment (losses) gains recognized on equity securities still held | (541) | | | 2,047 | | | 6,686 | | | 955 | |
| (514) | | | (1,105) | | | 6,524 | | | (2,883) | |
Realized losses during the second quarter and first six months of 2023 included a $3.2 million contingent receivable loss adjustment related to a previous disposition of a business.
Investment gains and losses recognized related to investments in equity securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
Net investment (losses) gains recognized on equity securities during the period | (541) | | | 1,988 | | | 6,693 | | | 232 | |
Less: Net realized (losses) gains on equity securities sold during the period | — | | | (59) | | | 7 | | | (723) | |
Net unrealized investment (losses) gains recognized on equity securities still held | (541) | | | 2,047 | | | 6,686 | | | 955 | |
Proceeds from sales of investments in securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
Proceeds from sales of debt securities | 1 | | | 7,433 | | | 20,768 | | | 14,879 | |
Proceeds from sales of equity securities | 96 | | | 5,283 | | | 203 | | | 24,609 | |
Total proceeds from sales of investments in securities | 97 | | | 12,716 | | | 20,971 | | | 39,488 | |
NOTE 6
Goodwill. The summary of changes in goodwill is as follows:
| | | | | | | | | | | | | | | | | | | |
| Title | | Real Estate Solutions | | | | Consolidated Total |
| ($000 omitted) |
Balances at December 31, 2023 | 707,935 | | | 364,194 | | | | | 1,072,129 | |
Acquisitions | 8,230 | | | — | | | | | 8,230 | |
Purchase accounting adjustments | 187 | | | — | | | | | 187 | |
| | | | | | | |
Balances at June 30, 2024 | 716,352 | | | 364,194 | | | | | 1,080,546 | |
During the first six months of 2024, goodwill recorded in the title segment was related to an acquisition of a title office.
NOTE 7
Estimated title losses. A summary of estimated title losses for the six months ended June 30 is as follows:
| | | | | | | | | | | |
| 2024 | | 2023 |
| ($000 omitted) |
Balances at January 1 | 528,269 | | | 549,448 | |
Provisions: | | | |
Current year | 37,793 | | | 36,773 | |
Previous policy years | 679 | | | 703 | |
Total provisions | 38,472 | | | 37,476 | |
Payments, net of recoveries: | | | |
Current year | (9,276) | | | (6,990) | |
Previous policy years | (40,746) | | | (57,954) | |
Total payments, net of recoveries | (50,022) | | | (64,944) | |
| | | |
Effects of changes in foreign currency exchange rates | (4,273) | | | 2,161 | |
Balances at June 30 | 512,446 | | | 524,141 | |
Loss ratios as a percentage of title operating revenues: | | | |
Current year provisions | 4.0 | % | | 4.0 | % |
Total provisions | 4.1 | % | | 4.1 | % |
NOTE 8
Share-based payments. As part of its incentive compensation program for executives and senior management employees, the Company provides share-based awards, which usually include a combination of time-based restricted stock units, performance-based restricted stock units and stock options. Each restricted stock unit represents a contractual right to receive a share of the Company's Common Stock. The time-based units generally vest on each of the first three anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives and an employee service requirement over a period of approximately three years. The Company has not granted stock options since 2021 and all outstanding stock option awards are fully vested at June 30, 2024. The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the corresponding vesting period.
During the first six months of 2024 and 2023, the Company granted time-based and performance-based restricted stock units with aggregate grant-date fair values of $13.8 million (225,000 units with an average grant price per unit of $61.44) and $12.0 million (293,000 units with an average grant price per unit of $41.01).
NOTE 9
Earnings per share. Basic earnings per share (EPS) attributable to Stewart is calculated by dividing net income attributable to Stewart by the weighted-average number of shares of Common Stock outstanding during the reporting periods. To calculate diluted EPS, the number of shares is adjusted to include the number of additional shares that would have been outstanding if restricted units were vested and issued and stock options were exercised. In periods of net losses, dilutive shares are excluded from the calculation of the diluted EPS and diluted EPS is computed in the same manner as basic EPS.
