STEWART INFORMATION SERVICES CORP [STC] Filings

10-Q 1 stc-20230930.htm Q3 2023 FORM 10-Q stc-20230930

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, 2023

☐ 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, 2023, there were 27,362,249 outstanding shares of the issuer's Common Stock.

FORM 10-Q QUARTERLY REPORT

QUARTER ENDED SEPTEMBER 30, 2023

TABLE OF CONTENTS


Item		Page
	PART I – FINANCIAL INFORMATION

1.	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

3.	Quantitative and Qualitative Disclosures About Market Risk	27

4.	Controls and Procedures	27
	PART II – OTHER INFORMATION
1.	Legal Proceedings	28

1A.	Risk Factors	28

2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

5.	Other Information	28

6.	Exhibits	29

	Signature	29

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,
	2023	2022	2023	2022
	($000 omitted, except per share)
Revenues
Title revenues:
Direct operations	256,377	307,408	722,242	976,364
Agency operations	265,700	340,470	723,476	1,154,546
Real estate solutions and other	68,190	69,737	202,169	281,152
Operating revenues	590,267	717,615	1,647,887	2,412,062
Investment income	13,393	5,158	32,114	15,519
Net realized and unrealized losses	(1,946)	(6,374)	(4,829)	(14,194)
	601,714	716,399	1,675,172	2,413,387
Expenses
Amounts retained by agencies	218,983	280,517	596,498	951,555
Employee costs	181,493	195,057	534,710	610,286
Other operating expenses	130,455	151,208	380,530	502,966
Title losses and related claims	22,251	25,486	59,727	81,105
Depreciation and amortization	16,414	14,067	46,848	42,103
Interest	5,054	4,553	14,777	13,471
	574,650	670,888	1,633,090	2,201,486
Income before taxes and noncontrolling interests	27,064	45,511	42,082	211,901
Income tax expense	(9,134)	(10,783)	(9,588)	(48,376)
Net income	17,930	34,728	32,494	163,525
Less net income attributable to noncontrolling interests	3,931	5,294	10,870	14,534
Net income attributable to Stewart	13,999	29,434	21,624	148,991

Net income	17,930	34,728	32,494	163,525
Other comprehensive loss, net of taxes:
Foreign currency translation adjustments	(5,847)	(15,300)	(995)	(22,861)
Change in net unrealized gains and losses on investments	(7,468)	(8,921)	(6,616)	(41,513)
Reclassification adjustments for realized gains and losses on investments	20	(385)	333	(687)
Other comprehensive loss, net of taxes:	(13,295)	(24,606)	(7,278)	(65,061)
Comprehensive income	4,635	10,122	25,216	98,464
Less net income attributable to noncontrolling interests	3,931	5,294	10,870	14,534
Comprehensive income attributable to Stewart	704	4,828	14,346	83,930

Basic average shares outstanding (000)	27,348	27,113	27,269	27,031
Basic earnings per share attributable to Stewart	0.51	1.09	0.79	5.51
Diluted average shares outstanding (000)	27,650	27,371	27,445	27,359
Diluted earnings per share attributable to Stewart	0.51	1.08	0.79	5.45

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2023 (Unaudited)	December 31, 2022
	($000 omitted)
Assets
Cash and cash equivalents	202,985	248,367
Short-term investments	37,238	24,318
Investments, at fair value:
Debt securities (amortized cost of $628,153 and $646,728)	585,406	611,934
Equity securities	75,333	98,149
	660,739	710,083
Receivables:
Premiums from agencies	40,509	39,921
Trade and other	64,364	67,348
Income taxes	4,725	10,281
Notes	13,765	7,482
Allowance for uncollectible amounts	(8,652)	(7,309)
	114,711	117,723
Property and equipment:
Land	2,545	2,545
Buildings	19,049	18,761
Furniture and equipment	233,062	213,707
Accumulated depreciation	(171,230)	(153,474)
	83,426	81,539
Operating lease assets	123,698	127,830
Title plants, at cost	73,359	73,358
Investments on equity method basis	4,283	4,575
Goodwill	1,072,022	1,072,982
Intangible assets, net of amortization	201,539	199,084
Deferred tax assets	2,554	2,590
Other assets	92,516	75,430
	2,669,070	2,737,879
Liabilities
Notes payable	445,158	447,006
Accounts payable and accrued liabilities	177,180	196,541
Operating lease liabilities	142,044	148,003
Estimated title losses	521,395	549,448
Deferred tax liabilities	24,094	26,616
	1,309,871	1,367,614
Contingent liabilities and commitments
Stockholders’ equity
Common Stock ($1 par value) and additional paid-in capital	337,924	324,344
Retained earnings	1,075,224	1,091,816
Accumulated other comprehensive loss:
Foreign currency translation adjustments	(24,851)	(23,856)
Net unrealized losses on debt securities investments	(33,770)	(27,487)

