STEWART INFORMATION SERVICES CORP (STC) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
MANAGEMENT'S OVERVIEW
On a full year basis, 2022 net income attributable to Stewart was $162.3 million, or $5.94 per diluted share, compared to $323.2 million, or $11.90 per diluted share, in 2021. Pretax income before noncontrolling interests in 2022 was $232.7 million (7.6% pretax margin) compared to $434.0 million (13.1% pretax margin) in 2021. Total 2022 operating revenues decreased 7% to $3.0 billion, compared to $3.3 billion in 2021, while total 2022 operating expenses decreased 1% to $2.8 billion, compared to $2.9 billion in 2021, primarily due to lower title transaction volumes which were partially offset by full year results of acquisitions from 2021. Refer to "Results of Operations" for detailed year-to-year income statement discussions, and "Liquidity and Capital Resources" for an analysis of Stewart's financial condition.
For the fourth quarter 2022, we reported net income attributable to Stewart of $13.3 million ($0.49 per diluted share), compared to net income attributable to Stewart of $85.5 million ($3.12 per diluted share) for the fourth quarter 2021. Fourth quarter 2022 pretax income before noncontrolling interests was $20.8 million compared to pretax income before noncontrolling interests of $114.1 million for the fourth quarter 2021.
Fourth quarter 2022 results included $12.7 million of pretax net realized and unrealized gains, primarily composed of net unrealized gains on fair value changes of equity securities investments and gains related to settlements of company-owned insurance policies, offset by $16.7 million of combined office closure, severance and regulatory settlement and litigation expenses. Fourth quarter 2021 results included $6.5 million of pretax net realized and unrealized gains, primarily composed of net unrealized gains on fair value changes of equity securities investments and net gains related to acquisition contingent liability adjustments, partially offset by net realized losses primarily related to sale of securities investments and other assets and $4.1 million of office closure costs.
Title segment. Summary results of the title segment are as follows (in $ millions, except pretax margin and % change):
| For the Three Months Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | ||||||
| Operating revenues | 581.6 | 836.4 | (30) | % | ||||
| Investment income | 6.9 | 3.7 | 85 | % | ||||
| Net realized and unrealized gains | 10.3 | 4.9 | 110 | % | ||||
| Pretax income | 26.9 | 118.6 | (77) | % | ||||
| Pretax margin | 4.5 | % | 14.0 | % |
Operating revenues for the title segment decreased $254.8 million, or 30%, in the fourth quarter 2022 compared to the fourth quarter 2021, primarily due to volume declines in our direct title and agency operations, while total segment operating expenses decreased $154.6 million, or 21%, primarily as a result of lower revenues. Agency retention expenses in the fourth quarter 2022 decreased $107.8 million, or 30%, consistent with the 30% decline in gross agency revenues, while the average independent agency remittance rate in the fourth quarter 2022 was 17.6% compared to 18.0% in the fourth quarter 2021.
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Total employee costs and other operating expenses in the fourth quarter 2022 decreased $36.2 million, or 11%, compared to the prior year quarter, and as a percentage of operating revenues, these expenses were 48.9% in the fourth quarter 2022 compared to 38.3% in the fourth quarter 2021, primarily due to lower revenues in the fourth quarter 2022. Title loss expense in the fourth quarter 2022 decreased $11.9 million, or 36%, compared to the prior year quarter, primarily due to lower title revenues. As a percentage of title revenues, title loss expense was 3.7% in the fourth quarter 2022 compared to 4.0% in the fourth quarter 2021.
The title segment’s net realized and unrealized gains in the fourth quarters 2022 and 2021 included net unrealized gains of $11.2 million and $8.1 million, respectively, related to fair value changes of equity securities investments and net realized losses of $0.6 million and $0.8 million, respectively, on sale of investment securities. Additionally, the segment recorded $2.0 million of net losses related to acquisition contingent liability adjustments during the fourth quarter 2021. Investment income in the fourth quarter 2022 increased compared to the prior year quarter, primarily as a result of higher interest income resulting from increased interest rates and higher short-term investments in the fourth quarter 2022.
Direct title revenue information is presented below (in $ millions, except % change):
| For the Three Months Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | ||||||
| Non-commercial | ||||||||
| Domestic | 171.3 | 251.0 | (32) | % | ||||
| International | 24.0 | 38.3 | (37) | % | ||||
| 195.3 | 289.3 | (32) | % | |||||
| Commercial: | ||||||||
| Domestic | 66.9 | 93.1 | (28) | % | ||||
| International | 7.7 | 9.4 | (18) | % | ||||
| 74.6 | 102.5 | (27) | % | |||||
| Total direct title revenues | 269.9 | 391.8 | (31) | % |
Total non-commercial revenues decreased $94.0 million, or 32%, primarily resulting from a 55% decline in residential purchase and refinancing transactions during the fourth quarter 2022 compared to the prior year quarter. Domestic commercial revenues in the fourth quarter 2022 decreased $26.2 million, or 28%, primarily due to lower transaction volume and size compared to the fourth quarter 2021. Average domestic commercial fee per file in the fourth quarter 2022 was $15,100, which was 23% lower compared to $19,700 in the fourth quarter 2021, while average residential fee per file in the fourth quarter 2022 increased 45% to $3,500, compared to $2,400 in the prior year quarter due to a higher purchase mix in the fourth quarter 2022. Total international revenues in the fourth quarter 2022 declined by $16.0 million, or 34%, primarily as a result of lower transaction volumes in our Canadian operations.
