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Accelerated filer ¨

Non-accelerated filer ¨
(Do not check if smaller reporting company)

Smaller reporting company ¨

Emerging growth company ¨

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-02658

STEWART INFORMATION SERVICES CORPORATION

(Exact name of registrant as specified in its charter)



Delaware		74-1677330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1980 Post Oak Blvd., Houston TX		77056
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 625-8100

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No þ

On November 2, 2017, there were 23,764,016 shares of the issuer's Common Stock, $1 par value per share, outstanding.

FORM 10-Q QUARTERLY REPORT

QUARTER ENDED SEPTEMBER 30, 2017

TABLE OF CONTENTS



Item		Page
	PART I – FINANCIAL INFORMATION

1.	Financial Statements	3

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

3.	Quantitative and Qualitative Disclosures About Market Risk	29

4.	Controls and Procedures	29
	PART II – OTHER INFORMATION
1.	Legal Proceedings	30

1A.	Risk Factors	30

2.	Unregistered Sales of Equity Securities and Use of Proceeds	30

5.	Other Information	30

6.	Exhibits	30

	Signature	30

As used in this report, “we,” “us,” “our,” "Registrant," the “Company” and “Stewart” mean Stewart Information Services Corporation and our subsidiaries, unless the context indicates otherwise.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	($000 omitted, except per share)
Revenues
Title revenues:
Direct operations	216,830		241,109		635,921		664,128
Agency operations	268,545		282,269		736,301		732,320
Ancillary services	12,674		22,059		45,096		65,276
Operating revenues	498,049		545,437		1,417,318		1,461,724
Investment income	4,567		4,520		14,179		14,445
Investment and other (losses) gains – net	(1,047	)	3,253		(1,436	)	4,706
	501,569		553,210		1,430,061		1,480,875
Expenses
Amounts retained by agencies	221,460		231,586		605,192		598,915
Employee costs	140,054		154,529		419,184		457,166
Other operating expenses	88,489		94,043		255,593		268,210
Title losses and related claims	25,428		26,365		70,591		66,612
Depreciation and amortization	6,578		7,082		19,397		22,728
Interest	963		797		2,492		2,237
	482,972		514,402		1,372,449		1,415,868

Income before taxes and noncontrolling interests	18,597		38,808		57,612		65,007
Income tax expense	4,686		9,041		15,536		16,779

Net income	13,911		29,767		42,076		48,228
Less net income attributable to noncontrolling interests	2,967		3,392		8,475		9,450
Net income attributable to Stewart	10,944		26,375		33,601		38,778

Net income	13,911		29,767		42,076		48,228
Other comprehensive income (loss), net of taxes:
Foreign currency translation adjustments	4,141		(1,808	)	8,670		(216	)
Change in net unrealized gains on investments	63		(263	)	2,885		11,708
Reclassification of adjustment for gains included in net income	(331	)	(865	)	(792	)	(1,044	)
Other comprehensive income (loss), net of taxes:	3,873		(2,936	)	10,763		10,448

Comprehensive income	17,784		26,831		52,839		58,676
Less net income attributable to noncontrolling interests	2,967		3,392		8,475		9,450
Comprehensive income attributable to Stewart	14,817		23,439		44,364		49,226

Basic average shares outstanding (000)	23,448		23,371		23,442		23,362
Basic earnings per share attributable to Stewart	0.47		1.13		1.43		1.15

Diluted average shares outstanding (000)	23,564		23,611		23,571		23,596
Diluted earnings per share attributable to Stewart	0.46		1.12		1.43		1.13

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETS



	As of September 30, 2017 (Unaudited)		As of December 31, 2016
	($000 omitted)
Assets
Cash and cash equivalents	168,746		185,772
Short-term investments	23,434		22,239
Investments in debt and equity securities available-for-sale, at fair value:
Statutory reserve funds	475,402		485,409
Other	204,280		146,094
	679,682		631,503
Receivables:
Premiums from agencies	33,754		31,246
Trade and other	52,055		41,897
Income taxes	3,085		4,878
Notes	3,761		3,402
Allowance for uncollectible amounts	(8,555	)	(9,647	)
	84,100		71,776
Property and equipment, at cost:
Land	3,991		3,991
Buildings	22,835		22,529
Furniture and equipment	230,308		217,105
Accumulated depreciation	(188,105	)	(173,119	)
	69,029		70,506
Title plants, at cost	74,237		75,313
Investments in investees, on an equity method basis	9,302		9,796
Goodwill	231,428		217,094
Intangible assets, net of amortization	10,673		10,890
Deferred tax assets	3,856		3,860
Other assets	48,458		42,975
	1,402,945		1,341,724
Liabilities
Notes payable	138,557		106,808
Accounts payable and accrued liabilities	95,283		115,640
Estimated title losses	475,845		462,572
Deferred tax liabilities	20,889		7,856
	730,574		692,876
Contingent liabilities and commitments
Stockholders’ equity
Common Stock and additional paid-in capital	182,055		180,959
Retained earnings	483,861		471,788
Accumulated other comprehensive income (loss):
Unrealized investment gains on investments - net	9,939		7,846
Foreign currency translation adjustments	(8,057	)	(16,727	)
Treasury stock – 352,161 common shares, at cost	(2,666	)	(2,666	)
Stockholders’ equity attributable to Stewart	665,132		641,200
Noncontrolling interests	7,239		7,648
Total stockholders’ equity (23,765,807 and 23,431,279 shares outstanding)	672,371		648,848
	1,402,945		1,341,724

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine Months Ended September 30,
	2017		2016
	($000 omitted)
Reconciliation of net income to cash provided by operating activities:
Net income	42,076		48,228
Add (deduct):
Depreciation and amortization	19,397		22,728
Provision for bad debt	697		1,189
Investment and other losses (gains) – net	1,436		(4,706	)
Amortization of net premium on investments available-for-sale	5,114		5,396
Payments for title losses less than (in excess of) provisions	5,940		(5,026	)
Adjustment for insurance recoveries of title losses	757		290
(Increase) decrease in receivables – net	(12,275	)	4,966
Increase in other assets – net	(5,633	)	(1,389	)
Decrease in payables and accrued liabilities – net	(20,482	)	(16,027	)
Change in net deferred income taxes	8,749		3,159
Net income from equity investees	(1,813	)	(1,933	)
Dividends received from equity investees	2,053		1,912
Stock-based compensation expense	2,078		5,093
Other – net	(46	)	106
Cash provided by operating activities	48,048		63,986

Investing activities:
Proceeds from investments available-for-sale sold	55,533		49,666
Proceeds from investments available-for-sale matured	33,867		25,562
Purchases of investments available-for-sale	(125,415	)	(122,149	)
Net purchases of short-term investments	(1,195	)	(361	)
Purchases of property and equipment, title plants and real estate – net	(12,411	)	(13,615	)
Cash paid for acquisition of businesses	(17,784	)	(300	)
Other – net	960		944
Cash used by investing activities	(66,445	)	(60,253	)

Financing activities:
Payments on notes payable	(18,848	)	(30,210	)
Proceeds from notes payable	48,043		51,956
Distributions to noncontrolling interests	(8,376	)	(9,430	)
Cash dividends paid	(21,100	)	(20,800	)
Cash paid on Class B Common Shares conversion	—		(12,000	)
Payment of contingent consideration related to an acquisition	(1,298	)	(2,002	)
Purchase of remaining interest in consolidated subsidiary	(1,014	)	(301	)
Cash used by financing activities	(2,593	)	(22,787	)

Effects of changes in foreign currency exchange rates	3,964		1,775
Decrease in cash and cash equivalents	(17,026	)	(17,279	)

Cash and cash equivalents at beginning of period	185,772		179,067
Cash and cash equivalents at end of period	168,746		161,788

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY (UNAUDITED)



	Common Stock ($1 par value)	Additional paid-in capital		Retained earnings		Accumulated other comprehensive (loss) income		Treasury stock		Noncontrolling interests		Total
	($000 omitted)
Balances at December 31, 2016	23,783	157,176		471,788		(8,881	)	(2,666	)	7,648		648,848
Net income attributable to Stewart	—	—		33,601		—		—		—		33,601
Cash dividends on Common Stock ($0.90 per share)	—	—		(21,528	)	—		—		—		(21,528	)
Stock-based compensation and other	335	1,743		—		—		—		—		2,078
Purchase of remaining interest in consolidated subsidiary	—	(982	)	—		—		—		(32	)	(1,014	)
Net change in unrealized gains and losses on investments	—	—		—		2,885		—		—		2,885
Net realized gain reclassification	—	—		—		(792	)	—		—		(792	)
Foreign currency translation adjustments	—	—		—		8,670		—		—		8,670
Net income attributable to noncontrolling interests	—	—		—		—		—		8,475		8,475
Subsidiary dividends paid to noncontrolling interests	—	—		—		—		—		(8,376	)	(8,376	)
Net effect of other changes in ownership	—	—		—		—		—		(476	)	(476	)
Balances at September 30, 2017	24,118	157,937		483,861		1,882		(2,666	)	7,239		672,371

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

Interim financial statements. The financial information contained in this report for the three and nine months ended September 30, 2017 and 2016, and as of September 30, 2017, is unaudited. This report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

A. Management’s responsibility. The accompanying interim financial statements were prepared by management, who is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP), including management’s best judgments and estimates. In the opinion of management, all adjustments necessary for a fair presentation of this information for all interim periods, consisting only of normal recurring accruals, have been made. The Company’s results of operations for interim periods are not necessarily indicative of results for a full year and actual results could differ.

