STEWART INFORMATION SERVICES CORPORATION For the year endedDecember 31, 2020 , net income attributable to Stewart was$154.9 million , or$6.22 per diluted share, compared to$78.6 million , or$3.31 per diluted share, for the year endedDecember 31, 2019 . Pretax income before noncontrolling interests for the year endedDecember 31, 2020 was$218.5 million , compared to$117.0 million for the year endedDecember 31, 2019 . Total revenues increased 18% to$2.3 billion in 2020, from$1.9 billion in 2019, primarily due to increased revenues from title operations principally resulting from increased transaction volumes, and a net revenue increase from ancillary services operations mainly due to acquisitions during 2020. In line with the improved revenues, total operating expenses increased 14% in 2020 compared to 2019. 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. During 2020, we acquired a number of title offices across several states, two appraisal management services companies, and an online notarization and closing solutions provider, in line with our investment and growth strategy of focusing on attractive businesses and geographies where we can have sustained success and where additional scale can efficiently and effectively improve profitability and margins. These acquisitions realign Stewart to strongly compete in several strategic markets where we have traditionally been underrepresented. As expected, these acquisitions were immediately accretive to Stewart and contributed in 2020 total revenues and pretax income of$109.2 million and$17.3 million , respectively. We believe our solid operating results and liquidity position will allow us to continue investing and growing to maximize our operational potential. For the fourth quarter 2020, we reported net income attributable to Stewart of$59.7 million ($2.22 per diluted share), compared to break-even results for the fourth quarter 2019. On an adjusted basis, Stewart's fourth quarter 2020 net income of$56.4 million ($2.09 per diluted share) increased 174% from$20.6 million ($0.87 per diluted share) in the fourth quarter 2019. Fourth quarter 2020 pretax income before noncontrolling interests was$83.9 million compared to pretax income before noncontrolling interests of$3.8 million for the fourth quarter 2019. 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 recorded in the title segment. Fourth quarter 2019 results included the following pretax items: •$8.0 million of net realized and unrealized losses, which included$11.7 million of impairment expenses relating to long-lived assets, partially offset by$2.2 million of realized gains on sale of securities investments and$1.1 million of net unrealized gains on fair value changes of equity securities investments, •$6.5 million of severance expenses related to our corporate reorganization included in employee costs ($4.3 million in the ancillary services and corporate segment and$2.2 million in the title segment), •$5.9 million of office closure costs primarily related to lease terminations included in other operating expenses ($4.7 million in the title segment and$1.2 million in the ancillary services and corporate segment), •$2.2 million of executive insurance policy settlement expense recorded as part of other operating expenses within the ancillary services and corporate segment, •$1.7 million of commercial services' escrow loss recorded as part of title loss expense in the title segment, and •$2.1 million of other non-operating charges ($1.3 million in the ancillary services and corporate segment and$0.8 million in the title segment). 13 --------------------------------------------------------------------------------
Summary results of the title segment are as follows (in $ millions, except pretax margin and % change):
For the Three Months
Ended December 31,
2020 2019 % Change
Operating revenues 690.2 506.0 36 %
Investment income 4.1 5.2 (21) %
Net realized and unrealized gains (losses) 4.4 (3.4) 230 %
Pretax income 94.9 20.3 367 %
Pretax margin 13.6 % 4.0 %
Title segment pretax income increased $74.6 million , while pretax margin
improved 960 basis points to 13.6% in the fourth quarter 2020 compared to the
prior year quarter. Title operating revenues increased $184.2 million , or 36%,
resulting from increases in direct title revenues of $106.0 million , or 45%, and
gross independent agency revenues of $78.3 million , or 29%. In line with the
increased title revenues, the segment's fourth quarter 2020 overall operating
expenses increased $116.3 million , or 24%, with agency retention expenses and
combined title employee costs and other operating expenses increasing 28% and
16%, respectively, from the prior year quarter. Average independent agency
remittance rate improved to 18.2% in the fourth quarter 2020, compared to 17.7%
in the prior year quarter, while combined title employee costs and other
operating expenses, as a percentage of title revenues, improved to 38.8% in the
fourth quarter 2020 compared to 45.7% in the prior year quarter.
Title loss expense increased $17.7 million , or 61%, in the fourth quarter 2020
compared to the prior year quarter, primarily due to increased title revenues
and higher loss provisioning rates due to the macroeconomic environment. As a
percentage of title revenues, the title loss expense in the fourth quarter 2020
was 6.8% compared to 5.7% from the prior year quarter; on a full year basis, the
title loss ratio was 5.3% in 2020 compared to 4.6% in 2019. Given the current
economic environment, we anticipate that our 2021 loss ratio will be comparable
to the full year 2020 loss ratio.
The segment's investment income decreased $1.1 million , or 21%, in the fourth
quarter 2020, primarily as a result of lower interest rates during 2020. As
noted previously, net realized and unrealized gains for the fourth quarter 2020
consisted primarily of net unrealized gains on fair value changes of equity
securities investments (as noted above), while net realized and unrealized
losses for the fourth quarter 2019 included $7.1 million of impairment expenses
related to long-lived assets, partially offset by net gains from sale of
securities investments and fair value changes of equity securities investments.
Direct title revenue information is presented below (in $ millions, except %
change):
For the Three Months
Ended December 31,
2020 2019 % Change
Non-commercial
Domestic 239.7 149.1 61 %
International 35.7 24.1 48 %
275.4 173.2 59 %
Commercial:
Domestic 58.1 54.7 6 %
International 7.7 7.4 4 %
65.8 62.1 6 %
Total direct title revenues 341.2 235.3 45 %
14-------------------------------------------------------------------------------- Direct title revenues increased as a result of overall improvements in commercial and non-commercial revenues, primarily driven by increased transactions during the fourth quarter 2020 compared to the prior year quarter. Domestic non-commercial revenues increased$90.6 million , or 61%, as a result of higher purchase and refinancing residential closed orders from both existing and newly acquired title offices. Domestic commercial revenues improved$3.4 million , or 6%, due to increased transaction size and volume. Total international revenues increased$11.9 million , or 38%, primarily due to higher volumes in our Canadian and European operations. Domestic commercial fee per file in the fourth quarter 2020 was approximately$12,900 , an improvement of 6% from the fourth quarter 2019; while domestic residential fee per file was approximately$2,000 , or 4% lower than the prior year quarter, primarily due to a higher mix of refinancing compared to purchase transactions.
Summary results of the ancillary services and corporate segment are as follows (in $ millions, except % change):
For the Three Months
Ended December 31,
2020 2019 % Change
Total operating revenues 38.0 6.7 464 %
Net realized losses - (4.6) 100 %
Pretax loss (11.0) (16.5) 33 %
The segment's operating revenues increased from the prior year quarter as a
result of 2020 acquisitions, which generated $34.5 million in the fourth quarter
2020. Revenues from our capital markets search and home equity valuation
services operations declined $3.2 million , or 48%, due to significantly lower
customer orders. Net realized losses in the fourth quarter 2019 were primarily
related to impairments of long-lived assets. Pretax results for ancillary
services operations, including acquisitions, improved $0.5 million , or 48%, in
the fourth quarter 2020 compared to the prior year quarter. Net expenses
attributable to parent company and corporate operations for the fourth quarter
2020 were approximately $10.4 million , which included costs related to
charitable contributions, increased employee vacation carryover, and third-party
strategic consulting; while net expenses for the fourth quarter 2019 were
approximately $10.9 million , which included reorganization severance expenses,
executive insurance policy settlement costs, charitable contributions and asset
impairment charges.
COVID-19 pandemic. In response to the COVID-19 pandemic, health and governmental
bodies, including the state of Texas where we are headquartered, issued travel
restrictions, quarantine orders, temporary closures of non-essential businesses
and other restrictive measures. In response to the pandemic, we deployed our
business continuity plan in March and continue to take appropriate measures to
protect the safety of all our employees and customers, while monitoring the
evolving effects of the COVID-19 pandemic on the national and international
fronts. Within the U.S. , our business was deemed an essential business which
allowed us to continue underwriting and closing real estate transactions for our
residential and commercial customers on a daily basis. When possible, we utilize
our digital capabilities, including remote online notarization (RON), remote ink
notarization (RIN), electronic signature platforms, virtual underwriting, and
mobile earnest money transfer tools to aid our employees in facilitating real
estate transactions during this challenging environment.
