STEWART INFORMATION SERVICES CORP

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of December 31, 2023, our total cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $952.3 million. Of our total cash and investments at December 31, 2023, $531.0 million ($283.3 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 $30.6 million at December 31, 2023) is available for funding the parent company's operating expenses, interest payments on debt and dividend payments to common stockholders. The parent company also receives distributions from Guaranty, its regulated title insurance underwriter, to meet cash requirements for acquisitions and other strategic investments.

A substantial majority of our consolidated cash and investments as of December 31, 2023 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty uses its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and real estate solutions operations) for their operating and debt service needs.

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 $527.4 million at December 31, 2023. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $10.0 million at December 31, 2023. 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, 2023, our known claims reserve totaled $70.2 million and our estimate of claims that may be reported in the future, under U.S. generally accepted accounting principles, totaled $458.1 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 of any dividend declared, and any dividend in excess of the greater of the statutory net operating income or 20% of surplus (which was approximately $168.7 million as of December 31, 2023) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI (see Note 3 to our audited consolidated financial statements for details). Also, the Texas Insurance Commissioner may raise an objection to a planned distribution during the notification period. Guaranty’s actual ability or intent to pay dividends to its parent may be constrained by business and regulatory considerations, such as the impact of dividends on surplus and liquidity, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. Guaranty paid no dividends to its parent during 2023, while it paid $150.0 million during 2022.

Contractual obligations. Our material contractual obligations at December 31, 2023 are composed primarily of our unsecured senior notes (and the related semi-annual interest payments), operating leases, and reserves for estimated title losses. Refer to Note 9 (Notes payable) and Note 14 (Leases) to our audited consolidated financial statements for details on the unsecured senior notes and operating leases, respectively. Refer to the Note 10 (Estimated title losses) to our audited consolidated financial statements and the Title losses section under Results of Operations for details on title losses.

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

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

Net cash provided by operations in 2023 declined by $108.8 million compared to 2022, primarily due to the lower net income and higher payments on claims, while net cash provided by operations in 2022 decreased by $198.4 million compared to the prior year, primarily due to the lower net income and higher payments related to claims and interest on debt in 2022. 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 continue to thoughtfully manage expenses, especially in light of the current economic environment due to elevated mortgage interest rates, specifically focusing on lowering unit costs of production and improving operating margins in our direct title and real estate solutions operations. Our plans to improve margins include additional automation of manual processes, further consolidation of our various systems and production operations, and full integration of acquisitions. We are investing 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 businesses. During 2023, 2022 and 2021, total proceeds from securities investments sold and matured were $132.2 million, $103.8 million and $143.8 million, respectively; while cash used for purchases of securities investments was $78.0 million, $207.5 million and $143.9 million, respectively. During 2021, we also invested $16.1 million in equity method investments in title offices.

We used $25.1 million, $142.9 million and $600.0 million of cash during 2023, 2022 and 2021, respectively, for acquisitions of various title and real estate solutions businesses, related to our strategy of increasing scale, growth in key markets and broader technology and service offerings. We used $37.8 million, $47.9 million and $39.8 million of cash for purchases of property and equipment during 2023, 2022 and 2021, 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 to pursue growth in key markets.

Financing activities and capital resources. Total debt and stockholders’ equity were $445.3 million and $1.4 billion, respectively, as of December 31, 2023. As of December 31, 2023, our total debt-to-equity and debt-to-capitalization ratios, excluding short-term loan agreements in connection with our Section 1031 tax-deferred property exchange (Section 1031) business, were approximately 32% and 25%, respectively.

During 2021, we had the following debt transactions related to the parent company:

•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 2023, 2022 and 2021, payments on notes payable of $5.7 million, $74.3 million and $165.0 million, respectively, and notes payable additions of $3.5 million, $39.5 million and $201.4 million, respectively, were related to our Section 1031 business, which had an outstanding balance of $0.2 million at December 31, 2023. As of December 31, 2023, the outstanding balance of our Senior Notes was $445.1 million, while we have an unused $197.5 million borrowing capacity on our existing line of credit facility (refer to Note 9 to our audited consolidated financial statements for details).

During 2023, we paid dividends of $1.85 per common share, compared to $1.65 and $1.365 per common share paid during 2022 and 2021, respectively. In aggregate, we paid total dividends of $50.5 million, $44.7 million and $36.6 million in 2023, 2022 and 2021, respectively.

Effect of changes in foreign currency rates. The effect of changes in foreign currency rates on the consolidated statements of cash flows was a net increase (decrease) in cash and cash equivalents of $1.0 million, ($5.5 million) and $(2.2 million) in 2023, 2022 and 2021, respectively. Our primary foreign currencies are the Canadian dollar and British pound, and, relative to the U.S. dollar, the value of the Canadian dollar and British pound generally appreciated in 2023 and declined during 2022 and 2021.

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

Other comprehensive income (loss). Unrealized gains and losses on available-for-sale securities investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive income (loss), a component of stockholders’ equity, until realized. Refer to Note 1-H and Note 19 to our audited consolidated financial statements for details.

In 2023, net unrealized investment gains of $10.9 million, net of taxes, which increased our other comprehensive income, were primarily related to net increases in the fair values of our corporate and foreign bond securities investments, primarily influenced by inflation improvements and expected government actions to lower interest rates. Also in 2023, we recorded foreign currency translation gains which increased our other comprehensive income by $5.3 million, net of taxes, which was primarily driven by the appreciation in value of the Canadian dollar and British pound against the U.S. dollar.

In 2022, net unrealized investment losses of $36.7 million, net of taxes, which increased our other comprehensive loss, were primarily related to overall decreases in the fair values of our bond securities, primarily driven by the effect of higher interest rates. The five-year U.S. treasury yield applicable on our investments increased approximately 270 basis points in 2022 compared to 2021. Also in 2022, we recorded foreign currency translation losses which increased our other comprehensive loss by $14.9 million, net of taxes, which was primarily driven by the depreciation in value of the Canadian dollar and British pound against the U.S. dollar.

Off-balance sheet arrangements. We do not have any material source of liquidity or financing that involves off-balance sheet arrangements, other than our contractual obligations under operating leases. We also routinely hold funds in segregated escrow accounts pending the closing of real estate transactions and have qualified intermediaries in tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. The Company holds the proceeds from these transactions until a qualifying exchange can occur. In accordance with industry practice, these segregated accounts are not included on the balance sheet. See Note 15 to our audited consolidated financial statements included in Item 15 of Part IV of this report for details.

Cautionary statements regarding forward-looking statements. Certain statements in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as “may,” "expect," "anticipate," "intend," "plan," "believe," "seek," "will," "foresee" or other similar words. Forward-looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the following:

•the volatility of economic conditions;

•adverse changes in the level of real estate activity;

•changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing;

•our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems;

•our ability to prevent and mitigate cyber risks;

•the impact of unanticipated title losses or the need to strengthen our policy loss reserves;

•any effect of title losses on our cash flows and financial condition;

•the ability to attract and retain highly productive sales associates;

•the impact of vetting our agency operations for quality and profitability;

•independent agency remittance rates;

•changes to the participants in the secondary mortgage market and the rate of refinancing that affects the demand for title insurance products;

•regulatory non-compliance, fraud or defalcations by our title insurance agencies or employees;

•our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services;

•our ability to realize anticipated benefits of our previous acquisitions;

•the outcome of pending litigation;

•our ability to manage risks associated with potential cybersecurity or other privacy or data security breaches;

•the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services;

•our dependence on our operating subsidiaries as a source of cash flow;

•our ability to access the equity and debt financing markets when and if needed;

•effects of seasonality and weather; and

•our ability to respond to the actions of our competitors.

All forward-looking statements included in this report are expressly qualified in their entirety by such cautionary statements. We expressly disclaim any obligation to update, amend or clarify any forward-looking statements contained in this report to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.