B. Consolidation. The condensed consolidated financial statements include all subsidiaries in which the Company owns more than 50% voting rights in electing directors. All significant intercompany amounts and transactions have been eliminated and provisions have been made for noncontrolling interests. Unconsolidated investees, in which the Company typically owns 20% through 50% of the equity, are accounted for by the equity method.

C. Reclassifications. Certain amounts in the 2016 interim financial statements have been reclassified for comparative purposes. Net income attributable to Stewart, as previously reported, was not affected.

D. Restrictions on cash and investments. The Company maintains investments in accordance with certain statutory requirements for the funding of statutory premium reserves. Statutory reserve funds, which approximated $475.4 million and $485.4 million at September 30, 2017 and December 31, 2016, respectively, are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $26.9 million and $13.9 million at September 30, 2017 and December 31, 2016, respectively. 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. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.

E. Recent accounting pronouncements. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which eliminated the transaction-specific and industry-specific revenue recognition guidance under current GAAP and replaced it with a principles-based approach for determining revenue recognition. The new guidance sets forth the steps to be followed to recognize revenue: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 will be effective on annual and interim periods beginning after December 15, 2017. The Company expects to adopt ASU 2014-09 on January 1, 2018 using the cumulative effect method of adoption. Management is in the process of documenting and completing its analysis of the impact of the new revenue guidance, specifically its evaluation of certain fee arrangement contracts. Based on management's preliminary assessment, the Company has determined that ASU 2014-09, other than certain additional footnote disclosures, will not have a material impact on our accounting or reporting for revenue streams related to direct and agency title insurance premiums, escrow and other title-related fees, and investment income. These revenue streams account for approximately 94% of the Company's total revenues. The Company expects to complete its evaluation and documentation of the impact of the new revenue standard during the fourth quarter 2017.

In February 2016, the FASB issued ASU 2016-02, Leases, which updated the current guidance related to leases. The new guidance includes the requirement for the lessee to recognize in the balance sheet a liability equal to the present value of contractual lease payments with terms of more than twelve months and a right-of-use asset representing the right to use the underlying asset for the lease term. Disclosures will be required by lessees to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This ASU is effective for annual and interim periods beginning after December 15, 2018 and early adoption is allowed. The Company expects to adopt ASU 2016-02 on January 1, 2019 and recognize and measure leases in the financial statements at the beginning of the earliest period presented using a modified retrospective approach. The Company expects the adoption of ASU 2016-02 will result in material increases in the assets and liabilities reported on its consolidated balance sheets. As disclosed in Note 16 of the Company's 2016 Form 10-K, the undiscounted future minimum lease payments with terms of more than twelve months were approximately $168.2 million as of December 31, 2016. The Company expects the new ASU will likely have an insignificant impact on its consolidated statements of operations and cash flows. The Company is currently evaluating certain lease management and accounting systems and plans to begin system implementation and testing on or before the first quarter 2018.

NOTE 2

Investments in debt and equity securities available-for-sale. The amortized costs and fair values follow:



	September 30, 2017		December 31, 2016
	Amortized costs	Fair values	Amortized costs	Fair values
	($000 omitted)
Debt securities:
Municipal	71,849	73,355	72,284	72,432
Corporate	334,143	342,760	338,365	343,047
Foreign	215,664	214,567	165,735	167,027
U.S. Treasury Bonds	12,837	12,721	12,795	12,613
Equity securities	29,900	36,279	30,255	36,384
	664,393	679,682	619,434	631,503

Foreign debt securities consist of Canadian government and corporate bonds, United Kingdom treasury bonds, and Mexican government bonds. Equity securities consist of common stocks and master limited partnership interests.

Gross unrealized gains and losses were:



	September 30, 2017		December 31, 2016
	Gains	Losses	Gains	Losses
	($000 omitted)
Debt securities:
Municipal	1,697	191	723	575
Corporate	8,879	262	6,871	2,189
Foreign	2,327	3,424	2,912	1,620
U.S. Treasury Bonds	12	128	4	186
Equity securities	6,744	365	6,800	671
	19,659	4,370	17,310	5,241

Debt securities as of September 30, 2017 mature, according to their contractual terms, as follows (actual maturities may differ due to call or prepayment rights):



	Amortized costs	Fair values
	($000 omitted)
In one year or less	31,735	31,933
After one year through five years	304,284	309,497
After five years through ten years	233,228	234,022
After ten years	65,246	67,951
	634,493	643,403

Gross unrealized losses on investments and the fair values of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2017, were:



	Less than 12 months		More than 12 months		Total
	Losses	Fair values	Losses	Fair values	Losses	Fair values
	($000 omitted)
Debt securities:
Municipal	55	3,771	136	4,353	191	8,124
Corporate	206	39,708	56	1,638	262	41,346
Foreign	3,191	131,992	233	5,071	3,424	137,063
U.S. Treasury Bonds	128	8,293	—	—	128	8,293
Equity securities	255	6,350	110	568	365	6,918
	3,835	190,114	535	11,630	4,370	201,744

The number of specific investment holdings in an unrealized loss position as of September 30, 2017 was 145, 15 securities of which were in unrealized loss positions for more than 12 months. Since the Company does not intend to sell and will more-likely-than-not maintain each investment security until its maturity or anticipated recovery, and no significant credit risk is deemed to exist, these investments are not considered as other-than-temporarily impaired.



	Less than 12 months		More than 12 months		Total
	Losses	Fair values	Losses	Fair values	Losses	Fair values
	($000 omitted)
Debt securities:
Municipal	575	32,038	—	—	575	32,038
Corporate	2,189	119,965	—	—	2,189	119,965
Foreign	1,427	70,012	193	3,160	1,620	73,172
U.S. Treasury Bonds	186	11,847	—	—	186	11,847
Equity securities	424	5,950	247	2,250	671	8,200
	4,801	239,812	440	5,410	5,241	245,222

The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.

NOTE 3

Fair value measurements. The Fair Value Measurements and Disclosures Topic (Topic 820) of the FASB Accounting Standards Codification (ASC) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal, or most advantageous, market for the asset or liability in an orderly transaction between market participants at the measurement date. Topic 820 establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs when possible. The three levels of inputs used to measure fair value are as follows:


•	Level 1 – quoted prices in active markets for identical assets or liabilities;


•	Level 2 – observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data; and


•	Level 3 – unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

As of September 30, 2017, financial instruments measured at fair value on a recurring basis are summarized below:



	Level 1	Level 2	Fair value measurements
	($000 omitted)
Investments available-for-sale:
Debt securities:
Municipal	—	73,355	73,355
Corporate	—	342,760	342,760
Foreign	—	214,567	214,567
U.S. Treasury Bonds	—	12,721	12,721
Equity securities	36,279	—	36,279
	36,279	643,403	679,682

As of December 31, 2016, financial instruments measured at fair value on a recurring basis are summarized below:



	Level 1	Level 2	Fair value measurements
	($000 omitted)
Investments available-for-sale:
Debt securities:
Municipal	—	72,432	72,432
Corporate	—	343,047	343,047
Foreign	—	167,027	167,027
U.S. Treasury Bonds	—	12,613	12,613
Equity securities	36,384	—	36,384
	36,384	595,119	631,503

As of September 30, 2017, Level 1 financial instruments consist of equity securities. Level 2 financial instruments consist of municipal, governmental and corporate bonds, both U.S. and foreign. In accordance with the Company’s policies and guidelines which incorporate relevant statutory requirements, the Company’s third-party registered investment manager invests only in securities rated as investment grade or higher by the major rating services, where observable valuation inputs are significant. All municipal, foreign, and U.S. Treasury bonds are valued using a third-party pricing service, and the corporate bonds are valued using the market approach, which includes three to ten inputs from relevant market sources, including Financial Industry Regulatory Authority’s (FINRA) Trade Reporting and Compliance Engine (TRACE) and independent broker/dealer quotes, bids and offerings, as well as other relevant market data, such as securities with similar characteristics (i.e. sector, rating, maturity, etc.). Broker/dealer quotes, bids and offerings mentioned above are gathered (typically three to ten) and a consensus risk premium spread (credit spread) over risk-free Treasury yields is developed from the inputs obtained, which is then used to calculate the resulting fair value.

There were no transfers of investments between levels during the nine months ended September 30, 2017 and 2016.

NOTE 4

Investment income and other gains and losses. Gross realized investment and other gains and losses follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	($000 omitted)
Realized gains	548		3,301		1,392		8,377
Realized losses	(1,595	)	(48	)	(2,828	)	(3,671	)
	(1,047	)	3,253		(1,436	)	4,706

Expenses assignable to investment income were insignificant. There were no significant investments as of September 30, 2017 that did not produce income during the year.

For the nine months ended September 30, 2017, investment and other losses – net included $0.8 million of net realized loss due to an increase in the fair value of a contingent consideration liability related to a prior acquisition and $0.5 million of net realized loss from the sale of subsidiaries. For the nine months ended September 30, 2016, investments and other gains - net included $1.6 million of net realized gains due to a net decrease in the fair values of contingent consideration liabilities associated with prior year acquisitions, $1.2 million of realized gain on a cost-basis investment transaction and $2.9 million of net realized gains from the sale of investments available-for-sale, partially offset by $1.3 million of office closure costs.

Proceeds from sales of investments available-for-sale are as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
	($000 omitted)
Proceeds from sales of investments available-for-sale	5,878	16,839	55,533	49,666

NOTE 5

Goodwill and other intangibles. The summary of changes in goodwill is as follows.