Real estate solutions segment. Summary results of the real estate solutions segment are as follows (in $ millions, except % change):
| For the Three Months Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | % Change | ||||||
| Operating revenues | 54.7 | 83.7 | (35) | % | ||||
| Net realized and unrealized gains | — | 3.3 | (100) | % | ||||
| Pretax income | 0.4 | 5.3 | (93) | % | ||||
| Pretax margin | 0.7 | % | 6.1 | % |
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Operating revenues for the real estate solutions segment decreased in the fourth quarter 2022 compared to last year’s fourth quarter primarily due to lower transaction volumes influenced by the current high interest rate environment. Combined employee costs and other operating expenses decreased 36% in the fourth quarter 2022, consistent with the reduced operating revenue. Net realized and unrealized gains during the fourth quarter 2021 were primarily driven by net gains related to acquisition contingent liability adjustments. Included in the segment's pretax income were total acquired intangible asset amortization expenses of $5.8 million and $5.6 million in the fourth quarters 2022 and 2021, respectively.
Corporate and other segment. The corporate and other segment recorded $2.5 million of net realized and unrealized gains in the fourth quarter 2022, primarily related to settlement of a company-owned life insurance policy, compared to $1.6 million of net realized losses in the fourth quarter 2021, primarily driven by losses on asset disposals. Segment results for the fourth quarter 2021 included a real estate brokerage company that was acquired in late 2021 and sold in early 2022. Net expenses attributable to corporate operations increased to $9.0 million in the fourth quarter 2022 compared to $7.9 million in the prior year quarter, primarily as a result of higher interest expense resulting from debt.
CRITICAL ACCOUNTING ESTIMATES
Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. The discussion of critical accounting estimates below should be read in conjunction with the related accounting policies disclosed within Note 1 to our audited consolidated financial statements in Part IV of this annual report.
Title loss reserves
Provisions for title losses, as a percentage of title operating revenues, were 3.8%, 4.2% and 5.3% for the years ended December 31, 2022, 2021 and 2020, 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 reasonable scenario based on our historical loss experience, would have increased or decreased our provision for title losses, and affected pretax operating results by approximately $27.1 million for the year ended December 31, 2022.
We consider our actual claims payments and incurred loss experience, including the frequency and severity of claims, compared to our actuarial estimates of claims payments and incurred losses in determining whether our overall loss experience has improved or worsened relative to prior periods. We also consider the impact of economic or market factors on particular policy years to determine whether the results of those policy years are indicative of future expectations. In addition, large claims (those exceeding $1.0 million on a single claim), including large title losses due to independent agency defalcations, are analyzed and reserved for separately due to the potential higher dollar amount of loss, lower volume of claims reported and sporadic reporting of such claims. We evaluate the frequency and severity of large losses in determining whether our experience has improved or worsened. Our method for recording the reserves for title losses on both an interim and annual basis begins with the calculation of our current loss provision rate which is applied to our current premium revenues, resulting in a title loss expense for the period, except for large claims and escrow losses. This loss provision rate is set to provide for losses on current year policies and is primarily determined using moving average ratios of recent actual policy loss payment experience (net of recoveries) to premium revenues.
Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by our management and our third-party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or lower than current reserves and/or our third-party actuary’s calculated estimates.
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Provisions for known claims arise primarily from prior policy years as claims are not typically reported until years after policies are issued. Provisions - Incurred But Not Reported (IBNR) are estimates of claims expected to be incurred over the next 20 years; therefore, it is not unusual or unexpected to experience changes to those estimated provisions in both current and prior policy years as additional loss experience on policy years is obtained. This loss experience may result in changes to our estimate of total ultimate losses expected (i.e., the IBNR policy loss reserve). Current year provisions - IBNR are recorded on policies issued in the current year as a percentage of premiums earned (loss provisioning rate). As claims become known, provisions are reclassified from IBNR to known claims. Adjustments relating to large claims may impact provisions either for known claims or for IBNR.
