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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 September 30, 2022
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 November 1, 2022, there were 27,127,013 outstanding shares of the issuer's Common Stock.
FORM 10-Q QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 30, 2022
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 September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($000 omitted, except per share) |
Revenues | | | | | | | |
Title revenues: | | | | | | | |
Direct operations | 307,408 | | | 366,091 | | | 976,364 | | | 999,098 | |
Agency operations | 340,470 | | | 401,762 | | | 1,154,546 | | | 1,138,023 | |
Real estate solutions and other | 69,737 | | | 61,934 | | | 281,152 | | | 176,057 | |
Operating revenues | 717,615 | | | 829,787 | | | 2,412,062 | | | 2,313,178 | |
Investment income | 5,158 | | | 4,053 | | | 15,519 | | | 13,127 | |
Net realized and unrealized (losses) gains | (6,374) | | | 2,887 | | | (14,194) | | | 17,816 | |
| 716,399 | | | 836,727 | | | 2,413,387 | | | 2,344,121 | |
Expenses | | | | | | | |
Amounts retained by agencies | 280,517 | | | 329,906 | | | 951,555 | | | 935,861 | |
Employee costs | 195,057 | | | 197,587 | | | 610,286 | | | 555,451 | |
Other operating expenses | 151,208 | | | 152,587 | | | 502,966 | | | 415,864 | |
Title losses and related claims | 25,486 | | | 30,345 | | | 81,105 | | | 92,687 | |
Depreciation and amortization | 14,067 | | | 9,144 | | | 42,103 | | | 22,394 | |
Interest | 4,553 | | | 712 | | | 13,471 | | | 1,960 | |
| 670,888 | | | 720,281 | | | 2,201,486 | | | 2,024,217 | |
Income before taxes and noncontrolling interests | 45,511 | | | 116,446 | | | 211,901 | | | 319,904 | |
Income tax expense | (10,783) | | | (23,051) | | | (48,376) | | | (70,547) | |
Net income | 34,728 | | | 93,395 | | | 163,525 | | | 249,357 | |
Less income attributable to noncontrolling interests | 5,294 | | | 4,732 | | | 14,534 | | | 11,639 | |
Net income attributable to Stewart | 29,434 | | | 88,663 | | | 148,991 | | | 237,718 | |
| | | | | | | |
Net income | 34,728 | | | 93,395 | | | 163,525 | | | 249,357 | |
Other comprehensive loss, net of taxes: | | | | | | | |
Foreign currency translation adjustments | (15,300) | | | (4,243) | | | (22,861) | | | (997) | |
Change in net unrealized gains and losses on investments | (8,921) | | | (2,183) | | | (41,513) | | | (10,330) | |
Reclassification adjustments for realized gains and losses on investments | (385) | | | (355) | | | (687) | | | (918) | |
Other comprehensive loss, net of taxes: | (24,606) | | | (6,781) | | | (65,061) | | | (12,245) | |
Comprehensive income | 10,122 | | | 86,614 | | | 98,464 | | | 237,112 | |
Less income attributable to noncontrolling interests | 5,294 | | | 4,732 | | | 14,534 | | | 11,639 | |
Comprehensive income attributable to Stewart | 4,828 | | | 81,882 | | | 83,930 | | | 225,473 | |
| | | | | | | |
Basic average shares outstanding (000) | 27,113 | | | 26,873 | | | 27,031 | | | 26,803 | |
Basic earnings per share attributable to Stewart | 1.09 | | | 3.30 | | | 5.51 | | | 8.87 | |
Diluted average shares outstanding (000) | 27,371 | | | 27,238 | | | 27,359 | | | 27,090 | |
Diluted earnings per share attributable to Stewart | 1.08 | | | 3.26 | | | 5.45 | | | 8.78 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| September 30, 2022 (Unaudited) | | December 31, 2021 |
| ($000 omitted) |
Assets | | | |
Cash and cash equivalents | 320,933 | | | 485,919 | |
Short-term investments | 18,077 | | | 17,650 | |
Investments, at fair value: | | | |
Debt securities (amortized cost of $624,272 and $578,165) | 582,461 | | | 589,772 | |
Equity securities | 87,166 | | | 89,442 | |
| 669,627 | | | 679,214 | |
Receivables: | | | |
Premiums from agencies | 43,426 | | | 45,428 | |