Currently, various levels of restrictions to address the spread of COVID-19 are
still in place across the U.S. and the rest of the world, with some economies
gradually opening up and efforts to distribute vaccines continue. We continue to
proactively manage our business through this crisis with the help of our
exceptional employees and support of our customers. While the pandemic
continues, Stewart is committed to helping people safely navigate the real
estate closing process. We believe our strong liquidity position and innovative
solutions will allow us to facilitate our customers' purchase and refinance of
real estate should macroeconomic conditions become more challenging.
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.
15
--------------------------------------------------------------------------------
Title loss reserves
Provisions for title losses, as a percentage of title operating revenues, were
5.3%, 4.6% and 3.9% for the years ended December 31, 2020 , 2019 and 2018,
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 pretax operating results by
approximately $21.9 million for the year ended December 31, 2020 .
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, 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 losses (those individually in excess of$1.0 million ) may impact provisions either for known claims or for IBNR. 2020 2019 2018 (in $ millions) Provisions - Known Claims: Current year 14.3 18.4 18.2 Prior policy years 68.8 73.5 61.6 83.1 91.9 79.8 Provisions - IBNR Current year 84.5 60.7 52.3 Prior policy years 16.4 5.3 1.0 100.9 66.0 53.3 Transferred IBNR to Known Claims (68.8) (73.5) (61.6) Total provisions 115.2 84.4 71.5 16
-------------------------------------------------------------------------------- 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. In 2019, total known claims provisions increased by$12.1 million , or 15%, to$91.9 million primarily due to the higher reported claims relating to prior year policies compared to 2018. Total 2019 provisions - IBNR increased by$12.7 million , or 24%, to$66.0 million compared to the prior year, primarily as a result of unfavorable loss experience in 2019 and a$4.0 million prior policy year reserve reduction during 2018. As a percentage of title operating revenues, current year provisions - IBNR were 3.9%, 3.3% and 2.8% in 2020, 2019 and 2018, respectively. Provisions - IBNR relating to prior policy years for 2019 were primarily related to adverse developments on large claims. 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 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. 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 endedDecember 31, 2020 , our net title losses due to independent agency defalcations were not material. 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 theAmerican 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.Goodwill impairmentGoodwill is not amortized, but is reviewed annually during the third quarter usingJune 30 balances, or whenever occurrences of events indicate a potential impairment at the reporting unit level. We evaluate goodwill based on four reporting units with goodwill balances - direct operations, agency operations, international operations and ancillary services. 17 -------------------------------------------------------------------------------- We have an option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. In performing the qualitative assessment, we consider factors that include macroeconomic conditions, industry and market considerations, overall actual and expected financial performance, market perspective on the Company, as well as other relevant events and circumstances determined by management. We evaluate the weight of each factor to determine whether an impairment more-likely-than-not exists. If we decide not to use a qualitative assessment or if the reporting unit fails the qualitative assessment, we perform the quantitative impairment analysis. The quantitative analysis involves the comparison of the fair value of each reporting unit to its carrying amount. The goodwill impairment is calculated as the excess of the reporting unit's carrying amount over the estimated fair value and is charged to current operations. While we are responsible for assessing whether an impairment of goodwill exists, we utilize inputs from third-party appraisers in performing the quantitative analysis. We estimate the fair value using a combination of the income approach (discounted cash flow (DCF) technique) and the market approach (guideline company and precedent transaction analyses). The DCF model utilizes historical and projected operating results and cash flows, initially driven by estimates of changes in future revenue levels, and risk-adjusted discount rates. Our projected operating results are primarily driven by anticipated mortgage originations, which we obtain from projections by industry experts, for our title reporting units and expected contractual revenues for our ancillary services reporting unit. Fluctuations in revenues, followed by our ability to appropriately adjust our employee count and other operating expenses, or large and unanticipated adjustments to title loss reserves, are the primary reasons for increases or decreases in our projected operating results. Our market-based valuation methodologies utilize (i) market multiples of earnings and/or other operating metrics of comparable companies and (ii) our market capitalization and a control premium based on market data. 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.