| 2022 | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| (in $ millions) | ||||||||
| Provisions – Known Claims: | ||||||||
| Current year | 20.2 | 22.8 | 14.3 | |||||
| Prior policy years | 84.2 | 55.7 | 68.8 | |||||
| 104.4 | 78.5 | 83.1 | ||||||
| Provisions – IBNR | ||||||||
| Current year | 75.2 | 98.3 | 84.5 | |||||
| Prior policy years | 7.3 | 5.1 | 16.4 | |||||
| 82.5 | 103.4 | 100.9 | ||||||
| Transferred IBNR to Known Claims | (84.2) | (55.7) | (68.8) | |||||
| Total provisions | 102.7 | 126.2 | 115.2 |
In 2022, total known claims provisions increased by $25.9 million, or 33%, primarily due to an increase in reported new and existing large claims relating to prior policy years compared to 2021. Total 2022 provisions - IBNR decreased $20.9 million, or 20%, compared to the prior year, primarily due to lower title premiums and lower provisioning rates from an overall favorable claims experience in 2022. In 2021, total known claims provisions decreased by $4.6 million, or 6%, to $78.5 million primarily due to lower reported claims relating to prior year policies compared to 2020. Total 2021 provisions - IBNR increased by $2.5 million, or 3%, to $103.4 million compared to the prior year, primarily due to increased title premiums in 2021, partially offset by the effect of lower provisioning rates due to favorable claims experience. As a percentage of title operating revenues, current year provisions - IBNR were 2.8%, 3.3% and 3.9% in 2022, 2021 and 2020, respectively.
In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. Escrow losses typically relate to errors or other miscalculations of amounts to be paid at closing, including timing or amount of a mortgage payoff, payment of property or other taxes and payment of homeowners’ association fees, and wire fraud. In those cases, the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. These losses are recognized as expenses when discovered or when contingencies associated with them (such as litigation) are resolved and are typically paid less than 12 months after the loss is recognized.
Large title losses due to independent agency defalcations typically occur when the independent agency misappropriates funds from escrow accounts under its control. Such losses are usually discovered when the independent agency fails to pay off an outstanding mortgage loan at closing (or immediately thereafter) from the proceeds of the new loan. These incurred losses are typically more severe in terms of dollar value compared with traditional title policy claims since the independent agency is often able, over time, to conceal misappropriation of escrow funds relating to more than one transaction through the constant volume of funds moving through its escrow accounts. In declining real estate markets, lower transaction volumes result in a lower incoming volume of funds, making it more difficult to cover up the misappropriation with incoming funds. Thus, when the defalcation is discovered, it often relates to several transactions. In addition, the overall decline in an independent agency’s revenues, profits and cash flows increases the agency’s incentive to improperly utilize the escrow funds from real estate transactions. For each of the three years ended December 31, 2022, our net title losses due to independent agency defalcations were not material.
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Internal controls relating to independent agencies include, but are not limited to, periodic audits, site visits and reconciliations of policy inventories and premiums. The audits and site visits cover examination of the escrow account bank reconciliations and an examination of a sample of closed transactions. In some instances, the scope of our review is limited by attorney agencies that cite client confidentiality. Certain states have mandated annual reviews of agencies by their underwriter. We also determine whether our independent agencies have appropriate internal controls as defined by ALTA'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 impairment
Goodwill is not amortized, but is reviewed for impairment annually and whenever occurrences of events indicate a potential impairment at the reporting unit level. Refer to Note 1-L and Note 8 to our audited consolidated financial statements for details about our goodwill impairment review process and goodwill balances, respectively.
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, which are inherently uncertain and difficult to project. In performing our analysis, we make assumptions and apply judgments to estimate industry economic factors and the future profitability of our businesses. Due to the uncertainty and complexity of performing the goodwill impairment analysis, future results related to market conditions and our business operations and other inputs to the analysis may be worse than estimated or assumed. In such cases, we may be exposed to future material impairments of goodwill.
For our annual goodwill impairment test for all our reporting units, we utilized the quantitative approach during 2022, while we used the qualitative approach during 2021. Additionally, due to the deterioration of the macroeconomic environment during the second half of 2022 and its impact on the real estate market, we performed an updated quantitative analysis using a valuation date of December 31, 2022 and concluded there is no impairment of goodwill for any of our reporting units.
RESULTS OF OPERATIONS
We discuss in this section the consolidated results of operations for the years 2022 and 2021, 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. Published U.S. mortgage interest rates and other selected residential housing data for the three years ended December 31, 2022 are shown below (amounts shown for 2022 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 as of December 31, 2022 from sources including Fannie Mae, Freddie Mac, and the Mortgage Bankers Association (MBA), when available.