Trade and other | 65,620 | | | 75,079 | |
Income taxes | 9,395 | | | 5,420 | |
Notes | 5,995 | | | 1,124 | |
Allowance for uncollectible amounts | (7,577) | | | (7,711) | |
| 116,859 | | | 119,340 | |
Property and equipment: | | | |
Land | 2,545 | | | 2,545 | |
Buildings | 18,553 | | | 19,303 | |
Furniture and equipment | 220,224 | | | 216,261 | |
Accumulated depreciation | (160,715) | | | (165,653) | |
| 80,607 | | | 72,456 | |
Operating lease assets | 130,316 | | | 134,578 | |
Title plants, at cost | 73,358 | | | 76,859 | |
Investments on equity method basis | 4,341 | | | 4,754 | |
Goodwill | 961,726 | | | 924,837 | |
Intangible assets, net of amortization | 174,430 | | | 229,804 | |
Deferred tax assets | 4,328 | | | 3,846 | |
Other assets | 150,858 | | | 64,105 | |
| 2,705,460 | | | 2,813,362 | |
Liabilities | | | |
Notes payable | 446,372 | | | 483,491 | |
Accounts payable and accrued liabilities | 184,065 | | | 287,326 | |
Operating lease liabilities | 146,309 | | | 149,417 | |
Estimated title losses | 547,214 | | | 549,614 | |
Deferred tax liabilities | 23,999 | | | 48,779 | |
| 1,347,959 | | | 1,518,627 | |
Contingent liabilities and commitments | | | |
Stockholders’ equity | | | |
Common Stock ($1 par value) and additional paid-in capital | 321,492 | | | 309,622 | |
Retained earnings | 1,090,938 | | | 974,800 | |
Accumulated other comprehensive income (loss): | | | |
Foreign currency translation adjustments | (31,778) | | | (8,917) | |
Net unrealized (losses) gains on debt securities investments | (33,030) | | | 9,170 | |
| | | |
Treasury stock – 352,161 common shares, at cost | (2,666) | | | (2,666) | |
Stockholders’ equity attributable to Stewart | 1,344,956 | | | 1,282,009 | |
Noncontrolling interests | 12,545 | | | 12,726 | |
Total stockholders’ equity (27,123,388 and 26,893,430 shares outstanding) | 1,357,501 | | | 1,294,735 | |
| 2,705,460 | | | 2,813,362 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| ($000 omitted) |
Reconciliation of net income to cash provided by operating activities: | | | |
Net income | 163,525 | | | 249,357 | |
Add (deduct): | | | |
Depreciation and amortization | 42,103 | | | 22,394 | |
Adjustments for bad debt provisions | 812 | | | 1,871 | |
Net realized and unrealized losses (gains) | 14,194 | | | (17,816) | |
Amortization of net premium on debt securities investments | 1,870 | | | 2,794 | |
Payments for title losses less than provisions | 10,950 | | | 39,761 | |
Adjustments for insurance recoveries of title losses | 220 | | | — | |
Decrease (increase) in receivables – net | 9,521 | | | (20,771) | |
Increase in other assets – net | (4,343) | | | (3,725) | |
Decrease in accounts payable and other liabilities – net | (81,987) | | | (30,385) | |
Change in net deferred income taxes | 25 | | | 7,024 | |
Net income from equity method investments | (2,536) | | | (6,852) | |
Dividends received from equity method investments | 3,135 | | | 5,496 | |
Stock-based compensation expense | 9,239 | | | 8,494 | |
Other – net | 312 | | | (325) | |
Cash provided by operating activities | 167,040 | | | 257,317 | |
Investing activities: | | | |
Proceeds from sales of investments in securities | 47,954 | | | 19,726 | |
Proceeds from matured investments in debt securities | 28,754 | | | 68,653 | |
Purchases of investments in securities | (165,130) | | | (111,107) | |
Net (purchases) sales of short-term investments | (1,632) | | | 2,734 | |
Purchases of property and equipment, and real estate | (35,274) | | | (26,213) | |
Proceeds from sale of property and equipment and other assets | 977 | | | 10,552 | |
Cash paid for acquisition of businesses | (102,864) | | | (149,921) | |
Cash paid for acquisition of equity method investment | (69) | | | (16,080) | |
Other – net | 1,941 | | | 988 | |