	Title		Ancillary Services and Corporate	Consolidated Total
			($000 omitted)
Balances at December 31, 2016	211,365		5,729	217,094
Acquisitions	14,419		—	14,419
Disposals	(85	)	—	(85	)
Balances at September 30, 2017	225,699		5,729	231,428

During the second quarter 2017, the Company acquired certain title businesses primarily funded by borrowings on the Company's unsecured line of credit. The Company completed its purchase price allocations related to these businesses during the third quarter 2017 and, as a result, increased its goodwill related to the title segment by a total of $14.4 million, which is deductible in full for income tax purposes over a period of 15 years. Also, in connection with the acquisitions, the Company identified and recorded $2.6 million of other intangibles, primarily related to acquired software to be amortized over 5 years from the date of acquisition.

The Company evaluates goodwill for impairment annually based on information as of June 30 of the current year or more frequently if circumstances suggest that an impairment may exist. The Company performed the annual goodwill impairment analysis during the quarter ended September 30, 2017, utilizing the qualitative assessment method for the direct operations, agency operations, international operations and ancillary services reporting units. Based on the qualitative analysis performed, the Company concluded that the goodwill related to all reporting units was not impaired.

NOTE 6

Estimated title losses. A summary of estimated title losses for the nine months ended September 30 is as follows:



	2017		2016
	($000 omitted)
Balances at January 1	462,572		462,622
Provisions:
Current year	69,067		73,380
Previous policy years	1,524		(6,768	)
Total provisions	70,591		66,612
Payments, net of recoveries:
Current year	(10,403	)	(13,938	)
Previous policy years	(53,491	)	(57,410	)
Total payments, net of recoveries	(63,894	)	(71,348	)
Effects of changes in foreign currency exchange rates	6,576		2,814
Balances at September 30	475,845		460,700
Loss ratios as a percentage of title operating revenues:
Current year provisions	5.0	%	5.3	%
Total provisions	5.1	%	4.8	%

There were no significant adjustments to the loss provisioning rates or large claim reserves during the nine months ended September 30, 2017. In 2016, the Company decreased its loss provisioning rates and reserves related to certain existing large claims due to continued favorable policy loss experience. As a result, a $5.4 million net policy loss reserve reduction was recorded during the nine months ended September 30, 2016.

NOTE 7

Share-based payments. During the first nine months of 2017 and 2016, the Company granted executives and senior management shares of restricted common stock, consisting of time-based shares, which vest on each of the first three anniversaries of the grant date, and performance-based shares, which vest upon achievement of certain financial objectives over the period of three years. The aggregate grant-date fair values of these awards in 2017 and 2016 were $5.1 million (120,000 shares with an average grant price per share of $42.55) and $3.9 million (105,000 shares with an average grant price per share of $37.33), respectively. Awards were made pursuant to the Company’s employee incentive compensation plans and the compensation expense associated with restricted stock awards is recognized over the corresponding vesting period.

Additionally, during the second quarters 2017 and 2016, the Company granted its board of directors, as a component of annual director retainer compensation, 13,000 and 16,300 shares, respectively, of common stock, which vested immediately. The aggregate fair values of these director awards at the grant dates in 2017 and 2016 were both $0.6 million.

NOTE 8

Earnings per share. The Company’s basic earnings per share (EPS) attributable to Stewart is calculated by dividing net income attributable to Stewart by the weighted-average number of shares of Common Stock outstanding during the reporting periods. Outstanding shares of Common Stock granted to employees that are not yet vested (restricted shares) are excluded from the calculation of the weighted-average number of shares outstanding for calculating basic EPS. To calculate diluted EPS, the number of shares is adjusted for the effects of any dilutive shares. The treasury stock method is used to calculate the dilutive number of shares related to the Company’s long term incentive and stock option plans. In periods of loss, dilutive shares are excluded from the calculation of the diluted EPS and diluted EPS is computed in the same manner as basic EPS.

The calculation of the basic and diluted EPS is as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
	($000 omitted, except per share)
Numerator:
Net income attributable to Stewart	10,944	26,375	33,601	38,778
Less: Cash paid on Class B Common Shares conversion (a)	—	—	—	(12,000	)
Net income available to common shareholders	10,944	26,375	33,601	26,778

Denominator (000):
Basic average shares outstanding	23,448	23,371	23,442	23,362
Average number of dilutive shares relating to options	—	1	—	1
Average number of dilutive shares relating to grants of restricted shares	116	239	129	233
Diluted average shares outstanding	23,564	23,611	23,571	23,596

Basic earnings per share attributable to Stewart	0.47	1.13	1.43	1.15

Diluted earnings per share attributable to Stewart	0.46	1.12	1.43	1.13

(a) - During 2016, the Company paid $12.0 million as part of the consideration related to the exchange agreement with the holders of the Class B Common Stock. In accordance with the ASC 260, Earnings Per Share, the $12.0 million payment was treated in a manner similar to the treatment of dividends on preferred stock for the purpose of calculating EPS. Accordingly, the $12.0 million payment was deducted from the 2016 net income to arrive at the net income for calculating basic and diluted EPS.

NOTE 9

Contingent liabilities and commitments. In the ordinary course of business, the Company guarantees the third-party indebtedness of certain of its consolidated subsidiaries. As of September 30, 2017, the maximum potential future payments on the guarantees are not more than the related notes payable recorded in the condensed consolidated balance sheets. The Company also guarantees the indebtedness related to lease obligations of certain of its consolidated subsidiaries. The maximum future obligations arising from these lease-related guarantees are not more than the Company’s future minimum lease payments. As of September 30, 2017, the Company also had unused letters of credit aggregating $5.6 million related to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees.

NOTE 10

Regulatory and legal developments. The Company is subject to claims and lawsuits arising in the ordinary course of its business, most of which involve disputed policy claims. In some of these lawsuits, the plaintiff seeks exemplary or treble damages in excess of policy limits. The Company does not expect that any of these ordinary course proceedings will have a material adverse effect on its consolidated financial condition or results of operations. In addition, along with the other major title insurance companies, the Company is party to class action lawsuits concerning the title insurance industry. The Company believes that it has adequate reserves for the various litigation matters and contingencies discussed in this paragraph and that the likely resolution of these matters will not materially affect its consolidated financial condition or results of operations.

The Company is subject to administrative actions and litigation relating to the basis on which premium taxes are paid in certain states. Additionally, the Company receives from time to time various other inquiries from governmental regulators concerning practices in the insurance industry. Many of these practices do not concern title insurance. To the extent the Company is in receipt of such inquiries, it believes that it has adequately reserved for these matters and does not anticipate that the outcome of these inquiries will materially affect its consolidated financial condition or results of operations.

The Company is subject to various other administrative actions and inquiries into its business conduct in certain of the states in which it operates. While the Company cannot predict the outcome of the various regulatory and administrative matters, it believes that it has adequately reserved for these matters and does not anticipate that the outcome of any of these matters will materially affect its consolidated financial condition or results of operations.

NOTE 11

Segment information. The Company reports two operating segments: title and ancillary services and corporate. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes centralized title services, home and personal insurance services and Internal Revenue Code Section 1031 tax-deferred exchanges. The ancillary services and corporate segment historically provided appraisal and valuation services, loan file review, quality control services, government services, document management, recording and call center-related services offered to large mortgage lenders and servicers, mortgage brokers and mortgage investors. Beginning in 2017, the principal offerings of ancillary services are appraisal and valuation services. Also included in the ancillary services and corporate segment are expenses of the parent holding company and certain other enterprise-wide overhead costs, net of centralized administrative services costs allocated to respective operating businesses.

Selected statement of income information related to these segments is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	($000 omitted)
Title segment:
Revenues	488,612		529,816		1,384,857		1,410,863
Depreciation and amortization	5,534		5,120		16,081		15,642
Income before taxes and noncontrolling interest	24,610		50,308		76,354		100,984

Ancillary services and corporate segment:
Revenues	12,957		23,394		45,204		70,012
Depreciation and amortization	1,044		1,962		3,316		7,086
Loss before taxes and noncontrolling interest	(6,013	)	(11,500	)	(18,742	)	(35,977	)

Consolidated Stewart:
Revenues	501,569		553,210		1,430,061		1,480,875
Depreciation and amortization	6,578		7,082		19,397		22,728
Income before taxes and noncontrolling interest	18,597		38,808		57,612		65,007

The Company does not provide asset information by reportable operating segment as it does not routinely evaluate the asset position by segment.

Revenues generated in the United States and all international operations are as follows:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2017	2016	2017	2016
	($000 omitted)
United States	464,111	518,204	1,335,129	1,394,228
International	37,458	35,006	94,932	86,647
	501,569	553,210	1,430,061	1,480,875

NOTE 12

Other comprehensive income (loss). Changes in the balances of each component of other comprehensive income (loss) and the related tax effects are as follows:



	Three Months Ended September 30, 2017						Three Months Ended September 30, 2016
	Before-Tax Amount		Tax Expense (Benefit)		Net-of-Tax Amount		Before-Tax Amount		Tax Expense (Benefit)		Net-of-Tax Amount
	($000 omitted)						($000 omitted)
Unrealized gains on investments - net:
Change in net unrealized gains on investments	95		32		63		(405	)	(142	)	(263	)
Less: reclassification adjustment for net gains included in net income	(508	)	(177	)	(331	)	(1,330	)	(465	)	(865	)
Net unrealized gains	(413	)	(145	)	(268	)	(1,735	)	(607	)	(1,128	)

Foreign currency translation adjustments	5,817		1,676		4,141		(2,363	)	(555	)	(1,808	)

Other comprehensive income (loss)	5,404		1,531		3,873		(4,098	)	(1,162	)	(2,936	)

	Nine Months Ended September 30, 2017						Nine Months Ended September 30, 2016
	Before-Tax Amount		Tax Expense (Benefit)		Net-of-Tax Amount		Before-Tax Amount		Tax Expense (Benefit)		Net-of-Tax Amount
	($000 omitted)						($000 omitted)
Unrealized gains on investments - net:
Change in net unrealized gains on investments	4,438		1,553		2,885		18,012		6,304		11,708
Less: reclassification adjustment for net gains included in net income	(1,218	)	(426	)	(792	)	(1,606	)	(562	)	(1,044	)
Net unrealized gains	3,220		1,127		2,093		16,406		5,742		10,664

Foreign currency translation adjustments	11,831		3,161		8,670		1,581		1,797		(216	)

Other comprehensive income	15,051		4,288		10,763		17,987		7,539		10,448

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S OVERVIEW

We reported net income attributable to Stewart of $10.9 million ($0.46 per diluted share) for the third quarter 2017 compared to a net income attributable to Stewart of $26.4 million ($1.12 per diluted share) for the third quarter 2016. Pretax income before noncontrolling interests for the third quarter 2017 was $18.6 million compared to pretax income before noncontrolling interests of $38.8 million for the third quarter 2016.

