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EX-32.2 - EXHIBIT 32.2 - STEWART INFORMATION SERVICES CORPq3-17ex322.htm
EX-32.1 - EXHIBIT 32.1 - STEWART INFORMATION SERVICES CORPq3-17ex321.htm
EX-31.2 - EXHIBIT 31.2 - STEWART INFORMATION SERVICES CORPq3-17ex312.htm
EX-31.1 - EXHIBIT 31.1 - STEWART INFORMATION SERVICES CORPq3-17ex311.htm
EX-10.1 - EXHIBIT 10.1 EMPLOYMENT AGREEMENT_HISEY - STEWART INFORMATION SERVICES CORPq3-17ex101employmentagreem.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 September 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 November 2, 2017, there were 23,764,016 shares of the issuer's Common Stock, $1 par value per share, outstanding.




FORM 10-Q QUARTERLY REPORT
QUARTER ENDED SEPTEMBER 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 (LOSS) (UNAUDITED)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted, except per share)
Revenues
 
 
 
 
 
 
 
Title revenues:
 
 
 
 
 
 
 
Direct operations
216,830

 
241,109

 
635,921

 
664,128

Agency operations
268,545

 
282,269

 
736,301

 
732,320

Ancillary services
12,674

 
22,059

 
45,096

 
65,276

Operating revenues
498,049

 
545,437

 
1,417,318

 
1,461,724

Investment income
4,567

 
4,520

 
14,179

 
14,445

Investment and other (losses) gains – net
(1,047
)
 
3,253

 
(1,436
)
 
4,706

 
501,569

 
553,210

 
1,430,061

 
1,480,875

Expenses
 
 
 
 
 
 
 
Amounts retained by agencies
221,460

 
231,586

 
605,192

 
598,915

Employee costs
140,054

 
154,529

 
419,184

 
457,166

Other operating expenses
88,489

 
94,043

 
255,593

 
268,210

Title losses and related claims
25,428

 
26,365

 
70,591

 
66,612

Depreciation and amortization
6,578

 
7,082

 
19,397

 
22,728

Interest
963

 
797

 
2,492

 
2,237

 
482,972

 
514,402

 
1,372,449

 
1,415,868

 
 
 
 
 
 
 
 
Income before taxes and noncontrolling interests
18,597

 
38,808

 
57,612

 
65,007

Income tax expense
4,686

 
9,041

 
15,536

 
16,779

 
 
 
 
 
 
 
 
Net income
13,911

 
29,767

 
42,076

 
48,228

Less net income attributable to noncontrolling interests
2,967

 
3,392

 
8,475

 
9,450

Net income attributable to Stewart
10,944

 
26,375

 
33,601

 
38,778

 
 
 
 
 
 
 
 
Net income
13,911

 
29,767

 
42,076

 
48,228

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,141

 
(1,808
)
 
8,670

 
(216
)
Change in net unrealized gains on investments
63

 
(263
)
 
2,885

 
11,708

Reclassification of adjustment for gains included in net income
(331
)
 
(865
)
 
(792
)
 
(1,044
)
Other comprehensive income (loss), net of taxes:
3,873

 
(2,936
)
 
10,763

 
10,448

 
 
 
 
 
 
 
 
Comprehensive income
17,784

 
26,831

 
52,839

 
58,676

Less net income attributable to noncontrolling interests
2,967

 
3,392

 
8,475

 
9,450

Comprehensive income attributable to Stewart
14,817

 
23,439

 
44,364

 
49,226

 
 
 
 
 
 
 
 
Basic average shares outstanding (000)
23,448

 
23,371

 
23,442

 
23,362

Basic earnings per share attributable to Stewart
0.47

 
1.13

 
1.43

 
1.15

 
 
 
 
 
 
 
 
Diluted average shares outstanding (000)
23,564

 
23,611

 
23,571

 
23,596

Diluted earnings per share attributable to Stewart
0.46

 
1.12

 
1.43

 
1.13

See notes to condensed consolidated financial statements.

3


CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of 
 September 30, 2017 (Unaudited)
 
As of 
 December 31, 2016
 
($000 omitted)
Assets
 
 
 
Cash and cash equivalents
168,746

 
185,772

Short-term investments
23,434

 
22,239

Investments in debt and equity securities available-for-sale, at fair value:
 
 
 
Statutory reserve funds
475,402

 
485,409

Other
204,280

 
146,094

 
679,682

 
631,503

Receivables:
 
 
 
Premiums from agencies
33,754

 
31,246

Trade and other
52,055

 
41,897

Income taxes
3,085

 
4,878

Notes
3,761

 
3,402

Allowance for uncollectible amounts
(8,555
)
 
(9,647
)
 
84,100

 
71,776

Property and equipment, at cost:
 
 
 
Land
3,991

 
3,991

Buildings
22,835

 
22,529

Furniture and equipment
230,308

 
217,105

Accumulated depreciation
(188,105
)
 
(173,119
)
 
69,029

 
70,506

Title plants, at cost
74,237

 
75,313

Investments in investees, on an equity method basis
9,302

 
9,796

Goodwill
231,428

 
217,094

Intangible assets, net of amortization
10,673

 
10,890

Deferred tax assets
3,856

 
3,860

Other assets
48,458

 
42,975

 
1,402,945

 
1,341,724

Liabilities
 
 
 
Notes payable
138,557

 
106,808

Accounts payable and accrued liabilities
95,283

 
115,640

Estimated title losses
475,845

 
462,572

Deferred tax liabilities
20,889

 
7,856

 
730,574

 
692,876

Contingent liabilities and commitments

 

Stockholders’ equity
 
 
 
Common Stock and additional paid-in capital
182,055

 
180,959

Retained earnings
483,861

 
471,788

Accumulated other comprehensive income (loss):
 
 
 
Unrealized investment gains on investments - net
9,939

 
7,846

Foreign currency translation adjustments
(8,057
)
 
(16,727
)
Treasury stock – 352,161 common shares, at cost
(2,666
)
 
(2,666
)
Stockholders’ equity attributable to Stewart
665,132

 
641,200

Noncontrolling interests
7,239

 
7,648

Total stockholders’ equity (23,765,807 and 23,431,279 shares outstanding)
672,371

 
648,848

 
1,402,945

 
1,341,724

See notes to condensed consolidated financial statements.