Cash used by investing activities | (225,343) | | | (200,668) | |
Financing activities: | | | |
Proceeds from notes payable | 38,012 | | | 331,755 | |
Payments on notes payable | (75,505) | | | (158,031) | |
Distributions to noncontrolling interests | (14,863) | | | (11,683) | |
| | | |
| | | |
Repurchases of Common Stock | (3,168) | | | (2,145) | |
Proceeds from stock option and employee stock purchase plan exercises | 5,799 | | | 2,715 | |
Cash dividends paid | (32,464) | | | (26,558) | |
Payment of contingent consideration related to acquisitions | (15,997) | | | (9,489) | |
Purchase of remaining interest in consolidated subsidiaries | (72) | | | (5,616) | |
Other - net | 115 | | | (777) | |
Cash (used) provided by financing activities | (98,143) | | | 120,171 | |
Effects of changes in foreign currency exchange rates | (8,540) | | | (1,898) | |
Change in cash and cash equivalents | (164,986) | | | 174,922 | |
Cash and cash equivalents at beginning of period | 485,919 | | | 432,683 | |
Cash and cash equivalents at end of period | 320,933 | | | 607,605 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Nine Months Ended September 30, 2022 | | | | | | | | | | | | | |
Balance at December 31, 2021 | 27,246 | | | 282,376 | | | 974,800 | | | 253 | | | (2,666) | | | 12,726 | | | 1,294,735 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 148,991 | | | — | | | — | | | — | | | 148,991 | |
Dividends on Common Stock ($1.20 per share) | — | | | — | | | (32,853) | | | — | | | — | | | — | | | (32,853) | |
| | | | | | | | | | | | | |
Stock-based compensation | 155 | | | 9,084 | | | — | | | — | | | — | | | — | | | 9,239 | |
Stock repurchases | (49) | | | (3,119) | | | — | | | — | | | — | | | — | | | (3,168) | |
Stock option and employee stock purchase plan exercises | 124 | | | 5,675 | | | — | | | — | | | — | | | — | | | 5,799 | |
Purchase of remaining interest in consolidated subsidiaries | — | | | — | | | — | | | — | | | — | | | (72) | | | (72) | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (41,513) | | | — | | | — | | | (41,513) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | (687) | | | — | | | — | | | (687) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (22,861) | | | — | | | — | | | (22,861) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 14,534 | | | 14,534 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (14,863) | | | (14,863) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 220 | | | 220 | |
Balance at September 30, 2022 | 27,476 | | | 294,016 | | | 1,090,938 | | | (64,808) | | | (2,666) | | | 12,545 | | | 1,357,501 | |
| | | | | | | | | | | | | |
Nine Months Ended September 30, 2021 | | | | | | | | | | | | | |
Balance at December 31, 2020 | 27,080 | | | 274,857 | | | 688,819 | | | 17,022 | | | (2,666) | | | 7,294 | | | 1,012,406 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 237,718 | | | — | | | — | | | — | | | 237,718 | |
Dividends on Common Stock ($0.99 per share) | — | | | — | | | (27,009) | | | — | | | — | | | — | | | (27,009) | |
| | | | | | | | | | | | | |
Stock-based compensation | 139 | | | 8,355 | | | — | | | — | | | — | | | — | | | 8,494 | |
Stock repurchases | (41) | | | (2,104) | | | — | | | — | | | — | | | — | | | (2,145) | |
Stock option and employee stock purchase plan exercises | 64 | | | 2,651 | | | — | | | — | | | — | | | — | | | 2,715 | |
Purchase of remaining interest in consolidated subsidiary | — | | | (4,744) | | | — | | | — | | | — | | | (872) | | | (5,616) | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (10,330) | | | — | | | — | | | (10,330) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | (918) | | | — | | | — | | | (918) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (997) | | | — | | | — | | | (997) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 11,639 | | | 11,639 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (11,683) | | | (11,683) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 2,426 | | | 2,426 | |