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| 2022 | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| Mortgage interest rates (30-year, fixed-rate) – % | ||||||||
| Averages for the year | 5.33 | 2.96 | 3.11 | |||||
| First quarter | 3.79 | 2.88 | 3.51 | |||||
| Second quarter | 5.24 | 3.00 | 3.23 | |||||
| Third quarter | 5.58 | 2.87 | 2.95 | |||||
| Fourth quarter | 6.69 | 3.08 | 2.76 | |||||
| Mortgage originations – $ billions | 2,296 | 4,504 | 4,241 | |||||
| Refinancings – % of originations | 29 | 58 | 64 | |||||
| New home sales – in millions | 0.65 | 0.77 | 0.83 | |||||
| New home median sales price – in $ thousands | 453 | 396 | 335 | |||||
| Existing home sales – in millions | 5.11 | 5.90 | 5.66 | |||||
| Existing home median sales price – in $ thousands | 385 | 348 | 295 |
Interest rates significantly increased during 2022 compared to the prior year, primarily driven by government actions to curb the elevated inflation rate. The high interest rate environment negatively impacted transactions in the real estate market. Mortgage originations during 2022 fell 49% from the prior year, with total refinancing transactions decreasing by 74%. Refinancing share from total mortgage originations declined to 29% in 2022 compared to 58% in 2021. Existing and new home sales activity declined 13% and 16%, respectively, while elevated existing and new median home prices continued, increasing 11% and 15%, respectively, in 2022 compared to 2021.
Fannie Mae and the MBA expect the housing market softening to continue into 2023, with total mortgage originations in 2023 expected to decline 22% from 2022. Existing and new homes sales in 2023 are anticipated to be lower by 17% and 9%, respectively, from the prior year. While the average 30-year mortgage interest rate is expected to be 5.8% for the full year 2023, it is expected to begin decreasing starting in the third quarter 2023 and anticipated to average lower at 5.0% in 2024. As a result, a market recovery is forecasted for 2024, with total mortgage lending expected to improve 22% and both total existing and new homes sales anticipated to increase by 15% compared to 2023.
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, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our real estate solutions operations include appraisal management services, online notarization and closing services, credit and real estate information services, and search and valuation services. The corporate and other segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with other businesses not related to title or real estate solutions operations. Refer to Item 1. Business for details.
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;
•premium rates;
•foreign currency exchange rates;
•market share;
•ability to attract and retain highly productive sales associates;
•independent agency remittance rates;
•opening and integration of new offices and acquisitions;
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•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 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 typically 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 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||
| (in $ millions) | (in $ millions) | |||||||||||||||
| Non-commercial | ||||||||||||||||
| Domestic | 830.5 | 960.1 | 743.7 | (129.6) | 216.4 | (13) | % | 29 | % | |||||||
| International | 130.5 | 157.1 | 106.1 | (26.6) | 51.0 | (17) | % | 48 | % | |||||||
| 961.0 | 1,117.2 | 849.8 | (156.2) | 267.4 | (14) | % | 31 | % | ||||||||
| Commercial: | ||||||||||||||||
| Domestic | 251.3 | 242.3 | 166.7 | 9.0 | 75.6 | 4 | % | 45 | % | |||||||
| International | 34.0 | 31.4 | 21.4 | 2.6 | 10.0 | 8 | % | 47 | % | |||||||
| 285.3 | 273.7 | 188.1 | 11.6 | 85.6 | 4 | % | 46 | % | ||||||||
| Total direct title revenues | 1,246.3 | 1,390.9 | 1,037.9 | (144.6) | 353.0 | (10) | % | 34 | % |
Direct title revenues declined 10% in 2022 compared to 2021 primarily due to lower non-commercial revenues driven by lower residential transactions, partially offset by increased commercial revenues. Non-commercial revenues declined as a result of 15% and 61% lower purchase and refinancing closed orders, respectively, which were primarily influenced by the high interest rate market environment in 2022 compared to 2021. Domestic commercial revenues improved 4% primarily due to a 6% increase in commercial transactions in 2022 compared to the prior year. Average domestic commercial fee per file in 2022 was approximately $13,600 compared to $14,000 in 2021, while average residential fee per file in 2022 was approximately $3,000 compared to $2,200 due to a higher purchase mix in 2022. Total international revenues decreased $24.1 million, or 13%, primarily due to lower transaction volumes in our Canadian operations and overall weaker average foreign currency exchange rates against the U.S. dollar in 2022 compared to the prior year.
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Direct title revenues in 2021 grew 34% compared to the prior year, as a result of overall revenue improvements in both non-commercial and commercial operations. Non-commercial revenues increased in 2021, primarily driven by increased residential transactions and scale compared to 2020. Domestic commercial revenues increased 45% in 2021 compared to 2020, primarily due to improved commercial transaction size and volume. Total purchase and refinancing closed orders improved 12%, while commercial closed orders increased 15% in 2021 compared to the prior year. Domestic commercial and residential fees per file in 2021 were approximately $14,000 and $2,200, respectively, which respectively were 26% and 18% higher compared to 2020. Total international revenues grew $61.0 million, or 48%, in 2021 compared to 2020, primarily due to increased residential and commercial transaction volumes in our Canadian operations.
