STEWART INFORMATION SERVICES CORPORATION MANAGEMENT'S OVERVIEW
On a full year basis, 2021 net income attributable to Stewart was$323.2 million , or$11.90 per diluted share, compared to$154.9 million , or$6.22 per diluted share, in 2020. Pretax income before noncontrolling interests in 2021 was$434.0 million (13.1% pretax margin), an increase of 99% compared to$218.5 million (9.5% pretax margin) in 2020. Total revenues increased 45% to$3.3 billion in 2021, compared to$2.3 billion in the prior year, primarily due to increased transaction volumes and acquisitions, and higher title fees per file. Total operating expenses increased 39% to$2.9 billion in 2021, from$2.1 billion in 2020, consistent with the revenue growth. Refer to " Results of Operations " for detailed year-to-year income statement discussions, and " Liquidity and Capital Resources " for an analysis of Stewart's financial condition. For the fourth quarter 2021, we reported net income attributable to Stewart of$85.5 million ($3.12 per diluted share), compared to net income attributable to Stewart of$59.7 million ($2.22 per diluted share) for the fourth quarter 2020. Fourth quarter 2021 pretax income before noncontrolling interests was$114.1 million compared to pretax income before noncontrolling interests of$83.9 million for the fourth quarter 2020. Fourth quarter 2021 results included$6.5 million of pretax net realized and unrealized gains, which included$8.1 million of net unrealized gains on fair value changes of equity securities investments and$1.3 million of net gains related to acquisition contingent liability adjustments, partially offset by$2.9 million of net realized losses primarily related to sale of securities investments and other assets. Fourth quarter 2020 results included$4.4 million of pretax net realized and unrealized gains, composed of$3.9 million of net unrealized gains on fair value changes of equity securities investments and$0.5 million of net realized gains on sale of securities investments.
Summary results of the title segment are as follows (in $ millions, except pretax margin and % change):
For the Three Months
Ended December 31,
2021 2020 % Change
Operating revenues 867.8 690.2 26 %
Investment income 3.7 4.1 (9) %
Net realized and unrealized gains (losses) 4.9 4.4 12 %
Pretax income 118.3 94.9 25 %
Pretax margin 13.5 % 13.6 %
Pretax income for the title segment increased by $23.4 million , or 25%, in the
fourth quarter 2021 compared to the prior year quarter, while pretax margin was
13.5% in the fourth quarter 2021 which was comparable to 13.6% in the fourth
quarter 2020. Title operating revenues in the fourth quarter 2021 grew $177.5
million , or 26%, as a result of improvements in direct title and gross
independent agency revenues of $81.9 million , or 24%, and $95.6 million , or 27%,
respectively. In line with higher title revenues, overall segment operating
expenses in the fourth quarter 2021 increased $154.3 million , or 26%, primarily
driven by 28% and 31% higher agency retention expenses and combined title
employee costs and other operating expenses, respectively, compared to the prior
year quarter. The average independent agency remittance rate in the fourth
quarter 2021 was 18.0%, compared to 18.2% in the prior year quarter. As a
percentage of title revenues, combined title employee costs and other operating
expenses increased to 40.6% in the fourth quarter 2021 compared to 38.8% in the
fourth quarter 2020, primarily due to office consolidation costs and state sales
tax assessments.
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Title loss expense decreased $13.1 million , or 28%, in the fourth quarter 2021
compared to the prior year quarter, primarily due to favorable claims experience
which was partially offset by higher title revenues. As a percentage of title
revenues, the title loss expense in the fourth quarter 2021 was 3.9% compared to
6.8% in the prior year quarter. For the year, the title loss ratio was 4.2%
compared to 5.3% in 2020.
The segment's net realized and unrealized gains in the fourth quarter 2021
primarily included $8.1 million of net unrealized gains on fair value changes of
equity securities investments, $2.0 million of net losses related to acquisition
contingent liability adjustments, and $0.8 million of net realized losses on
sale of securities investments, while net realized and unrealized gains in the
fourth quarter 2020 were related to $3.9 million of net unrealized gains on fair
value changes of equity securities investments and $0.5 million of net realized
gains on sale of securities investments. Investment income in the fourth quarter
2021 was slightly lower compared to the prior year quarter, primarily due to
lower interest income resulting from lower interest rates.
Direct title revenue information is presented below (in $ millions, except %
change):
For the Three Months
Ended December 31,
2021 2020 % Change
Non-commercial
Domestic 282.3 239.7 18 %
International 38.3 35.7 7 %
320.6 275.4 16 %
Commercial:
Domestic 93.1 58.1 60 %
International 9.4 7.7 22 %
102.5 65.8 56 %
Total direct title revenues 423.1 341.2 24 %
Overall revenue improvements in both non-commercial and commercial operations
contributed to higher direct title revenues in the fourth quarter 2021 compared
to the prior year quarter. Non-commercial revenues increased $45.2 million , or
16%, primarily driven by increased residential purchase transactions and scale,
partially offset by reduced refinancing transactions, in the fourth quarter 2021
compared to the fourth quarter 2020. Domestic commercial revenues increased
$35.0 million , or 60%, in the fourth quarter 2021, primarily due to improved
commercial transaction size and volume compared to the prior year quarter.