Total revenues for the third quarter 2017 were $501.6 million compared to total revenues of $553.2 million for the third quarter 2016, a decline of 9%. Total operating revenues for the third quarter 2017 were $498.0 million as compared to total operating revenues of $545.4 million for the third quarter 2016, also a decline of 9%. Our third quarter title revenues were adversely affected by business disruptions caused by hurricanes Harvey and Irma, which had a combined impact of approximately $4 million, and the departure of certain retail staff as described in our second quarter earnings release and quarterly report on Form 10-Q. While the revenue impact of the hurricanes was relatively minor, the impact to pretax income was more significant; there was no appreciable offsetting cost reduction as processing costs were largely incurred pre-closing, and we maintained the employees of the affected offices in order to quickly reopen them. On the positive side, our international operations delivered another strong quarter and revenues from the Title365 acquisition and recent new hires partially offset the retail revenue decline. We successfully recruited strong, new revenue-generating associates, which have offset $20-$25 million of the $70 million in departed annual revenues related to staff departures. The recent acquisition of Title365 generated new business, which we expect to result in $40-$50 million in annual revenue. These combined actions are expected to fully replace the departed revenue by 2018’s selling season, and our ongoing recruiting efforts and targeted acquisitions should further bolster our top line.

We have announced that John Killea, chief legal officer & chief compliance officer, has been appointed to the additional role of president of Stewart. His deep experience and intimate knowledge of our company uniquely positions him to expand his responsibilities as we execute on our strategic priorities. In addition, we are very pleased to announce that John Magness has joined Stewart as chief corporate development officer. John brings nearly 35 years of leadership experience in the title and real estate industry and will play a key role in ensuring Stewart continues to provide the high quality services our customers have come to expect. Most recently, John served as president of Old Republic Title Companies, Inc.

We also announced that the Board of Directors has previously formed a strategic committee which has been pursuing the full range of strategic alternatives available to Stewart. These alternatives include, among other things, business combinations, the sale of the Company, and continuing to execute on Stewart’s standalone business plan. The Company has retained and will be assisted in the strategic review process by Citi as financial advisor and Davis Polk & Wardwell LLP as legal advisor. The Board plans to complete this process in an expeditious manner. There can be no assurance that this process will result in a particular outcome. We do not intend to provide updates on its review until it deems further disclosure is appropriate or required.

Summary results of the title segment are as follows ($ in millions, except pretax margin):



	For the Three Months Ended September 30,
	2017		2016		% Change

Total revenues	488.6		529.8		(8	)%
Pretax income	24.6		50.3		(51	)%
Pretax margin	5.0	%	9.5	%

Pretax income during the third quarter 2017 declined $25.7 million compared to third quarter 2016, while total title revenues declined $41.2 million. In addition to the factors mentioned above, title revenues declined due to lower commercial revenues, fewer purchase orders closed, and a significant decline in refinancing orders industry-wide. Included in the segment’s results for the third quarter 2017 are approximately $1.4 million of Title365 integration costs. Also included in the third quarter 2017 results were $1.3 million of realized losses, compared to $2.1 million of realized gains in the third quarter 2016.

Non-commercial domestic revenue, as shown under the Results of Operations - Title revenues section, includes revenues from purchase transactions and centralized title operations (processing primarily refinancing and default title orders), which decreased 11% and 32%, respectively, in the third quarter 2017 compared to the prior year quarter as a result of declines in purchase and refinancing orders closed. Commercial revenues declined 10% from the prior year quarter primarily as a result of lower commercial orders closed, fewer large transactions than in the prior year quarter and reduced average fee per file. Total international title revenues increased 7% in the third quarter 2017 compared to the prior year quarter mainly due to transaction volume growth from our United Kingdom operations and a stronger Canadian dollar relative to the U.S. dollar. Revenues from independent agency operations in the third quarter 2017 declined 5% compared to the third quarter 2016. The independent agency remittance rate decreased to 17.5% in the third quarter 2017 from 18.0% in the third quarter 2016 mainly due to geographic mix of our agency business (reduced revenues in higher-remitting states and increases in lower-remitting states); third quarter 2017 revenues from independent agencies, net of retention, decreased 7% from the prior year quarter. Given our current independent agent geographic footprint, we expect the remittance rate to remain in the mid-to-high 17% range over the near term.

Summary results of the ancillary services and corporate segment are as follows ($ in millions):



	For the Three Months Ended September 30,
	2017		2016		% Change

Total revenues	13.0		23.4		(45	)%
Pretax loss	(6.0	)	(11.5	)	48	%

The decline in the segment’s revenues in the third quarter 2017 compared to the prior year quarter was primarily due to the divestitures of the loan file review, quality control services and government services lines of business at the end of 2016. The segment’s pretax results improved to a $6.0 million pretax loss, compared to a pretax loss of $11.5 million in the prior year quarter. The segment’s results for the third quarter 2017 and 2016 included approximately $6 million and $8 million, respectively, of expenses attributable to parent company and corporate operations.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.

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. During the nine months ended September 30, 2017, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Operations. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our ancillary services and corporate segment includes our parent holding company expenses and certain enterprise-wide overhead costs, along with our remaining ancillary services operations, principally appraisal and valuation services.

Factors affecting revenues. The principal factors that contribute to changes in operating revenues for our title and ancillary services and corporate 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;


•	number of households;


•	premium rates;


•	foreign currency exchange rates;


•	market share;


•	ability to attract and retain highly productive sales associates;


•	independent agency remittance rates;


•	opening of new offices and acquisitions;


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


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


•	acquisitions or divestitures of businesses;


•	volume of distressed property transactions; and


•	seasonality and/or weather.

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 approximate 3.6% 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.

RESULTS OF OPERATIONS

Comparisons of our results of operations for the three and nine months ended September 30, 2017 with the three and nine months ended September 30, 2016 are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.

Our statements on home sales and loan activity are based on published industry data from sources including Fannie Mae, the National Association of Realtors® (NAR), the Mortgage Bankers Association and Freddie Mac. We also use information from our direct operations.

Operating environment. Actual existing home sales in the third quarter 2017 declined approximately 2% from the third quarter 2016. September 2017 existing home sales totaled 465,000, which was down 4% from a year ago, and also down 13% from August 2017. According to NAR, lower home listings, fast-rising home prices and the temporary effect of hurricanes Harvey and Irma were the likely causes of lower existing home sales in the third quarter 2017. September 2017 median and average home prices both rose approximately 4% compared to September 2016 prices. September 2017 housing starts improved 6% from a year ago, but were down 5% sequentially from August 2017. Newly issued building permits in September 2017 declined 5% sequentially from August 2017 and 4% from a year ago. According to Fannie Mae, one-to-four family residential lending declined to $465 billion in the third quarter 2017 from $589 billion in the third quarter 2016, driven by a decrease of approximately $137 billion, or 47%, in refinance originations, partially offset by a $13 billion, or 4%, increase in purchase lending. On average, refinance title premium rates are 60% of the premium rates for a similarly priced sale transaction. Per Fannie Mae's forecast, total originations, as compared to the third quarter 2017, will decrease 8% to $427 billion in the fourth quarter 2017.

Title revenues. Direct title revenue information is presented below:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017	2016	% Change		2017	2016	% Change
	($ in millions)				($ in millions)
Non-commercial
Domestic	141.7	162.2	(13	)%	417.8	458.1	(9	)%
International	30.4	29.3	4	%	75.9	68.6	11	%
	172.1	191.5	(10	)%	493.7	526.7	(6	)%
Commercial:
Domestic	39.2	45.2	(13	)%	127.4	123.8	3	%
International	5.5	4.4	25	%	14.8	13.6	9	%
	44.7	49.6	(10	)%	142.2	137.4	3	%
Total direct title revenues	216.8	241.1	(10	)%	635.9	664.1	(4	)%

Revenues from direct title operations, which include residential, commercial, international and centralized title services transactions, decreased $24.3 million, or 10%, and $28.2 million, or 4%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, due to a decline in revenues from our residential, commercial and centralized title operations transactions, partially offset by revenue increases from our international operations. Our residential revenues, which make up about 60% of our total direct revenues, decreased $15.6 million, or 11%, and $28.7 million, or 7%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily due to management and staff departures within certain offices during the second quarter 2017, as well as the impact of hurricanes Harvey and Irma on Texas and Florida, respectively. We estimate the revenue impact of these items to be approximately $25 million, with the majority attributed to the staff attrition. Revenues from our centralized title operations, which primarily process refinancing and default title orders, decreased $4.9 million, or 32%, and $11.6 million, or 24%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively, primarily due to decreased refinancing orders and lower demand for default services, which are in line with industry trends.

