STEWART INFORMATION SERVICES CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) (Form 10-K)

MANAGEMENT OVERVIEW


On a full year basis, 2021 net income attributable to Stewart was $323.2
million, or $11.90 per diluted share, compared to $154.9 million, or $6.22 per
diluted share, in 2020. Pretax income before noncontrolling interests in 2021
was $434.0 million (13.1% pretax margin), an increase of 99% compared to $218.5
million (9.5% pretax margin) in 2020. Total revenues increased 45% to $3.3
billion in 2021, compared to $2.3 billion in the prior year, primarily due to
increased transaction volumes and acquisitions, and higher title fees per file.
Total operating expenses increased 39% to $2.9 billion in 2021, from $2.1
billion in 2020, consistent with the revenue growth. Refer to "  Results of
Operations  " for detailed year-to-year income statement discussions, and
"  Liquidity and Capital Resources  " for an analysis of Stewart's financial
condition.

For the fourth quarter 2021, we reported net income attributable to Stewart of
$85.5 million ($3.12 per diluted share), compared to net income attributable to
Stewart of $59.7 million ($2.22 per diluted share) for the fourth quarter 2020.
Fourth quarter 2021 pretax income before noncontrolling interests was $114.1
million compared to pretax income before noncontrolling interests of $83.9
million for the fourth quarter 2020.

Fourth quarter 2021 results included $6.5 million of pretax net realized and
unrealized gains, which included $8.1 million of net unrealized gains on fair
value changes of equity securities investments and $1.3 million of net gains
related to acquisition contingent liability adjustments, partially offset by
$2.9 million of net realized losses primarily related to sale of securities
investments and other assets. Fourth quarter 2020 results included $4.4 million
of pretax net realized and unrealized gains, composed of $3.9 million of net
unrealized gains on fair value changes of equity securities investments and $0.5
million of net realized gains on sale of securities investments.

Summary results for the securities segment are as follows (in millions of dollars, except pre-tax margin and % change):

                                                            For the Three Months
                                                             Ended December 31,
                                                       2021              2020        % Change

  Operating revenues                                       867.8        690.2            26  %
  Investment income                                          3.7          4.1            (9) %
  Net realized and unrealized gains (losses)                 4.9          4.4            12  %
  Pretax income                                            118.3         94.9            25  %
  Pretax margin                                             13.5  %      13.6  %



Pretax income for the title segment increased by $23.4 million, or 25%, in the
fourth quarter 2021 compared to the prior year quarter, while pretax margin was
13.5% in the fourth quarter 2021 which was comparable to 13.6% in the fourth
quarter 2020. Title operating revenues in the fourth quarter 2021 grew $177.5
million, or 26%, as a result of improvements in direct title and gross
independent agency revenues of $81.9 million, or 24%, and $95.6 million, or 27%,
respectively. In line with higher title revenues, overall segment operating
expenses in the fourth quarter 2021 increased $154.3 million, or 26%, primarily
driven by 28% and 31% higher agency retention expenses and combined title
employee costs and other operating expenses, respectively, compared to the prior
year quarter. The average independent agency remittance rate in the fourth
quarter 2021 was 18.0%, compared to 18.2% in the prior year quarter. As a
percentage of title revenues, combined title employee costs and other operating
expenses increased to 40.6% in the fourth quarter 2021 compared to 38.8% in the
fourth quarter 2020, primarily due to office consolidation costs and state sales
tax assessments.
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Title loss expense decreased $13.1 million, or 28%, in the fourth quarter 2021
compared to the prior year quarter, primarily due to favorable claims experience
which was partially offset by higher title revenues. As a percentage of title
revenues, the title loss expense in the fourth quarter 2021 was 3.9% compared to
6.8% in the prior year quarter. For the year, the title loss ratio was 4.2%
compared to 5.3% in 2020.

The segment's net realized and unrealized gains in the fourth quarter 2021
primarily included $8.1 million of net unrealized gains on fair value changes of
equity securities investments, $2.0 million of net losses related to acquisition
contingent liability adjustments, and $0.8 million of net realized losses on
sale of securities investments, while net realized and unrealized gains in the
fourth quarter 2020 were related to $3.9 million of net unrealized gains on fair
value changes of equity securities investments and $0.5 million of net realized
gains on sale of securities investments. Investment income in the fourth quarter
2021 was slightly lower compared to the prior year quarter, primarily due to
lower interest income resulting from lower interest rates.

Direct title revenue information is presented below (in $ millions, except %
change):

                                                     For the Three Months
                                                      Ended December 31,
                                                2021               2020       % Change
          Non-commercial
          Domestic                                    282.3       239.7           18  %
          International                                38.3        35.7            7  %
                                                      320.6       275.4           16  %
          Commercial:
          Domestic                                     93.1        58.1           60  %
          International                                 9.4         7.7           22  %
                                                      102.5        65.8           56  %
          Total direct title revenues                 423.1       341.2           24  %



Overall revenue improvements in both non-commercial and commercial operations
contributed to higher direct title revenues in the fourth quarter 2021 compared
to the prior year quarter. Non-commercial revenues increased $45.2 million, or
16%, primarily driven by increased residential purchase transactions and scale,
partially offset by reduced refinancing transactions, in the fourth quarter 2021
compared to the fourth quarter 2020. Domestic commercial revenues increased
$35.0 million, or 60%, in the fourth quarter 2021, primarily due to improved
commercial transaction size and volume compared to the prior year quarter.
Domestic commercial and residential fees per file in the fourth quarter 2021
were approximately $19,400 and $2,700, respectively, which were 50% and 38%,
respectively, higher compared to the fourth quarter 2020. Total international
revenues grew $4.3 million, or 10%, primarily due to increased residential and
commercial transaction volumes in our Canadian operations in the fourth quarter
2021 compared to the prior year quarter.

