On a full year basis, 2021 net income attributable to Stewart was
$323.2 million, or $11.90per diluted share, compared to $154.9 million, or $6.22per 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 billionin 2021, compared to $2.3 billionin 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 billionin 2021, from $2.1 billionin 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( $3.12per diluted share), compared to net income attributable to Stewart of $59.7 million( $2.22per diluted share) for the fourth quarter 2020. Fourth quarter 2021 pretax income before noncontrolling interests was $114.1 millioncompared to pretax income before noncontrolling interests of $83.9 millionfor the fourth quarter 2020. Fourth quarter 2021 results included $6.5 millionof pretax net realized and unrealized gains, which included $8.1 millionof net unrealized gains on fair value changes of equity securities investments and $1.3 millionof net gains related to acquisition contingent liability adjustments, partially offset by $2.9 millionof net realized losses primarily related to sale of securities investments and other assets. Fourth quarter 2020 results included $4.4 millionof pretax net realized and unrealized gains, composed of $3.9 millionof net unrealized gains on fair value changes of equity securities investments and $0.5 millionof 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. 15 -------------------------------------------------------------------------------- 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 millionof net unrealized gains on fair value changes of equity securities investments, $2.0 millionof net losses related to acquisition contingent liability adjustments, and $0.8 millionof net realized losses on sale of securities investments, while net realized and unrealized gains in the fourth quarter 2020 were related to $3.9 millionof net unrealized gains on fair value changes of equity securities investments and $0.5 millionof 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 $19,400and $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 % 16
-------------------------------------------------------------------------------- The segment's operating revenues improved
$45.6 million, or 120%, in the fourth quarter 2021, compared to the prior year quarter, primarily due to revenues generated by recent acquisitions and increased revenues from appraisal management and online notary services. Net realized and unrealized gains during the fourth quarter 2021 were primarily related to acquisition contingent liability net gain adjustments, which were partially offset by asset disposal charges. The ancillary services operations in the fourth quarter 2021 generated pretax income of $5.3 million(which included $3.3 millionof net gains related to acquisition contingent liability adjustments and $5.6 millionof purchased intangibles amortization expense), compared to a fourth quarter 2020 pretax loss of $0.6 million(which included $1.6 millionof 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 millionfor 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 millionon 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. 17 --------------------------------------------------------------------------------
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 millionprimarily 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 millioncompared 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 millionprimarily 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 millioncompared 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. 18 -------------------------------------------------------------------------------- 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'sbest practices and us. However, even with adequate internal controls in place, their effectiveness can be circumvented by collusion or improper override of the controls by management at the independent agencies. To aid in the selection of independent agencies to review, we have developed an agency risk model that aggregates data from different areas to identify possible issues. This is not a guarantee that all independent agencies with deficiencies will be identified. In addition, we are typically not the only underwriter for which an independent agency issues policies, and independent agencies may not always provide complete financial records for our review.
The valuation techniques performed in our quantitative analysis make use of our estimates and assumptions related to critical factors, which include revenue and operating margin growth rates, future market conditions, determination of market multiples and comparative companies, assignment of a control premium, and determination of risk-adjusted discount rates. Forecasts of future operations are based, in part, on actual operating results and our expectations as to future market conditions. Our calculation of fair value requires analysis of a range of possible outcomes and applying weights to each of the valuation technique used. Due to the uncertainty and complexity of performing the goodwill impairment analysis, actual results may not be consistent with our estimates and assumptions, which may result in a future material goodwill impairment. During 2021 and 2020, we utilized the qualitative approach in assessing goodwill impairment for each of our reporting units and concluded that no impairment was necessary. Refer also to Note 8 to our audited consolidated financial statements for details on goodwill.
RESULTS OF OPERATIONS
We discuss in this section the consolidated results of operations for the years 2021 and 2020, as compared to each corresponding prior year. Factors contributing to fluctuations in our results of operations are presented in the order of their monetary significance, and significant changes are quantified, when necessary. Segment results are included in the discussions and are discussed separately, when relevant. Industry data. Published
U.S.mortgage interest rates and other selected residential housing data for the three years ended December 31, 2021are 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
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
Refinancings - % of originations 58 64
New home sales - in millions 0.78 0.83
New home median sales price - in $ thousands 392 335
Existing home sales - in millions 6.14 5.66
Existing home median sales price - in $ thousands 346 295
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 Columbiaand 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; 19 -------------------------------------------------------------------------------- •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
$14,000and $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. 20 -------------------------------------------------------------------------------- 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 $1,900compared to $2,200in 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 $11,100compared to $11,600in 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 Canadaoperations, 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, 2021were 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
21 -------------------------------------------------------------------------------- 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. 22 -------------------------------------------------------------------------------- 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 millionand $91.0 millionin 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 millionand $6.1 million, respectively. 23 -------------------------------------------------------------------------------- Our liability for estimated title losses as of December 31, 2021and 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
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, 2021and 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 millionof 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 millionof 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 millionand $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 millionat 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 -------------------------------------------------------------------------------- A substantial majority of our consolidated cash and investments as of December 31, 2021was 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 Texaslaw) 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 millionat December 31, 2021. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $41.4 millionat 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 millionand 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 millionwhich are available for underwriter operations, including claims payments. The ability of Guaranty to pay dividends to its parent is governed by Texasinsurance 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 millionas 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
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
Net cash provided by operating activities 390.3
Net cash (used) from investing activities (645.3) (231.4) 7.0
Net cash provided (used) by financing activities 310.4
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 -------------------------------------------------------------------------------- Net cash provided by operations improved by
$114.5 millionin 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 millioncompared 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 millionand $99.3 million, respectively; while cash used for purchases of securities investments was $143.9 million, $118.3 millionand $77.5 million, respectively. During 2021, we also invested $16.1 millionin equity method investments in title offices. We used $600.0 millionand $200.0 millionof 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 millionand $17.1 millionof cash for purchases of property and equipment during 2021, 2020 and 2019, respectively, while we generated cash proceeds of $10.7 millionin 2021 primarily from the sale of our Coloradobuildings. 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 millionand $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 millionon our previous line of credit facility. •In October 2021, we entered into an unsecured credit agreement which included a new $200.0 millionline of credit facility and a $400.0 millionshort-term loan facility. We drew $370.0 millionfrom the short-term loan facility and used a portion of the proceeds to payoff the $273.9 millionbalance on the previous line of credit facility. •In November 2021, we completed an offering of $450.0 millionunsecured 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 millionbalance of our short-term loan. During 2021, 2020 and 2019, payments on notes payable of $165.0 million, $23.8 millionand $25.0 million, respectively, and notes payable additions of $201.4 million, $16.5 millionand $30.5 million, respectively, were related to our Section 1031 business, which had an outstanding balance of $37.1 millionat 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 $1.365per common share, compared to $1.20per common share paid for each of 2020 and 2019. In aggregate, we paid total dividends of $36.6 million, $30.2 millionand $28.3 millionin 2021, 2020 and 2019, respectively. During 2020, we generated net proceeds of approximately $109.0 millionfrom an issuance of new shares of Common Stock, which we used primarily for the acquisition of several title offices. 26 -------------------------------------------------------------------------------- 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 millionand $2.9 millionin 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 Kingdompound 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 Kingdompound 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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