Balance at September 30, 2021 | 27,242 | | | 279,015 | | | 899,528 | | | 4,777 | | | (2,666) | | | 8,804 | | | 1,216,700 | |
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Treasury stock | | Noncontrolling interests | | Total |
| ($000 omitted) |
Three Months Ended September 30, 2022 | | | | | | | | | | | | |
Balances at June 30, 2022 | 27,390 | | | 288,834 | | | 1,073,788 | | | (40,202) | | | (2,666) | | | 12,677 | | | 1,359,821 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 29,434 | | | — | | | — | | | — | | | 29,434 | |
Dividends on Common Stock ($0.45 per share) | — | | | — | | | (12,284) | | | — | | | — | | | — | | | (12,284) | |
| | | | | | | | | | | | | |
Stock-based compensation | 29 | | | 2,770 | | | — | | | — | | | — | | | — | | | 2,799 | |
Stock repurchases | (12) | | | (605) | | | — | | | — | | | — | | | — | | | (617) | |
Stock option and employee stock purchase plan exercises | 69 | | | 3,017 | | | — | | | — | | | — | | | — | | | 3,086 | |
Purchase of remaining interest in consolidated subsidiaries | — | | | — | | | — | | | — | | | — | | | (72) | | | (72) | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (8,921) | | | — | | | — | | | (8,921) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes | — | | | — | | | — | | | (385) | | | — | | | — | | | (385) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (15,300) | | | — | | | — | | | (15,300) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 5,294 | | | 5,294 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (5,380) | | | (5,380) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 26 | | | 26 | |
Balance at September 30, 2022 | 27,476 | | | 294,016 | | | 1,090,938 | | | (64,808) | | | (2,666) | | | 12,545 | | | 1,357,501 | |
| | | | | | | | | | | | | |
Three Months Ended September 30, 2021 | | | | | | | | | | | | |
Balances at June 30, 2021 | 27,177 | | | 274,074 | | | 819,834 | | | 11,558 | | | (2,666) | | | 6,096 | | | 1,136,073 | |
| | | | | | | | | | | | | |
Net income attributable to Stewart | — | | | — | | | 88,663 | | | — | | | — | | | — | | | 88,663 | |
Dividends on Common Stock ($0.33 per share) | — | | | — | | | (8,969) | | | — | | | — | | | — | | | (8,969) | |
| | | | | | | | | | | | | |
Stock-based compensation | 8 | | | 2,607 | | | — | | | — | | | — | | | — | | | 2,615 | |
Stock repurchases | (2) | | | (141) | | | — | | | — | | | — | | | — | | | (143) | |
Stock option exercises | 59 | | | 2,475 | | | | | | | | | | | 2,534 | |
| | | | | | | | | | | | | |
Change in net unrealized gains and losses on investments, net of taxes | — | | | — | | | — | | | (2,183) | | | — | | | — | | | (2,183) | |
Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes | — | | | — | | | — | | | (355) | | | — | | | — | | | (355) | |
Foreign currency translation adjustments, net of taxes | — | | | — | | | — | | | (4,243) | | | — | | | — | | | (4,243) | |
Net income attributable to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | 4,732 | | | 4,732 | |
Distributions to noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (4,430) | | | (4,430) | |
Net effect of other changes in ownership | — | | | — | | | — | | | — | | | — | | | 2,406 | | | 2,406 | |
Balance at September 30, 2021 | 27,242 | | | 279,015 | | | 899,528 | | | 4,777 | | | (2,666) | | | 8,804 | | | 1,216,700 | |
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 nine months ended September 30, 2022 and 2021, and as of September 30, 2022, 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, 2021 filed with the Securities and Exchange Commission on February 28, 2022 (2021 Form 10-K).