The summary results for the ancillary services and head office segment are as follows (in millions of dollars, except variation in %):

                                        For the Three Months
                                         Ended December 31,
                                   2021               2020       % Change
Total operating revenues                  83.7        38.0          120  %
Net realized losses                        1.6           -          100  %
Pretax loss                               (4.2)      (11.0)          62  %



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The segment's operating revenues improved $45.6 million, or 120%, in the fourth
quarter 2021, compared to the prior year quarter, primarily due to revenues
generated by recent acquisitions and increased revenues from appraisal
management and online notary services. Net realized and unrealized gains during
the fourth quarter 2021 were primarily related to acquisition contingent
liability net gain adjustments, which were partially offset by asset disposal
charges. The ancillary services operations in the fourth quarter 2021 generated
pretax income of $5.3 million (which included $3.3 million of net gains related
to acquisition contingent liability adjustments and $5.6 million of purchased
intangibles amortization expense), compared to a fourth quarter 2020 pretax loss
of $0.6 million (which included $1.6 million of purchased intangibles
amortization expense).

Net expenses attributable to parent company and corporate operations in the
fourth quarter 2021 were approximately $7.9 million, which included increased
interest expense resulting from newly issued debt, while net expenses for the
fourth quarter 2020 were approximately $10.4 million, which included costs
related to charitable contributions and consulting fees.


CRITICAL ACCOUNTING ESTIMATES


Actual results can differ from our accounting estimates. While we do not
anticipate significant changes in our estimates, there is a risk that such
changes could have a material impact on our consolidated financial condition or
results of operations for future periods. The discussion of critical accounting
estimates below should be read in conjunction with the related accounting
policies disclosed within   Note 1   to our audited consolidated financial
statements in Part IV of this annual report.

Reserves for loss of property


Provisions for title losses, as a percentage of title operating revenues, were
4.2%, 5.3% and 4.6% for the years ended December 31, 2021, 2020 and 2019,
respectively. Actual loss payment experience, including the impact of large
losses, is the primary reason for increases or decreases in our loss provision.
A 100 basis point change in the loss provisioning percentage, a reasonably
likely scenario based on our historical loss experience, would have increased or
decreased our provision for title losses, and affected pretax operating results
by approximately $30.0 million for the year ended December 31, 2021.


We consider our actual claims payments and incurred loss experience, including
the frequency and severity of claims, compared to our actuarial estimates of
claims payments and incurred losses in determining whether our overall loss
experience has improved or worsened relative to prior periods. We also consider
the impact of economic or market factors on particular policy years to determine
whether the results of those policy years are indicative of future expectations.
In addition, large claims (those exceeding $1.0 million on a single claim),
including large title losses due to independent agency defalcations, are
analyzed and reserved for separately due to the potential higher dollar amount
of loss, lower volume of claims reported and sporadic reporting of such claims.
We evaluate the frequency and severity of large losses in determining whether
our experience has improved or worsened. Our method for recording the reserves
for title losses on both an interim and annual basis begins with the calculation
of our current loss provision rate which is applied to our current premium
revenues, resulting in a title loss expense for the period, except for large
claims and escrow losses. This loss provision rate is set to provide for losses
on current year policies and is primarily determined using moving average ratios
of recent actual policy loss payment experience (net of recoveries) to premium
revenues.

Due to the inherent uncertainty in predicting future losses from securities policies, our management and third-party actuaries must exercise significant judgment in estimating reserves. Accordingly, our ultimate liability may be materially higher or lower than the current reserves and/or calculated estimates of our third-party actuary.


Provisions for known claims arise primarily from prior policy years as claims
are not typically reported until several years after policies are issued.
Provisions - Incurred But Not Reported (IBNR) are estimates of claims expected
to be incurred over the next 20 years; therefore, it is not unusual or
unexpected to experience changes to those estimated provisions in both current
and prior policy years as additional loss experience on policy years is
obtained. This loss experience may result in changes to our estimate of total
ultimate losses expected (i.e., the IBNR policy loss reserve). Current year
provisions - IBNR are recorded on policies issued in the current year as a
percentage of premiums earned (loss provisioning rate). As claims become known,
provisions are reclassified from IBNR to known claims. Adjustments relating to
large claims may impact provisions either for known claims or for IBNR.
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                                         2021          2020        2019
                                                (in $ millions)
Provisions - Known Claims:
Current year                            22.8           14.3        18.4
Prior policy years                      55.7           68.8        73.5
                                        78.5           83.1        91.9
Provisions - IBNR
Current year                            98.3           84.5        60.7
Prior policy years                       5.1           16.4         5.3
                                       103.4          100.9        66.0

IBNR transferred to known claims (55.7) (68.8) (73.5) Total provisions

                       126.2          115.2        84.4



In 2021, total known claims provisions decreased by $4.6 million, or 6%, to
$78.5 million primarily due to lower reported claims relating to prior year
policies compared to 2020. Total 2021 provisions - IBNR increased by $2.5
million, or 3%, to $103.4 million compared to the prior year, primarily due to
increased title premiums in 2021, partially offset by the effect of lower
provisioning rates due to favorable claims experience. In 2020, total known
claims provisions decreased by $8.8 million, or 10%, to $83.1 million primarily
due to lower reported claims relating to prior year policies compared to 2019.
Total 2020 provisions - IBNR increased by $34.9 million, or 53%, to $100.9
million compared to the prior year, primarily due to increased title premiums,
higher loss provisioning rates driven by an overall uncertainty related to
incurred losses resulting from the COVID-19 pandemic, and unfavorable loss
experience in our Canadian operations. As a percentage of title operating
revenues, current year provisions - IBNR were 3.3%, 3.9% and 3.3% in 2021, 2020
and 2019, respectively.

In addition to title policy claims, we incur losses in our direct operations
from escrow, closing and disbursement functions. Escrow losses typically relate
to errors or other miscalculations of amounts to be paid at closing, including
timing or amount of a mortgage payoff, payment of property or other taxes and
payment of homeowners' association fees, and wire fraud. In those cases, the
title insurer incurs the loss under its obligation to ensure that an
unencumbered title is conveyed. These losses are recognized as expenses when
discovered or when contingencies associated with them (such as litigation) are
resolved and are typically paid less than 12 months after the loss is
recognized.

Large title losses due to independent agency defalcations typically occur when
the independent agency misappropriates funds from escrow accounts under its
control. Such losses are usually discovered when the independent agency fails to
pay off an outstanding mortgage loan at closing (or immediately thereafter) from
the proceeds of the new loan. These incurred losses are typically more severe in
terms of dollar value compared with traditional title policy claims since the
independent agency is often able, over time, to conceal misappropriation of
escrow funds relating to more than one transaction through the constant volume
of funds moving through its escrow accounts. In declining real estate markets,
lower transaction volumes result in a lower incoming volume of funds, making it
more difficult to cover up the misappropriation with incoming funds. Thus, when
the defalcation is discovered, it often relates to several transactions. In
addition, the overall decline in an independent agency's revenues, profits and
cash flows increases the agency's incentive to improperly utilize the escrow
funds from real estate transactions. For each of the three years ended December
31, 2021, our net title losses due to independent agency defalcations were not
material.

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Internal controls relating to independent agencies include, but are not limited
to, periodic audits, site visits and reconciliations of policy inventories and
premiums. The audits and site visits cover examination of the escrow account
bank reconciliations and an examination of a sample of closed transactions. In
some instances, the scope of our review is limited by attorney agencies that
cite client confidentiality. Certain states have mandated annual reviews of
agencies by their underwriter. We also determine whether our independent
agencies have appropriate internal controls as defined by the American Land
Title Association's best practices and us. However, even with adequate internal
controls in place, their effectiveness can be circumvented by collusion or
improper override of the controls by management at the independent agencies. To
aid in the selection of independent agencies to review, we have developed an
agency risk model that aggregates data from different areas to identify possible
issues. This is not a guarantee that all independent agencies with deficiencies
will be identified. In addition, we are typically not the only underwriter for
which an independent agency issues policies, and independent agencies may not
always provide complete financial records for our review.

Good will deficiency

Good will is not amortized, but is tested for impairment annually or whenever the occurrence of events indicates potential impairment at the reporting unit level. Refer to Note 1-L to our audited consolidated financial statements for further details on our process for reviewing goodwill impairment.


The valuation techniques performed in our quantitative analysis make use of our
estimates and assumptions related to critical factors, which include revenue and
operating margin growth rates, future market conditions, determination of market
multiples and comparative companies, assignment of a control premium, and
determination of risk-adjusted discount rates. Forecasts of future operations
are based, in part, on actual operating results and our expectations as to
future market conditions. Our calculation of fair value requires analysis of a
range of possible outcomes and applying weights to each of the valuation
technique used. Due to the uncertainty and complexity of performing the goodwill
impairment analysis, actual results may not be consistent with our estimates and
assumptions, which may result in a future material goodwill impairment.

During 2021 and 2020, we utilized the qualitative approach in assessing goodwill
impairment for each of our reporting units and concluded that no impairment was
necessary. Refer also to   Note 8   to our audited consolidated financial
statements for details on goodwill.


RESULTS OF OPERATIONS


We discuss in this section the consolidated results of operations for the years
2021 and 2020, as compared to each corresponding prior year. Factors
contributing to fluctuations in our results of operations are presented in the
order of their monetary significance, and significant changes are quantified,
when necessary. Segment results are included in the discussions and are
discussed separately, when relevant.

Industry data. Published U.S. mortgage interest rates and other selected
residential housing data for the three years ended December 31, 2021 are shown
below (amounts shown for 2021 are preliminary and subject to revision). The
amounts below may not relate directly to or provide accurate data for
forecasting our operating revenues or order counts. Our statements on home
sales, mortgage interest rates and loan activity are based on averaged published
industry data from sources including Fannie Mae, Freddie Mac, and the Mortgage
Bankers Association, when available.
                                                           2021        2020 

2019

Mortgage interest rates (30-year, fixed-rate) - %
Averages for the year                                      2.96        3.11        3.94
First quarter                                              2.88        3.51        4.37
Second quarter                                             3.00        3.23        4.00
Third quarter                                              2.87        2.95        3.67
Fourth quarter                                             3.08        2.76        3.70
Mortgage originations - $ billions                        4,192       4,241 

2,358

Refinancings - % of originations                             58          64 

46

New home sales - in millions                               0.78        0.83 

0.68

New home median sales price - in $ thousands                392         335 

323

Existing home sales - in millions                          6.14        5.66 

5.34

Existing home median sales price - in $ thousands           346         295 

273




Total mortgage originations in 2021 declined slightly by 1% compared to 2020
primarily due to lower refinancing activity, which decreased by 10%, partially
offset by a 14% improvement in purchase originations. The lower refinancing
originations in 2021 were expected as the record activity in 2020 was
anticipated to decelerate, as interest rates gradually increased. Existing homes
sales in 2021 improved by 8%, compared to the prior year, as housing demand
continue to remain strong with buyers securing homes before interest rates
increase further, while new homes sales declined by 5% in 2021 compared to 2020,
primarily due to the supply constraints which are limiting sales and inventory.
Median home prices for new and existing homes both increased by 17% due to the
strong demand and limited supply.

For 2022, the average 30-year mortgage interest fixed rate is anticipated to
further climb to 3.6%, primarily influenced by the expected federal monetary
policy tightening to combat elevated inflation. While this will further reduce
refinancing lending and limit home affordability, with median home prices
forecasted to further move up 8% compared to 2021, the industry expects homes
sales to grow on a more sustainable pace. New and existing homes sales are
anticipated to improve 16% and 1%, respectively, in 2022 compared to 2021.

Factors affecting revenues. Our primary business is title insurance and
settlement-related services. We close transactions and issue title policies on
homes, commercial and other real properties located in all 50 states, 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, credit and real estate data services, search and valuation
services.

Key factors contributing to the evolution of operating revenues for our securities and ancillary services and our business segments include:


•mortgage interest rates;
•availability of mortgage loans;
•number and average value of mortgage loan originations;
•ability of potential purchasers to qualify for loans;
•inventory of existing homes available for sale;
•ratio of purchase transactions compared with refinance transactions;
•ratio of closed orders to open orders;
•home prices;
•consumer confidence, including employment trends;
•demand by buyers;
•premium rates;
•foreign currency exchange rates;
•supply chains;
•market share;
•ability to attract and retain highly productive sales associates;
•departure of revenue-attached employees;
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•independent agency remittance rates;
•opening of new offices and acquisitions;
•office closures;
•number and value of commercial transactions, which typically yield higher
premiums;
•government or regulatory initiatives impacting regulatory or operational
requirements, including tax incentives and the implementation of the integrated
disclosure and cybersecurity requirements;
•acquisitions or divestitures of businesses;
•volume of distressed property transactions;
•seasonality and/or weather; and
•outbreaks of diseases and related quarantine orders and restrictions on travel,
trade and business operations.