4


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
($000 omitted)
Reconciliation of net income to cash provided by operating activities:
 
 
 
Net income
42,076

 
48,228

Add (deduct):
 
 
 
Depreciation and amortization
19,397

 
22,728

Provision for bad debt
697

 
1,189

Investment and other losses (gains) – net
1,436

 
(4,706
)
Amortization of net premium on investments available-for-sale
5,114

 
5,396

Payments for title losses less than (in excess of) provisions
5,940

 
(5,026
)
Adjustment for insurance recoveries of title losses
757

 
290

(Increase) decrease in receivables – net
(12,275
)
 
4,966

Increase in other assets – net
(5,633
)
 
(1,389
)
Decrease in payables and accrued liabilities – net
(20,482
)
 
(16,027
)
Change in net deferred income taxes
8,749

 
3,159

Net income from equity investees
(1,813
)
 
(1,933
)
Dividends received from equity investees
2,053

 
1,912

Stock-based compensation expense
2,078

 
5,093

Other – net
(46
)
 
106

Cash provided by operating activities
48,048

 
63,986

 
 
 
 
Investing activities:
 
 
 
Proceeds from investments available-for-sale sold
55,533

 
49,666

Proceeds from investments available-for-sale matured
33,867

 
25,562

Purchases of investments available-for-sale
(125,415
)
 
(122,149
)
Net purchases of short-term investments
(1,195
)
 
(361
)
Purchases of property and equipment, title plants and real estate – net
(12,411
)
 
(13,615
)
Cash paid for acquisition of businesses
(17,784
)
 
(300
)
Other – net
960

 
944

Cash used by investing activities
(66,445
)
 
(60,253
)
 
 
 
 
Financing activities:
 
 
 
Payments on notes payable
(18,848
)
 
(30,210
)
Proceeds from notes payable
48,043

 
51,956

Distributions to noncontrolling interests
(8,376
)
 
(9,430
)
Cash dividends paid
(21,100
)
 
(20,800
)
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
(1,014
)

(301
)
Cash used by financing activities
(2,593
)
 
(22,787
)
 
 
 
 
Effects of changes in foreign currency exchange rates
3,964

 
1,775

Decrease in cash and cash equivalents
(17,026
)
 
(17,279
)
 
 
 
 
Cash and cash equivalents at beginning of period
185,772

 
179,067

Cash and cash equivalents at end of period
168,746

 
161,788

 
 
 
 
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

 

 
33,601

 

 

 

 
33,601

Cash dividends on Common Stock ($0.90 per share)

 

 
(21,528
)
 

 

 

 
(21,528
)
Stock-based compensation and other
335

 
1,743

 

 

 

 

 
2,078

Purchase of remaining interest in consolidated subsidiary

 
(982
)
 

 

 

 
(32
)
 
(1,014
)
Net change in unrealized gains and losses on investments

 

 

 
2,885

 

 

 
2,885

Net realized gain reclassification

 

 

 
(792
)
 

 

 
(792
)
Foreign currency translation adjustments

 

 

 
8,670

 

 

 
8,670

Net income attributable to noncontrolling interests

 

 

 

 

 
8,475

 
8,475

Subsidiary dividends paid to noncontrolling interests

 

 

 

 

 
(8,376
)
 
(8,376
)
Net effect of other changes in ownership

 

 

 

 

 
(476
)
 
(476
)
Balances at September 30, 2017
24,118

 
157,937

 
483,861

 
1,882

 
(2,666
)
 
7,239

 
672,371

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 nine months ended September 30, 2017 and 2016, and as of September 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 $475.4 million and $485.4 million at September 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 $26.9 million and $13.9 million at September 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. Recent accounting pronouncements. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which eliminated the transaction-specific and industry-specific revenue recognition guidance under current GAAP and replaced it with a principles-based approach for determining revenue recognition. The new guidance sets forth the steps to be followed to recognize revenue: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective on annual and interim periods beginning after December 15, 2017. The Company expects to adopt ASU 2014-09 on January 1, 2018 using the cumulative effect method of adoption. Management is in the process of documenting and completing its analysis of the impact of the new revenue guidance, specifically its evaluation of certain fee arrangement contracts. Based on management's preliminary assessment, the Company has determined that ASU 2014-09, other than certain additional footnote disclosures, will not have a material impact on our accounting or reporting for revenue streams related to direct and agency title insurance premiums, escrow and other title-related fees, and investment income. These revenue streams account for approximately 94% of the Company's total revenues. The Company expects to complete its evaluation and documentation of the impact of the new revenue standard during the fourth quarter 2017.

7


In February 2016, the FASB issued ASU 2016-02, Leases, which updated the current guidance related to leases. The new guidance includes the requirement for the lessee to recognize in the balance sheet a liability equal to the present value of contractual lease payments with terms of more than twelve months and a right-of-use asset representing the right to use the underlying asset for the lease term. Disclosures will be required by lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for annual and interim periods beginning after December 15, 2018 and early adoption is allowed. The Company expects to adopt ASU 2016-02 on January 1, 2019 and recognize and measure leases in the financial statements at the beginning of the earliest period presented using a modified retrospective approach. The Company expects the adoption of ASU 2016-02 will result in material increases in the assets and liabilities reported on its consolidated balance sheets. As disclosed in Note 16 of the Company's 2016 Form 10-K, the undiscounted future minimum lease payments with terms of more than twelve months were approximately $168.2 million as of December 31, 2016. The Company expects the new ASU will likely have an insignificant impact on its consolidated statements of operations and cash flows. The Company is currently evaluating certain lease management and accounting systems and plans to begin system implementation and testing on or before the first quarter 2018.

NOTE 2
Investments in debt and equity securities available-for-sale. The amortized costs and fair values follow:
 
September 30, 2017
 
December 31, 2016
 
Amortized
costs
 
Fair
values
 
Amortized
costs
 
Fair
values
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
71,849

 
73,355

 
72,284

 
72,432

Corporate
334,143

 
342,760

 
338,365

 
343,047

Foreign
215,664

 
214,567

 
165,735

 
167,027

U.S. Treasury Bonds
12,837

 
12,721

 
12,795

 
12,613

Equity securities
29,900

 
36,279

 
30,255

 
36,384

 
664,393

 
679,682

 
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:
 
September 30, 2017
 
December 31, 2016
 
Gains
 
Losses
 
Gains
 
Losses
 
($000 omitted)
Debt securities:
 
 
 
 
 
 
 
Municipal
1,697

 
191

 
723

 
575

Corporate
8,879

 
262

 
6,871

 
2,189

Foreign
2,327

 
3,424

 
2,912

 
1,620

U.S. Treasury Bonds
12

 
128

 
4

 
186

Equity securities
6,744

 
365

 
6,800

 
671

 
19,659

 
4,370

 
17,310

 
5,241


8


Debt securities as of September 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
31,735

 
31,933

After one year through five years
304,284

 
309,497

After five years through ten years
233,228

 
234,022

After ten years
65,246

 
67,951

 
634,493

 
643,403


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 September 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
55

 
3,771

 
136

 
4,353

 
191

 
8,124

Corporate
206

 
39,708

 
56

 
1,638

 
262

 
41,346

Foreign
3,191

 
131,992

 
233

 
5,071

 
3,424

 
137,063

U.S. Treasury Bonds
128

 
8,293

 

 

 
128

 
8,293

Equity securities
255

 
6,350

 
110

 
568

 
365

 
6,918

 
3,835

 
190,114

 
535

 
11,630

 
4,370

 
201,744

The number of specific investment holdings in an unrealized loss position as of September 30, 2017 was 145, 15 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 as 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 September 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

 
73,355

 
73,355

Corporate

 
342,760

 
342,760

Foreign

 
214,567

 
214,567

U.S. Treasury Bonds

 
12,721

 
12,721

Equity securities
36,279

 

 
36,279

 
36,279

 
643,403

 
679,682

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 September 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 nine months ended September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Realized gains
548

 
3,301

 
1,392

 
8,377

Realized losses
(1,595
)
 
(48
)
 
(2,828
)
 
(3,671
)
 
(1,047
)
 
3,253

 
(1,436
)
 
4,706

Expenses assignable to investment income were insignificant. There were no significant investments as of September 30, 2017 that did not produce income during the year.
 
For the nine months ended September 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 and $0.5 million of net realized loss from the sale of subsidiaries. For the nine months ended September 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to a net decrease in the fair values of contingent consideration liabilities associated with prior year acquisitions, $1.2 million of realized gain on a cost-basis investment transaction and $2.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.3 million of office closure costs.

Proceeds from sales of investments available-for-sale are as follows: 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Proceeds from sales of investments available-for-sale
5,878

 
16,839

 
55,533

 
49,666




11


NOTE 5
Goodwill and other intangibles. 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
14,419

 

 
14,419

Disposals
(85
)
 

 
(85
)
Balances at September 30, 2017
225,699

 
5,729

 
231,428

During the second quarter 2017, the Company acquired certain title businesses primarily funded by borrowings on the Company's unsecured line of credit. The Company completed its purchase price allocations related to these businesses during the third quarter 2017 and, as a result, increased its goodwill related to the title segment by a total of $14.4 million, which is deductible in full for income tax purposes over a period of 15 years. Also, in connection with the acquisitions, the Company identified and recorded $2.6 million of other intangibles, primarily related to acquired software to be amortized over 5 years from the date of acquisition.
The Company evaluates goodwill for impairment annually based on information as of June 30 of the current year or more frequently if circumstances suggest that an impairment may exist. The Company performed the annual goodwill impairment analysis during the quarter ended September 30, 2017, utilizing the qualitative assessment method for the direct operations, agency operations, international operations and ancillary services reporting units. Based on the qualitative analysis performed, the Company concluded that the goodwill related to all reporting units was not impaired.

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

 
462,622

Provisions:
 
 
 
Current year
69,067

 
73,380

Previous policy years
1,524

 
(6,768
)
Total provisions
70,591

 
66,612

Payments, net of recoveries:
 
 
 
Current year
(10,403
)
 
(13,938
)
Previous policy years
(53,491
)
 
(57,410
)
Total payments, net of recoveries
(63,894
)
 
(71,348
)
Effects of changes in foreign currency exchange rates
6,576

 
2,814

Balances at September 30
475,845

 
460,700

Loss ratios as a percentage of title operating revenues:
 
 
 
Current year provisions
5.0
%
 
5.3
%
Total provisions
5.1
%
 
4.8
%
There were no significant adjustments to the loss provisioning rates or large claim reserves during the nine months ended September 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 nine months ended September 30, 2016.


12


NOTE 7
Share-based payments. During the first nine 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 $5.1 million (120,000 shares with an average grant price per share of $42.55) 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 
 September 30,
Nine Months Ended 
 September 30,
 
2017
2016
2017
2016
 
($000 omitted, except per share)
Numerator:
 
 
 
 
Net income attributable to Stewart
10,944

26,375

33,601

38,778

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



(12,000
)
Net income available to common shareholders
10,944

26,375

33,601

26,778

 
 
 
 
 
Denominator (000):
 
 
 
 
Basic average shares outstanding
23,448

23,371

23,442

23,362

Average number of dilutive shares relating to options

1


1

Average number of dilutive shares relating to grants of restricted shares
116

239

129

233

Diluted average shares outstanding
23,564

23,611

23,571

23,596

 
 
 
 
 
Basic earnings per share attributable to Stewart
0.47

1.13

1.43

1.15

 
 
 
 
 
Diluted earnings per share attributable to Stewart
0.46

1.12

1.43

1.13


(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 September 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 September 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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
Title segment:
 
 
 
 
 
 
 
Revenues
488,612

 
529,816

 
1,384,857

 
1,410,863

Depreciation and amortization
5,534

 
5,120

 
16,081

 
15,642

Income before taxes and noncontrolling interest
24,610

 
50,308

 
76,354

 
100,984

 
 
 
 
 
 
 
 
Ancillary services and corporate segment:
 
 
 
 
 
 
 
Revenues
12,957

 
23,394

 
45,204

 
70,012

Depreciation and amortization
1,044

 
1,962

 
3,316

 
7,086

Loss before taxes and noncontrolling interest
(6,013
)
 
(11,500
)
 
(18,742
)
 
(35,977
)
 
 
 
 
 
 
 
 
Consolidated Stewart:
 
 
 
 
 
 
 
Revenues
501,569

 
553,210

 
1,430,061

 
1,480,875

Depreciation and amortization
6,578

 
7,082

 
19,397

 
22,728

Income before taxes and noncontrolling interest
18,597

 
38,808

 
57,612

 
65,007


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
 
($000 omitted)
United States
464,111

 
518,204

 
1,335,129

 
1,394,228

International
37,458

 
35,006

 
94,932

 
86,647

 
501,569

 
553,210

 
1,430,061

 
1,480,875


15


NOTE 12
Other comprehensive income (loss). Changes in the balances of each component of other comprehensive income (loss) and the related tax effects are as follows:
 
Three Months Ended 
 September 30, 2017
 
Three Months Ended 
 September 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 gains on investments - net:
 
 
 
 
 
 
 
Change in net unrealized gains on investments
95

32

63

 
(405
)
(142
)
(263
)
Less: reclassification adjustment for net gains included in net income
(508
)
(177
)
(331
)
 
(1,330
)
(465
)
(865
)
 Net unrealized gains
(413
)
(145
)
(268
)
 
(1,735
)
(607
)
(1,128
)
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
5,817

1,676

4,141

 
(2,363
)
(555
)
(1,808
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
5,404

1,531

3,873

 
(4,098
)
(1,162
)
(2,936
)
 
 
 
 
 
 
 
 
 
Nine Months Ended 
 September 30, 2017
 
Nine Months Ended 
 September 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 gains on investments - net:
 
 
 
 
 
 
 
Change in net unrealized gains on investments
4,438

1,553

2,885

 
18,012

6,304

11,708

Less: reclassification adjustment for net gains included in net income
(1,218
)
(426
)
(792
)
 
(1,606
)
(562
)
(1,044
)
Net unrealized gains
3,220

1,127

2,093

 
16,406

5,742

10,664

 
 
 
 
 
 
 
 
Foreign currency translation adjustments
11,831

3,161

8,670

 
1,581

1,797

(216
)
 
 
 
 
 
 
 
 
Other comprehensive income
15,051

4,288

10,763

 
17,987

7,539

10,448


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 $10.9 million ($0.46 per diluted share) for the third quarter 2017 compared to a net income attributable to Stewart of $26.4 million ($1.12 per diluted share) for the third quarter 2016. Pretax income before noncontrolling interests for the third quarter 2017 was $18.6 million compared to pretax income before noncontrolling interests of $38.8 million for the third quarter 2016.

Total revenues for the third quarter 2017 were $501.6 million compared to total revenues of $553.2 million for the third quarter 2016, a decline of 9%. Total operating revenues for the third quarter 2017 were $498.0 million as compared to total operating revenues of $545.4 million for the third quarter 2016, also a decline of 9%. Our third quarter title revenues were adversely affected by business disruptions caused by hurricanes Harvey and Irma, which had a combined impact of approximately $4 million, and the departure of certain retail staff as described in our second quarter earnings release and quarterly report on Form 10-Q. While the revenue impact of the hurricanes was relatively minor, the impact to pretax income was more significant; there was no appreciable offsetting cost reduction as processing costs were largely incurred pre-closing, and we maintained the employees of the affected offices in order to quickly reopen them. On the positive side, our international operations delivered another strong quarter and revenues from the Title365 acquisition and recent new hires partially offset the retail revenue decline. We successfully recruited strong, new revenue-generating associates, which have offset $20-$25 million of the $70 million in departed annual revenues related to staff departures. The recent acquisition of Title365 generated new business, which we expect to result in $40-$50 million in annual revenue. These combined actions are expected to fully replace the departed revenue by 2018’s selling season, and our ongoing recruiting efforts and targeted acquisitions should further bolster our top line.

We have announced that John Killea, chief legal officer & chief compliance officer, has been appointed to the additional role of president of Stewart. His deep experience and intimate knowledge of our company uniquely positions him to expand his responsibilities as we execute on our strategic priorities. In addition, we are very pleased to announce that John Magness has joined Stewart as chief corporate development officer. John brings nearly 35 years of leadership experience in the title and real estate industry and will play a key role in ensuring Stewart continues to provide the high quality services our customers have come to expect. Most recently, John served as president of Old Republic Title Companies, Inc.

We also announced that the Board of Directors has previously formed a strategic committee which has been pursuing the full range of strategic alternatives available to Stewart. These alternatives include, among other things, business combinations, the sale of the Company, and continuing to execute on Stewart’s standalone business plan. The Company has retained and will be assisted in the strategic review process by Citi as financial advisor and Davis Polk & Wardwell LLP as legal advisor. The Board plans to complete this process in an expeditious manner. There can be no assurance that this process will result in a particular outcome. We do not intend to provide updates on its review until it deems further disclosure is appropriate or required.

Summary results of the title segment are as follows ($ in millions, except pretax margin):
 
For the Three Months
Ended September 30,
 
2017
 
2016
 
% Change
 
 
 
 
 
 
Total revenues
488.6

 
529.8

 
(8
)%
Pretax income
24.6

 
50.3

 
(51
)%
Pretax margin
5.0
%
 
9.5
%
 



Pretax income during the third quarter 2017 declined $25.7 million compared to third quarter 2016, while total title revenues declined $41.2 million. In addition to the factors mentioned above, title revenues declined due to lower commercial revenues, fewer purchase orders closed, and a significant decline in refinancing orders industry-wide. Included in the segment’s results for the third quarter 2017 are approximately $1.4 million of Title365 integration costs. Also included in the third quarter 2017 results were $1.3 million of realized losses, compared to $2.1 million of realized gains in the third quarter 2016.


17


Non-commercial domestic revenue, as shown under the Results of Operations - Title revenues section, includes revenues from purchase transactions and centralized title operations (processing primarily refinancing and default title orders), which decreased 11% and 32%, respectively, in the third quarter 2017 compared to the prior year quarter as a result of declines in purchase and refinancing orders closed. Commercial revenues declined 10% from the prior year quarter primarily as a result of lower commercial orders closed, fewer large transactions than in the prior year quarter and reduced average fee per file. Total international title revenues increased 7% in the third quarter 2017 compared to the prior year quarter mainly due to transaction volume growth from our United Kingdom operations and a stronger Canadian dollar relative to the U.S. dollar. Revenues from independent agency operations in the third quarter 2017 declined 5% compared to the third quarter 2016. The independent agency remittance rate decreased to 17.5% in the third quarter 2017 from 18.0% in the third quarter 2016 mainly due to geographic mix of our agency business (reduced revenues in higher-remitting states and increases in lower-remitting states); third quarter 2017 revenues from independent agencies, net of retention, decreased 7% from the prior year quarter. Given our current independent agent geographic footprint, we expect the remittance rate to remain in the mid-to-high 17% range over the near term.

Summary results of the ancillary services and corporate segment are as follows ($ in millions):
 
For the Three Months
Ended September 30,
 
2017
 
2016
 
% Change
 
 
 
 
 
 
Total revenues
13.0

 
23.4

 
(45
)%
Pretax loss
(6.0
)
 
(11.5
)
 
48
 %

The decline in the segment’s revenues in the third 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 $6.0 million pretax loss, compared to a pretax loss of $11.5 million in the prior year quarter. The segment’s results for the third quarter 2017 and 2016 included approximately $6 million and $8 million, respectively, of expenses attributable to parent company and corporate operations.


18


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, 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.
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.


19


RESULTS OF OPERATIONS
Comparisons of our results of operations for the three and nine months ended September 30, 2017 with the three and nine months ended September 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® (NAR), the Mortgage Bankers Association and Freddie Mac. We also use information from our direct operations.
Operating environment. Actual existing home sales in the third quarter 2017 declined approximately 2% from the third quarter 2016. September 2017 existing home sales totaled 465,000, which was down 4% from a year ago, and also down 13% from August 2017. According to NAR, lower home listings, fast-rising home prices and the temporary effect of hurricanes Harvey and Irma were the likely causes of lower existing home sales in the third quarter 2017. September 2017 median and average home prices both rose approximately 4% compared to September 2016 prices. September 2017 housing starts improved 6% from a year ago, but were down 5% sequentially from August 2017. Newly issued building permits in September 2017 declined 5% sequentially from August 2017 and 4% from a year ago. According to Fannie Mae, one-to-four family residential lending declined to $465 billion in the third quarter 2017 from $589 billion in the third quarter 2016, driven by a decrease of approximately $137 billion, or 47%, in refinance originations, partially offset by a $13 billion, or 4%, increase in purchase lending. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction. Per Fannie Mae's forecast, total originations, as compared to the third quarter 2017, will decrease 8% to $427 billion in the fourth quarter 2017.
Title revenues. Direct title revenue information is presented below:
 
Three Months Ended
September 30,
 
Nine Months Ended
 September 30,
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
($ in millions)
 
 
 
($ in millions)
 
 
Non-commercial
 
 
 
 
 
 
 
 
 
 
 
Domestic
141.7

 
162.2

 
(13
)%
 
417.8

 
458.1

 
(9
)%
International
30.4

 
29.3

 
4
 %
 
75.9

 
68.6

 
11
 %
 
172.1

 
191.5

 
(10
)%
 
493.7

 
526.7

 
(6
)%
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Domestic
39.2

 
45.2

 
(13
)%
 
127.4

 
123.8

 
3
 %
International
5.5

 
4.4

 
25
 %
 
14.8

 
13.6

 
9
 %
 
44.7

 
49.6

 
(10
)%
 
142.2

 
137.4

 
3
 %
Total direct title revenues
216.8

 
241.1

 
(10
)%
 
635.9

 
664.1

 
(4
)%
Revenues from direct title operations, which include residential, commercial, international and centralized title services transactions, decreased $24.3 million, or 10%, and $28.2 million, or 4%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, due to a decline in revenues from our residential, commercial and centralized title operations transactions, partially offset by revenue increases from our international operations. Our residential revenues, which make up about 60% of our total direct revenues, decreased $15.6 million, or 11%, and $28.7 million, or 7%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily due to management and staff departures within certain offices during the second quarter 2017, as well as the impact of hurricanes Harvey and Irma on Texas and Florida, respectively. We estimate the revenue impact of these items to be approximately $25 million, with the majority attributed to the staff attrition. Revenues from our centralized title operations, which primarily process refinancing and default title orders, decreased $4.9 million, or 32%, and $11.6 million, or 24%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively, primarily due to decreased refinancing orders and lower demand for default services, which are in line with industry trends.

20


Our direct operations include local offices and international operations, and we generate commercial revenues both domestically and internationally. U.S. commercial revenues during the third quarter 2017 decreased $6.0 million, or 13%, compared to the third quarter 2016, primarily due to a decline in commercial orders and the average revenue fee per file; while revenues increased $3.6 million, or 3%, in the first nine months of 2017 compared with the same period in 2016, mainly due to certain large transactions during the second quarter 2017, which resulted in an improvement in our commercial revenue fee per file, partially offset by a decline in commercial orders. Total international revenues increased $2.2 million, or 7%, and $8.5 million, or 10%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively, primarily as a result of increased transaction volume from our Canada and United Kingdom operations. Direct revenues constituted 45% and 46% of our total title revenues in the third quarters 2017 and 2016, respectively, and 46% and 48% during the first nine months of 2017 and 2016, respectively.

Orders information for the third quarter and first nine months ended September 30 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
2017
2016
Change
% Change
 
2017
2016
Change
% Change
Opened Orders:
 
 
 
 
 
 
 
 
 
Commercial
10,685

11,866

(1,181
)
(10
)%
 
32,923

35,334

(2,411
)
(7
)%
Purchase
59,679

63,115

(3,436
)
(5
)%
 
188,744

193,625

(4,881
)
(3
)%
Refinance
27,155

42,851

(15,696
)
(37
)%
 
74,794

113,819

(39,025
)
(34
)%
Other
4,565

3,423

1,142

33
 %
 
13,584

10,032

3,552

35
 %
Total
102,084

121,255

(19,171
)
(16
)%
 
310,045

352,810

(42,765
)
(12
)%
 
 
 
 
 
 
 
 
 
 
Closed Orders:
 
 
 
 
 
 
 
 
 
Commercial
7,643

8,149

(506
)
(6
)%
 
23,136

24,344

(1,208
)
(5
)%
Purchase
48,432

52,937

(4,505
)
(9
)%
 
140,996

145,829

(4,833
)
(3
)%
Refinance
17,965

28,361

(10,396
)
(37
)%
 
53,471

78,304

(24,833
)
(32
)%
Other
2,872

4,086

(1,214
)
(30
)%
 
10,205

12,536

(2,331
)
(19
)%
Total
76,912

93,533

(16,621
)
(18
)%
 
227,808

261,013

(33,205
)
(13
)%

Gross revenues from independent agency operations decreased $13.7 million, or 5%, in the third quarter 2017, compared to the third quarter 2016, primarily as a result of revenue decreases in the states of Massachusetts, New York, Texas, Florida (there likely was some independent agency revenue impact from the hurricanes in Texas and Florida) and New Jersey, partially offset by increases in the states of California, Illinois and Ohio. As a result of decreased agency revenues, the third quarter 2017 net agency revenues (net of agency retention) decreased $3.6 million, or 7%, compared to the prior year quarter. Gross agency revenues for the first nine months of 2017 increased $4.0 million, or approximately 1%, compared to the first nine months of 2016, primarily due to revenue increases in the states of California, Minnesota, Michigan and Ohio, partially offset by revenue decreases in the states of New York, Massachusetts and Florida. Net of agency retention, agency revenues in the first nine months of 2017, compared to the same period in 2016, decreased $2.3 million, or 2%, primarily due to revenue increases from generally lower remitting states, while revenues from higher remitting states declined. 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 $9.4 million, or 43%, and $20.2 million, or 31%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, respectively, 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 nine months of 2017 compared to the first nine months of 2016. These divestitures primarily resulted in the pretax results improvement of $4.7 million, or 101%, and $12.4 million, or 90%, in the third quarter and first nine months of 2017 compared to the same periods in 2016 for ancillary services.

21


Investment income. Investment income during the third quarter and first nine 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 third quarter 2017 included net realized losses of $0.6 million from the sale of investments available-for-sale and $0.3 million from the sale of subsidiaries; while investment and other gains - net for the third quarter 2016 included net realized gains of $2.0 million from the sale of investments available-for-sale and $1.2 million on a cost-basis investment transaction.

For the nine months ended September 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 and $0.5 million of net realized loss from the sale of subsidiaries. For the nine months ended September 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to a net decrease in the fair values of contingent consideration liabilities associated with prior year acquisitions, $1.2 million of realized gain on a cost-basis investment transaction and $2.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.3 million of office closure costs.

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

 
2016

 
% Change
 
2017
 
2016
 
% Change
 
($ in millions)
 
 
 
 
($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amounts retained by agencies
221.5

 
231.6

 
(4
)%
 
605.2

 
598.9

 
1
 %
As a % of agency revenues
82.5
%
 
82.0
%
 
 
 
82.2
%
 
81.8
%
 
 
Employee costs
140.1

 
154.5

 
(9
)%
 
419.2

 
457.2

 
(8
)%
As a % of operating revenues
28.1
%
 
28.3
%
 
 
 
29.6
%
 
31.3
%
 
 
Other operating expenses
88.5

 
94.0

 
(6
)%
 
255.6

 
268.2

 
(5
)%
As a % of operating revenues
17.8
%
 
17.2
%
 
 
 
18.0
%
 
18.3
%
 
 
Title losses and related claims
25.4

 
26.4

 
(4
)%
 
70.6

 
66.6

 
6
 %
As a % of title revenues
5.2
%
 
5.0
%
 


 
5.1
%
 
4.8
%
 



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 third quarter and first nine months of 2017 were 17.5% and 17.8%, respectively, as compared to 18.0% and 18.2% in the same periods in 2016. The decrease in the agency remittance rates during the third quarter and first nine months of 2017 was primarily due to revenue declines from higher remitting states (with average remittance rates of 19.8% and 19.4%, respectively) accompanied by revenue increases from lower remitting states (with average remittance rates of 15.0% and 16.0%, respectively). 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 remittance rate to remain in the mid-to-high 17% range over the near term.

Employee costs. Total employee costs decreased $14.5 million, or 9%, and $38.0 million, or 8%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, as a result of a reduction in employee counts tied to volume declines, primarily in our ancillary services and centralized title operations, management and staff departures in direct operations during the second quarter 2017, and ongoing cost management efforts. Average employee counts for both the third quarter and first nine months of 2017 decreased approximately 7% and 8% from the third quarter and first nine months of 2016, respectively; as a percentage of total operating revenues, employee costs for the third quarter and first nine months of 2017 were 28.1% and 29.6% compared to 28.3% and 31.3%, respectively, for the same periods in 2016.


22


Employee costs in the title segment decreased $5.2 million, or 4%, and $14.6 million, or 4%, in the third quarter and first nine months of 2017, respectively, compared to the same periods last year, largely due to decreased salaries and incentives as a result of reduced employee counts, primarily in direct title operations. These decreases in employee costs were partially offset as we have hired replacement management and employees in offices impacted by the previously discussed departures. In the ancillary services and corporate segment, employee costs decreased $9.3 million, or 55%, and $23.3 million, or 45%, in the third quarter and first nine months of 2017, respectively, 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.

Consolidated other operating expenses decreased $5.6 million, or 6%, in the third quarter 2017 compared to the third quarter 2016, primarily due to a decrease in outside search fees resulting from reduced revenues from our ancillary search services, centralized title and commercial operations which are principal users of outside search services in generating revenues. Additionally, consolidated other operating expenses decreased $12.6 million, or 5%, in the first nine 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 17.8% and 18.0% for the third quarter and first nine months of 2017, respectively, as compared to 17.2% and 18.3%, respectively, for the same periods in 2016. During the third quarter 2017, we incurred $1.4 million of integration expenses related to a recent acquisition, while during the third quarter 2016, we incurred $1.2 million of consulting costs related to shareholder activism. Additionally, 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 non-operating charges, other operating expenses as a percentage of operating revenues were 17.5% and 17.0% in the third quarters 2017 and 2016, respectively, and 17.9% for both the first nine months of 2017 and 2016.

Costs that follow, to varying degrees, changes in transaction volumes and revenues decreased $4.2 million, or 9%, and $2.0 million, or 2%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily as a result of reduced outside search fees driven mainly by decreased search revenues within the ancillary services and centralized title operations. Costs that fluctuate independently of revenues during the third quarter 2017 were comparable to those of the prior year quarter; while excluding the litigation-related accrual mentioned above, these costs decreased $0.8 million, or 3%, during first nine months of 2017 compared to the same period last year due to lower general supplies expenses. Excluding the charges mentioned above, costs that are fixed in nature decreased $1.3 million, or 4%, and $3.2 million, or 3%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, mainly due to lower attorney and professional fees.
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 5.0% for the third quarters 2017 and 2016, respectively, and 5.1% and 4.8% for the first nine months of 2017 and 2016, respectively. Title loss expense in the third quarter 2017, compared to the third quarter 2016, decreased $0.9 million, or 4%, primarily as a result of lower title revenues, partially offset by an increase of our Canadian business' provisioning rate; while the title loss expense for the first nine months of 2017, compared to the same period in 2016, increased $4.0 million, or 6%, 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 5.2% in the first nine months of 2016. 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 third quarter and first nine months of 2017 compared to the same periods in the prior year decreased 35% and 10%, respectively, primarily due to a decrease in payments for existing non-large claims.

23


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 September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
($ in millions)
 
($ in millions)
Provisions – known claims:
 
 
 
 
 
 
 
Current year
3.9

 
5.3

 
8.1

 
13.1

Prior policy years
13.6

 
18.7

 
48.3

 
49.9

 
17.5

 
24.0

 
56.4

 
63.0

Provisions – IBNR
 
 
 
 
 
 
 
Current year
21.3

 
21.0

 
61.0

 
60.3

Prior policy years
0.2

 
0.1

 
1.5

 
(6.8
)
 
21.5

 
21.1

 
62.5

 
53.5

Transferred to known claims
(13.6
)
 
(18.7
)
 
(48.3
)
 
(49.9
)
Total provisions
25.4

 
26.4

 
70.6

 
66.6


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 $1.4 million, or 26%, and $5.0 million, or 38%, in the third quarter and first nine 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 was comparable in the third quarter 2017 and increased $9.0 million, or 17%, in the first nine 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 4.4% in both the third quarter and first nine months of 2017 compared with 4.0% and 4.3%, respectively, in the same periods in 2016, primarily driven by lower known claims related to the current policy year.

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 third quarter and first nine months of 2017, we recorded approximately $1.5 million and $3.6 million, respectively, of policy loss reserves relating to escrow losses arising from mortgage fraud, as compared to $2.1 million and $4.0 million, respectively, during the same periods in 2016.


24


Total title policy loss reserve balances:
 
September 30, 2017
 
December 31,
2016
 
($ in millions)
Known claims
69.0

 
76.5

IBNR
406.8

 
386.1

Total estimated title losses
475.8

 
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 $6.6 million and $19.4 million in the third quarter and first nine months of 2017, respectively, compared to $7.1 million and $22.7 million in the same periods in 2016, primarily due to the lower amortization expense in 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.

Income taxes. Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, were 30.0% and 31.6% in the third quarter and first nine months of 2017, respectively, and 25.5% and 30.2% in the third quarter and first nine months of 2016, respectively. Included in the tax provision calculation are discrete net income tax benefits of $0.7 million and $2.1 million in the third quarter and first nine months of 2017, respectively, principally relating to previously unrecognized research and development tax credits, compared with discrete net income tax benefits of $4.6 million and $4.5 million, respectively, in the same periods in 2016, principally relating to previously unrecognized research and development tax credits and a goodwill impairment true-up adjustment. Excluding the effect of the discrete tax items, our effective tax rates were 34.3% and 36.0% in the third quarter and first nine months of 2017, respectively, and 38.6% and 38.3% in the third quarter and first nine months of 2016, respectively.

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 September 30, 2017, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $871.9 million ($369.5 million, net of statutory reserves on cash and investments). Of our total cash and investments at September 30, 2017, $605.3 million ($300.2 million, net of statutory reserves) was held in the United States and the rest internationally, principally Canada.

Cash held at the parent company totaled $0.2 million at September 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).


25


A substantial majority of our consolidated cash and investments as of September 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 $475.4 million and $485.4 million at September 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 $26.9 million and $13.9 million at September 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 September 30, 2017, our known claims reserve totaled $69.0 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $406.8 million. In addition to this, we had cash and investments (excluding equity method investments) of $281.1 million which are available for underwriter operations, including claims payments.

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 September 30, 2017, our statutory liquidity ratio for our principal underwriter was 110%. 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 nine months ended September 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 Nine Months
Ended September 30,
 
2017
 
2016
 
(dollars in millions)
Net cash provided by operating activities
48.0

 
64.0

Net cash used by investing activities
(66.4
)
 
(60.3
)
Net cash used by financing activities
(2.6
)
 
(22.8
)
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.


26


Cash provided by operations was $48.0 million in the first nine months of 2017 compared to $64.0 million for the same period in 2016. The decrease in the cash flows from operations was primarily due to the lower net income generated during the third quarter 2017, higher payments on accounts payable and an increase in accounts receivable related to certain business units, partially offset by lower claim payments.

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 were $89.4 million and $75.2 million, while cash used for purchases of available-for-sale investments approximated $125.4 million and $122.1 million for the first nine months of 2017 and 2016, respectively. Our purchases of short-term investments, net of sales, aggregated $1.2 million and $0.4 million for the first nine months of 2017 and 2016, respectively.

During 2017, we used $17.8 million of cash for acquisitions of new subsidiaries, while purchases of property and equipment were $12.4 million and $13.6 million for the first nine 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.

Financing activities and capital resources. Total debt and stockholders’ equity were $138.6 million and $672.4 million, respectively, as of September 30, 2017. Of the total notes payable activity during the first nine months of 2017 and 2016, proceeds of $32.0 million and $32.0 million, respectively, and payments of $16.0 million and $27.6 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange business. Also during the first nine months of 2017 and 2016, we drew $16.0 million and $20.0 million, respectively, from our $125.0 million line of credit facility. At September 30, 2017, the outstanding balance of the 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. Our debt-to-equity ratio at September 30, 2017, excluding our Section 1031 notes, was approximately 17.4%, below the 20% we have set as our unofficial internal limit on leverage.

During the first nine months of 2017 and 2016, we declared and paid total dividends of $0.90 per common share, which aggregated $21.1 million and $20.8 million, respectively. 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.