A. Management’s responsibility. The accompanying interim financial statements were prepared by management, who is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with the United States (U.S.) generally accepted accounting principles (GAAP), including management’s best judgments and estimates. In the opinion of management, all adjustments necessary for a fair presentation of this information for all interim periods, consisting only of normal recurring accruals, have been made. The Company’s results of operations for interim periods are not necessarily indicative of results for a full year and actual results could differ.
B. Consolidation. The condensed consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. All significant intercompany amounts and transactions have been eliminated and provisions have been made for noncontrolling interests. Unconsolidated investees, in which the Company typically owns from 20% to 50% of the voting stock, are accounted for using the equity method.
C. Restrictions on cash and investments. The Company maintains investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory reserve funds are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately $541.0 million and $523.5 million at September 30, 2022 and December 31, 2021, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $10.5 million and $41.4 million at September 30, 2022 and December 31, 2021, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.
D. Recently enacted Inflation Reduction Act. On August 16, 2022, the U.S. government enacted the Inflation Reduction Act of 2022 (the Act) that includes, among other provisions, changes to the U.S. corporate income tax system, including a 15% minimum tax based on book income of certain large corporations for tax years beginning after December 31, 2022 and a 1% excise tax on net repurchases of stock starting in 2023. Management is still in the process of evaluating the Act and its requirements, however it does not believe that the Act will have a material impact on the Company's consolidated financial statements.
NOTE 2
Revenues. The Company's operating revenues, summarized by type, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($000 omitted) |
Title insurance premiums: | | | | | | | |
Direct | 209,477 | | | 248,738 | | | 646,760 | | | 687,369 | |
Agency | 340,470 | | | 401,762 | | | 1,154,546 | | | 1,138,023 | |
Escrow fees | 49,407 | | | 63,455 | | | 166,696 | | | 183,638 | |
Real estate solutions and abstract fees | 89,519 | | | 85,345 | | | 302,534 | | | 234,677 | |
Other revenues | 28,742 | | | 30,487 | | | 141,526 | | | 69,471 | |
| 717,615 | | | 829,787 | | | 2,412,062 | | | 2,313,178 | |
NOTE 3
Investments in debt and equity securities. As of September 30, 2022 and December 31, 2021, the net unrealized investment gains relating to investments in equity securities held were $8.0 million and $21.1 million, respectively (refer to Note 5).
The amortized costs and fair values of investments in debt securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Amortized costs | | Fair values | | Amortized costs | | Fair values |
| ($000 omitted) |
Municipal | 30,759 | | | 30,119 | | | 34,739 | | | 36,323 | |
Corporate | 279,392 | | | 257,575 | | | 249,757 | | | 258,102 | |
Foreign | 297,490 | | | 278,511 | | | 287,240 | | | 288,883 | |
U.S. Treasury Bonds | 16,631 | | | 16,256 | | | 6,429 | | | 6,464 | |
| | | | | | | |
| 624,272 | | | 582,461 | | | 578,165 | | | 589,772 | |
Foreign debt securities primarily 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Gains | | Losses | | Gains | | Losses |
| ($000 omitted) |
Municipal | 2 | | | 642 | | | 1,585 | | | 1 | |
Corporate | 226 | | | 22,043 | | | 9,389 | | | 1,044 | |
Foreign | 92 | | | 19,071 | | | 3,285 | | | 1,642 | |
U.S. Treasury Bonds | 7 | | | 382 | | | 60 | | | 25 | |
| | | | | | | |
| 327 | | | 42,138 | | | 14,319 | | | 2,712 | |
Debt securities as of September 30, 2022 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 | 88,203 | | | 87,384 | |
After one year through five years | 355,367 | | | 333,584 | |
After five years through ten years | 155,555 | | | 140,592 | |
After ten years | 25,147 | | | 20,901 | |