Treasury stock – 352,161 common shares, at cost	(2,666)	(2,666)
Stockholders’ equity attributable to Stewart	1,351,861	1,362,151
Noncontrolling interests	7,338	8,114
Total stockholders’ equity (27,355,427 and 27,130,412 shares outstanding)	1,359,199	1,370,265
	2,669,070	2,737,879

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Nine Months Ended September 30,
	2023	2022
	($000 omitted)
Reconciliation of net income to cash provided by operating activities:
Net income	32,494	163,525
Add (deduct):
Depreciation and amortization	46,848	42,103
Adjustments for bad debt provisions	2,425	812
Net realized and unrealized losses	4,829	14,194
Amortization of net premium on debt securities investments	448	1,870
Payments for title losses (in excess of) less than provisions	(26,417)	10,950
Adjustments for insurance recoveries of title losses	—	220
Decrease in receivables – net	7,007	9,521
Increase in other assets – net	(9,581)	(4,343)
Decrease in accounts payable and other liabilities – net	(24,766)	(81,987)
Change in net deferred income taxes	(692)	25
Net income from equity method investments	(847)	(2,536)
Dividends received from equity method investments	1,121	3,135
Stock-based compensation expense	10,310	9,239
Other – net	399	312
Cash provided by operating activities	43,578	167,040
Investing activities:
Proceeds from sales of investments in securities	53,630	47,954
Proceeds from matured investments in debt securities	58,005	28,754
Purchases of investments in securities	(72,857)	(165,130)
Net purchases of short-term investments	(14,005)	(1,632)
Purchases of property and equipment, and real estate	(29,487)	(35,274)
Proceeds from sale of property and equipment and other assets	369	977
Cash paid for acquisition of businesses	(25,100)	(102,864)
Increase in notes receivable	(6,960)	(69)
Other – net	(348)	1,941
Cash used by investing activities	(36,753)	(225,343)
Financing activities:
Proceeds from notes payable	3,538	38,012
Payments on notes payable	(5,776)	(75,505)
Distributions to noncontrolling interests	(11,646)	(14,863)


Repurchases of Common Stock	(1,576)	(3,168)
Proceeds from stock option and employee stock purchase plan exercises	4,846	5,799
Cash dividends paid	(37,524)	(32,464)
Payment of contingent consideration related to acquisitions	(3,025)	(15,997)
Purchase of remaining interest in consolidated subsidiaries	—	(72)
Other - net	—	115
Cash used by financing activities	(51,163)	(98,143)
Effects of changes in foreign currency exchange rates	(1,044)	(8,540)
Change in cash and cash equivalents	(45,382)	(164,986)
Cash and cash equivalents at beginning of period	248,367	485,919
Cash and cash equivalents at end of period	202,985	320,933

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) income	Treasury stock	Noncontrolling interests	Total
	($000 omitted)
Nine Months Ended September 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	—	—	21,624	—	—	—	21,624
Dividends on Common Stock ($1.38 per share)	—	—	(38,216)	—	—	—	(38,216)

Stock-based compensation	134	10,176	—	—	—	—	10,310
Stock repurchases	(37)	(1,539)	—	—	—	—	(1,576)
Stock option and employee stock purchase plan exercises	129	4,717	—	—	—	—	4,846

Change in net unrealized gains and losses on investments, net of taxes	—	—	—	(6,616)	—	—	(6,616)
Reclassification adjustment for realized gains and losses on investments, net of taxes	—	—	—	333	—	—	333
Foreign currency translation adjustments, net of taxes	—	—	—	(995)	—	—	(995)
Net income attributable to noncontrolling interests	—	—	—	—	—	10,870	10,870
Distributions to noncontrolling interests	—	—	—	—	—	(11,646)	(11,646)

Balance at September 30, 2023	27,709	310,215	1,075,224	(58,621)	(2,666)	7,338	1,359,199

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 subsidiary	—	—	—	—	—	(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, 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

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 September 30, 2023
Balance at June 30, 2023	27,620	304,405	1,074,458	(45,326)	(2,666)	7,504	1,365,995

Net income attributable to Stewart	—	—	13,999	—	—	—	13,999
Dividends on Common Stock ($0.48 per share)	—	—	(13,233)	—	—	—	(13,233)

Stock-based compensation	17	3,250	—	—	—	—	3,267
Stock repurchases	(5)	(218)	—	—	—	—	(223)
Stock option and employee stock purchase plan exercises	77	2,778	—	—	—		2,855

Change in net unrealized gains and losses on investments, net of taxes	—	—	—	(7,468)	—	—	(7,468)
Reclassification adjustment for realized gains and losses on investments, net of taxes	—	—	—	20	—	—	20
Foreign currency translation adjustments, net of taxes	—	—	—	(5,847)	—	—	(5,847)
Net income attributable to noncontrolling interests	—	—	—	—	—	3,931	3,931
Distributions to noncontrolling interests	—	—	—	—	—	(4,097)	(4,097)

Balance at September 30, 2023	27,709	310,215	1,075,224	(58,621)	(2,666)	7,338	1,359,199

Three Months Ended September 30, 2022
Balance 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 exercises	69	3,017					3,086
Purchase of remaining interest in consolidated subsidiary	—	—	—	—	—	(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, 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

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, 2023 and 2022, and as of September 30, 2023, 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, 2022 filed with the Securities and Exchange Commission on February 28, 2023 (2022 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 $510.8 million and $544.0 million at September 30, 2023 and December 31, 2022, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $11.0 million and $8.6 million at September 30, 2023 and December 31, 2022, 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 September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted)
Title insurance premiums:
Direct	169,285	209,477	470,779	646,760
Agency	265,700	340,470	723,476	1,154,546
Escrow fees	41,973	49,407	117,223	166,696
Real estate solutions and abstract fees	86,451	89,519	253,422	302,534
Other revenues	26,858	28,742	82,987	141,526
	590,267	717,615	1,647,887	2,412,062

NOTE 3

Investments in debt and equity securities. As of September 30, 2023 and December 31, 2022, the net unrealized investment gains relating to investments in equity securities held were $11.0 million and $19.2 million, respectively (refer to Note 5).

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


	September 30, 2023		December 31, 2022
	Amortized costs	Fair values	Amortized costs	Fair values
	($000 omitted)
Municipal	23,941	23,278	30,104	29,835
Corporate	250,552	231,038	272,362	254,316
Foreign	321,046	299,748	315,184	299,137
U.S. Treasury Bonds	32,614	31,342	29,078	28,646

	628,153	585,406	646,728	611,934

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:


	September 30, 2023		December 31, 2022
	Gains	Losses	Gains	Losses
	($000 omitted)
Municipal	1	664	3	272
Corporate	136	19,650	489	18,535
Foreign	152	21,450	165	16,212
U.S. Treasury Bonds	—	1,272	21	453

	289	43,036	678	35,472

Debt securities as of September 30, 2023 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	105,848	103,828
After one year through five years	329,317	306,479
After five years through ten years	180,634	164,702
After ten years	12,354	10,397
	628,153	585,406

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, 2023, were:


	Less than 12 months		More than 12 months		Total
	Losses	Fair values	Losses	Fair values	Losses	Fair values
	($000 omitted)
Municipal	292	13,477	372	9,800	664	23,277
Corporate	284	18,194	19,366	209,437	19,650	227,631
Foreign	4,594	93,809	16,856	200,359	21,450	294,168
U.S. Treasury Bonds	1,007	26,639	265	4,703	1,272	31,342

	6,177	152,119	36,859	424,299	43,036	576,418

The number of specific debt investment holdings held in an unrealized loss position as of September 30, 2023 was 374. Of these securities, 267 were in unrealized loss positions for more than 12 months. Total gross unrealized investment losses at September 30, 2023 were essentially unchanged compared to December 31, 2022; however, gross unrealized losses over 12 months increased in 2023 primarily due to the passage of time and 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.


	Less than 12 months		More than 12 months		Total
	Losses	Fair values	Losses	Fair values	Losses	Fair values
	($000 omitted)
Municipal	262	27,491	10	67	272	27,558
Corporate	12,935	193,239	5,600	44,342	18,535	237,581
Foreign	7,608	186,221	8,604	101,294	16,212	287,515
U.S. Treasury Bonds	413	25,102	40	445	453	25,547

	21,218	432,053	14,254	146,148	35,472	578,201

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, 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	—	23,278	23,278
Corporate	—	231,038	231,038
Foreign	—	299,748	299,748
U.S. Treasury Bonds	—	31,342	31,342
Equity securities	75,333	—	75,333
	75,333	585,406	660,739

As of December 31, 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	—	29,835	29,835
Corporate	—	254,316	254,316
Foreign	—	299,137	299,137
U.S. Treasury Bonds	—	28,646	28,646
Equity securities	98,149	—	98,149
	98,149	611,934	710,083

As of September 30, 2023 and December 31, 2022, 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,
	2023	2022	2023	2022
	($000 omitted)
Realized gains	900	183	1,239	3,460
Realized losses	(307)	(65)	(4,484)	(3,904)
Net unrealized investment losses recognized on equity securities still held at end of period	(2,539)	(6,492)	(1,584)	(13,750)
	(1,946)	(6,374)	(4,829)	(14,194)

Realized gains and losses during the first nine months of 2023 included a $3.2 million contingent receivable loss adjustment resulting from a previous disposition of a business, while realized gains and losses during the first nine months of 2022 included a loss of $3.6 million from the disposition of the same business, partially offset by $2.0 million of gains from an acquisition contingent liability adjustment and a sale of a title plant copy.

Investment gains and losses recognized related to investments in equity securities are as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted)
Net investment losses recognized on equity securities during the period	(1,738)	(6,489)	(1,505)	(13,284)
Less: Net realized gains on equity securities sold during the period	801	3	79	466
Net unrealized investment losses recognized on equity securities still held at end of period	(2,539)	(6,492)	(1,584)	(13,750)

Proceeds from sales of investments in securities are as follows:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted)
Proceeds from sales of debt securities	10,255	19,123	25,134	47,405
Proceeds from sales of equity securities	3,887	62	28,496	549
Total proceeds from sales of investments in securities	14,142	19,185	53,630	47,954

NOTE 6

Goodwill. The summary of changes in goodwill is as follows:


	Title	Real Estate Solutions	Corporate and Other	Consolidated Total
	($000 omitted)
Balances at December 31, 2022	720,478	352,504	—	1,072,982
Acquisitions	8,328	11,690	—	20,018
Purchase accounting adjustments	(20,978)	—	—	(20,978)

Balances at September 30, 2023	707,828	364,194	—	1,072,022

During the first nine months of 2023, goodwill recorded in the real estate solutions and title segments was related to acquisitions of a financial and personal information online verification services provider and several title offices, respectively, while title purchase accounting adjustments were primarily related to recognition of intangible assets (customer relationships) related to recent acquisitions.

NOTE 7

Estimated title losses. A summary of estimated title losses for the nine months ended September 30 is as follows:


	2023		2022
	($000 omitted)
Balances at January 1	549,448		549,614
Provisions:
Current year	59,036		81,108
Previous policy years	691		(3)
Total provisions	59,727		81,105
Payments, net of recoveries:
Current year	(12,911)		(14,191)
Previous policy years	(73,233)		(55,964)
Total payments, net of recoveries	(86,144)		(70,155)

Effects of changes in foreign currency exchange rates	(1,636)		(13,350)
Balances at September 30	521,395		547,214
Loss ratios as a percentage of title operating revenues:
Current year provisions	4.1	%	3.8	%
Total provisions	4.1	%	3.8	%

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 stock options vest on each of the first three anniversaries of the grant date at a rate of 20%, 30% and 50%, chronologically, and expire 10 years after the grant date. Each vested stock option can be exercised to purchase a share of the Company's Common Stock at the strike price set by the Company at the grant date. The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the corresponding vesting period.

During the first nine months of 2023 and 2022, the Company granted time-based and performance-based restricted stock units with aggregate grant-date fair values of $12.1 million (296,000 units with an average grant price per unit of $41.03) and $11.7 million (183,000 units with an average grant price per unit of $63.68).

NOTE 9

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted, except per share)
Numerator:


Net income attributable to Stewart	13,999	29,434	21,624	148,991

Denominator (000):
Basic average shares outstanding	27,348	27,113	27,269	27,031
Average number of dilutive shares relating to options	69	124	52	181
Average number of dilutive shares relating to grants of restricted units and shares	233	134	124	147
Diluted average shares outstanding	27,650	27,371	27,445	27,359

Basic earnings per share attributable to Stewart	0.51	1.09	0.79	5.51

Diluted earnings per share attributable to Stewart	0.51	1.08	0.79	5.45

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 September 30, 2023, the maximum potential future payments on the guarantees are not more than the related notes payable recorded in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related guarantees are not more than the Company’s future lease obligations, as presented on the condensed consolidated balance sheets, plus lease operating expenses. As of September 30, 2023, 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 September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted)
Title segment:
Revenues	533,624	646,607	1,476,093	2,135,000
Depreciation and amortization	9,196	7,467	26,182	21,098
Income before taxes and noncontrolling interest	35,385	51,837	70,181	228,212

Real estate solutions segment:
Revenues	68,215	69,738	202,250	241,993
Depreciation and amortization	6,820	6,204	19,401	19,381
Income before taxes	2,626	3,364	7,273	16,249

Corporate and other segment:
Revenues (net realized losses)	(125)	54	(3,171)	36,394
Depreciation and amortization	398	396	1,265	1,624
Loss before taxes	(10,947)	(9,690)	(35,372)	(32,560)

Consolidated Stewart:
Revenues	601,714	716,399	1,675,172	2,413,387
Depreciation and amortization	16,414	14,067	46,848	42,103
Income before taxes and noncontrolling interest	27,064	45,511	42,082	211,901

The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment. During 2022, the corporate and other segment included results of a real estate brokerage company that was sold during the second quarter 2022.

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


	Three Months Ended September 30,		Nine Months Ended September 30,
	2023	2022	2023	2022
	($000 omitted)
United States	562,045	670,846	1,574,275	2,271,497
International	39,669	45,553	100,897	141,890
	601,714	716,399	1,675,172	2,413,387

NOTE 13

Other comprehensive loss. Changes in the balances of each component of other comprehensive loss and the related tax effects are as follows:


	Three Months Ended September 30, 2023			Three Months Ended September 30, 2022
	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	(9,452)	(1,984)	(7,468)	(11,292)	(2,371)	(8,921)
Reclassification adjustments for realized gains and losses on investments	25	5	20	(488)	(103)	(385)
	(9,427)	(1,979)	(7,448)	(11,780)	(2,474)	(9,306)

Foreign currency translation adjustments	(6,931)	(1,084)	(5,847)	(18,315)	(3,015)	(15,300)

Other comprehensive loss	(16,358)	(3,063)	(13,295)	(30,095)	(5,489)	(24,606)


	Nine Months Ended September 30, 2023			Nine Months Ended September 30, 2022
	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	(8,374)	(1,758)	(6,616)	(52,548)	(11,035)	(41,513)
Reclassification adjustment for realized gains and losses on investments	421	88	333	(870)	(183)	(687)
	(7,953)	(1,670)	(6,283)	(53,418)	(11,218)	(42,200)

Foreign currency translation adjustments	(1,119)	(124)	(995)	(26,668)	(3,807)	(22,861)

Other comprehensive loss	(9,072)	(1,794)	(7,278)	(80,086)	(15,025)	(65,061)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S OVERVIEW

Third quarter 2023 overview. We reported net income attributable to Stewart of $14.0 million ($0.51 per diluted share) for the third quarter 2023, compared to net income attributable to Stewart of $29.4 million ($1.08 per diluted share) for the third quarter 2022. Pretax income before noncontrolling interests for the third quarter 2023 was $27.1 million compared to pretax income before noncontrolling interests of $45.5 million for the prior year quarter. The third quarter 2023 and 2022 results included $1.9 million and $6.4 million, respectively, of pretax net realized and unrealized losses primarily driven by net unrealized losses 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 September 30
	2023		2022		% Change

Operating revenues	522.1		647.9		(19)	%
Investment income	13.4		5.2		159	%
Net realized and unrealized losses	(1.8)		(6.4)		72	%
Pretax income	35.4		51.8		(32)	%
Pretax margin	6.6	%	8.0	%

Title segment operating revenues in the third quarter 2023 decreased $125.8 million, or 19%, compared to the third quarter 2022, due to transaction volume declines in our direct and agency title businesses. Total segment operating expenses in the third quarter 2023 decreased $96.5 million, or 16%, primarily driven by lower operating revenues. Agency retention expenses in the third quarter 2023 decreased $61.5 million, or 22%, in line with lower gross agency revenues of $74.8 million, or 22%, while the average independent agency remittance rate in the third quarter 2023 was comparable to the prior year quarter.

Total employee costs and other operating expenses in the third quarter 2023 decreased $33.8 million, or 12%, compared to the prior year quarter, while as a percentage of operating revenues, these expenses were 47.4% in the third quarter 2023 compared to 43.4% in the third quarter 2022. Title loss expense in the third quarter 2023 decreased $3.2 million, or 13%, compared to the prior year quarter, primarily as a result of lower title revenues. As a percentage of title revenues, title loss expense was 4.3% in the third quarter 2023 compared to 3.9% in the third quarter 2022, which benefited from last year’s favorable claims experience.

Investment income in the third quarter 2023 increased $8.2 million compared to the third quarter 2022, primarily due to higher interest income resulting from earned interest from eligible escrow balances and increased interest rates and higher short-term investment balances in the third quarter 2023. Acquisition intangible asset amortization expenses in the third quarters 2023 and 2022 amounted to $3.4 million and $2.0 million, respectively.

Summary results of the real estate solutions segment are as follows ($ in millions):


	For the Three Months Ended September 30
	2023		2022		% Change

Operating revenues	68.2		69.7		(2)	%
Pretax income	2.6		3.4		(22)	%
Pretax margin	3.8	%	4.8	%

The segment’s operating revenues in the third quarter 2023 decreased $1.5 million, or 2%, compared to the third quarter 2022, primarily as a result of lower valuation services revenues resulting from lower transaction volumes tied to the continuing elevated interest rate environment, partially offset by higher credit information services revenues. In line with the revenue decline, combined employee costs and other operating expenses in the third quarter 2023 decreased $1.6 million, or 3%. Acquisition intangible asset amortization expenses in the third quarters 2023 and 2022 amounted to $6.3 million and $5.8 million, respectively.

In regard to the corporate and other segment, pretax results in the third quarter 2023 and 2022 were driven by net expenses attributable to corporate operations which were $10.8 million and $9.7 million, respectively.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.

Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. During the nine months ended September 30, 2023, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2022 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 expenses and certain enterprise-wide overhead costs, along with other businesses not related to title or real estate solutions operations.

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, including tax incentives and the implementation of the integrated disclosure requirements;

•acquisitions or divestitures of businesses;

•volume of distressed property transactions;

•seasonality and/or weather; and

•outbreaks of diseases and related quarantine orders and restrictions on travel, trade and business operations.

Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. 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, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction.

RESULTS OF OPERATIONS

Comparisons of our results of operations for the three and nine months ended September 30, 2023 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 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 September 30, 2023. We also use information from our direct operations.

Operating environment. According to NAR, existing home sales (seasonally-adjusted basis) in September 2023 totaled 4.0 million units, which were 15% and 2% lower from a year ago and August 2023, respectively, primarily due to the current increasing mortgage interest rate environment. Limited inventory and low housing affordability continue to hamper home sales, with total housing inventory in September 2023 being 8% lower compared to a year ago and the September 2023 existing home median price at $394,300, or 3% higher than September 2022. Regarding new residential construction, U.S. housing starts (seasonally-adjusted) in September 2023 were 7% lower compared to September 2022, but 7% higher than August 2023, while September 2023 newly-issued building permits were 7% and 4% lower compared to a year ago and August 2023, respectively.

In relation to lending activity, total single family mortgage originations during the third quarter 2023 decreased 17% to $427 billion compared to the prior year quarter, with purchase and refinancing originations declining 13% and 31%, respectively, according to Fannie Mae and MBA (averaged). During the third quarter 2023, the average 30-year fixed interest rate reached 7.0%, compared to 5.7% from the third quarter 2022 and 6.5% in the second quarter 2023. For the year 2023, Fannie Mae and MBA expect the interest rate to average 6.5%, higher than the 5.4% average observed in 2022, while total originations for the year 2023 are expected to be 31% lower compared to 2022.

Title revenues. Direct title revenue information is presented below:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2023	2022	Change	% Chg		2023	2022	Change	% Chg
	($ in millions)					($ in millions)
Non-commercial
Domestic	167.6	204.4	(36.8)	(18)	%	502.4	659.1	(156.7)	(24)	%
International	29.1	33.8	(4.7)	(14)	%	74.1	106.6	(32.5)	(30)	%
	196.7	238.2	(41.5)	(17)	%	576.5	765.7	(189.2)	(25)	%
Commercial:
Domestic	51.9	61.0	(9.1)	(15)	%	126.1	184.5	(58.4)	(32)	%
International	7.8	8.2	(0.4)	(5)	%	19.6	26.2	(6.6)	(25)	%
	59.7	69.2	(9.5)	(14)	%	145.7	210.7	(65.0)	(31)	%
Total direct title revenues	256.4	307.4	(51.0)	(17)	%	722.2	976.4	(254.2)	(26)	%

Non-commercial revenues decreased in the third quarter and first nine months of 2023, compared to the same periods in 2022, primarily driven by lower residential purchase and refinancing transactions resulting from the rising mortgage interest rates in 2023. Combined purchase and refinancing orders closed declined 17% and 35% in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. Average residential fee per file in the third quarter and first nine months of 2023 was $3,000 and $3,200, respectively, compared to $3,300 and $3,000 in the third quarter and first nine months of 2022, respectively, primarily as a result of changes in the mix of purchase transactions.

Commercial revenues declined in the third quarter and first nine months of 2023, compared to the same periods in 2022, primarily as a result of lower transaction volume. Domestic commercial orders closed decreased 17% and 20% in the third quarter and first nine months of 2023, respectively, while average domestic commercial fee per file was $14,200 and $11,300 in the third quarter and first nine months of 2023, respectively, compared to $13,700 and $13,200, respectively, from the same periods in 2022. Total international revenues in the third quarter and first nine months of 2023 decreased $5.1 million, or 12%, and $39.1 million, or 29%, respectively, primarily due to lower transaction volumes in our Canadian operations compared to the same periods in 2022.

Orders information for the three and nine months ended September 30 is as follows: