STEWART INFORMATION SERVICES CORPORATION MANAGEMENT'S OVERVIEW
First quarter 2021 overview. We reported net income attributable to Stewart for the first quarter 2021 of$54.2 million ($2.01 per diluted share), compared to net income attributable to Stewart of$5.2 million ($0.22 per diluted share) for the first quarter 2020. Excluding net realized and unrealized gains and losses, Stewart's first quarter 2021 net income of$51.7 million ($1.92 per diluted share) increased$38.4 million , or 289%, from$13.3 million ($0.56 per diluted share) in the first quarter 2020. First quarter 2021 pretax income before noncontrolling interests was$74.0 million compared to pretax income before noncontrolling interests of$9.3 million for the first quarter 2020. First quarter 2021 results included$3.3 million of pretax net realized and unrealized gains, primarily related to net unrealized gains on fair value changes of equity securities investments recorded in the title segment. First quarter 2020 results included$11.1 million of pretax net realized and unrealized losses, which included$10.6 million of net unrealized losses on fair value changes of equity securities investments recorded in the title segment. Summary results of the title segment are as follows ($ in millions, except pretax margin): For the Three Months Ended March 31, 2021 2020 % Change Operating revenues 625.4 440.3 42 % Investment income 3.9 5.2 (24) % Net realized and unrealized gains (losses) 3.2 (11.1) 129 % Pretax income 77.1 14.8 420 % Pretax margin 12.2 % 3.4 % Title segment pretax income improved by$62.3 million , or 420%, while pretax margin increased 880 basis points to 12.2% in the first quarter 2021 compared to the prior year quarter. Title operating revenues grew$185.1 million , or 42%, as a result of improvements in direct title revenues of$81.2 million , or 41%, and gross independent agency revenues of$103.9 million , or 43%. Consistent with the increased title revenues, overall segment operating expenses increased$135.9 million , or 32%, in the first quarter 2021, with agency retention expenses and combined title employee costs and other operating expenses increasing 42% and 21%, respectively, from the first quarter 2020. Average independent agency remittance rate improved to 17.9% in the first quarter 2021, compared to 17.6% in the prior year quarter, while combined title employee costs and other operating expenses, as a percentage of title revenues, improved to 38.1% in the first quarter 2021, from 44.9% in the first quarter 2020. Title loss expense increased$10.1 million , or 54%, in the first quarter 2021 compared to the prior year quarter, primarily as a result of increased title revenues. As a percentage of title revenues, the title loss expense in the first quarter 2021 was 4.6% compared to 4.2% from the prior year quarter. The segment's investment income decreased$1.3 million , or 24%, primarily as a result of lower interest rates applicable to our short-term and securities investments during the first quarter 2021 compared to the first quarter 2020. Net realized and unrealized gains and losses for the first quarters 2021 and 2020 consisted primarily of net unrealized gains and losses related to fair value changes of equity securities investments, as mentioned above. 17 -------------------------------------------------------------------------------- Direct title revenues (refer to schedule in Results of Operations - Title Revenues section ) increased in the first quarter 2021, primarily driven by the$92.9 million , or 61%, growth in non-commercial revenues resulting from increased transactions from both existing and recently-acquired title offices. Total residential purchase and refinancing closed orders in the first quarter 2021 increased 35% and 107%, respectively, compared to the prior year quarter. However, the non-commercial revenue increase was partially offset by lower commercial revenues in the first quarter 2021, resulting from lower commercial transaction size and volume compared to the first quarter 2020. Domestic commercial fee per file in the first quarter 2021 was approximately$8,700 , compared to$11,400 from the first quarter 2020; while domestic residential fee per file was approximately$1,900 , which is 5% lower than the prior year quarter's average fee per file, primarily due to the higher mix of refinancing compared to purchase transactions in the first quarter 2021. Total international revenues increased$10.2 million , or 42%, primarily due to higher volumes in our Canadian operations. Summary results of the ancillary services and corporate segment are as follows ($ in millions): For the Three Months Ended March 31, 2021 2020 % Change Operating revenues 55.9 5.5 924 % Pretax loss (3.1) (5.6) 45 % The segment's operating revenues increased$50.5 million in the first quarter 2021, compared to the prior year quarter, primarily due to revenues generated by recent acquisitions. The ancillary services operations generated pretax income of$2.7 million (which included$1.7 million of purchased intangibles amortization) in the first quarter 2021, compared to a pretax loss of$0.5 million in the prior year quarter. Net expenses attributable to parent company and corporate operations for the first quarters 2021 and 2020 were approximately$5.7 million and$5.1 million , respectively. We continue to implement our strategy of improving operational performance through targeted growth, focused management, and broader technology and services offerings. During the first quarter 2021, we acquiredA.S.K. Services, Inc. , a title search and support services provider, consistent with our plan to strengthen and expand title production resources for our independent agency partners; while our acquisition ofSignature Closers, LLC , an online notarization and closing solutions provider, further advances our digital strategy and vision of streamlining closings, while providing a best-in-class customer experience. We expect these acquisitions to further leverage our position in the evolving real estate closing experience and improve scale and synergies within our title and ancillary services businesses. We believe our solid operating results and liquidity position will allow us to continue investing and growing to maximize our operational potential. COVID-19 pandemic. We continue to operate under our business continuity plan that we deployed inMarch 2020 when the pandemic started. While the distribution of vaccines is ramping up and states and certain businesses have reopened, our employees have not fully transitioned back to the workplace. We continue to take appropriate measures to protect the safety of all our employees and customers in carrying out our business operations, which is generally considered as essential business in theU.S. We are proactively taking advantage of digital tools and innovative solutions in facilitating real estate transactions when possible during this challenging environment. Currently, we are gathering information and insight from our associates, monitoring the evolving effects of the COVID-19 pandemic and guidance from health and governmental bodies, and evaluating the next phase of our return to workplace approach.
CRITICAL ACCOUNTING ESTIMATES
The preparation of the Company's condensed consolidated financial statements
requires management to make estimates and judgments that affect the reported
amounts of certain assets, liabilities, revenues, expenses and related
disclosures surrounding contingencies and commitments.
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Actual results can differ from our accounting estimates. While we do not
anticipate significant changes in our estimates, there is a risk that such
changes could have a material impact on our consolidated financial condition or
results of operations for future periods. During the three months ended
March 31, 2021 , we made no material changes to our critical accounting estimates
as previously disclosed in Management's Discussion and Analysis in the 2020 Form
10-K.
Operations. Our primary business is title insurance and settlement-related
services. We close transactions and issue title policies on homes, commercial
and other real properties located in all 50 states, the District of Columbia and
international markets through policy-issuing offices, agencies and centralized
title services centers. Our 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, and search and
valuation services.
Factors affecting revenues. The principal factors that contribute to changes in
operating revenues for our title and ancillary services and corporate segments
include:
•mortgage interest rates;
•availability of mortgage loans;
•number and average value of mortgage loan originations;
•ability of potential purchasers to qualify for loans;
•inventory of existing homes available for sale;
•ratio of purchase transactions compared with refinance transactions;
•ratio of closed orders to open orders;
•home prices;
•consumer confidence, including employment trends;
•demand by buyers;
•premium rates;
•foreign currency exchange rates;
•market share;
•ability to attract and retain highly productive sales associates;
•departure of revenue-attached employees;
•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, including tax incentives and the
implementation of the new integrated disclosure requirements;
•acquisitions or divestitures of businesses;
•volume of distressed property transactions;
•seasonality and/or weather; and
•outbreaks of diseases and related quarantine orders and restrictions on travel,
trade and business operations.
Premiums are determined in part by the values of the transactions we handle. To
the extent inflation or market conditions cause increases in the prices of homes
and other real estate, premium revenues are also increased. Conversely, falling
home prices cause premium revenues to decline. 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.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
Comparisons of our results of operations for the three months endedMarch 31, 2021 with the three months endedMarch 31, 2020 are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.