Premiums are determined in part by the values of the transactions we handle. To
the extent inflation or market conditions cause increases in the prices of homes
and other real estate, premium revenues are also increased. Conversely, falling
home prices cause premium revenues to decline. As an overall guideline, a 5%
change in median home prices results in an approximately 3.7% change in title
premiums. Home price changes may override the seasonal nature of the title
insurance business. Historically, our first quarter is the least active in terms
of title insurance revenues as home buying is generally depressed during winter
months. Our second and third quarters are the most active as the summer is the
traditional home buying season, and while commercial transaction closings are
skewed to the end of the year, individually large commercial transactions can
occur any time of year. On average, refinance title premium rates are 60% of the
premium rates for a similarly priced sale transaction.

Title income. The information on the title’s direct earnings is presented below:

                                                   Year Ended December 31                                Change                          Percent Change
                                              2021             2020          2019             2021 vs 2020    2020 vs 2019         2021 vs 2020  2020 vs 2019
                                                       (in $ millions)                              (in $ millions)
Non-commercial
Domestic                                      991.4            743.7         565.9               247.7           177.8                     33  %        31  %
International                                 157.1            106.1          90.9                51.0            15.2                     48  %        17  %
                                            1,148.5            849.8         656.8               298.7           193.0                     35  %        29  %
Commercial:
Domestic                                      242.3            166.7         188.4                75.6           (21.7)                    45  %       (12) %
International                                  31.4             21.4          24.3                10.0            (2.9)                    47  %       (12) %
                                              273.7            188.1         212.7                85.6           (24.6)                    46  %       (12) %
Total direct title revenues                 1,422.2          1,037.9         869.5               384.3           168.4                     37  %        19  %



Direct title revenues in 2021 grew 37% compared to the prior year, as a result
of overall revenue improvements in both non-commercial and commercial
operations. Non-commercial revenues increased 35% in 2021, primarily driven by
increased residential transactions and scale compared to 2020. Domestic
commercial revenues increased 45% in 2021 compared to 2020, primarily due to
improved commercial transaction size and volume. Total purchase and refinancing
closed orders improved 12%, while commercial closed orders increased 15% in 2021
compared to the prior year. Domestic commercial and residential fees per file in
2021 were approximately $14,000 and $2,300, respectively, which respectively
were 26% and 18% higher compared to 2020. Total international revenues grew
$61.0 million, or 48%, in 2021 compared to 2020, primarily due to increased
residential and commercial transaction volumes in our Canadian operations.

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Direct title revenues in 2020 improved 19% compared to 2019, primarily due to
higher non-commercial revenues driven by increased purchase and refinancing
residential orders, partially offset by decreased commercial revenues primarily
resulting from reduced transaction sizes and volumes. Total refinancing and
purchased closed orders in 2020 increased 123% and 8%, respectively; while
commercial closed orders decreased 8% compared to 2019. Domestic residential fee
per file in 2020 was approximately $1,900 compared to $2,200 in 2019, primarily
as a result of a higher mix of refinancing compared to purchase transactions in
2020. Domestic commercial fee per file in 2020 was $11,100 compared to $11,600
in 2019, primarily due to lower transaction sizes resulting from the slowdown in
the commercial real estate market as a result of the COVID-19 pandemic. Total
international revenues grew $12.3 million, or 11%, in 2020 versus 2019,
primarily because of higher volumes generated by our Canada operations,
partially offset by lower volumes from other international locations.

Closed and open order information is as follows:


                                            Year Ended December 31                                   Change                               % Change
                                     2021             2020            2019               2021 vs 2020      2020 vs 2019          2021 vs 2020  2020 vs 2019
Opened Orders:
Commercial                          18,113           15,748           17,813                 2,365            (2,065)                    15  %        (12) %
Purchase                           283,350          250,058          227,073                33,292            22,985                     13  %         10  %
Refinance                          256,621          304,064          141,852               (47,443)          162,212                    (16) %        114  %
Other                                6,753            3,868            4,744                 2,885              (876)                    75  %        (18) %
Total                              564,837          573,738          391,482                (8,901)          182,256                     (2) %         47  %

Closed Orders:
Commercial                          17,334           15,035           16,269                 2,299            (1,234)                    15  %         (8) %
Purchase                           217,895          178,935          165,219                38,960            13,716                     22  %          8  %
Refinance                          211,109          203,763           91,289                 7,346           112,474                      4  %        123  %
Other                                4,736            2,594            3,222                 2,142              (628)                    83  %        (19) %
Total                              451,074          400,327          275,999                50,747           124,328                     13  %         45  %



Gross revenues from independent agency operations (agency revenues) increased
$431.6 million, or 38%, and $180.5 million, or 19%, in 2021 and 2020,
respectively, compared to corresponding prior years, which was consistent with
the trends of our direct title operations and the overall improved real estate
market. In line with the change in gross agency revenues, net agency revenues
(which are net of agency retention) increased $75.7 million, or 37%, and $35.2
million, or 21%, in 2021 and 2020, respectively, compared to 2020 and 2019.
Refer further to the "Retention by agencies" discussion under Expenses below.