Closed and opened orders information is as follows:
| Year Ended December 31 | Change | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||
| Opened Orders: | ||||||||||||||||
| Commercial | 20,202 | 18,113 | 15,748 | 2,089 | 2,365 | 12 | % | 15 | % | |||||||
| Purchase | 241,781 | 283,350 | 250,058 | (41,569) | 33,292 | (15) | % | 13 | % | |||||||
| Refinance | 98,663 | 256,621 | 304,064 | (157,958) | (47,443) | (62) | % | (16) | % | |||||||
| Other | 9,037 | 6,753 | 3,868 | 2,284 | 2,885 | 34 | % | 75 | % | |||||||
| Total | 369,683 | 564,837 | 573,738 | (195,154) | (8,901) | (35) | % | (2) | % | |||||||
| Closed Orders: | ||||||||||||||||
| Commercial | 18,448 | 17,334 | 15,035 | 1,114 | 2,299 | 6 | % | 15 | % | |||||||
| Purchase | 184,652 | 217,895 | 178,935 | (33,243) | 38,960 | (15) | % | 22 | % | |||||||
| Refinance | 81,755 | 211,109 | 203,763 | (129,354) | 7,346 | (61) | % | 4 | % | |||||||
| Other | 8,071 | 4,736 | 2,594 | 3,335 | 2,142 | 70 | % | 83 | % | |||||||
| Total | 292,926 | 451,074 | 400,327 | (158,148) | 50,747 | (35) | % | 13 | % |
Gross revenues from independent agency operations (agency revenues) decreased $116.4 million, or 7%, in 2022 and increased $431.6 million, or 38%, in 2021, compared to corresponding prior years, which were consistent with the trends of our direct title operations and the overall real estate market during 2022 and 2021. As a result of changes in gross agency revenues, net agency revenues (which are net of agency retention) decreased $24.3 million, or 9%, in 2022 and increased $75.7 million, or 37%, in 2021, compared to respective prior periods. Refer further to the "Retention by agencies" discussion under Expenses below.
Title revenues by geographic location. The approximate amounts and percentages of consolidated title operating revenues for the last three years ended December 31, 2021 were as follows:
| Year Ended December 31 | Percentages | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||
| (in $ millions) | ||||||||||||||
| Texas | 448 | 469 | 359 | 17 | % | 16 | % | 16 | % | |||||
| New York | 284 | 263 | 187 | 10 | % | 9 | % | 9 | % | |||||
| International | 176 | 198 | 134 | 6 | % | 7 | % | 6 | % | |||||
| Florida | 135 | 150 | 102 | 5 | % | 5 | % | 5 | % | |||||
| California | 133 | 192 | 163 | 5 | % | 6 | % | 7 | % | |||||
| All others | 1,537 | 1,733 | 1,244 | 57 | % | 57 | % | 57 | % | |||||
| 2,713 | 3,005 | 2,189 | 100 | % | 100 | % | 100 | % |
Real estate solutions and other revenues. Real estate solutions and other revenues are comprised of revenues generated by our real estate solutions operations and, for the fourth quarter 2021 and first four months of 2022, by a real estate brokerage company which we sold in 2022. Excluding the real estate brokerage company, real estate solutions revenues improved $37.0 million, or 14%, and $177.1 million, or 214%, during 2022 and 2021, respectively, compared to corresponding prior periods, primarily due to revenues generated by acquisitions.
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Investment income. Investment income improved $5.6 million, or 33%, due to higher interest income driven by increased interest rates and higher dividend income from investments in 2022 compared to 2021. Investment income in 2021 decreased $1.8 million, or 9%, primarily due to reduced interest income on investments resulting from the lower interest rates environment compared to 2020. Refer to Note 6 to our audited consolidated financial statements for additional details.
Net realized and unrealized gains. Refer to Note 6 to our audited consolidated financial statements for details.
Expenses. Our employee costs and certain other operating expenses are sensitive to inflation. An analysis of expenses is shown below:
| Year Ended December 31 | Change* | % Change | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 vs 2021 | 2021 vs 2020 | 2022 vs 2021 | 2021 vs 2020 | ||||||||||
| (in $ millions) | (in $ millions) | |||||||||||||||
| Amounts retained by independent agencies | 1,208.3 | 1,300.4 | 944.5 | (92.1) | 355.9 | (7) | % | 38 | % | |||||||
| As a % of agency revenues | 82.4 | % | 82.2 | % | 82.1 | % | ||||||||||
| Employee costs | 802.0 | 777.0 | 613.2 | 25.0 | 163.8 | 3 | % | 27 | % | |||||||
| As a % of operating revenues | 26.3 | % | 23.8 | % | 27.0 | % | ||||||||||
| Other operating expenses | 648.0 | 626.8 | 375.2 | 21.2 | 251.6 | 3 | % | 67 | % | |||||||
| As a % of operating revenues | 21.3 | % | 19.2 | % | 16.5 | % | ||||||||||
| Title losses and related claims | 102.7 | 126.2 | 115.2 | (23.5) | 11.0 | (19) | % | 10 | % | |||||||
| As a % of title revenues | 3.8 | % | 4.2 | % | 5.3 | % |
*Amounts change may not add due to rounding.