Our statements on home sales and loan activity are based on published
Operating environment. Existing home sales (seasonally-adjusted basis) inMarch 2021 fell 4% fromFebruary 2021 , marking two months of consecutive declines, but grew 12% compared toMarch 2020 . According to NAR, consumers are facing much higher homes prices, rising mortgage rates, and falling affordability and inventory, which all contributed to the lower existing homes sales inMarch 2021 versus earlier months. On non-seasonally-adjusted basis, existing home sales in the first quarter 2021 improved 14% from the same quarter last year.March 2021 median and average home prices increased approximately 17% and 12%, respectively, compared toMarch 2020 prices, withMarch 2021 being the 109th consecutive month of year-over-year median home price increase. In regard to new residential construction,U.S. housing starts inMarch 2021 improved 37% fromMarch 2020 and 19% sequentially fromFebruary 2021 , while newly issued building permits inMarch 2021 also improved 30% and 3% fromMarch 2020 andFebruary 2021 , respectively. According to Fannie Mae and MBA (averaged), one-to-four family mortgage originations improved 77% to approximately$1.2 trillion in the first quarter 2021 from$658 billion in the first quarter 2020, primarily driven by a 115% increase in refinancing originations resulting from the current lower mortgage interest rate environment. Purchase originations increased 24% in the first quarter 2021 compared to the first quarter 2020 as the real estate market continues to recover from the effects of the COVID-19 pandemic. For the second quarter 2021, Fannie Mae and MBA are forecasting that existing and new home sales will improve 43% and 28%, respectively, compared to last year's second quarter. Total mortgage originations for the second quarter 2021 are expected to decline 3% compared to the second quarter 2020, primarily due to last year's surge in refinancing transactions resulting from lower interest rates and expectations of lower refinancing transactions in 2021 as interest rates are beginning to gradually increase. However, purchase lending transactions are predicted to improve 41% in the second quarter 2021 compared to last year's second quarter, partially offsetting the impact of reduced refinancing lending volumes. Compared to 2.95% in 2020, the average 30-year fixed mortgage interest rate is expected to increase to 3.35% in 2021.
Title revenues. Direct title revenue information is presented below:
Three Months Ended March 31,
2021 2020 Change % Change
($ in millions)
Non-commercial
Domestic 216.0 132.8 83.2 63 %
International 28.8 19.1 9.7 51 %
244.8 151.9 92.9 61 %
Commercial:
Domestic 29.2 41.4 (12.2) (29) %
International 5.5 5.0 0.5 10 %
34.7 46.4 (11.7) (25) %
Total direct title revenues 279.5 198.3 81.2 41 %
20-------------------------------------------------------------------------------- Direct title revenues improved in the first quarter 2021, compared to last year's first quarter, primarily driven by the$92.9 million , or 61%, increase in non-commercial revenues resulting from increased transactions from both existing and recently-acquired title offices. Total residential purchase and refinancing closed orders in the first quarter 2021 increased 35% and 107%, respectively, compared to the prior year quarter. However, the non-commercial revenue increase was partially offset by lower commercial revenues in the first quarter 2021, resulting from lower commercial transaction size and volume compared to the first quarter 2020. Domestic commercial fee per file in the first quarter 2021 was approximately$8,700 , compared to$11,400 from the first quarter 2020; while domestic residential fee per file was approximately$1,900 , which is 5 percent lower than the prior year quarter's average fee per file, primarily due to the higher mix of refinancing compared to purchase transactions in the first quarter 2021. Total international revenues increased$10.2 million , or 42%, primarily due to higher volumes in our Canadian operations.
Orders information for the three months ended
Three Months Ended March 31,
2021 2020 Change % Change
Opened Orders:
Commercial 3,569
4,153 (584) (14) %
Purchase 70,789 53,636 17,153 32 % Refinance 81,750 64,189 17,561 27 % Other 1,810
730 1,080 148 %
Total 157,918 122,708 35,210 29 % Closed Orders: Commercial 3,377
3,628 (251) (7) %
Purchase 45,483
33,715 11,768 35 %
Refinance 65,666 31,746 33,920 107 % Other 1,175 444 731 165 % Total 115,701 69,533 46,168 66 % Gross revenues from independent agency operations increased$103.9 million , or 43%, in the first quarter 2021 compared to last year's first quarter, which was consistent with the improved real estate market trends in the first quarter 2021 and the continued return of agents after the termination of the proposed merger in the third quarter 2019. Agency revenues, net of retention, increased$19.3 million , or 45%, in the first quarter 2021 compared to the same period in 2020, generally in line with the gross agency revenue change. Refer further to the "Retention by agencies" discussion under Expenses below. Ancillary services revenues. Ancillary services operating revenues increased to$55.9 million in the first quarter 2021, compared to$5.5 million in the first quarter 2020. The revenue growth was primarily due to revenues generated by recent acquisitions of appraisal management and online notarization and closing services companies, partially offset by lower valuation services revenues due to reduced capital market customer orders. Investment income. Investment income for the first quarter 2021 decreased$1.3 million , or 24%, primarily as a result of lower interest rates applicable to our short-term and securities investments during the first quarter 2021 compared to the first quarter 2020.
Net realized and unrealized gains (losses). Refer to Note 5 to the condensed consolidated financial statements.
