☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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NOTE 1

Interim financial statements. The financial information contained in this report for the three months ended March 31, 2020 and 2019, and as of March 31, 2020, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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% through 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 $497.5 million and $483.4 million at March 31, 2020 and December 31, 2019, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $18.3 million and $39.7 million at March 31, 2020 and December 31, 2019, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.

D. Recently adopted accounting standard. In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (Topic 326). Topic 326 significantly changed the impairment model for financial instruments by introducing the current expected credit loss (CECL) model, which requires the immediate recognition of estimated credit losses expected to occur over the remaining life of the financial instrument. The previous GAAP generally required the recognition of credit losses when incurred. Topic 326 also amended certain accounting treatments for available-for-sale debt securities. Effective January 1, 2020, the Company adopted Topic 326 which did not result in any material impact on its consolidated financial statements.

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E. Impact of the COVID-19 pandemic. In March 2020, a global pandemic escalated relating to a novel strain of coronavirus (COVID-19), which resulted in a slowdown in the global economy and a U.S. declaration of a national emergency. In response to the pandemic, health and governmental bodies, including the state of Texas where the Company is headquartered, have issued travel restrictions, quarantine orders, temporary closures of non-essential businesses and other restrictive measures. Although the title insurance industry has been deemed essential in the U.S., the pandemic and measures to contain it have caused disruptions in the real estate market and in the Company's business operations. While the Company continues to close transactions on a daily basis, as it works through a pipeline of business from the first quarter, orders opened in the second quarter are expected to be lower. There is near-term uncertainty regarding future real estate market transaction volumes and the impacts to the Company's results of operations. To the extent that the COVID-19 pandemic continues or worsens, it could adversely impact the Company's future operational and financial performance, which may include impairments of the Company's goodwill, investments and other long-lived assets. The Company is currently unable to determine the effects the COVID-19 pandemic will have on the Company's financial statements or results of operations.

NOTE 2

Revenues. The Company's operating revenues, summarized by type, are as follows:

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
Title insurance premiums:
Direct		138,283			111,918
Agency		242,030			214,863
Escrow fees		33,086			25,293
Search, abstract and valuation services		16,077			22,939
Other revenues		16,298			15,379
		445,774			390,392

NOTE 3

Investments in debt and equity securities. The total fair values of the Company's investments in debt and equity securities are as follows:

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	March 31, 2020			December 31, 2019
	($000 omitted)
Investments in:
Debt securities	584,153			605,721
Equity securities	28,250			39,318
	612,403			645,039

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As of March 31, 2020 and December 31, 2019, the net unrealized investment (losses) gains relating to investments in equity securities held were $(3.8) million and $6.9 million, respectively (refer to Note 5).

The amortized costs and fair values of investments in debt securities are as follows:

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	March 31, 2020						December 31, 2019
	Amortized costs			Fair values			Amortized costs			Fair values
	($000 omitted)
Municipal	48,780			50,348			52,176			53,823
Corporate	300,203			302,527			299,074			309,142
Foreign	218,918			224,681			234,734			236,073
U.S. Treasury Bonds	6,547			6,597			6,664			6,683
	574,448			584,153			592,648			605,721

Foreign debt securities consist of Canadian government 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:

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	March 31, 2020						December 31, 2019
	Gains			Losses			Gains			Losses
	($000 omitted)
Municipal	1,570			2			1,649			2
Corporate	6,203			3,879			10,091			23
Foreign	6,407			644			2,362			1,023
U.S. Treasury Bonds	91			41			60			41
	14,271			4,566			14,162			1,089

Debt securities as of March 31, 2020 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):

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	Amortized costs			Fair values
	($000 omitted)
In one year or less	77,995			78,047
After one year through five years	303,007			307,426
After five years through ten years	160,301			166,107
After ten years	33,145			32,573
	574,448			584,153

Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020, were:

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	Less than 12 months						More than 12 months						Total
	Losses			Fair values			Losses			Fair values			Losses			Fair values
	($000 omitted)
Municipal	2			52			—			—			2			52
Corporate	3,879			103,187			—			—			3,879			103,187
Foreign	584			31,671			60			4,224			644			35,895
U.S. Treasury Bonds	—			—			41			2,105			41			2,105
	4,465			134,910			101			6,329			4,566			141,239

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The number of specific debt investment holdings held in an unrealized loss position as of March 31, 2020 was 86. Of these securities, 9 were in unrealized loss positions for more than 12 months. During 2020, the overall gross unrealized losses on debt securities increased from the prior year-end due to lower investment fair values primarily resulting from increased credit spreads, partially offset by the effect of lower interest rates. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.