The calculation of the basic and diluted EPS is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted, except per share) |
Numerator: | | | | | | | |
| | | | | | | |
| | | | | | | |
Net income attributable to Stewart | 17,343 | | | 15,815 | | | 20,473 | | | 7,625 | |
| | | | | | | |
Denominator (000): | | | | | | | |
Basic average shares outstanding | 27,592 | | | 27,255 | | | 27,549 | | | 27,228 | |
Average number of dilutive shares relating to options | 211 | | | 43 | | | 206 | | | 52 | |
Average number of dilutive shares relating to restricted units | 210 | | | 146 | | | 256 | | | 122 | |
Diluted average shares outstanding | 28,013 | | | 27,444 | | | 28,011 | | | 27,402 | |
| | | | | | | |
Basic earnings per share attributable to Stewart | 0.63 | | | 0.58 | | | 0.74 | | | 0.28 | |
| | | | | | | |
Diluted earnings per share attributable to Stewart | 0.62 | | | 0.58 | | | 0.73 | | | 0.28 | |
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 June 30, 2024, the maximum potential future payments on the guarantees are not more than the related notes payable recorded in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related 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 June 30, 2024, 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.
The Company is subject to various other administrative actions, investigations 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 has three reportable operating segments: the title segment, the real estate solutions segment, and the corporate and other segment. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, abstracting, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home and personal insurance services, Internal Revenue Code Section 1031 tax-deferred exchanges, and digital customer engagement platform services. The real estate solutions segment supports the real estate industry and primarily includes credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment is primarily comprised of the parent holding company and centralized support services departments.
Selected statement of income information related to these segments is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
Title segment: | | | | | | | |
Revenues | 510,035 | | | 480,825 | | | 981,387 | | | 942,468 | |
Depreciation and amortization | 8,536 | | | 8,883 | | | 17,266 | | | 16,986 | |
Income before taxes and noncontrolling interest | 33,371 | | | 35,459 | | | 43,554 | | | 34,794 | |
| | | | | | | |
Real estate solutions segment: | | | | | | | |
Revenues | 92,222 | | | 71,411 | | | 175,263 | | | 134,035 | |
Depreciation and amortization | 6,264 | | | 6,280 | | | 12,538 | | | 12,581 | |
Income before taxes | 5,116 | | | 3,282 | | | 11,847 | | | 4,648 | |
| | | | | | | |
Corporate and other segment: | | | | | | | |
Revenues (net realized losses) | (27) | | | (3,082) | | | (105) | | | (3,047) | |
Depreciation and amortization | 398 | | | 365 | | | 778 | | | 867 | |
Loss before taxes | (9,482) | | | (13,567) | | | (19,250) | | | (24,424) | |
| | | | | | | |
Consolidated Stewart: | | | | | | | |
Revenues | 602,230 | | | 549,154 | | | 1,156,545 | | | 1,073,456 | |
Depreciation and amortization | 15,198 | | | 15,528 | | | 30,582 | | | 30,434 | |
Income before taxes and noncontrolling interest | 29,005 | | | 25,174 | | | 36,151 | | | 15,018 | |
The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.