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--------------------------------------------------------------------------------Expenses. An analysis of expenses is shown below:
Three Months Ended March 31,
2021 2020 Change % Change
($ in millions)
Amounts retained by agencies 283.9 199.4 84.6 42 %
As a % of agency revenues 82.1 % 82.4 %
Employee costs 169.4 135.7 33.7 25 %
As a % of operating revenues 24.9 % 30.4 %
Other operating expenses 125.5 71.9 53.6 75 %
As a % of operating revenues 18.4 % 16.1 %
Title losses and related claims 28.8 18.6 10.1 54 %
As a % of title revenues 4.6 % 4.2 %
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
82.1% for the first quarter 2021, as compared to 82.4% in the first quarter
2020. 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.
Employee costs. Consolidated employee costs increased $33.7 million , or 25%, in
the first quarter 2021, compared to the same period in 2020, primarily due to
higher salaries expense driven by a 12% higher average employee count, increased
incentive compensation on improved overall operating results, and additional
employee costs related to higher order volumes. As a percentage of total
operating revenues, consolidated employee costs improved to 24.9% in the first
quarter 2021 from 30.4% in the prior year quarter, which was primarily
influenced by our continued focus on managing operating costs.
Employee costs in the title segment increased $28.8 million , or 22%, the first
quarter 2021 compared to the first quarter 2020, primarily due to increased
salaries expense driven by a higher average employee count, mostly from recent
title office acquisitions, increased incentive compensation on improved title
operating results, and additional employee costs related to higher order
volumes. Employee costs in the ancillary services and corporate segment
increased $4.9 million , or 98%, in the first quarter 2021 compared to the first
quarter 2020, primarily due to increased average employee count driven by recent
acquisitions in the ancillary services operations.
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 notary 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.
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Consolidated other operating expenses increased $53.6 million , or 75%, in the
first quarter 2021 compared to last year's first quarter. This increase was
primarily due to increased appraisal and notary expenses by recently-acquired
ancillary services businesses, higher outside title search and premium tax
expenses on higher title revenues, and increased professional fees and rent
expenses, partially offset by lower travel and marketing expenses. As a
percentage of total operating revenues, consolidated other operating expenses
for the first quarter 2021 increased to 18.4% compared to 16.1% in the first
quarter 2020, primarily due to appraisal and notary costs related to our
recently acquired ancillary services businesses.
Total variable costs increased $45.3 million , or 142%, in the first quarter 2021
compared to the same period in 2020, mainly due to higher appraisal and notary
expenses by recently-acquired ancillary services businesses and increased
outside search and premium taxes, consistent with higher operating revenues.
Total costs that are fixed in nature increased $6.3 million , or 20%, in the
first quarter 2021 compared to the same period in 2020, primarily due to
increased professional fees, rent expense and technology costs. Independent
costs increased $2.0 million , or 25%, in the first quarter 2021 compared to the
same period in 2020, primarily due to higher office closures expenses,
litigation-related accruals and bank fees, partially offset by lower travel and
marketing expenses.
Title losses. Provisions for title losses, as a percentage of title operating
revenues, were 4.6% in the first quarter 2021, compared to 4.2% in the first
quarter 2020. Title loss expense increased $10.1 million , or 54%, in the first
quarter 2021 compared to the prior year quarter, primarily as a result of
increased title revenues. The title loss ratio in any given quarter can be
significantly influenced by changes in new large claims incurred, escrow losses
and adjustments to reserves for existing large claims.
The composition of title policy loss expense is as follows:
Three Months Ended
2021 2020 Change % Change
($ in millions)
Provisions - known claims:
Current year 2.2 1.3 0.9 69 %
Prior policy years 13.3 12.6 0.7 6 %
15.5 13.9 1.6 12 %
Provisions - IBNR
Current year 26.2 17.2 9.0 52 %
Prior policy years 0.4 0.1 0.3 300 %
26.6 17.3 9.3 54 %
Transferred from IBNR to known claims (13.3) (12.6) (0.7) 6 %
Total provisions 28.8 18.6 10.2 55 %
Provisions for known claims arise primarily from prior policy years as claims
are not typically reported until several years after policies are issued.
Provisions - Incurred But Not Reported (IBNR) are estimates of claims expected
to be incurred over the next 20 years; therefore, it is not unusual or
unexpected to experience changes to those estimated provisions in both current
and prior policy years as additional loss experience on policy years is
obtained. This loss experience may result in changes to our estimate of total
ultimate losses expected (i.e., the IBNR policy loss reserve). Current year
provisions - IBNR are recorded on policies issued in the current year as a
percentage of premiums earned (provisioning rate). As claims become known,
provisions are reclassified from IBNR to known claims. Adjustments relating to
large losses (those individually in excess of $1.0 million ) may impact
provisions either for known claims or for IBNR.
Total known claims provisions increased $1.6 million , or 12%, in the first
quarter 2021 compared to the same period last year, primarily as a result of
higher reported claims relating to current and prior year policies. Current year
IBNR provisions in the first quarter 2021 increased $9.0 million , or 52%,
compared to the first quarter 2020, primarily due to increased title premiums in
2021. As a percentage of title operating revenues, provisions - IBNR for the
current policy year were 4.2% in the first quarter 2021, compared to with 3.9%
in the first quarter 2020.
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Cash claim payments decreased $4.9 million , or 23%, in the first quarter 2021
compared to the last year's first quarter, primarily due to lower payments on
large and non-large claims relating to prior policy years. We continue to manage
and resolve large claims prudently and in keeping with our commitments to our
policyholders.
In addition to title policy claims, we incur losses in our direct operations
from escrow, closing and disbursement functions. These escrow losses typically
relate to errors or other miscalculations of amounts to be paid at closing,
including timing or amount of a mortgage payoff, payment of property or other
taxes and payment of homeowners' association fees. Escrow losses also arise in
cases of fraud, and in those cases, the title insurer incurs the loss under its
obligation to ensure that an unencumbered title is conveyed. Escrow losses are
recognized as expenses when discovered or when contingencies associated with
them (such as litigation) are resolved and are typically paid less than 12
months after the loss is recognized.
Total title policy loss reserve balances are as follows:
December 31,
March 31, 2021 2020
($ in millions)
Known claims 67.8 68.9
IBNR 441.7 427.4
Total estimated title losses 509.5 496.3
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, the outstanding loss reserves are paid out within
six 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.
Depreciation and amortization. Depreciation and amortization expenses increased
$2.2 million , or 52%, in the first quarter 2021 compared to the first quarter
2020, primarily due to incremental intangible asset amortization and fixed asset
depreciation expenses related to recent acquisitions.
Income taxes. Our effective tax rate, based on income before taxes and after
deducting income attributable to noncontrolling interests, for the first quarter
2021 was 24% compared to 27% for the first quarter 2020. The lower effective tax
rate in the first quarter 2021 was primarily due to increased year over year
annualized pretax income and reductions in expected nondeductible expenses
relative to pretax income in 2021.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to stockholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As ofMarch 31, 2021 , our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated$1.1 billion ($596.5 million , net of statutory reserves on cash and investments). Of our total cash and investments atMarch 31, 2021 ,$782.2 million ($518.7 million , net of statutory reserves) was held inthe United States and the rest internationally, principally inCanada . Cash held at the parent company totaled$32.5 million atMarch 31, 2021 . 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 and for stock repurchases, if any. To the extent such uses exceed cash available, the parent company is dependent on distributions from its regulated title insurance underwriter,Stewart Title Guaranty Company (Guaranty). 24 -------------------------------------------------------------------------------- A substantial majority of our consolidated cash and investments as ofMarch 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 claim 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 reserve funds are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. Included in investments in debt and equity securities are statutory reserve funds of approximately$491.3 million and$496.6 million atMarch 31, 2021 andDecember 31, 2020 , respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately$25.6 million and$20.0 million atMarch 31, 2021 andDecember 31, 2020 , respectively. As ofMarch 31, 2021 , our known claims reserve totaled$67.8 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled$441.7 million . In addition to this, we had cash and investments (excluding equity method investments) of$421.3 million , which are available for underwriter operations, including claims payments, and acquisitions. 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 (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 liquidity, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. During the three months endedMarch 31, 2021 and 2020, Guaranty paid dividends of$40.0 million and$30.0 million , respectively, to its parent.
As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.
Three Months Ended
2021 2020
($ in millions)
Net cash provided (used) by operating activities 47.4 (11.4)
Net cash used by investing activities (73.6) (3.3)
Net cash provided (used) by financing activities 6.2 (18.8)
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 the first quarter 2021 was $47.4 million ,
compared to net cash used by operations of $11.4 million in the prior year
quarter. The improvement in cash from operations was primarily driven by the
higher net income and lower payments of claims and accounts payables. 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 our direct title and
ancillary services 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.
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Investing activities. Net cash used 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 the
first quarter 2021, total proceeds from securities investments sold and matured
were $45.9 million , compared to $30.6 million during the same period in 2020.
Cash used for purchases of securities investments was $47.9 million during the
first quarter 2021, compared to $30.7 million during the first quarter 2020.
We used $52.6 million and $1.4 million of cash for several acquisitions of
businesses during the first quarter 2021 and 2020, respectively, and also used
$16.0 million of cash during the first quarter 2021 in acquiring an equity
method investment in a title company. During the first quarters 2021 and 2020,
we used $5.7 million and $4.8 million , respectively, of cash for purchases of
property and equipment. We maintain investment in capital expenditures at a
level that enables us to implement technologies for increasing our operational
and back-office efficiencies and to pursue growth in key markets.
Financing activities and capital resources. Total debt and stockholders' equity
were $125.6 million and $1,047.9 million , respectively, as of March 31, 2021 .
Payments on notes payable during the first quarters 2021 and 2020 of $154.7
million and $7.7 million , respectively, and notes payable additions of $154.0
million and $0.2 million , respectively, were related to short-term loan
agreements in connection with our Section 1031 tax-deferred property exchange
(Section 1031) business. During the first quarter 2021, we amended our line of
credit agreement, resulting in an increase in the total line of credit
commitment from our lenders from $200 million to $350 million (refer to Note
1-D for additional details on the amendment). At March 31, 2021, the
outstanding balance of our line of credit facility was $125.6 million , which
included the $25.0 million we drew from the facility during the first quarter
2021; while the available balance of the line of credit was $223.6 million , net
of an unused $2.5 million letter of credit. At March 31, 2021 , our
debt-to-equity ratio, excluding our Section 1031 notes, was approximately 12.0%.
During the first quarter 2021, we paid total dividends of $8.8 million ($0.33
per common share), compared to the total dividends paid in the first quarter
2020 of $7.1 million ($0.30 per common share).
Effect of changes in foreign currency exchange rates. The effect of changes in
foreign currency exchange rates on our cash and cash equivalents on the
consolidated statements of cash flows was minimal during the first quarter 2021,
compared to a net decrease of $3.5 million during the first quarter 2020. Our
principal foreign operating unit is in Canada , and, on average, the value of the
Canadian dollar relative to the U.S. dollar did not significantly change in
2021, while it depreciated in 2020.
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We believe we have sufficient liquidity and capital resources to meet the cash
needs of our ongoing operations, including in the current economic and real
estate environment created by the COVID-19 pandemic. However, we may determine
that additional debt or equity funding is warranted to provide liquidity for
achievement of strategic goals or acquisitions or for unforeseen circumstances.
Other than scheduled maturities of debt, operating lease payments and
anticipated claims payments, we have no material contractual commitments. We
expect that cash flows from operations and cash available from our underwriters,
subject to regulatory restrictions, will be sufficient to fund our operations,
including claims payments. However, to the extent that these funds are not
sufficient, we may be required to borrow funds on terms less favorable than we
currently have or seek funding from the equity market, which may not be
successful or may be on terms that are dilutive to existing stockholders.
Contingent liabilities and commitments. See discussion of contingent liabilities and commitments in Note 10 to the condensed consolidated financial statements.
Other comprehensive income (loss). Unrealized gains and losses on available-for-sale debt securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders' equity, until they are realized. During the first quarter 2021, net unrealized investment losses of$9.3 million , net of taxes, which increased our other comprehensive loss, were primarily related to a net decrease in the fair values of our overall bond securities investment portfolio mainly driven by the effect of rising interest rates. During the first quarter 2020, net unrealized investment losses of$2.7 million , net of taxes, which increased our other comprehensive loss, were primarily related to a net decrease in the fair values of our overall bond securities investment portfolio mainly driven by increased credit spreads. 26
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Changes in foreign currency exchange rates, primarily related to our Canadian andUnited Kingdom operations, reduced our other comprehensive loss, net of taxes, by$1.9 million in the first quarter 2021; while they increased our other comprehensive loss, net of taxes, by$11.4 million for the same period in 2020. Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 16 in our 2020 Form 10-K. 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 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. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with theSecurities and Exchange Commission , including in Part I, Item 1A "Risk Factors" in our 2020 Form 10-K, and as maybe further updated and supplemented from time to time in our future Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K filed subsequently. 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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