Domestic commercial and residential fees per file in the fourth quarter 2021
were approximately $19,400 and $2,700 , respectively, which were 50% and 38%,
respectively, higher compared to the fourth quarter 2020. Total international
revenues grew $4.3 million , or 10%, primarily due to increased residential and
commercial transaction volumes in our Canadian operations in the fourth quarter
2021 compared to the prior year quarter.
Summary results of the ancillary services and corporate segment are as follows (in $ millions, except % change):
For the Three Months
Ended December 31,
2021 2020 % Change
Total operating revenues 83.7 38.0 120 %
Net realized losses 1.6 - 100 %
Pretax loss (4.2) (11.0) 62 %
16-------------------------------------------------------------------------------- The segment's operating revenues improved$45.6 million , or 120%, in the fourth quarter 2021, compared to the prior year quarter, primarily due to revenues generated by recent acquisitions and increased revenues from appraisal management and online notary services. Net realized and unrealized gains during the fourth quarter 2021 were primarily related to acquisition contingent liability net gain adjustments, which were partially offset by asset disposal charges. The ancillary services operations in the fourth quarter 2021 generated pretax income of$5.3 million (which included$3.3 million of net gains related to acquisition contingent liability adjustments and$5.6 million of purchased intangibles amortization expense), compared to a fourth quarter 2020 pretax loss of$0.6 million (which included$1.6 million of purchased intangibles amortization expense). Net expenses attributable to parent company and corporate operations in the fourth quarter 2021 were approximately$7.9 million , which included increased interest expense resulting from newly issued debt, while net expenses for the fourth quarter 2020 were approximately$10.4 million , which included costs related to charitable contributions and consulting fees.
CRITICAL ACCOUNTING ESTIMATES
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. The discussion of critical accounting estimates below should be read in conjunction with the related accounting policies disclosed within Note 1 to our audited consolidated financial statements in Part IV of this annual report.
Title loss reserves
Provisions for title losses, as a percentage of title operating revenues, were 4.2%, 5.3% and 4.6% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Actual loss payment experience, including the impact of large losses, is the primary reason for increases or decreases in our loss provision. A 100 basis point change in the loss provisioning percentage, a reasonably likely scenario based on our historical loss experience, would have increased or decreased our provision for title losses, and affected pretax operating results by approximately$30.0 million for the year endedDecember 31, 2021 . We consider our actual claims payments and incurred loss experience, including the frequency and severity of claims, compared to our actuarial estimates of claims payments and incurred losses in determining whether our overall loss experience has improved or worsened relative to prior periods. We also consider the impact of economic or market factors on particular policy years to determine whether the results of those policy years are indicative of future expectations. In addition, large claims (those exceeding$1.0 million on a single claim), including large title losses due to independent agency defalcations, are analyzed and reserved for separately due to the potential higher dollar amount of loss, lower volume of claims reported and sporadic reporting of such claims. We evaluate the frequency and severity of large losses in determining whether our experience has improved or worsened. Our method for recording the reserves for title losses on both an interim and annual basis begins with the calculation of our current loss provision rate which is applied to our current premium revenues, resulting in a title loss expense for the period, except for large claims and escrow losses. This loss provision rate is set to provide for losses on current year policies and is primarily determined using moving average ratios of recent actual policy loss payment experience (net of recoveries) to premium revenues.
Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by our management and our third-party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or lower than current reserves and/or our third-party actuary's calculated estimates.
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 (loss provisioning rate). As claims become known,
provisions are reclassified from IBNR to known claims. Adjustments relating to
large claims may impact provisions either for known claims or for IBNR.
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2021 2020 2019
(in $ millions)
Provisions - Known Claims:
Current year 22.8 14.3 18.4
Prior policy years 55.7 68.8 73.5
78.5 83.1 91.9
Provisions - IBNR
Current year 98.3 84.5 60.7
Prior policy years 5.1 16.4 5.3
103.4 100.9 66.0Transferred IBNR to Known Claims (55.7) (68.8) (73.5) Total provisions
126.2 115.2 84.4
In 2021, total known claims provisions decreased by $4.6 million , or 6%, to
$78.5 million primarily due to lower reported claims relating to prior year
policies compared to 2020. Total 2021 provisions - IBNR increased by $2.5
million , or 3%, to $103.4 million compared to the prior year, primarily due to
increased title premiums in 2021, partially offset by the effect of lower
provisioning rates due to favorable claims experience. In 2020, total known
claims provisions decreased by $8.8 million , or 10%, to $83.1 million primarily
due to lower reported claims relating to prior year policies compared to 2019.
Total 2020 provisions - IBNR increased by $34.9 million , or 53%, to $100.9
million compared to the prior year, primarily due to increased title premiums,
higher loss provisioning rates driven by an overall uncertainty related to
incurred losses resulting from the COVID-19 pandemic, and unfavorable loss
experience in our Canadian operations. As a percentage of title operating
revenues, current year provisions - IBNR were 3.3%, 3.9% and 3.3% in 2021, 2020
and 2019, respectively.