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 82.4%, 82.2% and 82.1% during the three years ended December 31, 2022. The average retention percentage may vary from period to period due to the geographical mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. We continue to focus on increasing profit margins in every state, increasing premium revenue in states where remittance rates are above 20%, and maintaining the quality of our agency network, which we believe to be the industry’s best, in order to mitigate claims risk and drive consistent future performance. While market share is important in our agency operations channel, it is not as important as margins, risk mitigation and profitability.
Selected cost ratios (by selected segment). The following table shows employee costs and other operating expenses as a percentage of operating revenues for each of the title and real estate solutions segments for the years ended December 31:
| Employee Costs | Other Operating Expenses | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | 2022 | 2021 | 2020 | |||||||||
| Title | 27.1 | % | 24.5 | % | 26.8 | % | 14.8 | % | 13.0 | % | 13.5 | % | ||
| Real estate solutions | 17.0 | % | 13.3 | % | 16.4 | % | 68.8 | % | 78.5 | % | 81.9 | % |
Employee costs. Consolidated employee costs increased $25.0 million, or 3%, in 2022 compared to 2021, primarily due to higher salaries and employee benefits driven by 16% higher average employee count, as we integrate our acquisitions, partially offset by reduced incentive compensation, temporary labor and overtime costs resulting from lower operating results and volumes during 2022. Consolidated employee costs increased $163.8 million, or 27%, in 2021 compared to 2020, primarily due to increased salaries and employee benefits on a 20% higher average employee count driven by acquisitions, higher incentive compensation on improved overall operating results, and increased temporary labor and overtime costs on increased transaction volumes.
Our total employee counts at December 31, 2022, 2021 and 2020 were approximately 7,100, 7,400 and 5,800, respectively. Average cost per employee for 2022 decreased 10% compared to 2021, while average cost per employee in 2021 increased 5% compared to 2020.
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Employee costs for the title segment increased $7.4 million, or 1%, and $143.7 million, or 24%, in 2022 and 2021, respectively, compared to corresponding prior years, primarily due to acquisitions, while higher incentive compensation on increased title revenues also contributed to the increase in employee costs in 2021. Employee costs in the real estate solutions segment increased $15.9 million, or 46%, and $20.0 million, or 77%, in 2022 and 2021, respectively, compared to corresponding prior years, primarily due to higher salaries and employee benefits resulting from 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 primarily fixed in nature include rent and other occupancy expenses, equipment rental, insurance, repairs and maintenance, technology costs, telecommunications and title plant expenses. Variable costs include appraiser and service expenses related to real estate solutions operations, outside search and valuation fees, attorney fee splits, credit losses (on receivables), 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 $21.3 million, or 3%, and $251.6 million, or 67%, in 2022 and 2021, respectively, compared to corresponding prior years, while total other operating expenses, as a percentage of total operating revenues (other operating expenses ratio), were 21.3%, 19.2% and 16.5% during 2022, 2021 and 2020, respectively. The higher other operating expenses ratios in 2022 and 2021 were primarily influenced by the increased size of our real estate solutions operations which typically have higher other operating expenses.
During 2022, costs that are primarily fixed in nature increased $29.0 million, or 18%, compared to 2021, primarily due to additional rent and other occupancy and other expenses related to acquisitions, and increased insurance and technology expenses from existing businesses. Variable costs decreased $25.4 million, or 6%, primarily due to lower title and appraisal management transactions, partially offset by service costs related to increased revenues from our credit and real estate data services businesses. Independent costs increased $24.2 million, or 47%, primarily due to regulatory settlement and litigation expenses, increased office closure costs, and higher marketing and travel expenses.
During 2021, costs fixed in nature increased $29.0 million, or 21%, compared to 2020, primarily due to acquisitions, (which added technology costs, professional fees, and rent and other occupancy expenses), higher third-party outsourcing provider fees and increased consulting fees related to business acquisition and integration. Variable costs increased $206.5 million, or 101%, primarily due to increased appraiser and service expenses on higher real estate solutions revenues, increased outside title search, attorney fee splits and premium taxes on improved title revenues, and state sales tax assessments. Independent costs increased $16.1 million, or 46%, primarily due to office consolidation costs, higher marketing and travel expenses, and increased bank service fees.
Title losses. Provisions for title losses, as a percentage of title operating revenues, were 3.8%, 4.2% and 5.3% in 2022, 2021 and 2020, respectively. The title loss ratio in any given year can be significantly influenced by changes in new large claims incurred, escrow losses and 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.