Gross unrealized losses on investments in debt securities and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019, were:

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	Less than 12 months						More than 12 months						Total
	Losses			Fair values			Losses			Fair values			Losses			Fair values
	($000 omitted)
Municipal	2			53			—			—			2			53
Corporate	23			7,420			—			—			23			7,420
Foreign	318			92,108			705			55,875			1,023			147,983
U.S. Treasury Bonds	—			—			41			2,215			41			2,215
	343			99,581			746			58,090			1,089			157,671

NOTE 4

Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the FASB Accounting Standards Codification (ASC) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible.

The three levels of inputs used to measure fair value are as follows:

 

•	Level 1 – quoted prices in active markets for identical assets or liabilities;

•	Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and

•	Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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As of March 31, 2020, financial instruments measured at fair value on a recurring basis are summarized below:

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	Level 1			Level 2			Fair value measurements
	($000 omitted)
Investments in securities:
Debt securities:
Municipal	—			50,348			50,348
Corporate	—			302,527			302,527
Foreign	—			224,681			224,681
U.S. Treasury Bonds	—			6,597			6,597
Equity securities	28,250			—			28,250
	28,250			584,153			612,403

As of December 31, 2019, financial instruments measured at fair value on a recurring basis are summarized below:

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	Level 1			Level 2			Fair value measurements
	($000 omitted)
Investments in securities:
Debt securities:
Municipal	—			53,823			53,823
Corporate	—			309,142			309,142
Foreign	—			236,073			236,073
U.S. Treasury Bonds	—			6,683			6,683
Equity securities	39,318			—			39,318
	39,318			605,721			645,039

As of March 31, 2020, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental, and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. The fair value of the Company's investments in debt and equity securities is primarily determined using a third-party pricing service provider. The third-party pricing service provider calculates the fair values using both market approach and model valuation methods, as well as pricing information obtained from brokers, dealers and custodians. Management ensures the reasonableness of the third-party service valuations by comparing them with pricing information from the Company's investment manager.

NOTE 5

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
Investment and other gains		153			162
Investment and other losses		(690	)		(305	)
Net unrealized investment (losses) gains recognized on equity securities still held at March 31		(10,554	)		3,546
		(11,091	)		3,403

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Investment gains and losses recognized during the periods ended March 31, 2020 and 2019 related to investments in equity securities are as follows:

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
Net investment (losses) gains recognized on equity securities during the period		(11,061	)		3,657
Less: Net realized (losses) gains on equity securities sold during the period		(507	)		111
Net unrealized investment (losses) gains recognized on equity securities still held at March 31		(10,554	)		3,546

Proceeds from sales of investments in securities are as follows: 

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
Proceeds from sales of debt securities		11,503			6,318
Proceeds from sales of equity securities		293			640
Total proceeds from sales of investments in securities		11,796			6,958

NOTE 6

Estimated title losses. A summary of estimated title losses for the three months ended March 31 is as follows:

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	2020			2019
	($000 omitted)
Balances at January 1	459,053			461,560
Provisions:
Current year	18,521			15,526
Previous policy years	111			160
Total provisions	18,632			15,686
Payments, net of recoveries:
Current year	(2,214	)		(2,695	)
Previous policy years	(19,227	)		(20,772	)
Total payments, net of recoveries	(21,441	)		(23,467	)
Effects of changes in foreign currency exchange rates	(8,662	)		296
Balances at March 31	447,582			454,075
Loss ratios as a percentage of title operating revenues:
Current year provisions	4.2	%		4.1	%
Total provisions	4.2	%		4.2	%

Provisions in 2020 increased compared to 2019 primarily as a result of increased title revenues. Claim payments in 2020 decreased primarily due to lower payments of large claims compared to 2019, while the 2020 reduction effect relating to foreign currency exchange rate changes were primarily influenced by the depreciation of the Canadian dollar against the U.S. dollar during the three months ended March 31, 2020.