Our direct operations include local offices and international operations, and we generate commercial revenues both domestically and internationally. U.S. commercial revenues during the third quarter 2017 decreased $6.0 million, or 13%, compared to the third quarter 2016, primarily due to a decline in commercial orders and the average revenue fee per file; while revenues increased $3.6 million, or 3%, in the first nine months of 2017 compared with the same period in 2016, mainly due to certain large transactions during the second quarter 2017, which resulted in an improvement in our commercial revenue fee per file, partially offset by a decline in commercial orders. Total international revenues increased $2.2 million, or 7%, and $8.5 million, or 10%, in the third quarter and first nine months of 2017 compared to the third quarter and first nine months of 2016, respectively, primarily as a result of increased transaction volume from our Canada and United Kingdom operations. Direct revenues constituted 45% and 46% of our total title revenues in the third quarters 2017 and 2016, respectively, and 46% and 48% during the first nine months of 2017 and 2016, respectively.

Orders information for the third quarter and first nine months ended September 30 is as follows:



	Three Months Ended						Nine Months Ended
	2017	2016	Change		% Change		2017	2016	Change		% Change
Opened Orders:
Commercial	10,685	11,866	(1,181	)	(10	)%	32,923	35,334	(2,411	)	(7	)%
Purchase	59,679	63,115	(3,436	)	(5	)%	188,744	193,625	(4,881	)	(3	)%
Refinance	27,155	42,851	(15,696	)	(37	)%	74,794	113,819	(39,025	)	(34	)%
Other	4,565	3,423	1,142		33	%	13,584	10,032	3,552		35	%
Total	102,084	121,255	(19,171	)	(16	)%	310,045	352,810	(42,765	)	(12	)%

Closed Orders:
Commercial	7,643	8,149	(506	)	(6	)%	23,136	24,344	(1,208	)	(5	)%
Purchase	48,432	52,937	(4,505	)	(9	)%	140,996	145,829	(4,833	)	(3	)%
Refinance	17,965	28,361	(10,396	)	(37	)%	53,471	78,304	(24,833	)	(32	)%
Other	2,872	4,086	(1,214	)	(30	)%	10,205	12,536	(2,331	)	(19	)%
Total	76,912	93,533	(16,621	)	(18	)%	227,808	261,013	(33,205	)	(13	)%

Gross revenues from independent agency operations decreased $13.7 million, or 5%, in the third quarter 2017, compared to the third quarter 2016, primarily as a result of revenue decreases in the states of Massachusetts, New York, Texas, Florida (there likely was some independent agency revenue impact from the hurricanes in Texas and Florida) and New Jersey, partially offset by increases in the states of California, Illinois and Ohio. As a result of decreased agency revenues, the third quarter 2017 net agency revenues (net of agency retention) decreased $3.6 million, or 7%, compared to the prior year quarter. Gross agency revenues for the first nine months of 2017 increased $4.0 million, or approximately 1%, compared to the first nine months of 2016, primarily due to revenue increases in the states of California, Minnesota, Michigan and Ohio, partially offset by revenue decreases in the states of New York, Massachusetts and Florida. Net of agency retention, agency revenues in the first nine months of 2017, compared to the same period in 2016, decreased $2.3 million, or 2%, primarily due to revenue increases from generally lower remitting states, while revenues from higher remitting states declined. 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.

Ancillary services revenues. Ancillary services operating revenues decreased $9.4 million, or 43%, and $20.2 million, or 31%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, respectively, primarily due to our divestitures of the loan file review, quality control services and government services lines of business at the end of 2016. Our exit of the delinquent loan servicing operations, completed in the first quarter 2016, also contributed to the revenue decline during the first nine months of 2017 compared to the first nine months of 2016. These divestitures primarily resulted in the pretax results improvement of $4.7 million, or 101%, and $12.4 million, or 90%, in the third quarter and first nine months of 2017 compared to the same periods in 2016 for ancillary services.

Investment income. Investment income during the third quarter and first nine months of 2017 was comparable to the investment income during the same periods in 2016.

Investment and other (losses) gains - net. Investment and other losses - net for the third quarter 2017 included net realized losses of $0.6 million from the sale of investments available-for-sale and $0.3 million from the sale of subsidiaries; while investment and other gains - net for the third quarter 2016 included net realized gains of $2.0 million from the sale of investments available-for-sale and $1.2 million on a cost-basis investment transaction.

Expenses. An analysis of expenses is shown below:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017		2016		% Change		2017		2016		% Change
	($ in millions)						($ in millions)

Amounts retained by agencies	221.5		231.6		(4	)%	605.2		598.9		1	%
As a % of agency revenues	82.5	%	82.0	%			82.2	%	81.8	%
Employee costs	140.1		154.5		(9	)%	419.2		457.2		(8	)%
As a % of operating revenues	28.1	%	28.3	%			29.6	%	31.3	%
Other operating expenses	88.5		94.0		(6	)%	255.6		268.2		(5	)%
As a % of operating revenues	17.8	%	17.2	%			18.0	%	18.3	%
Title losses and related claims	25.4		26.4		(4	)%	70.6		66.6		6	%
As a % of title revenues	5.2	%	5.0	%			5.1	%	4.8	%

Retention by agencies. Amounts retained by title agencies are based on agreements between agencies and our title underwriters. Average independent agency remittance rates (i.e., inverse of retention rates, representing the amount paid to us relative to the amount collected by agents at the closing of the transaction) in the third quarter and first nine months of 2017 were 17.5% and 17.8%, respectively, as compared to 18.0% and 18.2% in the same periods in 2016. The decrease in the agency remittance rates during the third quarter and first nine months of 2017 was primarily due to revenue declines from higher remitting states (with average remittance rates of 19.8% and 19.4%, respectively) accompanied by revenue increases from lower remitting states (with average remittance rates of 15.0% and 16.0%, respectively). We continue to evaluate independent agency relationships with a focus on states that provide higher remittance rates. The average retention percentage may vary from quarter-to-quarter due to the geographic 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%. Consequently, we expect our average annual remittance rate to remain in the mid-to-high 17% range over the near term.

Employee costs. Total employee costs decreased $14.5 million, or 9%, and $38.0 million, or 8%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, as a result of a reduction in employee counts tied to volume declines, primarily in our ancillary services and centralized title operations, management and staff departures in direct operations during the second quarter 2017, and ongoing cost management efforts. Average employee counts for both the third quarter and first nine months of 2017 decreased approximately 7% and 8% from the third quarter and first nine months of 2016, respectively; as a percentage of total operating revenues, employee costs for the third quarter and first nine months of 2017 were 28.1% and 29.6% compared to 28.3% and 31.3%, respectively, for the same periods in 2016.

Employee costs in the title segment decreased $5.2 million, or 4%, and $14.6 million, or 4%, in the third quarter and first nine months of 2017, respectively, compared to the same periods last year, largely due to decreased salaries and incentives as a result of reduced employee counts, primarily in direct title operations. These decreases in employee costs were partially offset as we have hired replacement management and employees in offices impacted by the previously discussed departures. In the ancillary services and corporate segment, employee costs decreased $9.3 million, or 55%, and $23.3 million, or 45%, in the third quarter and first nine months of 2017, respectively, compared to the same periods last year, primarily as a result of the reduction in average employee count resulting from the disposed lines of ancillary services businesses mentioned above.

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 and costs that fluctuate independently of revenues. 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, telephone and title plant expenses. Costs that follow, to varying degrees, changes in transaction volumes and revenues include fee attorney splits, bad debt expenses, ancillary services cost of sales expenses, copy supplies, delivery fees, outside search fees, postage, premium taxes and title plant maintenance expenses. Costs that fluctuate independently of revenues include general supplies, litigation defense, business promotion and marketing and travel.

Consolidated other operating expenses decreased $5.6 million, or 6%, in the third quarter 2017 compared to the third quarter 2016, primarily due to a decrease in outside search fees resulting from reduced revenues from our ancillary search services, centralized title and commercial operations which are principal users of outside search services in generating revenues. Additionally, consolidated other operating expenses decreased $12.6 million, or 5%, in the first nine months of 2017 compared to the same period last year primarily due to lower professional fees, insurance and litigation-related expenses. As a percentage of total operating revenues, other operating expenses were 17.8% and 18.0% for the third quarter and first nine months of 2017, respectively, as compared to 17.2% and 18.3%, respectively, for the same periods in 2016. During the third quarter 2017, we incurred $1.4 million of integration expenses related to a recent acquisition, while during the third quarter 2016, we incurred $1.2 million of consulting costs related to shareholder activism. Additionally, during the first quarter 2016, we incurred other operating expenses of $3.6 million for a litigation-related accrual and $2.2 million of expenses associated primarily with a life insurance settlement with a former Class B shareholder. Excluding these non-operating charges, other operating expenses as a percentage of operating revenues were 17.5% and 17.0% in the third quarters 2017 and 2016, respectively, and 17.9% for both the first nine months of 2017 and 2016.