Total revenues generated in the United States and all international operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | 2024 | | 2023 |
| ($000 omitted) |
United States | 563,839 | | | 514,699 | | | 1,088,861 | | | 1,012,228 | |
International | 38,391 | | | 34,455 | | | 67,684 | | | 61,228 | |
| 602,230 | | | 549,154 | | | 1,156,545 | | | 1,073,456 | |
NOTE 13
Other comprehensive (loss) income. Changes in the balances of each component of other comprehensive (loss) income and the related tax effects are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2024 | | Three Months Ended June 30, 2023 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) |
Net unrealized gains and losses on investments: | | | | | | | |
Change in net unrealized gains and losses on investments | 145 | | 31 | | 114 | | | (7,298) | | (1,533) | | (5,765) | |
Reclassification adjustments for realized gains and losses on investments | 493 | | 103 | | 390 | | | 280 | | 59 | | 221 | |
| 638 | | 134 | | 504 | | | (7,018) | | (1,474) | | (5,544) | |
| | | | | | | |
Foreign currency translation adjustments | (1,685) | | (429) | | (1,256) | | | 5,102 | | 848 | | 4,254 | |
| | | | | | | |
Other comprehensive loss | (1,047) | | (295) | | (752) | | | (1,916) | | (626) | | (1,290) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2024 | | Six Months Ended June 30, 2023 |
| Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount | | Before-Tax Amount | Tax Expense (Benefit) | Net-of-Tax Amount |
| ($000 omitted) |
Net unrealized gains and losses on investments: | | | | | | | |
Change in net unrealized gains and losses on investments | (2,736) | | (574) | | (2,162) | | | 1,078 | | 226 | | 852 | |
Reclassification adjustment for realized gains and losses on investments | 683 | | 143 | | 540 | | | 396 | | 83 | | 313 | |
| (2,053) | | (431) | | (1,622) | | | 1,474 | | 309 | | 1,165 | |
| | | | | | | |
Foreign currency translation adjustments | (7,088) | | (1,362) | | (5,726) | | | 5,812 | | 960 | | 4,852 | |
| | | | | | | |
Other comprehensive (loss) income | (9,141) | | (1,793) | | (7,348) | | | 7,286 | | 1,269 | | 6,017 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
MANAGEMENT’S OVERVIEW
Second quarter 2024 overview. We reported net income attributable to Stewart of $17.3 million ($0.62 per diluted share) for the second quarter 2024, compared to net income of $15.8 million ($0.58 per diluted share) for the second quarter 2023. Pretax income before noncontrolling interests for the second quarter 2024 was $29.0 million compared to pretax income before noncontrolling interests of $25.2 million for the prior year quarter. The second quarter 2024 results included $0.5 million of pretax net realized and unrealized losses primarily driven by fair value changes of equity securities investments in the title segment, while second quarter 2023 results included $1.1 million of pretax net realized and unrealized losses primarily due to a realized loss related to a previous disposition of a business recorded in the corporate and other segment, partially offset by net unrealized gains on fair value changes of equity securities investments in the title segment.
Summary results of the title segment are as follows ($ in millions, except pretax margin):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30 | | |
| 2024 | | 2023 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 496.2 | | | 466.7 | | | 6 | % | | | | | | |
Investment income | 14.3 | | | 12.1 | | | 18 | % | | | | | | |
Net realized and unrealized (losses) gains | (0.5) | | | 2.0 | | | (125) | % | | | | | | |
Pretax income | 33.4 | | | 35.5 | | | (6) | % | | | | | | |
Pretax margin | 6.5 | % | | 7.4 | % | | | | | | | | |
Title segment operating revenues improved $29.5 million, or 6%, in the second quarter 2024 primarily driven by increased revenues from our domestic commercial, international and agency title operations, partially offset by lower domestic noncommercial revenues, while total segment operating expenses increased $31.3 million, or 7%, compared to the second quarter 2023. Agency retention expenses in the second quarter 2024 increased $28.4 million, or 17%, primarily driven by $32.0 million, or 15%, improvement in gross agency revenues compared to the second quarter 2023, while the average independent agency remittance rate in the second quarter 2024 decreased to approximately 16.9%, compared to 17.7% during the prior year quarter, primarily due to increased agency revenues in states with relatively higher agent retention rates.
Total title segment employee costs and other operating expenses slightly increased by $2.0 million, or less than 1%, in the second quarter 2024 compared to the prior year quarter, primarily due to increased outside search expenses related to higher commercial revenues. As a percentage of operating revenues, these expenses were 49.7% in the second quarter 2024 compared to 52.4% in the second quarter 2023. Title loss expense in the second quarter 2024 increased $1.3 million, or 7%, primarily driven by higher title revenues compared to the prior year quarter. As a percentage of title revenues, title loss expense was 4.2% for both the second quarters 2024 and 2023.