In addition to title policy claims, we incur losses in our direct operations
from escrow, closing and disbursement functions. 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, and wire fraud. In those cases, the
title insurer incurs the loss under its obligation to ensure that an
unencumbered title is conveyed. These losses are recognized as expenses 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.
Large title losses due to independent agency defalcations typically occur when
the independent agency misappropriates funds from escrow accounts under its
control. Such losses are usually discovered when the independent agency fails to
pay off an outstanding mortgage loan at closing (or immediately thereafter) from
the proceeds of the new loan. These incurred losses are typically more severe in
terms of dollar value compared with traditional title policy claims since the
independent agency is often able, over time, to conceal misappropriation of
escrow funds relating to more than one transaction through the constant volume
of funds moving through its escrow accounts. In declining real estate markets,
lower transaction volumes result in a lower incoming volume of funds, making it
more difficult to cover up the misappropriation with incoming funds. Thus, when
the defalcation is discovered, it often relates to several transactions. In
addition, the overall decline in an independent agency's revenues, profits and
cash flows increases the agency's incentive to improperly utilize the escrow
funds from real estate transactions. For each of the three years ended December
31, 2021 , our net title losses due to independent agency defalcations were not
material.
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Internal controls relating to independent agencies include, but are not limited
to, periodic audits, site visits and reconciliations of policy inventories and
premiums. The audits and site visits cover examination of the escrow account
bank reconciliations and an examination of a sample of closed transactions. In
some instances, the scope of our review is limited by attorney agencies that
cite client confidentiality. Certain states have mandated annual reviews of
agencies by their underwriter. We also determine whether our independent
agencies have appropriate internal controls as defined by the American Land
Title Association's best practices and us. However, even with adequate internal
controls in place, their effectiveness can be circumvented by collusion or
improper override of the controls by management at the independent agencies. To
aid in the selection of independent agencies to review, we have developed an
agency risk model that aggregates data from different areas to identify possible
issues. This is not a guarantee that all independent agencies with deficiencies
will be identified. In addition, we are typically not the only underwriter for
which an independent agency issues policies, and independent agencies may not
always provide complete financial records for our review.
The valuation techniques performed in our quantitative analysis make use of our estimates and assumptions related to critical factors, which include revenue and operating margin growth rates, future market conditions, determination of market multiples and comparative companies, assignment of a control premium, and determination of risk-adjusted discount rates. Forecasts of future operations are based, in part, on actual operating results and our expectations as to future market conditions. Our calculation of fair value requires analysis of a range of possible outcomes and applying weights to each of the valuation technique used. Due to the uncertainty and complexity of performing the goodwill impairment analysis, actual results may not be consistent with our estimates and assumptions, which may result in a future material goodwill impairment. During 2021 and 2020, we utilized the qualitative approach in assessing goodwill impairment for each of our reporting units and concluded that no impairment was necessary. Refer also to Note 8 to our audited consolidated financial statements for details on goodwill.
RESULTS OF OPERATIONS
We discuss in this section the consolidated results of operations for the years 2021 and 2020, as compared to each corresponding prior year. Factors contributing to fluctuations in our results of operations are presented in the order of their monetary significance, and significant changes are quantified, when necessary. Segment results are included in the discussions and are discussed separately, when relevant. Industry data. PublishedU.S. mortgage interest rates and other selected residential housing data for the three years endedDecember 31, 2021 are shown below (amounts shown for 2021 are preliminary and subject to revision). The amounts below may not relate directly to or provide accurate data for forecasting our operating revenues or order counts. Our statements on home sales, mortgage interest rates and loan activity are based on averaged published industry data from sources including Fannie Mae, Freddie Mac, and theMortgage Bankers Association , when available. 2021 2020
2019
Mortgage interest rates (30-year, fixed-rate) - % Averages for the year 2.96 3.11 3.94 First quarter 2.88 3.51 4.37 Second quarter 3.00 3.23 4.00 Third quarter 2.87 2.95 3.67 Fourth quarter 3.08 2.76 3.70 Mortgage originations - $ billions 4,192 4,241
2,358
Refinancings - % of originations 58 64
46
New home sales - in millions 0.78 0.83
0.68
New home median sales price - in $ thousands 392 335
323
Existing home sales - in millions 6.14 5.66
5.34
Existing home median sales price - in $ thousands 346 295
273
Total mortgage originations in 2021 declined slightly by 1% compared to 2020 primarily due to lower refinancing activity, which decreased by 10%, partially offset by a 14% improvement in purchase originations. The lower refinancing originations in 2021 were expected as the record activity in 2020 was anticipated to decelerate, as interest rates gradually increased. Existing homes sales in 2021 improved by 8%, compared to the prior year, as housing demand continue to remain strong with buyers securing homes before interest rates increase further, while new homes sales declined by 5% in 2021 compared to 2020, primarily due to the supply constraints which are limiting sales and inventory. Median home prices for new and existing homes both increased by 17% due to the strong demand and limited supply. For 2022, the average 30-year mortgage interest fixed rate is anticipated to further climb to 3.6%, primarily influenced by the expected federal monetary policy tightening to combat elevated inflation. While this will further reduce refinancing lending and limit home affordability, with median home prices forecasted to further move up 8% compared to 2021, the industry expects homes sales to grow on a more sustainable pace. New and existing homes sales are anticipated to improve 16% and 1%, respectively, in 2022 compared to 2021. Factors affecting revenues. 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, theDistrict 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 ancillary services operations, which are principally appraisal management services, online notarization and closing services, credit and real estate data services, search and valuation services.