Costs that follow, to varying degrees, changes in transaction volumes and revenues decreased $4.2 million, or 9%, and $2.0 million, or 2%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily as a result of reduced outside search fees driven mainly by decreased search revenues within the ancillary services and centralized title operations. Costs that fluctuate independently of revenues during the third quarter 2017 were comparable to those of the prior year quarter; while excluding the litigation-related accrual mentioned above, these costs decreased $0.8 million, or 3%, during first nine months of 2017 compared to the same period last year due to lower general supplies expenses. Excluding the charges mentioned above, costs that are fixed in nature decreased $1.3 million, or 4%, and $3.2 million, or 3%, in the third quarter and first nine months of 2017 compared to the same periods in 2016, mainly due to lower attorney and professional fees.

Title losses. Provisions for title losses, as a percentage of title revenues and including changes in estimates for certain large claims and escrow losses, were 5.2% and 5.0% for the third quarters 2017 and 2016, respectively, and 5.1% and 4.8% for the first nine months of 2017 and 2016, respectively. Title loss expense in the third quarter 2017, compared to the third quarter 2016, decreased $0.9 million, or 4%, primarily as a result of lower title revenues, partially offset by an increase of our Canadian business' provisioning rate; while the title loss expense for the first nine months of 2017, compared to the same period in 2016, increased $4.0 million, or 6%, primarily as a result of a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 due to favorable policy loss experience. Excluding this net reserve reduction, title losses as a percentage of title revenues were 5.2% in the first nine months of 2016. The title loss ratio in any given quarter can be significantly influenced by changes in new large claims incurred, escrow losses and adjustments to reserves for existing large claims.

Cash claim payments in the third quarter and first nine months of 2017 compared to the same periods in the prior year decreased 35% and 10%, respectively, primarily due to a decrease in payments for existing non-large claims.

We continue to manage and resolve large claims prudently and in keeping with our commitments to our policyholders.

The composition of title policy loss expense is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	($ in millions)				($ in millions)
Provisions – known claims:
Current year	3.9		5.3		8.1		13.1
Prior policy years	13.6		18.7		48.3		49.9
	17.5		24.0		56.4		63.0
Provisions – IBNR
Current year	21.3		21.0		61.0		60.3
Prior policy years	0.2		0.1		1.5		(6.8	)
	21.5		21.1		62.5		53.5
Transferred to known claims	(13.6	)	(18.7	)	(48.3	)	(49.9	)
Total provisions	25.4		26.4		70.6		66.6

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 (provisioning rate). As claims become known, provisions are reclassified from IBNR to known claims. Adjustments relating to large losses (those individually in excess of $1.0 million) may impact provisions either for known claims or for IBNR.

Current year known claims provisions decreased $1.4 million, or 26%, and $5.0 million, or 38%, in the third quarter and first nine months of 2017, respectively, compared to the same periods in 2016, primarily as a result of lower claim amounts reported. Compared to the same periods in 2016, total provisions - IBNR was comparable in the third quarter 2017 and increased $9.0 million, or 17%, in the first nine months of 2017, primarily due to a $5.4 million net policy loss reserve reduction recorded during the second quarter 2016 as a result of favorable loss experience. As a percentage of title operating revenues, provisions - IBNR for the current policy year increased to 4.4% in both the third quarter and first nine months of 2017 compared with 4.0% and 4.3%, respectively, in the same periods in 2016, primarily driven by lower known claims related to the current policy year.

In addition to title policy claims, we incur losses in our direct operations from escrow, closing and disbursement functions. These 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. Escrow losses also arise in cases of mortgage fraud, and in those cases the title insurer incurs the loss under its obligation to ensure that an unencumbered title is conveyed. Escrow losses are recognized as expense 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. During the third quarter and first nine months of 2017, we recorded approximately $1.5 million and $3.6 million, respectively, of policy loss reserves relating to escrow losses arising from mortgage fraud, as compared to $2.1 million and $4.0 million, respectively, during the same periods in 2016.

Total title policy loss reserve balances:



	September 30, 2017	December 31, 2016
	($ in millions)
Known claims	69.0	76.5
IBNR	406.8	386.1
Total estimated title losses	475.8	462.6

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. Title claims are generally incurred three to five years after policy issuance and the timing of payments on these claims can significantly impact the balance of known claims. In many cases, claims may be open for several years before the resolution and payment of the claims occur; as a result, the estimate of the ultimate amount to be paid 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.

Depreciation and amortization. Depreciation and amortization expenses decreased to $6.6 million and $19.4 million in the third quarter and first nine months of 2017, respectively, compared to $7.1 million and $22.7 million in the same periods in 2016, primarily due to the lower amortization expense in 2017 as a result of the fourth quarter 2016 disposal of certain intangible assets in connection with the divestitures of several lines of the ancillary services business, and the higher depreciation expense recorded in 2016 resulting from accelerated depreciation charges relating to our exit from the delinquent loan servicing operations, which was completed at the end of the first quarter 2016.

Income taxes. Our effective tax rates, based on income before taxes and after deducting income attributable to noncontrolling interests, were 30.0% and 31.6% in the third quarter and first nine months of 2017, respectively, and 25.5% and 30.2% in the third quarter and first nine months of 2016, respectively. Included in the tax provision calculation are discrete net income tax benefits of $0.7 million and $2.1 million in the third quarter and first nine months of 2017, respectively, principally relating to previously unrecognized research and development tax credits, compared with discrete net income tax benefits of $4.6 million and $4.5 million, respectively, in the same periods in 2016, principally relating to previously unrecognized research and development tax credits and a goodwill impairment true-up adjustment. Excluding the effect of the discrete tax items, our effective tax rates were 34.3% and 36.0% in the third quarter and first nine months of 2017, respectively, and 38.6% and 38.3% in the third quarter and first nine months of 2016, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to stockholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of September 30, 2017, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $871.9 million ($369.5 million, net of statutory reserves on cash and investments). Of our total cash and investments at September 30, 2017, $605.3 million ($300.2 million, net of statutory reserves) was held in the United States and the rest internationally, principally Canada.

Cash held at the parent company totaled $0.2 million at September 30, 2017. As a holding company, the parent company is funded principally by cash from its subsidiaries in the form of dividends, operating and other administrative expense reimbursements and pursuant to intercompany tax sharing agreements. The expense reimbursements are paid in accordance with management agreements, approved by the Texas Department of Insurance (TDI), among us and our subsidiaries. In addition to funding operating expenses, cash held at the parent company is used for dividend payments to common stockholders and for stock repurchases, if any. To the extent such uses exceed cash available, the parent company is dependent on distributions from its regulated title insurance underwriter, Stewart Title Guaranty Company (Guaranty).

A substantial majority of our consolidated cash and investments as of September 30, 2017 was held by Guaranty and its subsidiaries. The use and investment of these funds, dividends to the parent company, and cash transfers between Guaranty and its subsidiaries and the parent company are subject to certain legal and regulatory restrictions. In general, Guaranty may use its cash and investments in excess of its legally-mandated statutory premium reserve (established in accordance with requirements under Texas law) to fund its insurance operations, including claims payments. Guaranty may also, subject to certain limitations, provide funds to its subsidiaries (whose operations consist principally of field title offices and ancillary services operations) for their operating and debt service needs.

We maintain investments in accordance with certain statutory requirements in the states of domicile of our underwriters for the funding of statutory premium reserves. Statutory premium reserves, which approximated $475.4 million and $485.4 million at September 30, 2017 and December 31, 2016, respectively, are required to be fully funded and invested in high-quality securities and short-term investments. Statutory reserve funds are not available for current claim payments, which must be funded from current operating cash flow. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $26.9 million and $13.9 million at September 30, 2017 and December 31, 2016, respectively. 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 September 30, 2017, our known claims reserve totaled $69.0 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $406.8 million. In addition to this, we had cash and investments (excluding equity method investments) of $281.1 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 TDI must be notified of any dividend declared, and any dividend in excess of the statutory maximum of 20% of surplus (approximately $102.0 million as of December 31, 2016) would be, by regulation, considered extraordinary and subject to pre-approval by the TDI. 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 the liquidity ratio, which could affect its ratings and competitive position, the amount of insurance it can write and its ability to pay future dividends. As of September 30, 2017, our statutory liquidity ratio for our principal underwriter was 110%. Our internal objective is to maintain a ratio of at least 100%, as we believe that ratio is crucial to our competitiveness in the market and our insurer financial strength ratings. On an ongoing basis, this ratio will largely guide our decisions as to frequency and magnitude of dividends from Guaranty to the parent company. Further, depending on business and regulatory conditions, we may in the future need to retain cash in Guaranty or even raise cash in the capital markets to contribute to it in order to maintain its ratings or statutory capital position. Such a requirement could be the result of investment losses, reserve charges, adverse economic environment operating conditions or changes in interpretation of statutory accounting requirements by regulators. No dividend was paid by Guaranty to its parent during the nine months ended September 30, 2017 and 2016.

As the parent company conducts no operations apart from its wholly-owned subsidiaries, the discussion below focuses on consolidated cash flows.



	For the Nine Months Ended September 30,
	2017		2016
	(dollars in millions)
Net cash provided by operating activities	48.0		64.0
Net cash used by investing activities	(66.4	)	(60.3	)
Net cash used by financing activities	(2.6	)	(22.8	)

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

Cash provided by operations was $48.0 million in the first nine months of 2017 compared to $64.0 million for the same period in 2016. The decrease in the cash flows from operations was primarily due to the lower net income generated during the third quarter 2017, higher payments on accounts payable and an increase in accounts receivable related to certain business units, partially offset by lower claim payments.

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. Our approach allows us to adjust more easily to seasonal and cyclical fluctuations in transaction volumes. We are continuing our emphasis on cost management, specifically focusing on lowering unit costs of production, which will result in improved margins. Our plans to improve margins also include further outsourcing, additional automation of manual processes, and further consolidation of our various systems and production operations. We are currently investing in the technology necessary to accomplish these goals.

Investing activities. Cash used by investing activities was primarily driven by purchases of investments, capital expenditures and acquisition of subsidiaries, offset by proceeds from matured and sold investments. Total proceeds from available-for-sale investments sold and matured were $89.4 million and $75.2 million, while cash used for purchases of available-for-sale investments approximated $125.4 million and $122.1 million for the first nine months of 2017 and 2016, respectively. Our purchases of short-term investments, net of sales, aggregated $1.2 million and $0.4 million for the first nine months of 2017 and 2016, respectively.

During 2017, we used $17.8 million of cash for acquisitions of new subsidiaries, while purchases of property and equipment were $12.4 million and $13.6 million for the first nine months of 2017 and 2016, respectively. 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 $138.6 million and $672.4 million, respectively, as of September 30, 2017. Of the total notes payable activity during the first nine months of 2017 and 2016, proceeds of $32.0 million and $32.0 million, respectively, and payments of $16.0 million and $27.6 million, respectively, were related to short-term loan agreements in connection with our Section 1031 tax-deferred property exchange business. Also during the first nine months of 2017 and 2016, we drew $16.0 million and $20.0 million, respectively, from our $125.0 million line of credit facility. At September 30, 2017, the outstanding balance of the line of credit was $108.9 million, while the remaining balance of the line of credit available for use was $13.6 million, net of an unused $2.5 million letter of credit. Our debt-to-equity ratio at September 30, 2017, excluding our Section 1031 notes, was approximately 17.4%, below the 20% we have set as our unofficial internal limit on leverage.

During the first nine months of 2017 and 2016, we declared and paid total dividends of $0.90 per common share, which aggregated $21.1 million and $20.8 million, respectively. As previously disclosed in our 2016 Form 10-K, we paid $12.0 million in cash as part of the consideration in exchange for the retirement of the outstanding Class B Common Stock shares in relation to the Class B Exchange Agreement approved by our stockholders during the second quarter 2016.

Effect of changes in foreign currency exchange rates. The effect of changes in foreign currency exchange rates on our cash and cash equivalents on the consolidated statements of cash flows was a net increase of $4.0 million and $1.8 million in the first nine months of 2017 and 2016, respectively. Our principal foreign operating unit is in Canada, and, on average, the value of the Canadian dollar relative to the U.S. dollar appreciated during the nine months ended September 30, 2017 and 2016.

***********

We believe we have sufficient liquidity and capital resources to meet the cash needs of our ongoing operations. 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.

Contingent liabilities and commitments. See discussion of contingent liabilities and commitments in Note 9 to the condensed consolidated financial statements included in Item 1 of Part I of this Report.

Other comprehensive income. Unrealized gains and losses on 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. For the nine months ended September 30, 2017, net unrealized investment gains of $2.1 million, net of taxes and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporary increases in the fair values over costs of our corporate and municipal bond securities available-for-sale investments, partially offset by temporary decreases in fair values over costs of our foreign securities available-for-sale investments. For the nine months ended September 30, 2016, net unrealized investment gains of $10.7 million, net of taxes and reclassification adjustment, which increased our other comprehensive income, were primarily related to temporary increases in the fair values over costs of all classes of our securities available-for-sale investments.

Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased our other comprehensive income, net of taxes, by $8.7 million for the nine months ended September 30, 2017, compared to a decrease in other comprehensive income, net of taxes, by $0.2 million for the nine months ended September 30, 2016.

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 17 in our Annual Report on Form 10-K for the year ended December 31, 2016.

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 "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 challenging 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; 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; the continued realization of expense savings from our cost management program; our ability to successfully integrate acquired businesses; 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. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2016, and if applicable, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes during the quarter ended September 30, 2017 in our investment strategies, types of financial instruments held or the risks associated with such instruments that would materially alter the market risk disclosures made in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. Our principal executive officer and principal financial officer are responsible for establishing and maintaining disclosure controls and procedures. They evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2017, and have concluded that, as of such date, our disclosure controls and procedures are adequate and effective to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during the quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

See discussion of legal proceedings in Note 10 to the condensed consolidated financial statements included in Item 1 of Part I of this Report, which is incorporated by reference into this Part II, Item 1, as well as Item 3. Legal Proceedings, in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 1A. Risk Factors

There have been no changes during the first nine months ended September 30, 2017 to our risk factors as listed in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no repurchases of our Common Stock during the quarter ended September 30, 2017.

Item 5. Other Information

Our book value per share was $28.29 and $27.69 as of September 30, 2017 and December 31, 2016, respectively. As of September 30, 2017, our book value per share was based on approximately $672.4 million in stockholders’ equity and 23,765,807 shares of Common Stock outstanding. As of December 31, 2016, our book value per share was based on approximately $648.8 million in stockholders’ equity and 23,431,279 shares of Common Stock outstanding.

Item 6. Exhibits

Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

November 7, 2017

Date



		Stewart Information Services Corporation
		Registrant

By:		/s/ David C. Hisey
		David C. Hisey, Chief Financial Officer, Secretary and Treasurer

Index to Exhibits



Exhibit

3.1	-	Restated Certificate of Incorporation of the Registrant, dated April 28, 2016 (incorporated by reference in this report from Exhibit 3.1 of the Current Report on Form 8-K filed April 29, 2016)

3.2	-	Third Amended and Restated By-Laws of the Registrant, as of April 27, 2016 (incorporated by reference in this report from Exhibit 3.2 of the Current Report on Form 8-K filed April 28, 2016)

10.1*†	-	Employment Agreement entered into and effective as of September 1, 2017, by and between Stewart Information Services Corporation and David C. Hisey



31.1*	-	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	-	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*	-	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*	-	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



101.INS*	-	XBRL Instance Document

101.SCH*	-	XBRL Taxonomy Extension Schema Document

101.CAL*	-	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*	-	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	-	XBRL Taxonomy Extension Label Linkbase Document

101.PRE*	-	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith

† Management contract or compensatory plan



EXECUTIVE:	COMPANY:
______________________________________ David C. Hisey	STEWART INFORMATION SERVICES CORPORATION By:________________________________
	Name: Matthew W. Morris Title: Chief Executive Officer
Date:_______________________________	Date:_______________________________



Target STI Amount for 2017:	$300,000
Guaranteed Minimum STI Amount for 2017:	$150,000



Metric	Org Unit	Weight		Details	Threshold			Target			Maximum
Modified EBITDA	Corporate	33.33	%	Performance to Achieve*	See definition for Target Modified EBITDA (Corporate Metric)
				Performance to Achieve as Percent of Target	70		%	100		%	130		%
				Payout Percent of Target	25		%	100		%	100		%
				Payout Amount	$	25,000		$	100,000		$	100,000

Modified Pretax Margin	Corporate	33.33	%	Performance to Achieve	4.49		%	6.41		%	8.33		%
				Performance to Achieve as Percent of Target	70		%	100		%	130		%
				Payout Percent of Target	25		%	100		%	100		%
				Payout Amount	$	25,000		$	100,000		$	100,000


Modified Return on Equity	Corporate	33.33%		Performance to Achieve	7.36%			10.51%			13.66%
				Performance to Achieve as Percent of Target	70%			100%			130%
				Payout Percent of Target	25%			100%			100%
				Payout Amount	$25,000			$100,000			$100,000

				Total Payout Amount	$75,000**			$300,000			$300,000



Term of Calculation	Definition
Annual Salary	This is the annual salary as defined herein.
Budget Attainment	Budget Attainment measures the variance between actual expenses and budget expenses. The variance is expressed as a percent variance. The metric is calculated by taking the actual annual expenses minus the budgeted annual expenses. The difference is then divided by the budgeted annual expenses. Payout for this metric is based on variance percentage.
Company	The Company is Stewart Information Services Corporation and its subsidiaries.
Corporate	Corporate is the same as Company.
Corporate Performance	Corporate Performance is the set of metrics for the Company.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Business Unit Metric)	EBITDA (Business Unit Metric) is calculated by removing the effect of the fixed Home Office allocation from pretax profits for the business unit(s) and adding back interest, depreciation, and amortization expenses.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) (Corporate Metric)	EBITDA (Corporate Metric) is calculated by adding interest, depreciation, and amortization expenses to pretax profits for the Company.
Investment and Other (Losses) Gains - Net	Investment and Other (Losses) Gains - Net is a line item on the Company’s 10K that includes, but is not limited to, realized earnings (losses) from the sale of various types of financial and non-financial instruments; sale of subsidiaries, equity basis investments, and cost-bases investments; impairment of equity and cost-basis investments; and other types of non-operating transactions.
Maximum Performance Level	The level of performance that results in Maximum Payout for a metric.