Title revenues by geographic location. The approximate amounts and percentages
of consolidated title operating revenues for the last three years ended December
31, 2021 were as follows:

                                    Year Ended December 31                 Percentages
                                  2021        2020       2019         2021      2020    2019
                                       (in $ millions)
            Texas                 469         359         316            16  %   16  %   17  %
            New York              263         187         216             9  %    9  %   12  %
            International         198         134         122             7  %    6  %    7  %
            California            192         163         134             6  %    7  %    7  %
            Florida               150         102          78             5  %    5  %    4  %
            All others          1,733       1,244         974            57  %   57  %   53  %
                                3,005       2,189       1,840           100  %  100  %  100  %


Income from ancillary services. Ancillary services revenue in 2021 and 2020 is improving $177.1 millioni.e. 214%, and $45.2 millionor 121%, respectively, compared to 2020 and 2019, primarily due to revenue from new acquisitions, partially offset by lower revenue from our capital markets research and valuation services businesses net worth of homes due to reduced market activity in 2021 and 2020.

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Investment income. Investment income in 2021 and 2020 decreased $1.8 million, or
9%, and $1.2 million, or 6%, respectively, compared to 2020 and 2019, primarily
due to reduced interest income on investments resulting from the lower interest
rates environment in 2021 and 2020. Refer to   Note 6   to our audited
consolidated financial statements for additional details.

Net realized and unrealized gains. Refer to Note 6 of our audited consolidated financial statements for further details.

Expenses. Our personnel costs and certain other operating expenses are sensitive to inflation. An analysis of expenditure is presented below:

                                                  Year Ended December 31                                 Change                            % Change
                                                                                                                                                  2020 vs
                                            2021             2020           2019              2021 vs 2020    2020 vs 2019         2021 vs 2020    2019
                                                      (in $ millions)                               (in $ millions)
Amounts retained by independent
agencies                                     1,300.4          944.5          799.2               355.9           145.3                    38  %       18  %
As a % of agency revenues                       82.2  %        82.1  %        82.3  %
Employee costs                                 777.0          613.2          567.2               163.8            46.0                    27  %        8  %
As a % of operating revenues                    23.8  %        27.0  %        30.2  %
Other operating expenses                       626.8          375.2          345.3               251.6            29.9                    67  %        9  %
As a % of operating revenues                    19.2  %        16.5  %        18.4  %
Title losses and related claims                126.2          115.2           84.4                11.0            30.8                    10  %       36  %
As a % of title revenues                         4.2  %         5.3  %         4.6  %



Retention by agencies. Amounts retained by title agencies are based on
agreements between agencies and our title underwriters. Amounts retained by
independent agencies, as a percentage of revenues generated by them, averaged
82.2%, 82.1% and 82.3% in 2021, 2020 and 2019, respectively. The average
retention percentage may vary from period to period due to the geographical mix
of agency operations, the volume of title revenues and, in some states, laws or
regulations. Due to the variety of such laws or regulations, as well as
competitive factors, the average retention rate can differ significantly from
state to state. In addition, a high proportion of our independent agencies are
in states with retention rates greater than 80%. We continue to focus on
increasing profit margins in every state, increasing premium revenue in states
where remittance rates are above 20%, and maintaining the quality of our agency
network, which we believe to be the industry's best, in order to mitigate claims
risk and drive consistent future performance. While market share is important in
our agency operations channel, it is not as important as margins, risk
mitigation and profitability.

Selected cost ratios (by segment). The following table shows employee costs and
other operating expenses as a percentage of related segment operating revenues
for the years ended December 31:


                                                           Employee Costs                                 Other Operating Expenses
                                                 2021           2020           2019                 2021            2020           2019
Title                                              24.3  %        26.8  %        29.4  %               13.8  %        13.5  %         16.5  %
Ancillary services and corporate                   17.7  %        31.3  %        70.7  %               81.6  %        95.6  %        109.6  %



Employee costs. Consolidated employee costs increased $163.8 million, or 27%, in
2021 compared to 2020, primarily due to increased salaries and employee benefits
on a 20% higher average employee count driven by acquisitions, higher incentive
compensation on improved overall operating results, and increased temporary
labor and overtime costs on increased transaction volumes. Consolidated employee
costs increased $46.0 million, or 8%, in 2020 compared to 2019, primarily due to
acquisitions, higher incentive compensation on improved operating results, and
increased overtime costs driven by higher transaction volumes, partially offset
by reduced salaries expense resulting from a 4% reduction in average employee
counts (excluding acquisitions) in 2020.

Our total employee counts at December 31, 2021, 2020 and 2019 were approximately
7,300, 5,800 and 5,300, respectively, with increases in 2021 and 2020 driven by
acquisitions. Average cost per employee in 2021 and 2020 increased 5% and 7%,
respectively, compared to the corresponding prior years, while as a percentage
of total operating revenues, employee costs were 23.8%, 27.0% and 30.2% in 2021,
2020 and 2019, respectively.

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Employee costs for the title segment increased $143.7 million, or 24%, and $46.6
million, or 9%, in 2021 and 2020, respectively, compared to corresponding prior
years, primarily due to acquisitions and higher incentive compensation on higher
title revenues. Employee costs in the ancillary services and corporate segment
increased $20.0 million, or 77%, in 2021 compared to 2020, due to higher
salaries and employee benefits as a result of acquisitions, while employee costs
decreased $0.6 million, or 2%, in 2020 compared to 2019, primarily due to
reduced average employee counts driven by volume declines, partially offset by
added employee costs from 2020 acquisitions.

Other operating expenses. Other operating expenses include costs that are fixed
in nature, costs that follow, to varying degrees, changes in transaction volumes
and revenues (variable costs) and costs that fluctuate independently of revenues
(independent costs). Costs that are fixed in nature include attorney and
professional fees, third-party outsourcing provider fees, equipment rental,
insurance, rent and other occupancy expenses, repairs and maintenance,
technology costs, telecommunications and title plant expenses. Variable costs
include appraiser and service expenses related to ancillary services operations,
outside search and valuation fees, attorney fee splits, bad debt expenses, copy
supplies, delivery fees, postage, premium taxes and title plant maintenance
expenses. Independent costs include general supplies, litigation defense,
business promotion and marketing and travel.

Consolidated other operating expenses increased $251.6 million, or 67%, and
$29.8 million, or 9%, in 2021 and 2020, respectively, compared to corresponding
prior years. Other operating expenses, as a percentage of total operating
revenues (other operating expenses ratio), were 19.2%, 16.5% and 18.4% in 2021,
2020 and 2019, respectively. Excluding non-operating charges in 2019 primarily
related to FNF merger expenses, executive insurance policy settlement and office
closures, the other operating expenses ratio for 2019 was 17.5%.