Investment income improved by $2.2 million in the second quarter 2024 compared to the prior year quarter, primarily resulting from higher interest income on eligible escrow balances in the second quarter 2024. Included in the title segment’s pretax income for the second quarters 2024 and 2023 were acquisition intangible asset amortization expenses of $2.8 million and $3.3 million, respectively.
Summary results of the real estate solutions segment are as follows ($ in millions, except pretax margin):
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended June 30 | | |
| 2024 | | 2023 | | % Change | | | | | | |
| | | | | | | | | | | |
Operating revenues | 92.2 | | | 71.4 | | | 29 | % | | | | | | |
Pretax income | 5.1 | | | 3.3 | | | 56 | % | | | | | | |
Pretax margin | 5.5 | % | | 4.6 | % | | | | | | | | |
| | | | | | | | | | | |
The segment's operating revenues increased $20.8 million, or 29%, in the second quarter 2024 compared to the prior year quarter, primarily due to increased revenues from credit information and valuation services. On a combined basis, employee costs and other operating expenses in the second quarter 2024 increased $19.0 million, or 31%, primarily due to the higher operating revenues. Included in the segment's results for the second quarters 2024 and 2023 were acquisition intangible asset amortization expenses of $5.5 million and $5.8 million, respectively.
In regard to the corporate and other segment, pretax results were driven by net expenses attributable to corporate operations which decreased to $9.5 million in the second quarter 2024, compared to $10.5 million in the second quarter 2023, primarily driven by management’s cost discipline. The segment’s results for the second quarter 2023 included net realized losses of $3.1 million, primarily driven by a loss adjustment resulting from a previous disposition of a business.
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 six months ended June 30, 2024, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2023 Form 10-K.
Operations. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our real estate solutions operations include credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment includes our parent holding company and centralized support services departments.
Factors affecting revenues. The principal factors that contribute to changes in our operating revenues include:
•interest rates;
•availability of mortgage loans;
•number and average value of mortgage loan originations;
•ability of potential purchasers to qualify for loans;
•inventory of existing homes available for sale;
•ratio of purchase transactions compared with refinance transactions;
•ratio of closed orders to open orders;
•home prices;
•consumer confidence, including employment trends;
•demand by buyers;
•premium rates;
•foreign currency exchange rates;
•market share;
•ability to attract and retain highly productive sales associates;
•independent agency remittance rates;
•opening and integration of new offices and acquisitions;
•office closures;
•number and value of commercial transactions, which typically yield higher premiums;
•government or regulatory initiatives;
•acquisitions or divestitures of businesses;
•volume of distressed property transactions; and
•seasonality and/or weather.
Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance revenues as home buying is generally depressed during winter months. Our second and third quarters are typically the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of the year. On average, title premium rates for refinance orders are lower compared to a similarly priced purchase transaction.
RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and six months ended June 30, 2024 with the corresponding periods in the prior year are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.
Our statements on home sales, interest rates and loan activity are based on published U.S. industry data from sources including Fannie Mae, the Mortgage Bankers Association (MBA), the National Association of Realtors® (NAR) and the U.S. Census Bureau as of June 30, 2024. We also use information from our direct operations.
Operating environment. Existing home sales in June 2024 were 3.9 million units (seasonally-adjusted basis), which were 5% lower from both a year ago and May 2024, primarily due to the continuing elevated interest rate environment accompanied by rising home prices. According to NAR, the June 2024 median home price of $427,000 was the highest ever recorded, further affecting housing affordability and increasing unsold home inventory, which at the end of June 2024 was 23% higher than a year ago and 3% higher than May 2024. On new residential construction, U.S. housing starts (seasonally-adjusted) in June 2024 were 3% better than May 2024, but 4% lower than a year ago, while June 2024 newly-issued building permits were 3% higher than May 2024, but 3% lower compared to June 2023.
