STEWART INFORMATION SERVICES CORP

We discuss in this section the consolidated results of operations for the years 2023 and 2022, 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, 2023 are shown below (amounts shown for 2023 are preliminary and subject to revision). The amounts below may not relate directly to or provide accurate data for forecasting our operating revenues or order counts. Our statements on home sales, mortgage interest rates and loan activity are based on averaged published industry data as of December 31, 2023 from sources including Fannie Mae and the Mortgage Bankers Association (MBA), when available.

Interest rates increased further in 2023 as a result of government actions to address the high inflation rate, which started in the late 2022. The elevated interest rate environment negatively impacted transactions in the real estate market, where 2023 mortgage originations declined 33% from the prior year, with total refinancing transactions decreasing by 61%. Refinancing share from total mortgage originations declined to 18% in 2023 compared to 31% in 2022. Existing home sales activity declined 19% in 2023, primarily due to the high interest rate environment, while new homeowner demand and materials supply improvement contributed to new home sales improving by 7% in 2023 compared to the prior year.

With the government pausing interest rate hikes during the second half of 2023 and encouraging economic data, Fannie Mae and the MBA expect the housing market to slowly recover beginning in 2024. As interest rates are expected to gradually decline, total loan originations are forecast to improve 23% in 2024 with purchase and refinancing originations expected to increase 13% and 67%, respectively, compared to 2023. Additionally, existing and new home sales are estimated to increase 3% and 4%, respectively, in 2024 compared to 2023.

Factors affecting revenues. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our real estate solutions operations include appraisal management services, online notarization and closing services, credit and real estate information services, and search and valuation services. The corporate and other segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with other businesses not related to title or real estate solutions operations. Refer to Item 1. Business for details.

The principal factors that contribute to changes in our operating revenues include:

•interest rates;

•availability of mortgage loans;

•number and average value of mortgage loan originations;

•ability of potential purchasers to qualify for loans;

•inventory of existing homes available for sale;

•ratio of purchase transactions compared with refinance transactions;

•ratio of closed orders to open orders;

•home prices;

•consumer confidence, including employment trends;

•demand by buyers;

•premium rates;

•foreign currency exchange rates;

•market share;

•ability to attract and retain highly productive sales associates;

•independent agency remittance rates;

•opening and integration of new offices and acquisitions;

•office closures;

•number and value of commercial transactions, which typically yield higher premiums;

•government or regulatory initiatives, including tax incentives and the implementation of the integrated disclosure requirements;

•acquisitions or divestitures of businesses;

•volume of distressed property transactions;

•seasonality and/or weather; and

•outbreaks of diseases and related quarantine orders and restrictions on travel, trade and business operations.

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

Title revenues. Direct title revenue information is presented below:

Direct title revenues in 2023 decreased 23% compared to 2022, primarily due to reduced transaction volumes driven by the elevated interest rate market environment. Total non-commercial domestic revenues in 2023 declined 21%, primarily due to 20% and 51% lower residential purchase and refinancing transactions, respectively, compared to 2022. Domestic commercial revenues decreased 27% in 2023, primarily driven by 19% lower commercial transactions and smaller transaction sizes compared to 2022. Average domestic commercial fee per file in 2023 was $12,200, which was 11% lower compared to 2022, while average residential fee per file in 2023 was $3,200, which was 6% higher compared to 2022, primarily due to transaction mix in 2023. Total international revenues decreased $40.3 million, or 24%, in 2023 primarily due to lower transaction volumes in our Canadian and United Kingdom operations compared to the prior year.

Direct title revenues declined 10% in 2022 compared to 2021 primarily due to lower non-commercial revenues driven by lower residential transactions, partially offset by increased commercial revenues. Non-commercial revenues declined as a result of 15% and 61% lower purchase and refinancing closed orders, respectively, which were primarily influenced by the high interest rate market environment in 2022 compared to 2021. Domestic commercial revenues improved 4% primarily due to a 6% increase in commercial transactions in 2022 compared to the prior year. Average domestic commercial fee per file in 2022 was approximately $13,600 compared to $14,000 in 2021, while average residential fee per file in 2022 was approximately $3,000 compared to $2,200 due to a higher purchase mix in 2022. Total international revenues decreased $24.1 million, or 13%, primarily due to lower transaction volumes in our Canadian operations and overall weaker average foreign currency exchange rates against the U.S. dollar in 2022 compared to the prior year.