In 2021, costs fixed in nature increased $29.0 million, or 21%, compared to
2020, primarily due to acquisitions, (which added technology costs, professional
fees, and rent and other occupancy expenses), higher third-party outsourcing
provider fees and increased consulting fees related to business acquisition and
integration. Variable costs increased $206.5 million, or 101%, primarily due to
increased appraiser and service expenses on higher ancillary services revenues,
increased outside title search, attorney fee splits and premium taxes on
improved title revenues, and state sales tax assessments. Independent costs
increased $16.1 million, or 46%, primarily due to office consolidation costs,
higher marketing and travel expenses, and increased bank service fees.

In 2020, excluding the non-operating charges presented in the table above, costs
fixed in nature increased $1.3 million, or 1%, compared to 2019, primarily due
to increased professional and consulting fees related to acquisitions and
integration and higher technology expenses, partially offset by lower rent and
other occupancy expenses. Variable costs increased $55.3 million, or 37%,
primarily due to increased appraiser expenses tied to appraisal revenues
generated by new acquisitions in the ancillary services operations, as well as
higher premium taxes, title plant maintenance expenses and attorney fee splits
consistent with higher overall title revenues. These increases were partially
offset by lower outside search expenses related to lower revenues from
commercial title and search and valuation services operations. Independent
costs, excluding the operating charges, decreased $9.1 million, or 20%,
primarily due to reduced marketing and travel expenses mainly as a result of the
COVID-19 pandemic.

Title losses. Provisions for title losses, as a percentage of title operating
revenues, were 4.2%, 5.3% and 4.6% in 2021, 2020 and 2019, respectively. The
title loss ratio in any given year can be significantly influenced by new large
claims incurred as well as adjustments to reserves for existing large claims. We
continue to manage and resolve large claims prudently and in keeping with our
commitments to our policyholders.

For the year ended December 31, 2021, title losses increased $11.0 million, or
10%, compared to the prior year, primarily due to increased title premiums,
partially offset by favorable claims experience. For the year ended December 31,
2020, title losses increased $30.8 million, or 36%, compared to 2019, primarily
due to increased title premiums, higher loss provisioning rate driven by an
overall uncertainty related to incurred losses resulting from the COVID-19
pandemic, and unfavorable loss experience in our Canadian operations.

Title losses paid were $71.5 million, $82.0 million and $91.0 million in 2021,
2020 and 2019, respectively. Total claims payments in 2021 decreased compared to
the prior year, due to lower payments on large and non-large claims. Total claim
payments in 2020 decreased compared to 2019, primarily due to lower payments on
non-large claims, partially offset by higher payments on large claims. Claims
payments made on large title claims, net of insurance recoveries, during 2021,
2020 and 2019 were $2.8 million, $8.7 million and $6.1 million, respectively.
                                       23
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Our liability for estimated title losses as of December 31, 2021 and 2020
comprises both known claims and our IBNR. Known claims reserves are reserves
related to actual losses reported to us. Our reserve for known claims comprises
both claims related to title insurance policies as well as losses arising from
escrow closing and funding operations due to fraud or error (which are
recognized as expense when discovered). The amount of the reserve represents the
aggregate, non-discounted future payments (net of recoveries) that we expect to
incur on policy and escrow losses and in costs to settle claims.

Total balances of the reserve for losses on securities policies at the 31st of December were the following:

                                                    2021          2020
                                                   (in $ millions)
               Known claims                       75.9            68.9
               IBNR                              473.7           427.4
               Total estimated title losses      549.6           496.3



The actual timing of estimated title loss payments may vary since claims, by
their nature, are complex and paid over long periods of time. Based on
historical payment patterns, 86% of the outstanding loss reserves are paid out
within seven years. As a result, the estimate of the ultimate amount to be paid
on any claim may be modified over that time period. Due to the inherent
uncertainty in predicting future title policy losses, significant judgment is
required by both our management and our third party actuaries in estimating
reserves. As a consequence, our ultimate liability may be materially greater or
less than current reserves and/or our third party actuary's calculated
estimates. As of December 31, 2021 and 2020, our reserve balance was above the
actuarial midpoint of total estimated policy loss reserves. Refer to   Note 10
(Estimated title losses) to our audited consolidated financial statements for
details.

Depreciation and amortization. Depreciation and amortization expense increased
$17.2 million, or 89%, in 2021 compared to 2020, primarily due to $16.4 million
of intangible asset amortization from acquisitions. Depreciation and
amortization expense in 2020 decreased $3.3 million, or 15%, compared to 2019,
primarily due to certain information technology and other fixed assets being
fully depreciated or written off by end of 2019, and reduced purchases of fixed
assets in 2020, partially offset by $2.7 million of intangible asset
amortization related to 2020 acquisitions.

Income taxes. Our effective tax rates for 2021, 2020 and 2019 were 22.5%, 24.0%
and 25.3%, respectively, based on income before taxes (after deducting
noncontrolling interests) of $417.2 million, $203.7 million and $105.3 million,
respectively. Refer to   Note 7   to our audited consolidated financial
statements for details on the effective tax rates and income tax accounts.


CASH 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,
2021, our total cash and investments, including amounts reserved pursuant to
statutory requirements, aggregated $1.2 billion. Of our total cash and
investments at December 31, 2021, $798.3 million ($517.5 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 $85.9 million at December 31, 2021) is available for funding the
parent company's operating expenses, interest payments on debt and dividend
payments to common stockholders. The parent company also receives distributions
from Guaranty, its regulated title insurance underwriter, to meet cash
requirements for acquisitions and other strategic investments.

                                       24
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A substantial majority of our consolidated cash and investments as of
December 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 under Texas law) to fund its
insurance operations, including claims payments. Guaranty may also, subject to
certain limitations, provide funds to its subsidiaries (whose operations consist
principally of field title offices and ancillary services operations) for their
operating and debt service needs.

We maintain investments in accordance with certain statutory requirements for
the funding of statutory premium reserves. Statutory premium reserves are
required to be fully funded and invested in high-quality securities and
short-term investments. Statutory reserve funds are not available for current
claims payments, which must be funded from current operating cash flow. Included
in investments in debt and equity securities are statutory reserve funds of
approximately $523.5 million at December 31, 2021. In addition, included within
cash and cash equivalents are statutory reserve funds of approximately $41.4
million at December 31, 2021. Although these cash statutory reserve funds are
not restricted or segregated in depository accounts, they are required to be
held pursuant to state statutes. If the Company fails to maintain minimum
investments or cash and cash equivalents sufficient to meet statutory
requirements, the Company may be subject to fines or other penalties, including
potential revocation of its business license. As of December 31, 2021, our known
claims reserve totaled $75.9 million and our estimate of claims that may be
reported in the future, under U.S. generally accepted accounting principles,
totaled $473.7 million. In addition to this, we had cash and investments
(excluding equity method investments) of $339.2 million which are available for
underwriter operations, including claims payments.

The ability of Guaranty to pay dividends to its parent is governed by Texas
insurance law. The Texas Department of Insurance (TDI) must be notified in the
future of any dividend declared, and any dividend in excess of the statutory
maximum (which was approximately $210.1 million as of December 31, 2021) would
be, by regulation, considered extraordinary and subject to pre-approval by the
TDI (see   Note 3   to our audited consolidated financial statements for
details). Also, the Texas Insurance Commissioner may raise an objection to a
planned distribution during the notification period. Guaranty's actual ability
or intent to pay dividends to its parent may be constrained by business and
regulatory considerations, such as the impact of dividends on surplus, which
could affect its ratings and competitive position, the amount of insurance it
can write and its ability to pay future dividends. In 2021 and 2020, Guaranty
paid dividends of $293.9 million (including an extraordinary dividend of $135.0
million) and $30.0 million, respectively.

Contractual Obligations. Our important contractual obligations to December 31, 2021 consist primarily of our senior unsecured notes (and related semi-annual interest payments), other notes payable, operating leases and estimated property loss reserves. 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 stock losses.


Cash flows. As the parent company conducts no operations apart from its
wholly-owned subsidiaries, the discussion below focuses on consolidated cash
flows. Refer to the   consolidated statements of cash flows   in the audited
consolidated financial statements.

                                                              2021          

2020 2019

                                                                     (in $ 

millions)

    Net cash provided by operating activities               390.3          

275.8 166.4

Net cash (used) from investing activities (645.3) (231.4) 7.0

Net cash provided (used) by financing activities 310.4

54.3 (37.8)




Operating activities. Our principal sources of cash from operations are premiums
on title policies and revenue from title service-related transactions, ancillary
services and other operations. Our independent agencies remit cash to us net of
their contractual retention. Our principal cash expenditures for operations are
employee costs, operating costs and title claims payments.

                                       25
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Net cash provided by operations improved by $114.5 million in 2021 compared to
2020, primarily as a result of the higher net income and lower claims payments
in 2021. Net cash provided by operations in 2020 improved by $109.4 million
compared to 2019, also primarily due to the higher net income generated and
lower claim payments in 2020. Although our business is labor intensive, we are
focused on a cost-effective, scalable business model which includes utilization
of technology, centralized back and middle office functions and business process
outsourcing. We are continuing our emphasis on cost management, especially in
light of the current economic environment due to the COVID-19 pandemic,
specifically focusing on lowering unit costs of production and improving
operating margins in all our businesses. Our plans to improve margins include
additional automation of manual processes, and further consolidation of our
various systems and production operations. We continue to invest in the
technology necessary to accomplish these goals.

Investing activities. Cash used and provided by investing activities is
primarily driven by proceeds from matured and sold investments, purchases of
investments, capital expenditures and acquisition of title offices and other
businesses. During 2021, 2020 and 2019, total proceeds from securities
investments sold and matured were $143.8 million, $96.0 million and $99.3
million, respectively; while cash used for purchases of securities investments
was $143.9 million, $118.3 million and $77.5 million, respectively. During 2021,
we also invested $16.1 million in equity method investments in title offices.

We used $600.0 million and $200.0 million of cash in 2021 and 2020,
respectively, for acquisitions of various title and ancillary services
businesses, consistent with our strategy of increasing scale, growth in key
markets and broader technology and service offerings. We used $39.8 million,
$15.0 million and $17.1 million of cash for purchases of property and equipment
during 2021, 2020 and 2019, respectively, while we generated cash proceeds of
$10.7 million in 2021 primarily from the sale of our Colorado buildings. We
maintain investment in capital expenditures at a level that enables us to
implement technologies for increasing our operational and back-office
efficiencies and pursuing market growth.

Financing activities and capital resources. Total debt and stockholders' equity
were $483.5 million and $1.3 billion, respectively, as of December 31, 2021. As
of December 31, 2021, our total debt-to-equity and debt-to-capitalization
ratios, excluding short-term loan agreements in connection with our Section 1031
tax-deferred property exchange (Section 1031) business, were approximately 34%
and 26%, respectively.

During 2021, we had the following debt transactions related to the parent
company (refer to   Note 9   to our audited consolidated financial statements
for details of our debt transactions):
•During the first and third quarters of 2021, we drew a total of $175.0 million
on our previous line of credit facility.
•In October 2021, we entered into an unsecured credit agreement which included a
new $200.0 million line of credit facility and a $400.0 million short-term loan
facility. We drew $370.0 million from the short-term loan facility and used a
portion of the proceeds to payoff the $273.9 million balance on the previous
line of credit facility.
•In November 2021, we completed an offering of $450.0 million unsecured ten-year
senior notes (Senior Notes) and generated proceeds, net of underwriting
discounts and issuance costs, of $444.0 million. We used a portion of the
proceeds to payoff the $370.0 million balance of our short-term loan.

During 2021, 2020 and 2019, payments on notes payable of $165.0 million, $23.8
million and $25.0 million, respectively, and notes payable additions of $201.4
million, $16.5 million and $30.5 million, respectively, were related to our
Section 1031 business, which had an outstanding balance of $37.1 million at
December 31, 2021. As of December 31, 2021, the outstanding balance of our
Senior Notes was $444.1 million, while the new the line of credit facility was
fully available.

During 2021, we paid dividends of $1.365 per common share, compared to $1.20 per
common share paid for each of 2020 and 2019. In aggregate, we paid total
dividends of $36.6 million, $30.2 million and $28.3 million in 2021, 2020 and
2019, respectively. During 2020, we generated net proceeds of approximately
$109.0 million from an issuance of new shares of Common Stock, which we used
primarily for the acquisition of several title offices.

                                       26
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Effect of changes in foreign currency rates. The effect of changes in foreign
currency rates on the consolidated statements of cash flows was a net (decrease)
increase in cash and cash equivalents of $(2.2) million, $3.3 million and $2.9
million in 2021, 2020 and 2019, respectively. Our primary foreign currencies are
the Canadian dollar and British pound, and, relative to the U.S. dollar, the
value of the Canadian dollar was essentially unchanged and the value of the
British pound declined in 2021, while both foreign currencies appreciated during
2020 and 2019.

                                  ***********

We believe we have sufficient liquidity and capital resources to meet the cash
needs of our ongoing operations, including the current economic and real estate
environment created by the COVID-19 pandemic (as discussed in   Note 1-Q   to
our audited consolidated financial statements). However, we may determine that
additional debt or equity funding is warranted to provide liquidity for
achievement of strategic goals or acquisitions or for unforeseen circumstances.
Other than scheduled maturities of debt, operating lease payments and
anticipated claims payments, we have no material contractual commitments. We
expect that cash flows from operations and cash available from our underwriters,
subject to regulatory restrictions, will be sufficient to fund our operations,
including claims payments. However, to the extent that these funds are not
sufficient, we may be required to borrow funds on terms less favorable than we
currently have or seek funding from the equity market, which may not be
successful or may be on terms that are dilutive to existing stockholders.

Other comprehensive income (loss). Unrealized gains and losses on investments in available-for-sale securities and changes in exchange rates are recognized net of deferred tax in accumulated other comprehensive income (loss), a component of equity, up to their achievement. Refer to Note 1-H of our audited consolidated financial statements for further details.


In 2021, net unrealized investment losses of $16.1 million, net of taxes, which
increased our other comprehensive loss, were primarily related to decreases in
the fair values of our corporate and foreign bond securities, primarily
resulting from higher interest rates. The five-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.

In 2020, net unrealized investment gains of $14.9 million, net of taxes, which
increased our other comprehensive income, were primarily related to increases in
the fair values of our overall bond securities portfolio, mainly driven by the
effect of lower interest rates and partially offset by higher credit spreads.
The five-year U.S. treasury yield applicable on our investments decreased
approximately 130 basis points in 2020 versus 2019, while the applicable credit
spreads increased by approximately 70 basis points in 2020 compared to 2019.
Also in 2020, we recorded foreign currency translation gains which increased our
other comprehensive income by $4.8 million, net of taxes, which was primarily
driven by the appreciation in value of the Canadian dollar and United Kingdom
pound against the U.S. dollar in 2020.

In 2019, net unrealized investment gains of $15.6 million, net of taxes, which
increased our other comprehensive income, were primarily related to increases in
the fair values of our overall bond securities portfolio driven by reduced
interest rates and credit spreads. The five-year U.S. treasury yield and
applicable credit spreads on our investments decreased approximately 80 and 20
basis points, respectively, in 2019 compared to the prior year. Also in 2019, we
recorded foreign currency translation gains which increased our other
comprehensive income by $6.5 million, net of taxes, which was primarily driven
by the appreciation in value of the Canadian dollar and United Kingdom pound
against the U.S. dollar in 2019.

Off-balance sheet arrangements. We do not have any material source of liquidity
or financing that involves off-balance sheet arrangements. We routinely hold
funds in segregated escrow accounts relating to closing of real estate
transactions that we service and tax-deferred property exchanges, pursuant to
Section 1031 of the Internal Revenue Code, where we serve as a qualified
intermediary and hold the proceeds until the related qualifying exchange occurs.
In accordance with industry practice, these segregated accounts are not included
on our balance sheet. See   Note 15   to our audited consolidated financial
statements included in Item 15 of Part IV of this report for details.

                                       27

————————————————– ——————————


Cautionary statements regarding forward-looking statements. Certain statements
in this report are "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements relate to future, not past, events and often address our expected
future business and financial performance. These statements often contain words
such as "may," "expect," "anticipate," "intend," "plan," "believe," "seek,"
"will," "foresee" or other similar words. Forward-looking statements by their
nature are subject to various risks and uncertainties that could cause our
actual results to be materially different than those expressed in the
forward-looking statements. These risks and uncertainties include, among other
things, the volatility of economic conditions, including the duration and
ultimate impact of the COVID-19 pandemic; adverse changes in the level of real
estate activity; changes in mortgage interest rates, existing and new home
sales, and availability of mortgage financing; our ability to respond to and
implement technology changes, including the completion of the implementation of
our enterprise systems; the impact of unanticipated title losses or the need to
strengthen our policy loss reserves; any effect of title losses on our cash
flows and financial condition; the ability to attract and retain highly
productive sales associates; the impact of vetting our agency operations for
quality and profitability; independent agency remittance rates; changes to the
participants in the secondary mortgage market and the rate of refinancing that
affects the demand for title insurance products; regulatory non-compliance,
fraud or defalcations by our title insurance agencies or employees; our ability
to timely and cost-effectively respond to significant industry changes and
introduce new products and services; the outcome of pending litigation; the
impact of changes in governmental and insurance regulations, including any
future reductions in the pricing of title insurance products and services; our
dependence on our operating subsidiaries as a source of cash flow; our ability
to access the equity and debt financing markets when and if needed; our ability
to grow our international operations; seasonality and weather; and our ability
to respond to the actions of our competitors. All forward-looking statements
included in this report are expressly qualified in their entirety by such
cautionary statements. We expressly disclaim any obligation to update, amend or
clarify any forward-looking statements contained in this report to reflect
events or circumstances that may arise after the date hereof, except as may be
required by applicable law.

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