Regarding lending activity, total U.S. single family mortgage originations during the second quarter 2024 totaled $441 billion, which was comparable to $442 billion in the second quarter 2023, as the purchase lending decline of 3% was offset by a 12% improvement in refinancing originations, according to Fannie Mae and MBA (averaged). During the second quarter 2024, the average 30-year fixed interest rate averaged 7.0% compared to 6.5% in the second quarter 2023 and 6.7% in the first quarter 2024. For the full year 2024, Fannie Mae and MBA expect the interest rate to average 6.8%, similar to the 2023 average, while total originations for the year 2024 are expected to be 13% higher compared to 2023, with total lending volumes in the third and fourth quarters of 2024 anticipated to improve 17% and 29%, respectively, compared to the same periods in 2023.
Title revenues. Direct title revenue information is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | | 2023 | | Change | % Chg | | 2024 | | 2023 | | Change | % Chg |
| ($ in millions) | | | ($ in millions) | |
Non-commercial | | | | | | | | | | | | | |
Domestic | 169.4 | | | 184.5 | | | (15.1) | | (8) | % | | 304.6 | | | 334.9 | | | (30.3) | | (9) | % |
International | 28.1 | | | 25.9 | | | 2.2 | | 8 | % | | 47.3 | | | 45.0 | | | 2.3 | | 5 | % |
| 197.5 | | | 210.4 | | | (12.9) | | (6) | % | | 351.9 | | | 379.9 | | | (28.0) | | (7) | % |
Commercial: | | | | | | | | | | | | | |
Domestic | 51.0 | | | 41.5 | | | 9.5 | | 23 | % | | 100.8 | | | 74.2 | | | 26.6 | | 36 | % |
International | 7.0 | | | 6.1 | | | 0.9 | | 15 | % | | 13.4 | | | 11.8 | | | 1.6 | | 14 | % |
| 58.0 | | | 47.6 | | | 10.4 | | 22 | % | | 114.2 | | | 86.0 | | | 28.2 | | 33 | % |
Total direct title revenues | 255.5 | | | 258.0 | | | (2.5) | | (1) | % | | 466.1 | | | 465.9 | | | 0.2 | | — | % |
Domestic non-commercial revenues decreased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily driven by lower residential transactions with total purchase and refinancing closed orders decreasing 9% and 8% in the second quarter and first six months of 2024, respectively. Additionally, average residential fee per file in both the second quarter and first six months of 2024 decreased to $3,000 (or 7% and 11%, respectively) compared to the same periods in 2023, primarily due to a lower purchase transaction mix in 2024.
Domestic commercial revenues increased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily as a result of increased average transaction size (primarily in the energy and industrial sectors). Average domestic commercial fee per file improved to $13,500 (or 17%) and $13,700 (or 39%) in the second quarter and first six months of 2024, respectively, while domestic commercial orders closed increased 6% in the second quarter 2024 and slightly decreased 2% in the first six months of 2024, compared to the same periods in 2023.
Orders information for the three and six months ended June 30 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2024 | 2023 | Change | % Chg | | 2024 | 2023 | Change | % Chg |
Opened Orders: | | | | | | | | | |
Commercial | 3,526 | | 3,294 | | 232 | | 7 | % | | 7,219 | | 7,136 | | 83 | | 1 | % |
Purchase | 55,057 | | 57,443 | | (2,386) | | (4) | % | | 103,081 | | 106,912 | | (3,831) | | (4) | % |
Refinance | 16,731 | | 16,860 | | (129) | | (1) | % | | 33,102 | | 32,989 | | 113 | | — | % |
Other | 11,407 | | 7,588 | | 3,819 | | 50 | % | | 22,654 | | 12,009 | | 10,645 | | 89 | % |
Total | 86,721 | | 85,185 | | 1,536 | | 2 | % | | 166,056 | | 159,046 | | 7,010 | | 4 | % |
| | | | | | | | | |
Closed Orders: | | | | | | | | | |
Commercial | 3,787 | | 3,585 | | 202 | | 6 | % | | 7,355 | | 7,509 | | (154) | | (2) | % |
Purchase | 37,832 | | 42,226 | | (4,394) | | (10) | % | | 67,576 | | 73,854 | | (6,278) | | (9) | % |
Refinance | 9,978 | | 10,583 | | |