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NOTE 7

Share-based payments. Prior to 2020, the Company granted time-based and performance-based restricted stock units to executives and senior management employees. Each restricted stock unit represents a contractual right to receive a share of the Company's common stock. The time-based units vest on each of the first three anniversaries of the grant date, while the performance-based units vest upon achievement of certain financial objectives over a period of approximately three years. During the first quarter 2020, the Company granted time-based restricted stock units and nonqualified stock options, in lieu of performance-based restricted stock units. The stock options vest and may be exercised at a strike price of $39.76 on each of the first three anniversaries of the grant date at a rate of 20%, 30% and 50%, chronologically, and expire 10 years after the grant date.

NOTE 8

Earnings per share. Basic earnings per share (EPS) attributable to Stewart is calculated by dividing net income attributable to Stewart by the weighted-average number of shares of Common Stock outstanding during the reporting periods. Outstanding shares of Common Stock granted to employees that are not yet vested (restricted shares) are excluded from the calculation of the weighted-average number of shares outstanding for calculating basic EPS. To calculate diluted EPS, the number of shares is adjusted to include the number of additional shares that would have been outstanding if restricted shares and units were vested and stock options were exercised. In periods of loss, dilutive shares are excluded from the calculation of the diluted EPS and diluted EPS is computed in the same manner as basic EPS.

The calculation of the basic and diluted EPS is as follows:

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted, except per share)
Numerator:
Net income (loss) attributable to Stewart		5,177			(6,766	)
Denominator (000):
Basic average shares outstanding		23,638			23,595
Average number of dilutive shares relating to grants of restricted shares and units		111			—
Diluted average shares outstanding		23,749			23,595
Basic earnings (loss) per share attributable to Stewart		0.22			(0.29	)
Diluted earnings (loss) per share attributable to Stewart		0.22			(0.29	)

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NOTE 9

Contingent liabilities and commitments. In the ordinary course of business, the Company guarantees the third-party indebtedness of certain of its consolidated subsidiaries. As of March 31, 2020, the maximum potential future payments on the guarantees are not more than the related notes payable recorded in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related guarantees are not more than the Company’s future lease obligations, as presented on the condensed consolidated balance sheets, plus lease operating expenses. As of March 31, 2020, the Company also had unused letters of credit aggregating $5.2 million related to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees.

NOTE 10

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 plaintiff seeks 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 discussed in this paragraph and that the likely resolution of these matters will not materially affect its consolidated financial condition or results of operations.

Additionally, the Company receives from time to time 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 it has adequately reserved for these matters and does not anticipate that the outcome of these inquiries will materially affect its consolidated financial condition or results of operations.

NOTE 11

Segment information. The Company reports two operating segments: title and ancillary services and corporate. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home and personal insurance services and Internal Revenue Code Section 1031 tax-deferred exchanges. The ancillary services and corporate segment includes search and valuation services, which are the principal offerings of ancillary services, and expenses of the parent holding company and certain other enterprise-wide overhead costs (net of centralized administrative services costs allocated to respective operating businesses).

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Selected statement of operations information related to these segments is as follows:

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
Title segment:
Revenues		434,440			384,437
Depreciation and amortization		3,821			5,153
Income (loss) before taxes and noncontrolling interest		14,836			(379	)
Ancillary services and corporate segment:
Revenues		5,461			14,082
Depreciation and amortization		410			837
Loss before taxes and noncontrolling interest		(5,566	)		(6,847	)
Consolidated Stewart:
Revenues		439,901			398,519
Depreciation and amortization		4,231			5,990
Income (loss) before taxes and noncontrolling interest		9,270			(7,226	)

The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.

Revenues generated in the United States and all international operations are as follows:

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		Three Months Ended   March 31,
		2020			2019
	($000 omitted)
United States		414,128			376,482
International		25,773