We concluded that the goodwill related to each of our reporting units was not impaired after performing the qualitative assessment during 2020 and the quantitative impairment analysis during 2019. Refer to Note 1-L and
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 2020 and 2019, 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, 2020 are shown below (amounts shown for 2020 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 . 2020 2019 2018 Mortgage interest rates (30-year, fixed-rate) - % Averages for the year 3.11 3.94 4.54 First quarter 3.51 4.37 4.27 Second quarter 3.23 4.00 4.54 Third quarter 2.95 3.67 4.57 Fourth quarter 2.76 3.70 4.78 Mortgage originations - $ billions 3,929 2,358 1,766 Refinancings - % of originations 62 46 30 New home sales - in millions 0.84 0.68 0.62 New home sales - median sales price in $ thousands 332 323 326 Existing home sales - in millions 5.65
5.34 5.34 Existing home sales - median sales price in $ thousands 292 273 259
Total mortgage originations improved 67% in 2020 compared to 2019 primarily due to the record-low interest rates in 2020, which drove refinancing lending to increase 125% from the prior year. Purchase lending also increased 17%, which was additionally influenced by growth in buyer demand, despite lower housing inventory levels. Compared to the prior year, new and existing home sales in 2020 improved 23% and 6%, respectively, while the median new and existing home prices also increased 3% and 7%, respectively. For 2021, the average 30-year mortgage interest fixed rate is expected to stay the same with that of 2020, while the housing activity, though expected to remain strong in 2021, is forecasted to decelerate compared to the pace set by the second half of 2020. Total lending is estimated to decline 21%, compared to 2020, mainly due to 39% lower refinancing originations, which will be partially offset by an 8% rise in purchase originations. Nevertheless, 2021 refinancing originations are expected to be 38% higher than that in 2019. New and existing homes sales in 2021 are expected to grow 10% and 7%, respectively, compared to 2020, while median new and existing home prices are estimated to increase 2% and 3%, respectively. 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, independent agencies and centralized title services centers, or through reinsurance agreements. 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, search and valuation services. The principal factors that contribute to changes in our operating revenues 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 executives and associates; •departure of revenue-attached employees; •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; 18 -------------------------------------------------------------------------------- •acquisitions or divestitures of businesses; •volume of distressed property transactions; •seasonality and/or weather; and •outbreaks of disease, including the COVID-19 pandemic, and related 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 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
2019 vs
2020 2019 2018 2020 vs 2019 2019 vs 2018 2020 vs 2019 2018
(in $ millions) (in $ millions)Non-commercial
Domestic 743.7 565.9 520.8 177.8 45.1 31 % 9 %
International 106.1 90.9 87.4 15.2 3.5 17 % 4 %
849.8 656.8 608.2 193.0 48.6 29 % 8 %
Commercial:
Domestic 166.7 188.4 200.5 (21.7) (12.1) (12) % (6) %
International 21.4 24.3 24.5 (2.9) (0.2) (12) % (1) %
188.1 212.7 225.0 (24.6) (12.3) (12) % (5) %
Total direct title revenues 1,037.9 869.5 833.2 168.4 36.3 19 % 4 %
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 from existing offices and revenues generated by acquired
title offices in 2020. This increase was 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 in 2020
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 during
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.
Direct title revenues in 2019 increased 4% compared to 2018, primarily due to
the improvement in non-commercial domestic and total international revenues,
respectively, which were partially offset by a decline in domestic commercial
revenues. The improvement in non-commercial domestic revenues was primarily due
to a 13% improvement in total purchase and refinancing closed orders influenced
by lower interest rates in 2019 compared to the prior year. Domestic commercial
revenues declined primarily as a result of lower number of commercial
transactions in 2019 versus the prior year. Total international revenues
increased primarily due to improved transaction volumes in our Canada and United
Kingdom operations, partially offset by the effect of the weaker average
exchange rates of the Canadian dollar and United Kingdom pound against the U.S.
dollar during 2019 compared to 2018.
19
--------------------------------------------------------------------------------Closed and opened orders information is as follows:
Year Ended December 31 Change % Change
2020 2019 2018 2020 vs 2019 2019 vs 2018 2020 vs 2019 2019 vs 2018
Opened Orders:
Commercial 15,775 17,813 24,152 (2,038) (6,339) (11) % (26) %
Purchase 250,074 227,073 227,787 23,001 (714) 10 % - %
Refinance 304,068 141,852 83,231 162,216 58,621 114 % 70 %
Other 3,868 4,744 8,997 (876) (4,253) (18) % (47) %
Total 573,785 391,482 344,167 182,303 47,315 47 % 14 %
Closed Orders:
Commercial 15,042 16,269 19,629 (1,227) (3,360) (8) % (17) %
Purchase 178,954 165,219 171,219 13,735 (6,000) 8 % (4) %
Refinance 203,766 91,289 54,986 112,477 36,303 123 % 66 %
Other 2,594 3,222 8,567 (628) (5,345) (19) % (62) %
Total 400,356 275,999 254,401 124,357 21,598 45 % 8 %
Gross revenues from independent agency operations (agency revenues) increased
$180.5 million , or 19%, in 2020 compared to 2019, which was consistent with the
improving real estate market trends and the continued return of agents after the
terminated merger transaction with FNF in late 2019. Gross agency revenues in
2019 declined $33.4 million , or 3%, compared to 2018, primarily due to the
negative effect of the proposed FNF merger on our agents. In line with the
change in gross agency revenues, net agency revenues (which are net of agency
retention) increased $35.2 million , or 21%, in 2020 and declined $5.6 million ,
or 3%, in 2019 compared to 2018. 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, 2020 were as follows:
Year Ended December 31 Percentages
2020 2019 2018 2020 2019 2018
(in $ millions)
Texas 359 316 340 16 % 17 % 19 %
New York 187 216 224 9 % 12 % 12 %
California 163 134 130 7 % 7 % 7 %
International 134 122 119 6 % 7 % 6 %
Florida 102 78 76 5 % 4 % 4 %
Colorado 81 50 44 4 % 3 % 2 %
All others 1,163 924 904 53 % 50 % 50 %
2,189 1,840 1,837 100 % 100 % 100 %
Ancillary services revenues. Ancillary services revenues in 2020 increased $45.2
million , or 121%, compared to 2019, primarily due to $65.8 million of revenues
generated from 2020 acquisitions, partially offset by $20.6 million , or 55%,
lower revenues from our capital markets search and home equity valuation
services operations as a result of reduced market activity in 2020. In 2019,
ancillary services revenues declined $13.3 million , or 26%, compared to 2018,
primarily due to significantly lower customer orders.
Investment income. Investment income in 2020 declined
Net realized and unrealized gains. Refer to Note 6 to our audited consolidated financial statements for details.
20
--------------------------------------------------------------------------------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. 2019 vs.
2020 2019 2018 2020 vs. 2019 2019 vs. 2018 2019 2018
(in $ millions) (in $ millions)
Amounts retained by independent
agencies 944.5 799.2 827.0 145.3 (27.8) 18 % (3) %
As a % of agency revenues 82.1 % 82.3 % 82.4 %
Employee costs 613.2 567.2 562.5 46.0 4.7 8 % 1 %
As a % of operating revenues 27.0 % 30.2 % 29.8 %
Other operating expenses 375.2 345.3 345.3 29.9 - 9 % - %
As a % of operating revenues 16.5 % 18.4 % 18.3 %
Title losses and related claims 115.2 84.4 71.5 30.8 12.9 36 % 18 %
As a % of title revenues 5.3 % 4.6 % 3.9 %
`
Retention by agencies. Amounts retained by title agencies are based on
agreements between the agencies and our title underwriters. Amounts retained by
independent agencies, as a percentage of revenues generated by them, averaged
82.1%, 82.3% and 82.4% in 2020, 2019 and 2018, respectively. The slight
improvement of the average retention ratio in 2020, compared to 2019, was
primarily due to relatively higher agency revenue increase in states with lower
retention rates. 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.
Non-operating charges. Comparisons for employee costs and other operating
expenses for the three years ended
Income Statement Line 2020 2019 2018
(in $ thousands)
Ancillary services and corporate segment:
FNF merger expenses Other operating expenses - 6,835 12,673
Severance expenses Employee costs - 4,296 354
Executive insurance policy settlement Other operating expenses - 2,151 -
Office closure costs Other operating expenses - 1,222 -
Litigation-related accruals Other operating expenses - - 1,200
Other charges Other operating expenses - 1,298 -
- 15,802 14,227
Title segment:
Severance expenses Employee costs 2,816 2,188 635
Office closure costs Other operating expenses - 5,346 750
2,816 7,534 1,385
Total charges 2,816 23,336 15,612
21-------------------------------------------------------------------------------- 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 endedDecember 31 : Employee Costs Other Operating Expenses 2020 2019 2018 2020 2019 2018 Title 26.8 % 29.4 % 29.0 % 13.5 % 16.5 % 16.0 % Ancillary services and corporate 31.3 % 70.7 % 57.1 % 95.6 % 109.6 % 101.5 % Employee costs. Consolidated employee costs increased$46.0 million , or 8%, primarily due to acquisitions, higher incentive compensation on improved operating results, and increased overtime costs driven by higher transaction volumes in 2020 compared to 2019. These increases were partially offset by reduced salaries expense resulting from a 4% reduction in average employee counts (excluding acquisitions) in 2020. Consolidated employee costs in 2019 increased$4.7 million , or 1%, compared to 2018, primarily due to increased incentive compensation resulting from higher direct title revenues and the executive severance charges related to the corporate reorganization, which was partially offset by reduced salaries expense driven by a 6% reduction in average employee counts. Our total employee counts atDecember 31, 2020 , 2019 and 2018 were approximately 5,800, 5,300 and 5,400, respectively. Average cost per employee in 2020 and 2019 both increased 7%, compared to the corresponding prior years, primarily due to increased incentive compensation and severance charges. As a percentage of total operating revenues, employee costs were 27.0%, 30.2% and 29.8% in 2020, 2019 and 2018, respectively. Employee costs for the title segment increased$46.6 million , or 9%, in 2020 compared to 2019, primarily due to acquisitions and higher incentive compensation on higher title revenues. The title segment's employee costs in 2019 increased$7.2 million , or 1%, versus 2018, primarily due to increased incentive compensation, partially reduced by the lower salaries expense resulting from lower average employee counts. Employee costs in the ancillary services and corporate segment decreased$0.6 million , or 2%, in 2020 compared to 2019, and also decreased$2.5 million , or 8%, in 2019 compared to 2018, primarily due to lower overall costs resulting from reduced average employee counts driven volume declines. However, the decreased employee costs in 2020 were 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 expenses, 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$29.8 million , or 9%, in 2020 compared to 2019, while other operating expenses in 2019 were comparable to 2018. Other operating expenses, as a percentage of total operating revenues (other operating expenses ratio), were 16.5%, 18.4% and 18.3% in 2020, 2019 and 2018, respectively. Excluding the impact of the non-operating charges (as presented in the table above), the other operating expenses ratio would have been 17.5% in both 2019 and 2018. 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. 22 -------------------------------------------------------------------------------- In 2019, excluding the non-operating charges presented in the table above, costs fixed in nature decreased$6.1 million , or 4%, compared to 2018, primarily due to reduced insurance expenses, professional and consulting fees and telecommunications expenses. Variable costs remained comparable to the prior year as the decreased outside search expenses resulting from lower ancillary services revenues were offset by increased bad debt expenses and higher premium taxes on higher title revenues. Excluding the non-operating charges, independent costs increased$2.9 million , or 7%, primarily due to increased marketing expenses and litigation-related accruals. Title losses. Provisions for title losses, as a percentage of title operating revenues, were 5.3%, 4.6% and 3.9% in 2020, 2019 and 2018, 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 endedDecember 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. For the year endedDecember 31, 2019 , title losses increased$12.9 million , or 18%, compared to 2018, primarily due to unfavorable loss experience in 2019, resulting in a higher current year policy provisioning rate and increased loss provisions in portions of our non-Canadian international operations, and a$4.0 million prior policy year reserve reduction during 2018. Title losses paid were$82.0 million ,$91.0 million and$82.7 million in 2020, 2019 and 2018, respectively. 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. The higher claims payments in 2019 compared to the prior year were primarily due to higher payments on non-large claims, partially offset by lower payments on large claims. Claims payments made on large title claims, net of insurance recoveries, during 2020, 2019 and 2018 were$8.7 million ,$6.1 million and$7.3 million , respectively. Our liability for estimated title losses as ofDecember 31, 2020 and 2019 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
2020 2019
(in $ millions)
Known claims 68.9 67.8
IBNR 427.4 391.3
Total estimated title losses 496.3 459.1
Title claims are generally reported within the first six years after policy
issuance and the timing of payments on these claims can significantly impact the
balance of known claims, since claims, in many cases, may be open for several
years before resolution and payment occur. As a result, the estimate of ultimate
amount to be paid on any claim may be modified over that time period. As of
December 31, 2020 and 2019, our reserve balance was above the actuarial midpoint
of total estimated policy loss reserves.
Depreciation and amortization. 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. Depreciation and amortization expense in 2019 decreased $2.4
million , or 10%, compared to the prior year, primarily due to some assets being
fully depreciated or amortized.
Income taxes. Our effective tax rates for 2020, 2019 and 2018 were 24.0%, 25.3%
and 22.1%, respectively, based on income before taxes (after deducting
noncontrolling interests) of $203.7 million , $105.3 million and $61.0 million ,
respectively. Refer to Note 7 to our audited consolidated financial
statements for details on the effective tax rates and income tax accounts.
23
--------------------------------------------------------------------------------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, 2020 , our total cash and investments, including amounts reserved pursuant to statutory requirements, aggregated$1.1 billion ($621.2 million , net of statutory reserves on cash and investments). Of our total cash and investments atDecember 31, 2020 ,$814.8 million ($546.0 million , net of statutory reserves) was held inthe United States (U.S. ) and the rest internationally, principally inCanada . Cash held at the parent company totaled$3.6 million atDecember 31, 2020 . 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 theTexas 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. To the extent such uses exceed cash available, the parent company is dependent on distributions from Guaranty, its regulated title insurance underwriter. A substantial majority of our consolidated cash and investments as ofDecember 31, 2020 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$496.6 million atDecember 31, 2020 . In addition, included within cash and cash equivalents are statutory reserve funds of approximately$20.0 million atDecember 31, 2020 . 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, 2020 , our known claims reserve totaled$68.9 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled$427.4 million . In addition to this, we had cash and investments (excluding equity method investments) of$428.9 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. The TDI must be notified of any dividend declared, and any dividend in excess of the statutory maximum of 20% of surplus (which was approximately$158.9 million as ofDecember 31, 2020 ) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. Also, theTexas 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. Guaranty paid dividends of$30.0 million to its parent during 2020 and none during 2019. Contractual obligations. Our material contractual obligations atDecember 31, 2020 are composed primarily of amounts drawn on our line of credit facility, other notes payable, operating leases and reserves for estimated title losses. The timing above for payments of notes payable is based upon contractually stated payment terms of each debt agreement. AtDecember 31, 2020 , the outstanding balance on our line of credit facility is due in 2025. Other notes payable include short-term loan agreements in connection with our Section 1031 business (Section 1031 notes) and finance lease obligations. Operating leases are primarily for office space and expire over the next ten years. Refer to
Note 10 (Notes payable) and Note 15 (Leases) to our audited consolidated financial statements for details on the annual maturity of related obligations.
24
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In regard to the reserves for estimated title losses, the timing of payments is
not set by contract. 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 our historical payment patterns, approximately 77% of the outstanding
reserves are paid out within six years. Refer to Note 11 (Estimated title
losses) to our audited consolidated financial statements for details.
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.
2020 2019 2018
(in $ millions)
Net cash provided by operating activities 275.8 166.4 84.2
Net cash (used) provided by investing activities (231.4)
7.0 9.4
Net cash provided (used) by financing activities 54.3 (37.8) (47.8)
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. Net cash provided by operations in 2020 improved by$109.4 million compared to 2019, primarily due to the higher net income generated and lower claim payments in 2020. Net cash provided by operations in 2019 improved by$82.2 million compared to 2018, primarily due to the higher net income in 2019, which included the$50.0 million merger termination fee from FNF, partially offset by higher payments on claims. 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 2020, 2019 and 2018, total proceeds from securities investments sold and matured were$96.0 million ,$99.3 million and$79.1 million , respectively; while cash used for purchases of securities investments was$118.3 million ,$77.5 million and$43.1 million , respectively. The higher purchases of securities investments in 2020 and 2019 were primarily due to our resumption to normal activity of investing in securities, following the relatively lower activity in 2018 when we invested more into cash equivalents and short-term investments, which had more favorable interest rates. We used$200.0 million of cash in 2020 for acquisitions of several title offices and ancillary services businesses and also used$19.0 million of cash in 2018 for acquiring title offices; while we used$15.0 million ,$17.1 million and$10.7 million of cash for purchases of property and equipment during 2020, 2019 and 2018, 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. 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. During each of 2020, 2019 and 2018, we paid total dividends of$1.20 per common share, which aggregated to$30.2 million ,$28.3 million and$28.3 million , respectively. 25 -------------------------------------------------------------------------------- Total debt and stockholders' equity were$101.8 million and$1.0 billion , respectively, as ofDecember 31, 2020 . During 2020, 2019 and 2018, payments on notes payable of$23.8 million ,$25.0 million and$16.3 million , respectively, and notes payable additions of$16.5 million ,$30.5 million and$14.5 million , respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business. As ofDecember 31, 2020 , the outstanding balance on the line of credit facility was$98.9 million , while the remaining balance of the line of credit available for use was$98.6 million , net of an unused$2.5 million letter of credit. Our debt-to-equity ratio atDecember 31, 2020 , excluding our Section 1031 notes, was approximately 10.0%. 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 increase (decrease) in cash and cash equivalents of$3.3 million ,$2.9 million and$(3.8) million in 2020, 2019 and 2018, respectively. Our principal foreign operating unit is inCanada , and the value of the Canadian dollar, on average and relative to theU.S. dollar, appreciated during 2020 and 2019, while it declined during 2018. *********** We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations. However, we may determine that additional debt or equity funding is warranted to provide liquidity for achievement of strategic goals or acquisitions or for unforeseen circumstances. Other than scheduled maturities of debt, operating lease payments and anticipated claims payments, we have no material contractual commitments. We expect that cash flows from operations and cash available from our underwriters, subject to regulatory restrictions, will be sufficient to fund our operations, including claims payments. However, to the extent that these funds are not sufficient, we may be required to borrow funds on terms less favorable than we currently have or seek funding from the equity market, which may not be successful or may be on terms that are dilutive to existing stockholders.
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 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. In 2018, net unrealized investment losses of$9.8 million , net of taxes, which increased our other comprehensive loss, were primarily related to temporary decreases in fair values of corporate bond securities investments driven by increases in the overall rate environment. Our net unrealized investment losses were consistent with the approximately 40 basis points increase of the five-yearU.S. treasury yield, along with the approximately 40 basis points increase of applicable credit spreads on our investments in 2018. Also in 2018, we recorded foreign currency translation losses which increased our other comprehensive loss by$10.5 million , net of taxes, which was primarily driven by declines in the value of the Canadian dollar andUnited Kingdom pound against theU.S. dollar in 2018. 26
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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 16 to our audited consolidated financial statements included in Item 15 of Part IV of this report for details. 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, as amended. 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 effects 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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