Closed and opened orders information is as follows:

Gross revenues from independent agency operations (agency revenues) decreased $480.3 million, or 33%, in 2023 and $116.4 million, or 7%, in 2022 compared to corresponding prior years, which were consistent with the trends of the overall real estate market and our direct title operations during 2023 and 2022. In line with changes in gross agency revenues, our net agency revenues (which are net of agency retention) decreased $85.5 million, or 33%, and $24.3 million, or 9%, in 2023 and 2022, respectively, compared to prior periods. Refer further to the "Retention by agencies" discussion under Expenses below.

Title revenues by geographic location. The approximate amounts and percentages of consolidated title operating revenues for the last three years ended December 31, 2023 were as follows:

Real estate solutions and other revenues. Real estate solutions and other revenues are primarily comprised of revenues generated by our real estate solutions operations. These revenues also included revenues generated by a real estate brokerage company which we operated from the fourth quarter 2021 to the mid-second quarter 2022 before being sold in 2022. Excluding the real estate brokerage company, real estate solutions revenues decreased $33.1 million, or 11%, in 2023 compared to 2022, primarily due to the slow market activity influenced by higher interest rates, while these revenues improved $37.0 million, or 14%, in 2022 compared to 2021, primarily due to revenues generated by acquisitions.

Investment income. Investment income increased $22.7 million, or 101%, in 2023 compared to the prior year, primarily due to higher interest income resulting from earned interest from eligible escrow balances and increased interest rates in 2023. Investment income in 2022 improved $5.6 million, or 33%, due to higher interest income driven by increased interest rates and higher dividend income from investments in 2022 compared to 2021. Refer to Note 6 to our audited consolidated financial statements for additional details.

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

Expenses. Our employee costs and certain other operating expenses are sensitive to inflation. An analysis of expenses is shown below:

*Amounts change may not add due to rounding.

Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Amounts retained by independent agencies, as a percentage of revenues generated by them, averaged 82.5%, 82.4% and 82.2% during the three years ended December 31, 2023. The average retention percentage may vary from period to period due to the geographical mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. We continue to focus on increasing profit margins in every state, increasing premium revenue in states where remittance rates are above 20%, and maintaining the quality of our agency network, which we believe to be the industry’s best, in order to mitigate claims risk and drive consistent future performance. While market share is important in our agency operations channel, it is not as important as margins, risk mitigation and profitability.

Selected cost ratios (by selected segment). The following table shows employee costs and other operating expenses as a percentage of operating revenues for each of the title and real estate solutions segments for the years ended December 31:

Employee costs. Consolidated employee costs in 2023 decreased $89.2 million, or 11%, compared to 2022, primarily driven by lower salaries and benefits expenses, temporary labor and overtime costs, and incentive compensation resulting from lower average employee count and transaction volumes in 2023. Consolidated employee costs increased $25.0 million, or 3%, in 2022 compared to 2021, primarily due to higher salaries and employee benefits driven by 16% higher average employee count, as we integrated our acquisitions, partially offset by reduced incentive compensation, temporary labor and overtime costs resulting from lower operating results and volumes during 2022.

Our total employee counts at December 31, 2023, 2022 and 2021 were approximately 6,800, 7,100 and 7,400, respectively. Average cost per employee for 2023 and 2022 decreased 2% and 10%, respectively, compared to corresponding prior years, primarily due to lower incentive compensation, temporary labor and overtime costs driven by reduced 2023 and 2022 transaction volumes.

Employee costs in 2023 for the title and real estate solutions segments decreased $86.9 million, or 12%, and $1.1 million, or 2%, respectively, compared to 2022, primarily driven by lower average employee counts and transaction volumes in 2023. Employee costs in 2022 for the title and real estate solutions segments increased $7.4 million, or 1%, and $15.9 million, or 46%, respectively, compared to 2021, primarily due to higher salaries and employee benefits from acquisitions.

Other operating expenses. Other operating expenses include costs that are primarily fixed in nature, costs that follow, to varying degrees, changes in transaction volumes and revenues (variable costs) and costs that fluctuate independently of revenues (independent costs). Costs that are primarily fixed in nature include rent and other occupancy expenses, equipment rental, insurance, repairs and maintenance, technology costs, telecommunications and title plant expenses. Variable costs include appraiser and service expenses related to real estate solutions operations, outside search fees, attorney fee splits, credit losses (on receivables), copy supplies, delivery fees, postage, premium taxes and title plant maintenance expenses. Independent costs include general supplies, litigation defense, business promotion and marketing and travel.

Consolidated other operating expenses in 2023 decreased $140.3 million, or 22%, compared to 2022, primarily due to reduced transaction volumes in 2023, while other operating expenses in 2022 increased $21.3 million, or 3%, compared to 2021. Total other operating expenses, as a percentage of total operating revenues (other operating expenses ratio), were 22.9%, 21.3% and 19.2% during 2023, 2022 and 2021, respectively, with the higher other operating expenses ratios in 2023 and 2022 primarily driven by lower operating revenues and the increased size of our real estate solutions operations which typically have higher other operating expenses.

During 2023, total variable costs decreased $109.6 million, or 29%, compared to 2022, primarily due to lower appraisal and outside search expenses tied to lower overall operating revenues. Costs that are primarily fixed in nature decreased $11.8 million, or 6%, primarily driven by reduced outsourcing and rent and other occupancy expenses, while independent costs decreased $19.0 million, or 25%, primarily due to lower litigation settlement, business promotion and marketing, and office closures expenses.

During 2022, costs that are primarily fixed in nature increased $29.0 million, or 18%, compared to 2021, primarily due to additional rent and other occupancy and other expenses related to acquisitions, and increased insurance and technology expenses from existing businesses. Variable costs decreased $25.4 million, or 6%, primarily due to lower title and appraisal management transactions, partially offset by service costs related to increased revenues from our credit and real estate data services businesses. Independent costs increased $24.2 million, or 47%, primarily due to regulatory settlement and litigation expenses, increased office closure costs, and higher marketing and travel expenses.

Title losses. Provisions for title losses, as a percentage of title operating revenues, were 4.1%, 3.8% and 4.2% in 2023, 2022 and 2021, respectively. The title loss ratio in any given year can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims. We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.

Title losses in 2023 decreased $22.5 million, or 22%, compared to 2022, primarily as a result of lower title premiums in 2023. Title losses in 2022 decreased $23.5 million, or 19%, compared to the prior year, primarily due to lower title premiums and overall favorable claims experience in 2022. Title losses paid were $104.3 million, $93.1 million and $71.5 million in 2022, 2021 and 2020, respectively. Total claims payments in 2023 increased $11.2 million, or 12%, compared to 2022, primarily due to increase in payments for non-large claims related to prior policy years, while total claims in 2022 increased $21.6 million, or 30%, compared to 2021, primarily as a result of increased payments on large claims. Claims payments made on large title claims, net of insurance recoveries, during 2023, 2022 and 2021 were $26.3 million, $23.1 million and $2.8 million, respectively.

Our liability for estimated title losses as of December 31, 2023 and 2022 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 title policy loss reserve balances at December 31 were as follows:

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, approximately 86% of the outstanding loss reserves are paid out within eight years. As a result, the estimate of the ultimate amount to be paid on any claim may be modified over that time period. Due to the inherent uncertainty in predicting future title policy losses, significant judgment is required by both our management and our third party actuaries in estimating reserves. As a consequence, our ultimate liability may be materially greater or less than current reserves and/or our third party actuary’s calculated estimates. As of December 31, 2023 and 2022, 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 $5.3 million, or 9%, in 2023 compared to 2022, primarily due to increased depreciation expenses related to internal-use technology systems placed into operation starting in late 2022. Depreciation and amortization expense in 2022 increased $20.8 million, or 57%, compared to 2021, primarily due to acquisitions' intangible asset amortization. Acquisition intangible amortization expenses in 2023, 2022 and 2021 were $34.6 million, $33.0 million and $19.0 million, respectively.

Income taxes. Our effective tax rates for 2023, 2022 and 2021 were 33.4%, 23.9% and 22.5%, respectively, based on income before taxes (after deducting noncontrolling interests) of $45.7 million, $213.2 million and $417.2 million, respectively. The higher effective tax rate for 2023 was primarily due to the effect of non-deductible expenses on lower pretax income and higher foreign income contribution, which is taxed at a higher rate than domestic income. Refer to Note 7 to our audited consolidated financial statements for details on the effective tax rates and income tax accounts.