Title losses in 2022 decreased $23.5 million, or 19%, compared to the prior year, primarily due to lower title premiums and overall favorable claims experience in 2022. Title losses in 2021 increased $11.0 million, or 10%, compared to the prior year, primarily due to increased title premiums, partially offset by favorable claims experience. Title losses paid were $93.1 million, $71.5 million and $82.0 million in 2022, 2021 and 2020, respectively. Total claims payments in 2022 increased $21.6 million, or 30%, compared to 2021, primarily as a result of increased payments on large claims, while claims payments in 2021 decreased $10.5 million, or 12.8%, compared to the prior year, due to lower payments on large and non-large claims. Claims payments made on large title claims, net of insurance recoveries, during 2022, 2021 and 2020 were $18.3 million, $2.8 million and $8.7 million, respectively.
Our liability for estimated title losses as of December 31, 2022 and 2021 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.
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Total title policy loss reserve balances at December 31 were as follows:
| 2022 | 2021 | ||
|---|---|---|---|
| (in $ millions) | |||
| Known claims | 87.3 | 75.9 | |
| IBNR | 462.1 | 473.7 | |
| Total estimated title losses | 549.4 | 549.6 |
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, 87% of the outstanding loss reserves are paid out within eight years. As a result, the estimate of the ultimate amount to be paid on any claim may be modified over that time period. Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates. As of December 31, 2022 and 2021, our reserve balance was above the actuarial midpoint of total estimated policy loss reserves. Refer to Note 10 (Estimated title losses) to our audited consolidated financial statements for details.
Depreciation and amortization. Depreciation and amortization expense increased $20.8 million, or 57%, and $17.2 million, or 89%, in 2022 and 2021, respectively, compared to corresponding prior years, primarily due to acquisitions' intangible asset amortization, which totaled $33.0 million and $19.0 million, respectively.
Income taxes. Our effective tax rates for 2022, 2021 and 2020 were 23.9%, 22.5% and 24.0%, respectively, based on income before taxes (after deducting noncontrolling interests) of $213.2 million, $417.2 million and $203.7 million, respectively. Refer to Note 7 to our audited consolidated financial statements for details on the effective tax rates and income tax accounts.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of December 31, 2022, our total cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $982.8 million. Of our total cash and investments at December 31, 2022, $594.9 million ($310.4 million, net of statutory reserves) was held in the United States (U.S.) and the rest internationally, principally in Canada.
As a holding company, the parent company is funded principally by cash from its subsidiaries' earnings in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. Cash held at the parent company and its unregulated subsidiaries (which totaled $56.8 million at December 31, 2022) is available for funding the parent company's operating expenses, interest payments on debt and dividend payments to common stockholders. The parent company also receives distributions from Guaranty, its regulated title insurance underwriter, to meet cash requirements for acquisitions and other strategic investments.
A substantial majority of our consolidated cash and investments as of December 31, 2022 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 uses its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and real estate solutions operations) for their operating and debt service needs.
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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 $544.0 million at December 31, 2022. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $8.6 million at December 31, 2022. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. As of December 31, 2022, our known claims reserve totaled $87.3 million and our estimate of claims that may be reported in the future, under U.S. generally accepted accounting principles, totaled $462.1 million. In addition to this, we had cash and investments (excluding equity method investments) of $198.8 million which are available for underwriter operations, including claims payments.
The ability of Guaranty to pay dividends to its parent is governed by Texas insurance law. The Texas Department of Insurance (TDI) must be notified of any dividend declared, and any dividend in excess of the greater of the statutory net operating income or 20% of surplus (which was approximately $158.1 million as of December 31, 2022) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI (see Note 3 to our audited consolidated financial statements for details). Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and liquidity, 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 to its parent of $150.0 million and $293.9 million (including an extraordinary dividend of $135.0 million) during 2022 and 2021, respectively.
Contractual obligations. Our material contractual obligations at December 31, 2022 are composed primarily of our unsecured senior notes (and the related semi-annual interest payments), other notes payable, operating leases, and reserves for estimated title losses. Refer to Note 9 (Notes payable) and Note 14 (Leases) to our audited consolidated financial statements for details on the unsecured senior notes and other notes payable, and operating leases, respectively. Refer to the Note 10 (Estimated title losses) to our audited consolidated financial statements and the Title losses section under Results of Operations for details on title losses.
Cash flows. As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows. Refer to the consolidated statements of cash flows in the audited consolidated financial statements.
| 2022 | 2021 | 2020 | ||||||
|---|---|---|---|---|---|---|---|---|
| (in $ millions) | ||||||||
| Net cash provided by operating activities | 191.9 | 390.3 | 275.8 | |||||
| Net cash used by investing activities | (300.7) | (645.3) | (231.4) | |||||
| Net cash provided (used) by financing activities | (123.2) | 310.4 | 54.3 |
Operating activities. Our principal sources of cash from operations are premiums on title policies and revenue from title service-related transactions, real estate solutions 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 2022 decreased by $198.4 million from 2021, primarily due to the lower net income and higher payments related to claims and interest on debt in 2022. Net cash provided by operations improved by $114.5 million in 2021 compared to 2020, primarily as a result of the higher net income and lower claims payments in 2021. 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, specifically focusing on lowering unit costs of production and improving operating margins in all our businesses, while continuing to invest in capabilities that we expect will have a positive impact on our business over the long term. 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. 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 2022, 2021 and 2020, total proceeds from securities investments sold and matured were $103.8 million, $143.8 million and $96.0 million, respectively; while cash used for purchases of securities investments was $207.5 million, $143.9 million and $118.3 million, respectively. During 2021, we also invested $16.1 million in equity method investments in title offices.