| 624,272 | | | 582,461 | |
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, 2022, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 633 | | | 28,835 | | | 9 | | | 33 | | | 642 | | | 28,868 | |
Corporate | 17,822 | | | 224,128 | | | 4,221 | | | 29,888 | | | 22,043 | | | 254,016 | |
Foreign | 13,264 | | | 210,499 | | | 5,807 | | | 65,721 | | | 19,071 | | | 276,220 | |
U.S. Treasury Bonds | 323 | | | 13,116 | | | 59 | | | 951 | | | 382 | | | 14,067 | |
| | | | | | | | | | | |
| 32,042 | | | 476,578 | | | 10,096 | | | 96,593 | | | 42,138 | | | 573,171 | |
The number of specific debt investment holdings held in an unrealized loss position as of September 30, 2022 was 355. Of these securities, 49 were in unrealized loss positions for more than 12 months. Gross unrealized investment losses at September 30, 2022 increased compared to December 31, 2021, primarily due to the market volatility influenced by higher interest rates and credit spreads during 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, 2021, were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | More than 12 months | | Total |
| Losses | | Fair values | | Losses | | Fair values | | Losses | | Fair values |
| ($000 omitted) |
Municipal | 1 | | | 130 | | | — | | | — | | | 1 | | | 130 | |
Corporate | 588 | | | 42,231 | | | 456 | | | 12,014 | | | 1,044 | | | 54,245 | |
Foreign | 1,502 | | | 118,943 | | | 140 | | | 3,394 | | | 1,642 | | | 122,337 | |
U.S. Treasury Bonds | 8 | | | 477 | | | 17 | | | 508 | | | 25 | | | 985 | |
| | | | | | | | | | | |
| 2,099 | | | 161,781 | | | 613 | | | 15,916 | | | 2,712 | | | 177,697 | |
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 September 30, 2022, 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 | — | | | 30,119 | | | 30,119 | |
Corporate | — | | | 257,575 | | | 257,575 | |
Foreign | — | | | 278,511 | | | 278,511 | |
U.S. Treasury Bonds | — | | | 16,256 | | | 16,256 | |
Equity securities | 87,166 | | | — | | | 87,166 | |
| 87,166 | | | 582,461 | | | 669,627 | |
As of December 31, 2021, 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 | — | | | 36,323 | | | 36,323 | |
Corporate | — | | | 258,102 | | | 258,102 | |
Foreign | — | | | 288,883 | | | 288,883 | |
U.S. Treasury Bonds | — | | | 6,464 | | | 6,464 | |
Equity securities | 89,442 | | | — | | | 89,442 | |
| 89,442 | | | 589,772 | | | 679,214 | |
As of September 30, 2022 and December 31, 2021, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental, and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. The fair value of the Company's investments in debt and equity securities is primarily determined using a third-party pricing service provider. The third-party pricing service provider calculates the fair values using both market approach and model valuation methods, as well as pricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with pricing information from the Company's investment manager.
NOTE 5
Net realized and unrealized gains. Realized and unrealized gains and losses are detailed as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| ($000 omitted) |
Realized gains | 183 | | | 2,615 | | | 3,460 | | | 10,695 | |
Realized losses | (65) | | | (47) | | | (3,904) | | | (2,516) | |
Net unrealized investment (losses) gains recognized on equity securities still held at end of period | (6,492) | | | 319 | | | (13,750) | | | 9,637 | |
| (6,374) | | | 2,887 | | | (14,194) | | | 17,816 | |
Realized gains and losses during the first nine months of 2022 included realized losses of $3.6 million from disposals of businesses, a $1.0 million gain from an acquisition contingent liability adjustment, and a $1.0 million realized gain related to a sale of a title plant copy.
Realized gains and losses during the third quarter 2021 included $2.5 million gain related to an acquisition contingent liability adjustment. Additionally, realized gains and losses for the first nine months of 2021 included $7.3 million of gains on sales of buildings and a $2.5 million loss related to a disposal of an equity method investment.
Investment gains and losses recognized related to investments in equity securities are as follows: