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EX-32.2 - EXHIBIT 32.2 - STEWART INFORMATION SERVICES CORPq2-17ex322.htm
EX-32.1 - EXHIBIT 32.1 - STEWART INFORMATION SERVICES CORPq2-17ex321.htm
EX-31.2 - EXHIBIT 31.2 - STEWART INFORMATION SERVICES CORPq2-17ex312.htm
EX-31.1 - EXHIBIT 31.1 - STEWART INFORMATION SERVICES CORPq2-17ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
FORM 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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.)
1980 Post Oak Blvd., Houston TX
 
77056
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (713) 625-8100
(Former name, former address and former fiscal year, if changed since last report)

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 þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes þ    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  þ
 
Accelerated filer ¨
 
Non-accelerated filer  ¨ 
(Do not check if smaller reporting company)
 
Smaller reporting company  ¨ 
Emerging growth 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 þ
On July 25, 2017, there were 23,741,722 shares of the issuer's Common Stock, $1 par value per share, outstanding.




FORM 10-Q QUARTERLY REPORT
QUARTER ENDED JUNE 30, 2017
TABLE OF CONTENTS
 
As used in this report, “we,” “us,” “our,” "Registrant," the “Company” and “Stewart” mean Stewart Information Services Corporation and our subsidiaries, unless the context indicates otherwise.





















2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted, except per share)
Revenues
 
 
 
 
 
 
 
Title revenues:
 
 
 
 
 
 
 
Direct operations
231,662

 
237,017

 
419,091

 
423,018

Agency operations
234,407

 
225,416

 
467,756

 
450,051

Ancillary services
15,118

 
21,182

 
32,422

 
43,217

Operating revenues
481,187

 
483,615

 
919,269

 
916,286

Investment income
4,941

 
4,856

 
9,613

 
9,926

Investment and other (losses) gains – net
(676
)
 
966

 
(389
)
 
1,454

 
485,452

 
489,437

 
928,493

 
927,666

Expenses
 
 
 
 
 
 
 
Amounts retained by agencies
192,558

 
183,485

 
383,733

 
367,329

Employee costs
139,346

 
152,427

 
279,131

 
302,636

Other operating expenses
88,786

 
86,458

 
167,103

 
174,168

Title losses and related claims
24,462

 
17,153

 
45,163

 
40,247

Depreciation and amortization
6,441

 
7,340

 
12,819

 
15,646

Interest
712

 
661

 
1,529

 
1,440

 
452,305

 
447,524

 
889,478

 
901,466

 
 
 
 
 
 
 
 
Income before taxes and noncontrolling interests
33,147

 
41,913

 
39,015

 
26,200

Income tax expense
10,993

 
14,386

 
10,850

 
7,738

 
 
 
 
 
 
 
 
Net income
22,154

 
27,527

 
28,165

 
18,462

Less net income attributable to noncontrolling interests
3,586

 
3,928

 
5,508

 
6,058

Net income attributable to Stewart
18,568

 
23,599

 
22,657

 
12,404

 
 
 
 
 
 
 
 
Net income
22,154

 
27,527

 
28,165

 
18,462

Other comprehensive income, net of taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
3,204

 
(1,703
)
 
4,529

 
1,592

Change in net unrealized gains on investments
355

 
6,182

 
2,822

 
11,971

Reclassification of adjustment for gains included in net income
(94
)
 
(115
)
 
(461
)
 
(179
)
Other comprehensive income, net of taxes:
3,465

 
4,364

 
6,890

 
13,384

 
 
 
 
 
 
 
 
Comprehensive income
25,619

 
31,891

 
35,055

 
31,846

Less net income attributable to noncontrolling interests
3,586

 
3,928

 
5,508

 
6,058

Comprehensive income attributable to Stewart
22,033

 
27,963

 
29,547

 
25,788

 
 
 
 
 
 
 
 
Basic average shares outstanding (000)
23,444

 
23,365

 
23,438

 
23,357

Basic earnings per share attributable to Stewart
0.79

 
0.50

 
0.97

 
0.02

 
 
 
 
 
 
 
 
Diluted average shares outstanding (000)
23,620

 
23,559

 
23,613

 
23,542

Diluted earnings per share attributable to Stewart
0.79

 
0.49

 
0.96

 
0.02

See notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of 
 June 30, 2017 (Unaudited)
 
As of 
 December 31, 2016
 
($000 omitted)
Assets
 
 
 
Cash and cash equivalents
147,205

 
185,772

Short-term investments
23,092

 
22,239

Investments in debt and equity securities available-for-sale, at fair value:
 
 
 
Statutory reserve funds
479,155

 
485,409

Other
175,607

 
146,094

 
654,762

 
631,503

Receivables:
 
 
 
Premiums from agencies
34,603

 
31,246

Trade and other
50,023

 
41,897

Income taxes
1,223

 
4,878

Notes
3,702

 
3,402

Allowance for uncollectible amounts
(9,108
)
 
(9,647
)
 
80,443

 
71,776

Property and equipment, at cost:
 
 
 
Land
3,991

 
3,991

Buildings
22,771

 
22,529

Furniture and equipment
226,536

 
217,105

Accumulated depreciation
(183,179
)
 
(173,119
)
 
70,119

 
70,506

Title plants, at cost
75,313

 
75,313

Investments in investees, on an equity method basis
9,536

 
9,796

Goodwill
234,667

 
217,094

Intangible assets, net of amortization
9,317

 
10,890

Deferred tax assets
3,865

 
3,860

Other assets
49,725

 
42,975

 
1,358,044

 
1,341,724

Liabilities
 
 
 
Notes payable
116,331

 
106,808

Accounts payable and accrued liabilities
97,095

 
115,640

Estimated title losses
465,294

 
462,572

Deferred tax liabilities
12,947

 
7,856

 
691,667

 
692,876

Contingent liabilities and commitments

 

Stockholders’ equity
 
 
 
Common Stock and additional paid-in capital
183,350

 
180,959

Retained earnings
479,860

 
471,788

Accumulated other comprehensive income (loss):
 
 
 
Unrealized investment gains on investments - net
10,207

 
7,846

Foreign currency translation adjustments
(12,198
)
 
(16,727
)
Treasury stock – 352,161 common shares, at cost
(2,666
)
 
(2,666
)
Stockholders’ equity attributable to Stewart
658,553

 
641,200

Noncontrolling interests
7,824

 
7,648

Total stockholders’ equity (23,737,447 and 23,431,279 shares outstanding)
666,377

 
648,848

 
1,358,044

 
1,341,724

See notes to condensed consolidated financial statements.

4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
($000 omitted)
Reconciliation of net income to cash provided by operating activities:
 
 
 
Net income
28,165

 
18,462

Add (deduct):
 
 
 
Depreciation and amortization
12,819

 
15,646

Provision for bad debt
634

 
1,098

Investment and other loss (gains) – net
389

 
(1,454
)
Amortization of net premium on investments available-for-sale
3,421

 
3,559

Payments for title losses in excess of provisions
(1,260
)
 
(3,690
)
Adjustment for insurance recoveries of title losses
793

 
538

(Increase) decrease in receivables – net
(8,999
)
 
2,151

Increase in other assets – net
(6,526
)
 
(2,936
)
Decrease in payables and accrued liabilities – net
(18,868
)
 
(20,768
)
Change in net deferred income taxes
2,329

 
2,017

Net income from equity investees
(977
)
 
(1,069
)
Dividends received from equity investees
1,237

 
1,172

Stock-based compensation expense
3,372

 
3,723

Other – net
2

 
10

Cash provided by operating activities
16,531

 
18,459

 
 
 
 
Investing activities:
 
 
 
Proceeds from investments available-for-sale sold
49,655

 
32,827

Proceeds from investments available-for-sale matured
22,834

 
7,782

Purchases of investments available-for-sale
(88,381
)
 
(75,771
)
Net purchases of short-term investments
(853
)
 
(2,325
)
Purchases of property and equipment, title plants and real estate – net
(9,328
)
 
(11,494
)
Cash paid for acquisition of businesses
(18,080
)
 

Other – net
410

 
592

Cash used by investing activities
(43,743
)
 
(48,389
)
 
 
 
 
Financing activities:
 
 
 
Payments on notes payable
(8,042
)
 
(15,101
)
Proceeds from notes payable
16,022

 
34,578

Distributions to noncontrolling interests
(5,300
)
 
(5,660
)
Cash dividends paid
(14,065
)
 
(13,760
)
Cash paid on Class B Common Shares conversion

 
(12,000
)
Payment of contingent consideration related to an acquisition
(1,298
)

(2,002
)
Purchase of remaining interest in consolidated subsidiary
(1,013
)

(301
)
Cash used by financing activities
(13,696
)
 
(14,246
)
 
 
 
 
Effects of changes in foreign currency exchange rates
2,341

 
2,375

Decrease in cash and cash equivalents
(38,567
)
 
(41,801
)
 
 
 
 
Cash and cash equivalents at beginning of period
185,772

 
179,067

Cash and cash equivalents at end of period
147,205

 
137,266

 
 
 
 
See notes to condensed consolidated financial statements.

5


CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)

 
Common Stock ($1 par value)
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive (loss) income
 
Treasury stock
 
Noncontrolling interests
 
Total
 
($000 omitted)
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2016
23,783

 
157,176

 
471,788

 
(8,881
)
 
(2,666
)
 
7,648

 
648,848

Net income attributable to Stewart

 

 
22,657

 

 

 

 
22,657

Cash dividends on Common Stock ($0.60 per share)

 

 
(14,585
)
 

 

 

 
(14,585
)
Stock-based compensation and other
307

 
3,065

 

 

 

 

 
3,372

Purchase of remaining interest in consolidated subsidiary

 
(981
)
 

 

 

 
(32
)
 
(1,013
)
Net change in unrealized gains and losses on investments

 

 

 
2,822

 

 

 
2,822

Net realized gain reclassification

 

 

 
(461
)
 

 

 
(461
)
Foreign currency translation adjustments

 

 

 
4,529

 

 

 
4,529

Net income attributable to noncontrolling interests

 

 

 

 

 
5,508

 
5,508

Subsidiary dividends paid to noncontrolling interests

 

 

 

 

 
(5,300
)
 
(5,300
)
Balances at June 30, 2017
24,090

 
159,260

 
479,860

 
(1,991
)
 
(2,666
)
 
7,824

 
666,377

See notes to condensed consolidated financial statements.


6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1
Interim financial statements. The financial information contained in this report for the three and six months ended June 30, 2017 and 2016, and as of June 30, 2017, 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, 2016.
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 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 20% through 50% of the equity, are accounted for by the equity method.
C. Reclassifications. Certain amounts in the 2016 interim financial statements have been reclassified for comparative purposes. Net income attributable to Stewart, as previously reported, was not affected.
D. 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, which approximated $479.2 million and $485.4 million at June 30, 2017 and December 31, 2016, respectively, 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. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $23.3 million and $13.9 million at June 30, 2017 and December 31, 2016, 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.
E. Recently adopted accounting pronouncements. In May 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new standard, modification is required only if the fair value, the vesting conditions, or the classification of an award as equity or liability changes as a result of the change in terms or conditions. This ASU is effective for annual and interim periods beginning after December 15, 2017, with prospective application, and early adoption is allowed. The Company early adopted ASU 2017-09 effective June 1, 2017.


7


NOTE 2
Investments in debt and equity securities available-for-sale. The amortized costs and fair values follow:
 
June 30, 2017
 
December 31, 2016
 
Amortized
costs
 
Fair
values
 
Amortized
costs
 
Fair
values
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
72,214

 
73,601

 
72,284

 
72,432

Corporate
324,116

 
332,226

 
338,365

 
343,047

Foreign
199,369

 
200,669

 
165,735

 
167,027

U.S. Treasury Bonds
13,016

 
12,894

 
12,795

 
12,613

Equity securities
30,345

 
35,372

 
30,255

 
36,384

 
639,060

 
654,762

 
619,434

 
631,503

Foreign debt securities consist of Canadian government and corporate bonds, United Kingdom treasury bonds, and Mexican government bonds. Equity securities consist of common stocks and master limited partnership interests.
Gross unrealized gains and losses were:
 
June 30, 2017
 
December 31, 2016
 
Gains
 
Losses
 
Gains
 
Losses
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
1,635

 
248

 
723

 
575

Corporate
8,524

 
414

 
6,871

 
2,189

Foreign
2,972

 
1,672

 
2,912

 
1,620

U.S. Treasury Bonds
7

 
129

 
4

 
186

Equity securities
6,079

 
1,052

 
6,800

 
671

 
19,217

 
3,515

 
17,310

 
5,241

Debt securities as of June 30, 2017 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
27,282

 
27,481

After one year through five years
278,518

 
284,020

After five years through ten years
230,715

 
232,923

After ten years
72,200

 
74,966

 
608,715

 
619,390



8


Gross unrealized losses on investments and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2017, were:
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Losses
 
Fair values
 
Losses
 
Fair values
 
Losses
 
Fair values
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
248

 
10,021

 

 

 
248

 
10,021

Corporate
414

 
56,365

 

 

 
414

 
56,365

Foreign
1,657

 
95,724

 
15

 
247

 
1,672

 
95,971

U.S. Treasury Bonds
129

 
10,824

 

 

 
129

 
10,824

Equity securities
1,038

 
11,488

 
14

 
48

 
1,052

 
11,536

 
3,486

 
184,422

 
29

 
295

 
3,515

 
184,717

The number of investment securities in an unrealized loss position as of June 30, 2017 was 163, 4 securities of which were in unrealized loss positions for more than 12 months. 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 other-than-temporarily impaired.
Gross unrealized losses on investments 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, 2016, were:
 
 
Less than 12 months
 
More than 12 months
 
Total
 
Losses
 
Fair values
 
Losses
 
Fair values
 
Losses
 
Fair values
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
575

 
32,038

 

 

 
575

 
32,038

Corporate
2,189

 
119,965

 

 

 
2,189

 
119,965

Foreign
1,427

 
70,012

 
193

 
3,160

 
1,620

 
73,172

U.S. Treasury Bonds
186

 
11,847

 

 

 
186

 
11,847

Equity securities
424

 
5,950

 
247

 
2,250

 
671

 
8,200

 
4,801

 
239,812

 
440

 
5,410

 
5,241

 
245,222

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.

9


NOTE 3
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.
As of June 30, 2017, financial instruments measured at fair value on a recurring basis are summarized below:
 
Level 1
 
Level 2
 
Fair value
measurements
 
($000 omitted)
Investments available-for-sale:
 
 
 
 
 
Debt securities:
 
 
 
 
 
Municipal

 
73,601

 
73,601

Corporate

 
332,226

 
332,226

Foreign

 
200,669

 
200,669

U.S. Treasury Bonds

 
12,894

 
12,894

Equity securities
35,372

 

 
35,372

 
35,372

 
619,390

 
654,762

As of December 31, 2016, financial instruments measured at fair value on a recurring basis are summarized below:
 
Level 1
 
Level 2
 
Fair value
measurements
 
($000 omitted)
Investments available-for-sale:
 
 
 
 
 
Debt securities:
 
 
 
 
 
Municipal

 
72,432

 
72,432

Corporate

 
343,047

 
343,047

Foreign

 
167,027

 
167,027

U.S. Treasury Bonds

 
12,613

 
12,613

Equity securities
36,384

 

 
36,384

 
36,384

 
595,119

 
631,503


10


As of June 30, 2017, 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. All municipal, foreign, and U.S. Treasury bonds are valued using a third-party pricing service, and the corporate bonds are valued using the market approach, which includes three to ten inputs from relevant market sources, including Financial Industry Regulatory Authority’s (FINRA) Trade Reporting and Compliance Engine (TRACE) and independent broker/dealer quotes, bids and offerings, as well as other relevant market data, such as securities with similar characteristics (i.e. sector, rating, maturity, etc.). Broker/dealer quotes, bids and offerings mentioned above are gathered (typically three to ten) and a consensus risk premium spread (credit spread) over risk-free Treasury yields is developed from the inputs obtained, which is then used to calculate the resulting fair value.
There were no transfers of investments between levels during the six months ended June 30, 2017 and 2016.

NOTE 4
Investment income and other gains and losses. Gross realized investment and other gains and losses follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Realized gains
279

 
1,139

 
845

 
5,076

Realized losses
(955
)
 
(173
)
 
(1,234
)
 
(3,622
)
 
(676
)
 
966

 
(389
)
 
1,454

Expenses assignable to investment income were insignificant. There were no significant investments as of June 30, 2017 that did not produce income during the year.
 
For the six months ended June 30, 2017, investment and other losses – net included $0.8 million of net realized loss due to an increase in the fair value of a contingent consideration liability related to a prior acquisition. For the six months ended June 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to changes in the fair values of contingent consideration liabilities associated with prior year acquisitions and $0.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.2 million of office closure costs.

Proceeds from sales of investments available-for-sale are as follows: 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Proceeds from sales of investments available-for-sale
33,812

 
21,500

 
49,655

 
32,827




11


NOTE 5
Goodwill. The summary of changes in goodwill is as follows.
 
Title
 
Ancillary Services and Corporate
 
Consolidated Total
 
 
 
($000 omitted)

 
 
Balances at December 31, 2016
211,365

 
5,729

 
217,094

Acquisitions
17,573

 

 
17,573

Balances at June 30, 2017
228,938

 
5,729

 
234,667


During the second quarter 2017, the Company acquired certain businesses primarily funded by borrowings on the Company's unsecured line of credit. Based on the Company's preliminary purchase price allocations as of June 30, 2017, the Company increased its goodwill related to the title segment by a total of $17.6 million, which is subject to change pending completion of the Company's purchase price allocations by the end of 2017.


NOTE 6
Estimated title losses. A summary of estimated title losses for the six months ended June 30 is as follows:
 
2017
 
2016
 
($000 omitted)
Balances at January 1
462,572

 
462,622

Provisions:
 
 
 
Current year
43,850

 
47,146

Previous policy years
1,313

 
(6,899
)
Total provisions
45,163

 
40,247

Payments, net of recoveries:
 
 
 
Current year
(5,966
)
 
(9,047
)
Previous policy years
(39,664
)
 
(34,352
)
Total payments, net of recoveries
(45,630
)
 
(43,399
)
Effects of changes in foreign currency exchange rates
3,189

 
3,768

Balances at June 30
465,294

 
463,238

Loss ratios as a percentage of title operating revenues:
 
 
 
Current year provisions
4.9
%
 
5.4
%
Total provisions
5.1
%
 
4.6
%
There were no significant adjustments to the loss provisioning rates or large claim reserves during the six months ended June 30, 2017. In 2016, the Company decreased its loss provisioning rates and reserves related to certain existing large claims due to continued favorable policy loss experience. As a result, a $5.4 million net policy loss reserve reduction was recorded during the six months ended June 30, 2016.


12


NOTE 7
Share-based payments. During the first six months of 2017 and 2016, the Company granted executives and senior management shares of restricted common stock, consisting of time-based shares, which vest on each of the first three anniversaries of the grant date, and performance-based shares, which vest upon achievement of certain financial objectives over the period of three years. The aggregate grant-date fair values of these awards in 2017 and 2016 were $4.7 million (107,000 shares with an average grant price per share of $44.21) and $3.9 million (105,000 shares with an average grant price per share of $37.33), respectively. Awards were made pursuant to the Company’s employee incentive compensation plans and the compensation expense associated with restricted stock awards is recognized over the corresponding vesting period.
Additionally, during the second quarters 2017 and 2016, the Company granted its board of directors, as a component of annual director retainer compensation, 13,000 and 16,300 shares, respectively, of common stock, which vested immediately. The aggregate fair values of these director awards at the grant dates in 2017 and 2016 were both $0.6 million.
 
NOTE 8
Earnings per share. The Company’s 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 for the effects of any dilutive shares. The treasury stock method is used to calculate the dilutive number of shares related to the Company’s long term incentive and stock option plans. 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 
 June 30,
Six Months Ended 
 June 30,
 
2017
2016
2017
2016
 
($000 omitted, except per share)
Numerator:
 
 
 
 
Net income attributable to Stewart
18,568

23,599

22,657

12,404

Less: Cash paid on Class B Common Shares conversion (a)

(12,000
)

(12,000
)
Net income available to common shareholders
18,568

11,599

22,657

404

 
 
 
 
 
Denominator (000):
 
 
 
 
Basic average shares outstanding
23,444

23,365

23,438

23,357

Average number of dilutive shares relating to options

1


1

Average number of dilutive shares relating to grants of restricted shares
176

193

175

184

Diluted average shares outstanding
23,620

23,559

23,613

23,542

 
 
 
 
 
Basic earnings per share attributable to Stewart
0.79

0.50

0.97

0.02

 
 
 
 
 
Diluted earnings per share attributable to Stewart
0.79

0.49

0.96

0.02


(a) - During 2016, the Company paid $12.0 million as part of the consideration related to the exchange agreement with the holders of the Class B Common Stock. In accordance with the ASC 260, Earnings Per Share, the $12.0 million payment was treated in a manner similar to the treatment of dividends on preferred stock for the purpose of calculating EPS. Accordingly, the $12.0 million payment was deducted from the 2016 net income to arrive at the net income for calculating basic and diluted EPS.



13


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 June 30, 2017, 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 minimum lease payments. As of June 30, 2017, the Company also had unused letters of credit aggregating $5.6 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. In addition, along with the other major title insurance companies, the Company is party to class action lawsuits concerning the title insurance industry. 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.

The Company is subject to administrative actions and litigation relating to the basis on which premium taxes are paid in certain states. Additionally, the Company receives from time to time various other 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.

The Company is subject to various other administrative actions and inquiries into its business conduct in certain of the states in which it operates. While the Company cannot predict the outcome of the various regulatory and administrative matters, it believes that it has adequately reserved for these matters and does not anticipate that the outcome of any of these matters will materially affect its consolidated financial condition or results of operations.

NOTE 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 centralized title services, home and personal insurance services and Internal Revenue Code Section 1031 tax-deferred exchanges. The ancillary services and corporate segment historically provided appraisal and valuation services, loan file review, quality control services, government services, document management, recording and call center-related services offered to large mortgage lenders and servicers, mortgage brokers and mortgage investors. Beginning in 2017, the principal offerings of ancillary services are appraisal and valuation services. Also included in the ancillary services and corporate segment are expenses of the parent holding company and certain other enterprise-wide overhead costs, net of centralized administrative services costs allocated to respective operating businesses.

14


Selected statement of income information related to these segments is as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Title segment:
 
 
 
 
 
 
 
Revenues
470,449

 
467,508

 
896,246

 
881,047

Depreciation and amortization
5,321

 
5,364

 
10,547

 
10,522

Income before taxes and noncontrolling interest
39,467

 
51,296

 
51,744

 
50,676

 
 
 
 
 
 
 
 
Ancillary services and corporate segment:
 
 
 
 
 
 
 
Revenues
15,003

 
21,929

 
32,247

 
46,619

Depreciation and amortization
1,120

 
1,976

 
2,272

 
5,124

Loss before taxes and noncontrolling interest
(6,320
)
 
(9,383
)
 
(12,729
)
 
(24,476
)
 
 
 
 
 
 
 
 
Consolidated Stewart:
 
 
 
 
 
 
 
Revenues
485,452

 
489,437

 
928,493

 
927,666

Depreciation and amortization
6,441

 
7,340

 
12,819

 
15,646

Income before taxes and noncontrolling interest
33,147

 
41,913

 
39,015

 
26,200


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:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
United States
451,766

 
458,438

 
871,019

 
876,026

International
33,686

 
30,999

 
57,474

 
51,640

 
485,452

 
489,437

 
928,493

 
927,666


15


NOTE 12
Other comprehensive income. Changes in the balances of each component of other comprehensive income and the related tax effects are as follows:
 
Three Months Ended 
 June 30, 2017
 
Three Months Ended 
 June 30, 2016
 
Before-Tax Amount
Tax Expense (Benefit)
Net-of-Tax Amount
 
Before-Tax Amount
Tax Expense (Benefit)
Net-of-Tax Amount
 
($000 omitted)
 
($000 omitted)
Unrealized investment gains on investments - net:
 
 
 
 
 
 
 
Change in net unrealized gains on investments
548

193

355

 
9,511

3,329

6,182

Less: reclassification adjustment for net gains included in net income
(145
)
(51
)
(94
)
 
(178
)
(63
)
(115
)
 Net unrealized gains
403

142

261

 
9,333

3,266

6,067

 
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,334

1,130

3,204

 
(1,413
)
290

(1,703
)
 
 
 
 
 
 
 
 
Other comprehensive income
4,737

1,272

3,465

 
7,920

3,556

4,364

 
 
 
 
 
 
 
 
 
Six Months Ended 
 June 30, 2017
 
Six Months Ended 
 June 30, 2016
 
Before-Tax Amount
Tax Expense (Benefit)
Net-of-Tax Amount
 
Before-Tax Amount
Tax Expense (Benefit)
Net-of-Tax Amount
 
($000 omitted)
 
($000 omitted)
Unrealized investment gains on investments - net:
 
 
 
 
 
 
 
Change in net unrealized gains on investments
4,343

1,521

2,822

 
18,417

6,446

11,971

Less: reclassification adjustment for net gains included in net income
(710
)
(249
)
(461
)
 
(276
)
(97
)
(179
)
Net unrealized gains
3,633

1,272

2,361

 
18,141

6,349

11,792

 
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,014

1,485

4,529

 
3,944

2,352

1,592

 
 
 
 
 
 
 
 
Other comprehensive income
9,647

2,757

6,890

 
22,085

8,701

13,384


16


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

MANAGEMENT’S OVERVIEW

We reported net income attributable to Stewart of $18.6 million ($0.79 per diluted share) for the second quarter 2017 compared to a net income attributable to Stewart of $23.6 million ($0.49 per diluted share) for the second quarter 2016. Pretax income before noncontrolling interests for the second quarter 2017 was $33.1 million compared to pretax income before noncontrolling interests of $41.9 million for the second quarter 2016. Of note, the second quarter 2016 results included a $5.4 million net policy loss reserve reduction. Excluding this reduction, the second quarter 2016 pretax income before noncontrolling interests and net income attributable to Stewart were $36.5 million and $20.2 million, respectively. In addition, for purposes of calculating second quarter 2016’s net income per share, net income was reduced by the $12.0 million cash consideration paid in connection with the Class B share exchange. Excluding this payment, net income per diluted share would have been $1.00 (or $0.86 per diluted share excluding the net policy loss reserve reduction) for the second quarter 2016, as compared to $0.79 per diluted share for the second quarter 2017.

As of June 2, 2017, Stewart acquired the retail branch division of Title365 Company. Title365’s retail division operates primarily in Southern California. This asset acquisition reinforces Stewart’s commitment to providing innovative title solutions and focused, smart growth in key markets throughout the United States, as more than 250 employees and 15 Title365 offices are now operating under the Stewart name.

Summary results of the title segment are as follows ($ in millions, except pretax margin):
 
For the Three Months
Ended June 30,
 
2017
 
2016
 
% Change
 
 
 
 
 
 
Total revenues
470.4

 
467.5

 
1
 %
Pretax income
39.5

 
51.3

 
(23
)%
Pretax margin
8.4
%
 
11.0
%
 



As noted above, the second quarter 2016 results included a $5.4 million net policy loss reserve reduction, which resulted from favorable policy loss experience. Excluding this credit, the segment’s second quarter 2017 pretax income would have declined 14% from pretax income of $45.9 million (9.8% margin) in the second quarter 2016.

Non-commercial domestic revenue, as shown under the Results of Operations - Title revenues section, includes revenues from purchase transactions and centralized title operations. Revenues from purchase transactions decreased 7% in the second quarter 2017 compared to the prior year quarter, as discussed below, while revenues from our centralized title operations, which primarily process refinancing and default title orders, declined 24% due primarily to decreased refinancing transactions, an industry-wide trend. Total international revenues increased 8% in the second quarter 2017 compared to the prior year quarter, mainly due to transaction volume growth from our Canada and U.K. operations, partially offset by the effect of a stronger U.S. dollar against the Canadian dollar and British pound. Revenues from independent agency operations in the second quarter 2017 increased 4% compared to the second quarter 2016. The independent agency remittance rate decreased to 17.9% in the second quarter 2017 from 18.6% in the second quarter 2016 due to the geographic mix of our agency business; second quarter 2017 revenues from independent agencies, net of retention, were $41.8 million, similar to the prior year quarter.

During our first quarter investor earnings call in April 2017, we noted that we had seen some management and staff departures in our retail operations, and those departures continued during May and June 2017. The markets most impacted were in Texas, Arizona, and the Pacific Northwest, although several other markets experienced similar staff attrition to a lesser extent. As many of the associates that resigned were responsible for customer relationships, we experienced a concurrent loss of revenue which we believe resulted in the decline in residential purchase revenues noted above.


17


We have focused on margin improvement and financial discipline for many quarters now. The pace and scope of those initiatives intensified in early 2017 and we believe the aggressive goals established, coupled with assertive timelines, culminated in the associate departures, most of whom chose to work for smaller underwriters and independent agencies. Our goal is to rebuild in the markets affected, and we began immediately to recruit strong industry players to that end. We have hired several industry veterans to date, and ultimately we believe those markets will not only recapture the lost revenue but lay a strong foundation for our long term growth objectives.

In addition to rebuilding, we are refining the timing and objectives of the aforementioned margin improvement initiatives. We believe the new additions to our team along with the changes to the initiatives have brought a renewed stability to our offices, improving our opportunities going forward.

Summary results of the ancillary services and corporate segment are as follows ($ in millions):
 
For the Three Months
Ended June 30,
 
2017
 
2016
 
% Change
 
 
 
 
 
 
Total revenues
15.0

 
21.9

 
(32
)%
Pretax loss
(6.3
)
 
(9.4
)
 
33
 %

The decline in the segment’s revenues in the second quarter 2017 compared to the prior year quarter was primarily due to the divestitures of the loan file review, quality control services and government services lines of business at the end of 2016.

The segment’s pretax results improved to a $6.3 million pretax loss compared to a pretax loss of $9.4 million in the prior year quarter. This was driven by a $9.2 million, or 32%, decrease in the segment’s total employee costs and other operating expenses, more than offsetting the revenue decline during the second quarter. The segment’s results for the second quarter 2017 and 2016 included approximately $6 million and $7 million, respectively, of expenses attributable to parent company and corporate operations.

CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.
Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. During the six months ended June 30, 2017, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Operations. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our ancillary services and corporate segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with our remaining ancillary services operations, principally appraisal and valuation services.

18


Factors affecting revenues. The principal factors that contribute to changes in operating revenues for our title and ancillary services and corporate segments include:
 
mortgage interest rates;
availability of mortgage loans;
number and average value of mortgage loan originations;
ability of potential purchasers to qualify for loans;
inventory of existing homes available for sale;
ratio of purchase transactions compared with refinance transactions;
ratio of closed orders to open orders;
home prices;
consumer confidence, including employment trends;
demand by buyers;
number of households;
premium rates;
foreign currency exchange rates;
market share;
ability to attract and retain highly productive sales associates;
independent agency remittance rates;
opening of new offices and acquisitions;
number and value of commercial transactions, which typically yield higher premiums;
government or regulatory initiatives, including tax incentives and the implementation of the new integrated disclosure requirements;
acquisitions or divestitures of businesses;
volume of distressed property transactions; and
seasonality and/or weather.

Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. As an overall guideline, a 5% change in median home prices results in an approximate 3.6% change in title premiums. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance revenues as home buying is generally depressed during winter months. Our second and third quarters are the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of year.

RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and six months ended June 30, 2017 with the three and six months ended June 30, 2016 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 industry data from sources including Fannie Mae, the National Association of Realtors®, the Mortgage Bankers Association and Freddie Mac. We also use information from our direct operations.
Operating environment. Actual existing home sales in the second quarter 2017 increased approximately 2% from the second quarter 2016. June 2017 existing home sales totaled 601,000, which was up 3% from a year ago, and up 8% from May 2017. Further, June 2017 median and average home prices rose 7% and 5%, respectively, as compared to June 2016 prices. June 2017 housing starts improved 8% sequentially from May 2017 and also increased 2% from a year ago. Newly issued building permits in June 2017 were up 7% sequentially from May 2017 and increased 5% from a year ago. According to Fannie Mae, one-to-four family residential lending declined to $455 billion in the second quarter 2017 from $505 billion in the second quarter 2016, driven primarily by a decrease of approximately $70 billion, or 33%, decrease in refinance originations, partially offset by an increase in purchase lending of approximately $19 billion, or 7%. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction.

19


Title revenues. Direct title revenue information is presented below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
($ in millions)
 
 
 
($ in millions)
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Domestic
46.5

 
39.9

 
17
 %
 
88.2

 
78.6

 
12
 %
International
4.9

 
5.2

 
(6
)%
 
9.3

 
9.3

 
 %
 
51.4

 
45.1

 
14
 %
 
97.5

 
87.9

 
11
 %
Non-commercial
 
 
 
 
 
 
 
 
 
 
 
Domestic
153.1

 
167.4

 
(9
)%
 
276.1

 
295.9

 
(7
)%
International
27.2

 
24.5

 
11
 %
 
45.5

 
39.2

 
16
 %
 
180.3

 
191.9

 
(6
)%
 
321.6

 
335.1

 
(4
)%
Total direct title revenues
231.7

 
237.0

 
(2
)%
 
419.1

 
423.0

 
(1
)%
Revenues from direct title operations, which include residential, commercial, international and centralized title services transactions, decreased $5.3 million, or 2%, and $3.9 million, or 1%, in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, due to decline in revenues from our centralized title operations and residential transactions, partially offset by revenue increases from our international and commercial operations. Revenues from our centralized title operations, which primarily process refinancing and default title orders, decreased $3.8 million, or 24%, and $6.6 million, or 21%, in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016, respectively, primarily due to decreased refinancing orders and lower demand for default services, which are in line with industry trends. Our residential revenues, which make up the majority of direct revenue, decreased $10.5 million, or 7%, and $13.2 million, or 5%, in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily due to management and staff departures within certain offices described above.
Our direct operations include local offices and international operations, and we generate commercial revenues both domestically and internationally. U.S. commercial revenues increased $6.6 million, or 17%, and $9.6 million, or 12%, in the second quarter and first six months of 2017, respectively, over the same periods in 2016, mainly due to certain large transactions which resulted in an improvement in our commercial revenue per file. Total international revenues increased $2.4 million, or 8%, and $6.3 million, or 13%, in the second quarter and first six months of 2017 compared to the second quarter and first six months of 2016 primarily as a result of increased transaction volume from our Canada and United Kingdom operations. Direct revenues constituted 50% and 51% of our total title revenues in the second quarters 2017 and 2016, respectively, and 47% and 48% during the first six months of 2017 and 2016, respectively.

Orders information for the second quarter and first six months ended June 30 is as follows:
 
Three Months Ended
 
Six Months Ended
 
2017
 
2016
 
2017
 
2016
Opened Orders:
 
 
 
 
 
 
 
Commercial
10,788

 
12,137

 
22,238

 
23,468

Purchase
67,823

 
71,429

 
129,065

 
130,510

Refinance
24,183

 
37,501

 
47,639

 
70,968

Other
4,423

 
3,162

 
9,019

 
6,609

Total
107,217

 
124,229

 
207,961

 
231,555

 
 
 
 
 
 
 
 
Closed Orders:
 
 
 
 
 
 
 
Commercial
8,167

 
8,577

 
15,493

 
16,195

Purchase
52,362

 
54,183

 
92,564

 
92,892

Refinance
16,298

 
25,412

 
35,506

 
49,943

Other
4,135

 
4,665

 
7,333

 
8,450

Total
80,962

 
92,837

 
150,896

 
167,480



20


Total orders closed decreased by approximately 11,900, or 13%, and 16,600, or 10%, in the second quarter and first six months of 2017, respectively, over the same periods in 2016 primarily due to the declines in refinancing orders mentioned earlier. Compared to the second quarter and first six months of 2016, refinancing orders closed decreased in the second quarter and first six months of 2017 by approximately 9,100, or 36%, and 14,400, or 29%, respectively; while commercial orders decreased by approximately 400, or 5%, and 700, or 4%, respectively. Additionally, purchase orders declined by approximately 1,800, or 3%, during the second quarter 2017 compared to the prior year quarter primarily due to the management and staff departures mentioned earlier; for the first six months of 2017, total purchase orders were comparable to the same period in 2016.

In the second quarter and first six months of 2017 compared to the same periods in 2016, revenues from independent agency operations increased $9.0 million, or 4%, and $17.7 million, or 4%, respectively; net of agency retention, independent agency revenues during the second quarter 2017 were comparable to the prior year quarter, while revenues increased $1.3 million, or 2%, in the first six months of 2017 compared to the same period in 2016. The increases in gross agency revenues in the second quarter and first six months of 2017 over the same periods in 2016 were primarily driven by revenue increases from agents in the states of Minnesota, Pennsylvania, Michigan, California and Colorado, partially offset by revenue decreases from agents in the states of Texas (for the second quarter 2017) and New York (for the first six months of 2017). We continue to focus on increasing profit margins in every state, increasing premium revenue in states where remittance rates are above 20%, and maintaining the quality of our agency network, which we believe to be the industry’s best, in order to mitigate claims risk and drive consistent future performance. While market share is important in our agency operations channel, it is not as important as margins, risk mitigation and profitability.
Ancillary services revenues. Ancillary services operating revenues decreased $6.1 million, or 29%, and $10.8 million, or 25%, in the second quarter and first six months of 2017 compared to the same periods in 2016, primarily due to our divestitures of the loan file review, quality control services and government services lines of business at the end of 2016. Our exit of the delinquent loan servicing operations, completed in the first quarter 2016, also contributed to the revenue decline during the first six months of 2017 compared to the first six months of 2016.
Investment income. Investment income during the second quarter and first six months of 2017 was comparable to the investment income during the same periods in 2016.

Investment and other (losses) gains - net. Investment and other losses - net for the second quarter 2017 included $0.8 million of net realized loss due to an increase in the fair value of a contingent consideration liability related to a prior year acquisition; while investment and other gains - net for the second quarter 2016 included $0.6 million of net realized gains from the sale of investments available-for-sale.

For the six months ended June 30, 2017, investment and other losses – net included $0.8 million of net realized loss due to an increase in the fair value of a contingent consideration liability related to a prior year acquisition. For the six months ended June 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to changes in the fair values of contingent consideration liabilities associated with prior year acquisitions and $0.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.2 million of office closure costs primarily associated with the aforementioned exit of the delinquent loan servicing operations.


21


Expenses. An analysis of expenses is shown below:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017

 
2016

 
% Change
 
2017
 
2016
 
% Change
 
($ in millions)
 
 
 
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts retained by agencies
192.6

 
183.5

 
5
 %
 
383.7

 
367.3

 
5
 %
As a % of agency revenues
82.1
%
 
81.4
%
 
 
 
82.0
%
 
81.6
%
 
 
Employee costs
139.3

 
152.4

 
(9
)%
 
279.1

 
302.6

 
(8
)%
As a % of operating revenues
29.0
%
 
31.5
%
 
 
 
30.4
%
 
33.0
%
 
 
Other operating expenses
88.8

 
86.5

 
3
 %
 
167.1

 
174.2

 
(4
)%
As a % of operating revenues
18.5
%
 
17.9
%
 
 
 
18.2
%
 
19.0
%
 
 
Title losses and related claims
24.5

 
17.2

 
43
 %
 
45.2

 
40.2

 
12
 %
As a % of title revenues
5.2
%
 
3.7
%
 


 
5.1
%
 
4.6
%
 



Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Average independent agency remittance rates (i.e., inverse of retention rates, representing the amount paid to us relative to the amount collected by agents at the closing of the transaction) in the second quarter and first six months of 2017 were 17.9% and 18.0%, respectively, as compared to 18.6% and 18.4% in the same periods in 2016. The decrease in the agency remittance rates was primarily due to the revenue increases from lower remitting states (the states mentioned in our gross agency revenue discussion above average 15% remittance rates). We continue to evaluate independent agency relationships with a focus on states that provide higher remittance rates. The average retention percentage may vary from quarter-to-quarter due to the geographic mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. Consequently, we expect our average annual retention percentage to remain in the 81% - 82% range over the near to medium term.

Employee costs. Total employee costs decreased $13.1 million, or 9%, and $23.5 million, or 8%, in the second quarter and first six months of 2017 compared to the same periods in 2016, as a result of ongoing cost management efforts, a reduction in employee counts tied to volume declines, primarily in our ancillary services and centralized title operations, and the management and staff departures in direct operations, as discussed earlier. Average employee counts for both the second quarter and first six months of 2017 decreased approximately 9% from the second quarter and first six months of 2016; as a percentage of total operating revenues, employee costs for the second quarter and first six months of 2017 were 29.0% and 30.4% compared to 31.5% and 33.0%, respectively, for the same periods in 2016.

Employee costs in the title segment decreased $6.6 million, or 5%, and $9.5 million, or 4%, in the second quarter and first six months of 2017 compared to the same periods last year largely due to decreased salaries and incentives as a result of reduced employee counts, primarily in direct operations. In the ancillary services and corporate segment, employee costs decreased $6.5 million, or 42%, and $14.0 million, or 40%, in the second quarter and first six months of 2017 compared to the same periods last year, primarily as a result of the reduction in average employee count resulting from the disposed lines of ancillary services businesses mentioned above.
Other operating expenses. Other operating expenses include costs that are fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues and costs that fluctuate independently of revenues. Costs that are fixed in nature include attorney and professional fees, third-party-outsourcing provider fees, equipment rental, insurance, rent and other occupancy expenses, repairs and maintenance, technology costs, telephone and title plant expenses. Costs that follow, to varying degrees, changes in transaction volumes and revenues include fee attorney splits, bad debt expenses, ancillary services cost of sales expenses, copy supplies, delivery fees, outside search fees, postage, premium taxes and title plant maintenance expenses. Costs that fluctuate independently of revenues include general supplies, litigation defense, business promotion and marketing and travel.


22


Consolidated other operating expenses increased $2.3 million, or 3%, in the second quarter 2017 compared to the second quarter 2016, primarily due to increased outside search fees resulting from increased revenues from our commercial and international operations which are principal users of outside search services in generating title revenues. However, consolidated other operating expenses decreased $7.1 million, or 4%, in the first six months of 2017 compared to the same period last year primarily due to lower professional fees, insurance and litigation-related expenses. As a percentage of total operating revenues, other operating expenses were 18.5% and 18.2% for the second quarter and first six months of 2017, respectively, as compared to 17.9% and 19.0%, respectively, for the same periods in 2016. During the first quarter 2016, we incurred other operating expenses of $3.6 million for a litigation-related accrual and $2.2 million of expenses associated primarily with a life insurance settlement with a former Class B shareholder. Excluding these litigation-related accrual and charges, other operating expenses as a percentage of operating revenues in the first six months of 2016 were 18.4%.

Costs that follow, to varying degrees, changes in transaction volumes and revenues increased $2.1 million, or 5%, and $2.2 million, or 3%, in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016, primarily as a result of increased outside search fees, as discussed above. Excluding the litigation-related accrual mentioned above and compared to the similar periods in the prior year, costs that fluctuate independently of revenues decreased $1.4 million, or 13%, and $2.0 million, or 10%, in the second quarter and first six months of 2017, respectively, due to lower general supplies and litigation-related expenses. Costs that are fixed in nature increased $1.3 million, or 4%, in the second quarter 2017 compared to the prior year quarter due to higher technology costs; excluding the charges mentioned above, costs that are fixed in nature decreased $1.8 million, or 3%, in the first six months of 2017 compared to the same period in 2016, mainly due to lower professional fees and insurance expenses, partially offset by higher technology costs.
Title losses. Provisions for title losses, as a percentage of title revenues and including changes in estimates for certain large claims and escrow losses, were 5.2% and 3.7% for the second quarters 2017 and 2016, respectively, and 5.1% and 4.6% for the first six months of 2017 and 2016, respectively. Title loss expense in the second quarter and first six months of 2017 increased $7.3 million, or 43%, and $4.9 million, or 12%, to $24.5 million and $45.2 million compared to the second quarter and first six months of 2016, respectively, primarily as a result of a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 due to favorable policy loss experience. Excluding this net reserve reduction, title losses as a percentage of title revenues were 4.9% and 5.2% in the second quarter and first six months of 2016, respectively. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.

Cash claim payments in the second quarter and first six months of 2017 compared to the same periods in the prior year increased 8% and 5%, respectively, primarily due to an increase in payments for existing non-large claims. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.

The composition of title policy loss expense is as follows:
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
($ in millions)
 
($ in millions)
Provisions – known claims:
 
 
 
 
 
 
 
Current year
2.1

 
4.9

 
4.2

 
7.8

Prior policy years
15.9

 
14.9

 
34.7

 
31.2

 
18.0

 
19.8

 
38.9

 
39.0

Provisions – IBNR
 
 
 
 
 
 
 
Current year
21.3

 
19.3

 
39.7

 
39.3

Prior policy years
1.1

 
(7.0
)
 
1.3

 
(6.9
)
 
22.4

 
12.3

 
41.0

 
32.4

Transferred to known claims
(15.9
)
 
(14.9
)
 
(34.7
)
 
(31.2
)
Total provisions
24.5

 
17.2

 
45.2

 
40.2



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Provisions for known claims arise primarily from prior policy years as claims are not typically reported until several years after policies are issued. Provisions - Incurred But Not Reported (IBNR) are estimates of claims expected to be incurred over the next 20 years; therefore, it is not unusual or unexpected to experience changes to those estimated provisions in both current and prior policy years as additional loss experience on policy years is obtained. This loss experience may result in changes to our estimate of total ultimate losses expected (i.e., the IBNR policy loss reserve). Current year provisions - IBNR are recorded on policies issued in the current year as a percentage of premiums earned (provisioning rate). As claims become known, provisions are reclassified from IBNR to known claims. Adjustments relating to large losses (those individually in excess of $1.0 million) may impact provisions either for known claims or for IBNR.

Current year known claims provisions decreased $2.8 million, or 57%, and $3.6 million, or 46%, in the second quarter and first six months of 2017, respectively, compared to the same periods in 2016 primarily as a result of lower claim amounts reported. Compared to the same periods in 2016, total provisions - IBNR increased $10.1 million, or 82%, and $8.6 million, or 27%, in the second quarter and first six months of 2017 primarily due to a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 as a result of favorable loss experience. As a percentage of title operating revenues, provisions - IBNR for the current policy year increased to 4.6% in the second quarter 2017 from 4.2% in the second quarter 2016 and were 4.5% for both the first six months of 2017 and 2016.

In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. These escrow losses typically relate to errors or other miscalculations of amounts to be paid at closing, including timing or amount of a mortgage payoff, payment of property or other taxes and payment of homeowners’ association fees. Escrow losses also arise in cases of mortgage fraud, and in those cases the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. Escrow losses are recognized as expense when discovered or when contingencies associated with them (such as litigation) are resolved and are typically paid less than 12 months after the loss is recognized. During the six months ended June 30, 2017 and 2016, we recorded approximately $2.1 million and $1.9 million, respectively, for policy loss reserves relating to escrow losses arising from mortgage fraud.

Total title policy loss reserve balances:
 
June 30, 2017
 
December 31,
2016
 
($ in millions)
Known claims
69.8

 
76.5

IBNR
395.5

 
386.1

Total estimated title losses
465.3

 
462.6


The amount of the reserve represents the aggregate, non-discounted future payments (net of recoveries) that we expect to incur on policy and escrow losses and in costs to settle claims. Title claims are generally incurred three to five years after policy issuance and the timing of payments on these claims can significantly impact the balance of known claims. In many cases, claims may be open for several years before the resolution and payment of the claims occur; as a result, the estimate of the ultimate amount to be paid may be modified over that time period.

Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates.

Depreciation and amortization. Depreciation and amortization expenses decreased to $6.4 million and $12.8 million in the second quarter and first six months of 2017, respectively, compared to $7.3 million and $15.6 million in the same periods in 2016, primarily due to the lower amortization expense in the 2017 as a result of the fourth quarter 2016 disposal of certain intangible assets in connection with the divestitures of several lines of the ancillary services business, and the higher depreciation expense recorded in 2016 resulting from accelerated depreciation charges relating to our exit from the delinquent loan servicing operations, which was completed at the end of the first quarter 2016.


24


Income taxes. Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, were 37.2% and 37.9% for the second quarters 2017 and 2016, respectively, and 32.4% and 38.4% for the first six months of 2017 and 2016, respectively. The lower effective tax rate for the first six months of 2017 was primarily due to a discrete net income tax benefit of $1.7 million recorded in the first quarter 2017 relating to previously unrecognized research and development tax credits. Excluding the effect of the 2017 discrete tax items, which included the $1.7 million income tax benefit, our effective tax rate for the first six months of 2017 was 36.8%.

LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to stockholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of June 30, 2017, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $825.1 million ($322.7 million, net of statutory reserves on cash and investments). Of our total cash and investments at June 30, 2017, $583.9 million ($262.9 million, net of statutory reserves) was held in the United States and the rest internationally, principally Canada.

Cash held at the parent company totaled $3.9 million at June 30, 2017. As a holding company, the parent company is funded principally by cash from its subsidiaries in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. The expense reimbursements are paid in accordance with management agreements, approved by the Texas Department of Insurance (TDI), among us and our subsidiaries. In addition to funding operating expenses, cash held at the parent company is used for dividend payments to common stockholders and for stock repurchases, if any. To the extent such uses exceed cash available, the parent company is dependent on distributions from its regulated title insurance underwriter, Stewart Title Guaranty Company (Guaranty).

A substantial majority of our consolidated cash and investments as of June 30, 2017 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty may use its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and ancillary services operations) for their operating and debt service needs.

We maintain investments in accordance with certain statutory requirements in the states of domicile of our underwriters for the funding of statutory premium reserves. Statutory premium reserves, which approximated $479.2 million and $485.4 million at June 30, 2017 and December 31, 2016, respectively, 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. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $23.3 million and $13.9 million at June 30, 2017 and December 31, 2016, 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. As of June 30, 2017, our known claims reserve totaled $69.8 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $395.5 million. In addition to this, we had cash and investments (excluding equity method investments) of $236.9 million which are available for underwriter operations, including claims payments.


25


The ability of Guaranty to pay dividends to its parent is governed by Texas insurance law. The TDI must be notified of any dividend declared, and any dividend in excess of the statutory maximum of 20% of surplus (approximately $102.0 million as of December 31, 2016) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and the liquidity ratio, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. As of March 31, 2017, our statutory liquidity ratio for our principal underwriter was 106%. Our internal objective is to maintain a ratio of at least 100%, as we believe that ratio is crucial to our competitiveness in the market and our insurer financial strength ratings. On an ongoing basis, this ratio will largely guide our decisions as to frequency and magnitude of dividends from Guaranty to the parent company. Further, depending on business and regulatory conditions, we may in the future need to retain cash in Guaranty or even raise cash in the capital markets to contribute to it in order to maintain its ratings or statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse economic environment operating conditions or changes in interpretation of statutory accounting requirements by regulators. No dividend was paid by Guaranty to its parent during the six months ended June 30, 2017 and 2016.

As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
 
For the Six Months
Ended June 30,
 
2017
 
2016
 
(dollars in millions)
Net cash provided by operating activities
16.5

 
18.5

Net cash used by investing activities
(43.7
)
 
(48.4
)
Net cash used by financing activities
(13.7
)
 
(14.2
)
Operating activities. Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, ancillary services and other operations. Our independent agencies remit cash to us net of their contractual retention. Our principal cash expenditures for operations are employee costs, operating costs and title claims payments.

Cash provided by operations was $16.5 million in the first six months of 2017 compared to $18.5 million for the same period in 2016. The decrease in the cash flows from operations was primarily due to lower collections on our accounts receivable, partially offset by the increase in net income generated during 2017.

Although our business is labor intensive, we are focused on a cost-effective, scalable business model which includes utilization of technology, centralized back and middle office functions and business process outsourcing. Our approach allows us to adjust more easily to seasonal and cyclical fluctuations in transaction volumes. We are continuing our emphasis on cost management, specifically focusing on lowering unit costs of production, which will result in improved margins. Our plans to improve margins also include further outsourcing, additional automation of manual processes, and further consolidation of our various systems and production operations. We are currently investing in the technology necessary to accomplish these goals.

Investing activities. Cash used by investing activities was primarily driven by purchases of investments, capital expenditures and acquisition of subsidiaries, offset by proceeds from matured and sold investments. Total proceeds from available-for-sale investments sold and matured approximated $72.5 million and $40.6 million, while cash used for purchases of available-for-sale investments approximated $88.4 million and $75.8 million for the first six months of 2017 and 2016, respectively. Our purchases of short-term investments, net of sales, aggregated $0.9 million and $2.3 million for the first six months of 2017 and 2016, respectively.

During the second quarter 2017, we used $18.1 million of cash for acquisitions of new subsidiaries. Capital expenditures were $9.3 million and $11.5 million for the first six months of 2017 and 2016, respectively. We maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies and to pursue growth in key markets.


26


Financing activities and capital resources. Total debt and stockholders’ equity were $116.3 million and $666.4 million, respectively, as of June 30, 2017. During the first six months of 2017 and 2016, we borrowed $16.0 million and $34.6 million, and repaid $8.0 million and $15.1 million, respectively, of debt in accordance with the underlying terms of the debt instruments. Of the total debt activity, $14.6 million of additions during the first six months of 2016 and $6.1 million and $13.4 million of payments during the first six months of 2017 and 2016, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange business.

Our debt-to-equity ratio at June 30, 2017 was approximately 17.5%, below the 20% we have set as our unofficial internal limit on leverage. At June 30, 2017, the outstanding balance of our $125.0 million line of credit was $108.9 million, while the remaining balance of the line of credit available for use was $13.6 million, net of an unused $2.5 million letter of credit.

During the first six months of 2017 and 2016, we declared and paid total dividends of $0.60 per common share. As previously disclosed in our 2016 Form 10-K, we paid $12.0 million in cash as part of the consideration in exchange for the retirement of the outstanding Class B Common Stock shares in relation to the Class B Exchange Agreement approved by our stockholders during the second quarter 2016.

Effect of changes in foreign currency exchange rates. The effect of changes in foreign currency exchange rates on our cash and cash equivalents on the consolidated statements of cash flows was a net increase of $2.3 million and $2.4 million in the first six months of 2017 and 2016, respectively. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar appreciated during the six months ended June 30, 2017 and 2016.

***********

We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations. However, we may determine that additional debt or equity funding is warranted to provide liquidity for achievement of strategic goals or acquisitions or for unforeseen circumstances. Other than scheduled maturities of debt, operating lease payments and anticipated claims payments, we have no material contractual commitments. We expect that cash flows from operations and cash available from our underwriters, subject to regulatory restrictions, will be sufficient to fund our operations, including claims payments. However, to the extent that these funds are not sufficient, we may be required to borrow funds on terms less favorable than we currently have or seek funding from the equity market, which may not be successful or may be on terms that are dilutive to existing stockholders.

Contingent liabilities and commitments. See discussion of contingent liabilities and commitments in Note 9 to the condensed consolidated financial statements included in Item 1 of Part I of this Report.

Other comprehensive income. Unrealized gains and losses on investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders’ equity, until realized. For the six months ended June 30, 2017, net unrealized investment gains of $2.4 million, net of taxes and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporary increases in the fair values over costs of our corporate and municipal bond securities available-for-sale investments, partially offset by temporary decreases in fair values over costs of our equity securities available-for-sale investments. For the six months ended June 30, 2016, net unrealized investment gains of $11.8 million, net of taxes and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporary increases in the fair values over costs of all classes of our securities available-for-sale investments.

Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased our other comprehensive income, net of taxes, by $4.5 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively.


27


Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 17 in our Annual Report on Form 10-K for the year ended December 31, 2016.

Forward-looking statements. Certain statements in this report are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance.  These statements often contain words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the challenging economic conditions; adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses or the need to strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the impact of vetting our agency operations for quality and profitability; changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the outcome of pending litigation; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expense savings from our cost management program; our ability to successfully integrate acquired businesses; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; and our ability to respond to the actions of our competitors. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2016, and if applicable, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K. All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.


28


Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes during the quarter ended June 30, 2017 in our investment strategies, types of financial instruments held or the risks associated with such instruments that would materially alter the market risk disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer are responsible for establishing and maintaining disclosure controls and procedures. They evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2017, and have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during the quarter ended June 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29


PART II – OTHER INFORMATION
 
Item 1. Legal Proceedings
See discussion of legal proceedings in Note 10 to the condensed consolidated financial statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part II, Item 1, as well as Item 3. Legal Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 1A. Risk Factors

There have been no changes during the first six months ended June 30, 2017 to our risk factors as listed in our Annual Report on Form 10-K for the year ended December 31, 2016.


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

There were no repurchases of our Common Stock during the quarter ended June 30, 2017.

Item 5. Other Information
Our book value per share was $28.07 and $27.69 as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017, our book value per share was based on approximately $666.4 million in stockholders’ equity and 23,737,447 shares of Common Stock outstanding. As of December 31, 2016, our book value per share was based on approximately $648.8 million in stockholders’ equity and 23,431,279 shares of Common Stock outstanding.
Item 6. Exhibits
Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference.


SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
July 28, 2017
Date
 
 
Stewart Information Services Corporation
 
 
Registrant
 
 
By:
 
/s/ J. Allen Berryman
 
 
J. Allen Berryman, Chief Financial Officer, Secretary and Treasurer

30


Index to Exhibits