We used $142.9 million, $600.0 million and $200.0 million of cash during 2022, 2021 and 2020, respectively, for acquisitions of various title and real estate solutions businesses, consistent with our strategy of increasing scale, growth in key markets and broader technology and service offerings. We used $47.9 million, $39.8 million and $15.0 million of cash for purchases of property and equipment during 2022, 2021 and 2020, respectively, while we generated cash proceeds of $10.7 million in 2021 primarily from the sale of our Colorado buildings. We maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies and pursuing market growth.
Financing activities and capital resources. Total debt and stockholders’ equity were $447.0 million and $1.4 billion, respectively, as of December 31, 2022. As of December 31, 2022, our total debt-to-equity and debt-to-capitalization ratios, excluding short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business, were approximately 32% and 25%, respectively.
During 2021, we had the following debt transactions related to the parent company (refer to Note 9 to our audited consolidated financial statements for details of our debt transactions):
•During the first and third quarters of 2021, we drew a total of $175.0 million on our previous line of credit facility.
•In October 2021, we entered into an unsecured credit agreement which included a new $200.0 million line of credit facility and a $400.0 million short-term loan facility. We drew $370.0 million from the short-term loan facility and used a portion of the proceeds to payoff the $273.9 million balance on the previous line of credit facility.
•In November 2021, we completed an offering of $450.0 million unsecured ten-year senior notes (Senior Notes) and generated proceeds, net of underwriting discounts and issuance costs, of $444.0 million. We used a portion of the proceeds to payoff the $370.0 million balance of our short-term loan.
During 2022, 2021 and 2020, payments on notes payable of $74.3 million, $165.0 million and $23.8 million, respectively, and notes payable additions of $39.5 million, $201.4 million and $16.5 million, respectively, were related to our Section 1031 business, which had an outstanding balance of $2.3 million at December 31, 2022. As of December 31, 2022, the outstanding balance of our Senior Notes was $444.6 million, while we have an unused $197.5 million borrowing capacity on our existing line of credit facility.
During 2022, we paid dividends of $1.65 per common share, compared to $1.365 and $1.20 per common share paid during 2021 and 2020, respectively. In aggregate, we paid total dividends of $44.7 million, $36.6 million and $30.2 million in 2022, 2021 and 2020, respectively. During 2020, we generated net proceeds of approximately $109.0 million from an issuance of new shares of Common Stock, which we used primarily for the acquisition of several title offices.
Effect of changes in foreign currency rates. The effect of changes in foreign currency rates on the consolidated statements of cash flows was a net (decrease) increase in cash and cash equivalents of ($5.5 million) $(2.2 million) and $3.3 million in 2022, 2021 and 2020, respectively. Our primary foreign currencies are the Canadian dollar and British pound, and, relative to the U.S. dollar, the value of the Canadian dollar and British pound generally declined during 2022 and 2021, while both foreign currencies appreciated during 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 increasing mortgage interest and inflation rates. 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 (loss) income. 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 and Note 19 to our audited consolidated financial statements for details.
In 2022, net unrealized investment losses of $36.7 million, net of taxes, which increased our other comprehensive loss, were primarily related to overall decreases in the fair values of our bond securities, primarily driven by the effect of higher interest rates. The five-year U.S. treasury yield applicable on our investments increased approximately 270 basis points in 2022 compared to 2021. Also in 2022, we recorded foreign currency translation losses which increased our other comprehensive loss by $14.9 million, net of taxes, which was primarily driven by the depreciation in value of the Canadian dollar and British pound against the U.S. dollar.
In 2021, net unrealized investment losses of $16.1 million, net of taxes, which increased our other comprehensive loss, were primarily related to decreases in the fair values of our corporate and foreign bond securities, primarily resulting from higher interest rates. The five-year U.S. treasury yield applicable on our investments increased approximately 90 basis points in 2021 versus 2020. Also in 2021, we recorded foreign currency translation losses which increased our other comprehensive loss by $0.7 million, net of taxes, which was primarily driven by the depreciation in value of the British pound against the U.S. dollar in 2021.
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 15 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. 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 following:
•the volatility of economic conditions;
•adverse changes in the level of real estate activity;
•changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing;
•our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems;
•our ability to prevent and mitigate cyber risks;
•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;
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•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;
•our ability to realize anticipated benefits of our previous acquisitions;
•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;
•effects of 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.