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;
•premium rates;
•foreign currency exchange rates;
•supply chains;
•market share;
•ability to attract and retain highly productive sales associates;
•departure of revenue-attached employees;
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•independent agency remittance rates;
•opening of new offices and acquisitions;
•office closures;
•number and value of commercial transactions, which typically yield higher
premiums;
•government or regulatory initiatives impacting regulatory or operational
requirements, including tax incentives and the implementation of the integrated
disclosure and cybersecurity requirements;
•acquisitions or divestitures of businesses;
•volume of distressed property transactions;
•seasonality and/or weather; and
•outbreaks of diseases and related quarantine orders and restrictions on travel,
trade and business operations.
Premiums are determined in part by the values of the transactions we handle. To
the extent inflation or market conditions cause increases in the prices of homes
and other real estate, premium revenues are also increased. Conversely, falling
home prices cause premium revenues to decline. As an overall guideline, a 5%
change in median home prices results in an approximately 3.7% 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. On average, refinance title premium rates are 60% of the
premium rates for a similarly priced sale transaction.
Title revenues. Direct title revenue information is presented below:
Year Ended December 31 Change Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019 2021 vs 2020 2020 vs 2019
(in $ millions) (in $ millions)
Non-commercial
Domestic 991.4 743.7 565.9 247.7 177.8 33 % 31 %
International 157.1 106.1 90.9 51.0 15.2 48 % 17 %
1,148.5 849.8 656.8 298.7 193.0 35 % 29 %
Commercial:
Domestic 242.3 166.7 188.4 75.6 (21.7) 45 % (12) %
International 31.4 21.4 24.3 10.0 (2.9) 47 % (12) %
273.7 188.1 212.7 85.6 (24.6) 46 % (12) %
Total direct title revenues 1,422.2 1,037.9 869.5 384.3 168.4 37 % 19 %
Direct title revenues in 2021 grew 37% compared to the prior year, as a result
of overall revenue improvements in both non-commercial and commercial
operations. Non-commercial revenues increased 35% in 2021, primarily driven by
increased residential transactions and scale compared to 2020. Domestic
commercial revenues increased 45% in 2021 compared to 2020, primarily due to
improved commercial transaction size and volume. Total purchase and refinancing
closed orders improved 12%, while commercial closed orders increased 15% in 2021
compared to the prior year. Domestic commercial and residential fees per file in
2021 were approximately $14,000 and $2,300 , respectively, which respectively
were 26% and 18% higher compared to 2020. Total international revenues grew
$61.0 million , or 48%, in 2021 compared to 2020, primarily due to increased
residential and commercial transaction volumes in our Canadian operations.
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Direct title revenues in 2020 improved 19% compared to 2019, primarily due to
higher non-commercial revenues driven by increased purchase and refinancing
residential orders, partially offset by decreased commercial revenues primarily
resulting from reduced transaction sizes and volumes. Total refinancing and
purchased closed orders in 2020 increased 123% and 8%, respectively; while
commercial closed orders decreased 8% compared to 2019. Domestic residential fee
per file in 2020 was approximately $1,900 compared to $2,200 in 2019, primarily
as a result of a higher mix of refinancing compared to purchase transactions in
2020. Domestic commercial fee per file in 2020 was $11,100 compared to $11,600
in 2019, primarily due to lower transaction sizes resulting from the slowdown in
the commercial real estate market as a result of the COVID-19 pandemic. Total
international revenues grew $12.3 million , or 11%, in 2020 versus 2019,
primarily because of higher volumes generated by our Canada operations,
partially offset by lower volumes from other international locations.
Closed and opened orders information is as follows:
Year Ended December 31 Change % Change
2021 2020 2019 2021 vs 2020 2020 vs 2019 2021 vs 2020 2020 vs 2019
Opened Orders:
Commercial 18,113 15,748 17,813 2,365 (2,065) 15 % (12) %
Purchase 283,350 250,058 227,073 33,292 22,985 13 % 10 %
Refinance 256,621 304,064 141,852 (47,443) 162,212 (16) % 114 %
Other 6,753 3,868 4,744 2,885 (876) 75 % (18) %
Total 564,837 573,738 391,482 (8,901) 182,256 (2) % 47 %
Closed Orders:
Commercial 17,334 15,035 16,269 2,299 (1,234) 15 % (8) %
Purchase 217,895 178,935 165,219 38,960 13,716 22 % 8 %
Refinance 211,109 203,763 91,289 7,346 112,474 4 % 123 %
Other 4,736 2,594 3,222 2,142 (628) 83 % (19) %
Total 451,074 400,327 275,999 50,747 124,328 13 % 45 %
Gross revenues from independent agency operations (agency revenues) increased
$431.6 million , or 38%, and $180.5 million , or 19%, in 2021 and 2020,
respectively, compared to corresponding prior years, which was consistent with
the trends of our direct title operations and the overall improved real estate
market. In line with the change in gross agency revenues, net agency revenues
(which are net of agency retention) increased $75.7 million , or 37%, and $35.2
million , or 21%, in 2021 and 2020, respectively, compared to 2020 and 2019.
Refer further to the "Retention by agencies" discussion under Expenses below.
Title revenues by geographic location. The approximate amounts and percentages
of consolidated title operating revenues for the last three years ended December
31, 2021 were as follows:
Year Ended December 31 Percentages
2021 2020 2019 2021 2020 2019
(in $ millions)
Texas 469 359 316 16 % 16 % 17 %
New York 263 187 216 9 % 9 % 12 %
International 198 134 122 7 % 6 % 7 %
California 192 163 134 6 % 7 % 7 %
Florida 150 102 78 5 % 5 % 4 %
All others 1,733 1,244 974 57 % 57 % 53 %
3,005 2,189 1,840 100 % 100 % 100 %
Ancillary services revenues. Ancillary services revenues in 2021 and 2020
improved
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Investment income. Investment income in 2021 and 2020 decreased $1.8 million , or
9%, and $1.2 million , or 6%, respectively, compared to 2020 and 2019, primarily
due to reduced interest income on investments resulting from the lower interest
rates environment in 2021 and 2020. Refer to Note 6 to our audited
consolidated financial statements for additional details.
Net realized and unrealized gains. Refer to Note 6 to our audited consolidated financial statements for details.
Expenses. Our employee costs and certain other operating expenses are sensitive to inflation. An analysis of expenses is shown below:
Year Ended December 31 Change % Change
2020 vs
2021 2020 2019 2021 vs 2020 2020 vs 2019 2021 vs 2020 2019
(in $ millions) (in $ millions)
Amounts retained by independent
agencies 1,300.4 944.5 799.2 355.9 145.3 38 % 18 %
As a % of agency revenues 82.2 % 82.1 % 82.3 %
Employee costs 777.0 613.2 567.2 163.8 46.0 27 % 8 %
As a % of operating revenues 23.8 % 27.0 % 30.2 %
Other operating expenses 626.8 375.2 345.3 251.6 29.9 67 % 9 %
As a % of operating revenues 19.2 % 16.5 % 18.4 %
Title losses and related claims 126.2 115.2 84.4 11.0 30.8 10 % 36 %
As a % of title revenues 4.2 % 5.3 % 4.6 %
Retention by agencies. Amounts retained by title agencies are based on
agreements between agencies and our title underwriters. Amounts retained by
independent agencies, as a percentage of revenues generated by them, averaged
82.2%, 82.1% and 82.3% in 2021, 2020 and 2019, respectively. The average
retention percentage may vary from period to period due to the geographical 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%. 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.
Selected cost ratios (by segment). The following table shows employee costs and
other operating expenses as a percentage of related segment operating revenues
for the years ended December 31 :
Employee Costs Other Operating Expenses
2021 2020 2019 2021 2020 2019
Title 24.3 % 26.8 % 29.4 % 13.8 % 13.5 % 16.5 %
Ancillary services and corporate 17.7 % 31.3 % 70.7 % 81.6 % 95.6 % 109.6 %
Employee costs. Consolidated employee costs increased $163.8 million , or 27%, in
2021 compared to 2020, primarily due to increased salaries and employee benefits
on a 20% higher average employee count driven by acquisitions, higher incentive
compensation on improved overall operating results, and increased temporary
labor and overtime costs on increased transaction volumes. Consolidated employee
costs increased $46.0 million , or 8%, in 2020 compared to 2019, primarily due to
acquisitions, higher incentive compensation on improved operating results, and
increased overtime costs driven by higher transaction volumes, partially offset
by reduced salaries expense resulting from a 4% reduction in average employee
counts (excluding acquisitions) in 2020.
Our total employee counts at December 31, 2021 , 2020 and 2019 were approximately
7,300, 5,800 and 5,300, respectively, with increases in 2021 and 2020 driven by
acquisitions. Average cost per employee in 2021 and 2020 increased 5% and 7%,
respectively, compared to the corresponding prior years, while as a percentage
of total operating revenues, employee costs were 23.8%, 27.0% and 30.2% in 2021,
2020 and 2019, respectively.
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Employee costs for the title segment increased $143.7 million , or 24%, and $46.6
million , or 9%, in 2021 and 2020, respectively, compared to corresponding prior
years, primarily due to acquisitions and higher incentive compensation on higher
title revenues. Employee costs in the ancillary services and corporate segment
increased $20.0 million , or 77%, in 2021 compared to 2020, due to higher
salaries and employee benefits as a result of acquisitions, while employee costs
decreased $0.6 million , or 2%, in 2020 compared to 2019, primarily due to
reduced average employee counts driven by volume declines, partially offset by
added employee costs from 2020 acquisitions.
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 (variable costs) and costs that fluctuate independently of revenues
(independent costs). 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, telecommunications and title plant expenses. Variable costs
include appraiser and service expenses related to ancillary services operations,
outside search and valuation fees, attorney fee splits, bad debt expenses, copy
supplies, delivery fees, postage, premium taxes and title plant maintenance
expenses. Independent costs include general supplies, litigation defense,
business promotion and marketing and travel.
Consolidated other operating expenses increased $251.6 million , or 67%, and
$29.8 million , or 9%, in 2021 and 2020, respectively, compared to corresponding
prior years. Other operating expenses, as a percentage of total operating
revenues (other operating expenses ratio), were 19.2%, 16.5% and 18.4% in 2021,
2020 and 2019, respectively. Excluding non-operating charges in 2019 primarily
related to FNF merger expenses, executive insurance policy settlement and office
closures, the other operating expenses ratio for 2019 was 17.5%.
In 2021, costs fixed in nature increased $29.0 million , or 21%, compared to
2020, primarily due to acquisitions, (which added technology costs, professional
fees, and rent and other occupancy expenses), higher third-party outsourcing
provider fees and increased consulting fees related to business acquisition and
integration. Variable costs increased $206.5 million , or 101%, primarily due to
increased appraiser and service expenses on higher ancillary services revenues,
increased outside title search, attorney fee splits and premium taxes on
improved title revenues, and state sales tax assessments. Independent costs
increased $16.1 million , or 46%, primarily due to office consolidation costs,
higher marketing and travel expenses, and increased bank service fees.
In 2020, excluding the non-operating charges presented in the table above, costs
fixed in nature increased $1.3 million , or 1%, compared to 2019, primarily due
to increased professional and consulting fees related to acquisitions and
integration and higher technology expenses, partially offset by lower rent and
other occupancy expenses. Variable costs increased $55.3 million , or 37%,
primarily due to increased appraiser expenses tied to appraisal revenues
generated by new acquisitions in the ancillary services operations, as well as
higher premium taxes, title plant maintenance expenses and attorney fee splits
consistent with higher overall title revenues. These increases were partially
offset by lower outside search expenses related to lower revenues from
commercial title and search and valuation services operations. Independent
costs, excluding the operating charges, decreased $9.1 million , or 20%,
primarily due to reduced marketing and travel expenses mainly as a result of the
COVID-19 pandemic.
Title losses. Provisions for title losses, as a percentage of title operating
revenues, were 4.2%, 5.3% and 4.6% in 2021, 2020 and 2019, respectively. The
title loss ratio in any given year can be significantly influenced by new large
claims incurred as well as adjustments to reserves for existing large claims. We
continue to manage and resolve large claims prudently and in keeping with our
commitments to our policyholders.
For the year ended December 31, 2021 , title losses increased $11.0 million , or
10%, compared to the prior year, primarily due to increased title premiums,
partially offset by favorable claims experience. For the year ended December 31,
2020 , title losses increased $30.8 million , or 36%, compared to 2019, primarily
due to increased title premiums, higher loss provisioning rate driven by an
overall uncertainty related to incurred losses resulting from the COVID-19
pandemic, and unfavorable loss experience in our Canadian operations.
Title losses paid were $71.5 million , $82.0 million and $91.0 million in 2021,
2020 and 2019, respectively. Total claims payments in 2021 decreased compared to
the prior year, due to lower payments on large and non-large claims. Total claim
payments in 2020 decreased compared to 2019, primarily due to lower payments on
non-large claims, partially offset by higher payments on large claims. Claims
payments made on large title claims, net of insurance recoveries, during 2021,
2020 and 2019 were $2.8 million , $8.7 million and $6.1 million , respectively.
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Our liability for estimated title losses as of December 31, 2021 and 2020
comprises both known claims and our IBNR. Known claims reserves are reserves
related to actual losses reported to us. Our reserve for known claims comprises
both claims related to title insurance policies as well as losses arising from
escrow closing and funding operations due to fraud or error (which are
recognized as expense when discovered). 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.
Total title policy loss reserve balances at
2021 2020
(in $ millions)
Known claims 75.9 68.9
IBNR 473.7 427.4
Total estimated title losses 549.6 496.3
The actual timing of estimated title loss payments may vary since claims, by
their nature, are complex and paid over long periods of time. Based on
historical payment patterns, 86% of the outstanding loss reserves are paid out
within seven years. As a result, the estimate of the ultimate amount to be paid
on any claim 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. As of December 31, 2021 and 2020, our reserve balance was above the
actuarial midpoint of total estimated policy loss reserves. Refer to Note 10
(Estimated title losses) to our audited consolidated financial statements for
details.
Depreciation and amortization. Depreciation and amortization expense increased
$17.2 million , or 89%, in 2021 compared to 2020, primarily due to $16.4 million
of intangible asset amortization from acquisitions. Depreciation and
amortization expense in 2020 decreased $3.3 million , or 15%, compared to 2019,
primarily due to certain information technology and other fixed assets being
fully depreciated or written off by end of 2019, and reduced purchases of fixed
assets in 2020, partially offset by $2.7 million of intangible asset
amortization related to 2020 acquisitions.
Income taxes. Our effective tax rates for 2021, 2020 and 2019 were 22.5%, 24.0%
and 25.3%, respectively, based on income before taxes (after deducting
noncontrolling interests) of $417.2 million , $203.7 million and $105.3 million ,
respectively. Refer to Note 7 to our audited consolidated financial
statements for details on the effective tax rates and income tax accounts.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As ofDecember 31, 2021 , our total cash and investments, including amounts reserved pursuant to statutory requirements, aggregated$1.2 billion . Of our total cash and investments atDecember 31, 2021 ,$798.3 million ($517.5 million , net of statutory reserves) was held inthe United States (U.S. ) and the rest internationally, principally inCanada . As a holding company, the parent company is funded principally by cash from its subsidiaries' earnings in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. Cash held at the parent company and its unregulated subsidiaries (which totaled$85.9 million atDecember 31, 2021 ) is available for funding the parent company's operating expenses, interest payments on debt and dividend payments to common stockholders. The parent company also receives distributions from Guaranty, its regulated title insurance underwriter, to meet cash requirements for acquisitions and other strategic investments. 24 -------------------------------------------------------------------------------- A substantial majority of our consolidated cash and investments as ofDecember 31, 2021 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 underTexas 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 for the funding of statutory premium reserves. Statutory premium reserves are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claims payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately$523.5 million atDecember 31, 2021 . In addition, included within cash and cash equivalents are statutory reserve funds of approximately$41.4 million atDecember 31, 2021 . 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 ofDecember 31, 2021 , our known claims reserve totaled$75.9 million and our estimate of claims that may be reported in the future, underU.S. generally accepted accounting principles, totaled$473.7 million . In addition to this, we had cash and investments (excluding equity method investments) of$339.2 million which are available for underwriter operations, including claims payments. The ability of Guaranty to pay dividends to its parent is governed byTexas insurance law. TheTexas Department of Insurance (TDI) must be notified in the future of any dividend declared, and any dividend in excess of the statutory maximum (which was approximately$210.1 million as ofDecember 31, 2021 ) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI (see Note 3 to our audited consolidated financial statements for details). 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, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. In 2021 and 2020, Guaranty paid dividends of$293.9 million (including an extraordinary dividend of$135.0 million ) and$30.0 million , respectively.
Contractual obligations. Our material contractual obligations at
Note 14 (Leases) to our audited consolidated financial statements for details on the unsecured senior notes and other notes payable, and operating leases, respectively. Refer to the Note 10 (Estimated title losses) to our audited consolidated financial statements and the Title losses section under
Results of Operations for details on title losses.
Cash flows. As the parent company conducts no operations apart from its
wholly-owned subsidiaries, the discussion below focuses on consolidated cash
flows. Refer to the consolidated statements of cash flows in the audited
consolidated financial statements.
2021 2020 2019
(in $ millions)
Net cash provided by operating activities 390.3 275.8 166.4
Net cash (used) provided by investing activities (645.3) (231.4) 7.0
Net cash provided (used) by financing activities 310.4
54.3 (37.8)
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.
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Net cash provided by operations improved by $114.5 million in 2021 compared to
2020, primarily as a result of the higher net income and lower claims payments
in 2021. Net cash provided by operations in 2020 improved by $109.4 million
compared to 2019, also primarily due to the higher net income generated and
lower claim payments in 2020. 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. We are continuing our emphasis on cost management, especially in
light of the current economic environment due to the COVID-19 pandemic,
specifically focusing on lowering unit costs of production and improving
operating margins in all our businesses. Our plans to improve margins include
additional automation of manual processes, and further consolidation of our
various systems and production operations. We continue to invest in the
technology necessary to accomplish these goals.
Investing activities. Cash used and provided by investing activities is
primarily driven by proceeds from matured and sold investments, purchases of
investments, capital expenditures and acquisition of title offices and other
businesses. During 2021, 2020 and 2019, total proceeds from securities
investments sold and matured were $143.8 million , $96.0 million and $99.3
million , respectively; while cash used for purchases of securities investments
was $143.9 million , $118.3 million and $77.5 million , respectively. During 2021,
we also invested $16.1 million in equity method investments in title offices.
We used $600.0 million and $200.0 million of cash in 2021 and 2020,
respectively, for acquisitions of various title and ancillary services
businesses, consistent with our strategy of increasing scale, growth in key
markets and broader technology and service offerings. We used $39.8 million ,
$15.0 million and $17.1 million of cash for purchases of property and equipment
during 2021, 2020 and 2019, respectively, while we generated cash proceeds of
$10.7 million in 2021 primarily from the sale of our Colorado buildings. We
maintain investment in capital expenditures at a level that enables us to
implement technologies for increasing our operational and back-office
efficiencies and pursuing market growth.
Financing activities and capital resources. Total debt and stockholders' equity
were $483.5 million and $1.3 billion , respectively, as of December 31, 2021 . As
of December 31, 2021 , our total debt-to-equity and debt-to-capitalization
ratios, excluding short-term loan agreements in connection with our Section 1031
tax-deferred property exchange (Section 1031) business, were approximately 34%
and 26%, respectively.
During 2021, we had the following debt transactions related to the parent
company (refer to Note 9 to our audited consolidated financial statements
for details of our debt transactions):
•During the first and third quarters of 2021, we drew a total of $175.0 million
on our previous line of credit facility.
•In October 2021 , we entered into an unsecured credit agreement which included a
new $200.0 million line of credit facility and a $400.0 million short-term loan
facility. We drew $370.0 million from the short-term loan facility and used a
portion of the proceeds to payoff the $273.9 million balance on the previous
line of credit facility.
•In November 2021 , we completed an offering of $450.0 million unsecured ten-year
senior notes (Senior Notes) and generated proceeds, net of underwriting
discounts and issuance costs, of $444.0 million . We used a portion of the
proceeds to payoff the $370.0 million balance of our short-term loan.
During 2021, 2020 and 2019, payments on notes payable of $165.0 million , $23.8
million and $25.0 million , respectively, and notes payable additions of $201.4
million , $16.5 million and $30.5 million , respectively, were related to our
Section 1031 business, which had an outstanding balance of $37.1 million at
December 31, 2021 . As of December 31, 2021 , the outstanding balance of our
Senior Notes was $444.1 million , while the new the line of credit facility was
fully available.
During 2021, we paid dividends of $1.365 per common share, compared to $1.20 per
common share paid for each of 2020 and 2019. In aggregate, we paid total
dividends of $36.6 million , $30.2 million and $28.3 million in 2021, 2020 and
2019, respectively. During 2020, we generated net proceeds of approximately
$109.0 million from an issuance of new shares of Common Stock, which we used
primarily for the acquisition of several title offices.
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Effect of changes in foreign currency rates. The effect of changes in foreign
currency rates on the consolidated statements of cash flows was a net (decrease)
increase in cash and cash equivalents of $(2.2) million , $3.3 million and $2.9
million in 2021, 2020 and 2019, respectively. Our primary foreign currencies are
the Canadian dollar and British pound, and, relative to the U.S. dollar, the
value of the Canadian dollar was essentially unchanged and the value of the
British pound declined in 2021, while both foreign currencies appreciated during
2020 and 2019.
***********
We believe we have sufficient liquidity and capital resources to meet the cash
needs of our ongoing operations, including the current economic and real estate
environment created by the COVID-19 pandemic (as discussed in Note 1-Q to
our audited consolidated financial statements). 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.
Other comprehensive income (loss). Unrealized gains and losses on available-for-sale securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive (loss) income, a component of stockholders' equity, until realized. Refer to Note 1-H to our audited consolidated financial statements for details.
In 2021, net unrealized investment losses of$16.1 million , net of taxes, which increased our other comprehensive loss, were primarily related to decreases in the fair values of our corporate and foreign bond securities, primarily resulting from higher interest rates. The five-yearU.S. treasury yield applicable on our investments increased approximately 90 basis points in 2021 versus 2020. Also in 2021, we recorded foreign currency translation losses which increased our other comprehensive loss by$0.7 million , net of taxes, which was primarily driven by the depreciation in value of the British pound against theU.S. dollar in 2021. In 2020, net unrealized investment gains of$14.9 million , net of taxes, which increased our other comprehensive income, were primarily related to increases in the fair values of our overall bond securities portfolio, mainly driven by the effect of lower interest rates and partially offset by higher credit spreads. The five-yearU.S. treasury yield applicable on our investments decreased approximately 130 basis points in 2020 versus 2019, while the applicable credit spreads increased by approximately 70 basis points in 2020 compared to 2019. Also in 2020, we recorded foreign currency translation gains which increased our other comprehensive income by$4.8 million , net of taxes, which was primarily driven by the appreciation in value of the Canadian dollar andUnited Kingdom pound against theU.S. dollar in 2020. In 2019, net unrealized investment gains of$15.6 million , net of taxes, which increased our other comprehensive income, were primarily related to increases in the fair values of our overall bond securities portfolio driven by reduced interest rates and credit spreads. The five-yearU.S. treasury yield and applicable credit spreads on our investments decreased approximately 80 and 20 basis points, respectively, in 2019 compared to the prior year. Also in 2019, we recorded foreign currency translation gains which increased our other comprehensive income by$6.5 million , net of taxes, which was primarily driven by the appreciation in value of the Canadian dollar andUnited Kingdom pound against theU.S. dollar in 2019. Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements. We routinely hold funds in segregated escrow accounts relating to closing of real estate transactions that we service and tax-deferred property exchanges, pursuant to Section 1031 of the Internal Revenue Code, where we serve as a qualified intermediary and hold the proceeds until the related qualifying exchange occurs. In accordance with industry practice, these segregated accounts are not included on our balance sheet. See Note 15 to our audited consolidated financial statements included in Item 15 of Part IV of this report for details. 27
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Cautionary statements regarding 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 "may," "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 volatility of economic conditions, including the duration and ultimate impact of the COVID-19 pandemic; 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 ability to attract and retain highly productive sales associates; the impact of vetting our agency operations for quality and profitability; independent agency remittance rates; 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; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; seasonality and weather; and our ability to respond to the actions of our competitors. 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.
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