Maximum Payout Amount	The Maximum Payout Amount is the maximum annual cash bonus that can be earned and paid under the STI Plan. It is calculated by multiplying the Target Payout by an agreed upon percentage as indicated in Executive’s STI Plan Summary Table.
Modified Average Shareholders’ Equity	Modified Average Shareholders’ Equity is Calculated by subtracting cumulative other comprehensive income and non-controlling interest as well as effects of Non-Recurring Items from shareholders’ equity. This calculation is done as of the beginning of the year and the end of the year. The average is then calculated by adding the beginning of the year and ending of the year calculations and then dividing by two.
Modified Earnings Before Interest, Taxes, Depreciation and Amortization (“Modified EBITDA”) (Business Unit Metric)	The Modified EBITDA (Business Unit Metric) is calculated by adding/subtracting actual Investment and Other (Losses) Gains - Net as well as the effects of Non-Recurring Items from EBITDA (Business Unit Metric).
Modified Earnings Before Interest, Taxes, Depreciation and Amortization (“Modified EBITDA”) (Corporate Metric)	The Modified EBITDA (Corporate Metric) is calculated by adding/subtracting actual Investment and Other (Losses) Gains - Net as well as the effects of Non-Recurring Items from EBITDA (Corporate Metric).
Modified EBITDA Margin (Business Unit Metric)	The Modified EBITDA Margin (Business Unit Metric) is calculated by dividing Modified EBITDA (Business Unit Metric) by Modified Operating Revenues (Business Unit Metric).
Modified Gross Revenues (Corporate Metric)	Modified Gross Revenues is calculated by subtracting Investment and Other (Losses) Gains - Net, as well as the effects of Non-Recurring Items from Total Gross Revenues (Corporate Metric).
Modified Operating Revenues (Business Unit Metric)	Modified Operating Revenues is calculated by subtracting the effects of Non-Recurring Items from Operating Revenues (Business Unit Metric).
Modified Pretax Profits (Corporate Metric)	Modified Pretax Profits (Corporate Metric) is calculated by subtracting Investment and Other (Losses) Gains - Net, as well as removing the effects of Non-Recurring Items from pretax profits.
Modified Pretax Margin (Corporate Metric)	The Modified Pretax Margin (Corporate Metric) is calculated by dividing Modified Pretax Profits (Corporate Metric) by Modified Gross Revenues (Corporate Metric).
Modified Net Income Attributable to Company (Actual)	Modified Net Income Attributable to Company (Actual) is calculated by subtracting Investment and Other (Losses) Gains - Net, as well as the effects of Non-Recurring Items, (all on an after-tax basis) from Net Income Attributable to Company. The source of data is as reported in the Company’s 10K.
Modified Net Income Attributable to Company (Budget)	Modified Net Income Attributable to Company (Budget) is calculated as pretax profit from the System of Record less estimated effective tax rate and non-controlling interest.
Modified Return on Equity (“Modified ROE”) (Corporate Metric)	Modified Return on Equity (Corporate Metric) is calculated by dividing Modified Net Income Attributable to Company by Modified Average Shareholders’ Equity.
Non-Recurring Items	Non-recurring, unusual and/or extraordinary items as determined at the discretion of the Committee.
Operating Revenues (Business Unit Metric)	Operating Revenues is total operating income plus equity income as reported in the System of Record. Where applicable, shadow credit revenue is also included.
Operating Revenues Local Currency (Business Unit Metrics International Operations)	The source of data for local currency is from International Operations accounting and reporting systems as reported in Lawson (in USD) and converted at current foreign exchange rates used to generate such financial reporting.
Pretax Profit (Corporate Metric)	Pretax Profit (Corporate Metric) is as reported in the System of Record.



Project Attainment	Project Attainment metric is tied to specific goals established for Executive. This metric is measured by determining how much of the annual goals were completed on a percentage basis. Payout for this metric is based on completion percentage.
System of Record (Actual)	Unless otherwise stated, System of Record for actual financial performance is management instance of actual as loaded into Adaptive Insights as populated by Hyperion Financial Management.
System of Record (Budget)	System of Record for budgeted financial performance is management instance of budget as loaded in Adaptive Insights.
Target Modified Earnings Before Interest, Taxes, Depreciation and Amortization (“Target Modified EBITDA”) (Corporate Metric)	The Target Modified EBITDA (Corporate Metric) is as approved by the Committee for the respective Performance Period.
Target Performance Level	The expected level of performance, which results in a payout of 100% of target.
Target Payout	Target Payout is the annual cash bonus that can be earned and paid under the STI. Target Payout is calculated by multiplying Annual Salary by an agreed upon percentage as indicated in Executive’s STI Plan Summary Table.
Threshold Performance Level	The level of performance for a metric below which no payout is earned or paid.
Total Gross Revenues (Corporate Metric)	Total Gross Revenues (Corporate Metric) is equivalent to total revenues as reported in the System of Record excluding the effect of agent retention.
Weighting	Weighting is a calculation that applies a percentage to each metric, which is the fraction of the Target STI tied to that metric. The aggregation of the percentages is 100%.



Grant date	September 1, 2017
Annual Salary	$450,000
Target estimated grant date value of full-year LTI grant as percent of base salary at grant	200%
Total number of shares of full-year LTI grant	24,944
Target adjusted number of shares for proration in year of hire (4/12ths of full-year target) (“Total LTI Grant”)	8,313
Target estimated grant date value of total LTI grant:	$300,000
Closing stock price on August 31, 2017	$36.08


•	One-third (1/3) of the grant date value of total LTI grant will be provided in time-based RSA’s.


•	The target number of shares is calculated as: Target estimated grant date value of total LTI grant ÷ 3 ÷ the closing stock price on August 31, 2017, rounded down to the nearest full share.


•	One-third (1/3) of RSA’s will vest on each of the first three anniversaries of the date of grant.


•	These shares are not subject to performance contingencies and will be earned by the recipient by continued employment through the vesting period.


•	The TSR-based performance shares will constitute one-third (1/3) of the grant date value of total LTI grant.


•	The target number of shares granted will be equal to the number of time-based restricted shares.


•	The three-year period from January 1, 2017 to December 31, 2019 (the “Performance Period”).


•	The shares shall be released to Executive after the Board reviews and approves Company performance, after the performance period has concluded.


•	The performance metrics associated with the Performance Shares will function on a relative TSR-based scale. Actual relative TSR performance will be measured as soon as practicable at the end of the three-year Performance Period as compared to the Board-approved Custom Real Estate Index.



	TSR Percentile Ranking Performance Achieved	Payout as % of Target Number of Shares
Maximum	80^th	225%
Target	50^th	100%
Threshold	40^th	25%
Below Threshold	<40^th	0%


•	Payout percentages will be interpolated for performance achievement between threshold, target, and maximum.


•	The BV-based performance shares will constitute one-third (1/3) of the grant date value of total LTI grant.


•	The target number of shares to grant will be equal to the number of time-based RSA’s.


•	Vesting of performance shares occurs at the end of the three-year Performance Period based on the achievement of pre-determined performance levels determined by the Committee. At the end of the three-year Performance Period, any BV-based performance shares determined not to have become vested shall be forfeited and Executive shall have no further rights with respect to such forfeited shares.


•	BV performance shares will function on a Compound Annual Growth Rate (CAGR) Book Value Per Share + Cumulative Dividends Per Share performance scale.


•	As set out in the table below, Threshold and Maximum opportunity to incentivize performance will be associated with varying levels of performance achievement detailed in the table below.



	CAGR (Book Value Per Share + Cumulative Dividends Per Share) Performance Achieved	Payout as % of Target Number of Shares
Maximum	15%	225%
Target	10%	100%
Threshold	5%	25%
Below Threshold	<5%	0%



Term/Calculation	Definition
Annual Salary	This is the annual salary as defined herein.
Average Shares Outstanding	Average Shares Outstanding is the number of shares at the end of the Baseline Period, plus the shares at the end of the Performance Period, divided by two.
Baseline Period	Baseline Period is the 12-month period ending immediately preceding the Performance Period. For example, a Performance Period of January 1, 2017 through December 31, 2019 would have a baseline period of 12 months ending December 31, 2016.
Book Value per Share	Book Value is calculated as assets less total liabilities as reported in the Company 10K, divided by Average Shares Outstanding.
Compound Annual Growth Rate (CAGR)	CAGR is the annual growth rate, taking into account the Performance Period and effects of compounded growth. The formula used to determine CAGR is as follows: CAGR = (Value at end of Performance Period / Value at end of Baseline Period)^1/years in Performance Period - 1. For example, for a Performance Period of January 1, 2017 through December 31, 2019, the basis for the CAGR calculation would be as follows: CAGR = (Value at December 31, 2016 / Value at December 31, 2019)^1/3-1
Company	The Company is Stewart Information Services Corporation and its subsidiaries.
Cumulative Dividends Per Share	Cumulative Dividends Per Share is the aggregate cash dividend paid during the Performance Period as reported in the 10K.
Maximum Performance Level	The level of performance that results in Maximum Payout for a metric.
Maximum Payout	The Maximum Payout is the maximum number of shares that can be earned under the LTI Plan for each performance metric. It is calculated by multiplying the Target number of shares by an agreed upon percentage as indicated in Executive’s LTI Plan Summary.
Performance Period	Performance Period is a three-year period beginning on January 1 of the initial award year and ending December 31 three years later. For example, the Performance Period for 2017-initiated awards is January 1, 2017 through December 31, 2019.
Performance Share Award (PSA)	Performance Share Award is share-based compensation that vests based on defined measures, which include Company performance and time-based measures.
Restricted Stock Award (RSA)	Restricted Stock Award is share-based compensation that is restricted by time of service.
System of Record	Hyperion Financial Management (HFM) is the system of record for all financial data unless otherwise stated.
Target Performance Level	The expected level of performance, which results in a payout of 100% of Target number of shares.
Threshold Performance Level	The level of performance for a metric below which no shares will vest.
Total Shareholder Return (TSR)	Total Shareholder Return is calculated by taking the difference between the Company’s end of year price per share and the beginning of year price per share and adding the Company dividend per share. Next, divide that sum by the Company’s beginning of year price per share.
Total Shareholder Return (TSR) Ranking	Total Shareholder Return Ranking is determined by calculating the Company’s percentile ranking for Total Shareholder Return relative to the Comparative Group.


•	The target estimated grant date value of the one-time RSA is $600,000.


•	The RSA will cliff vest on the third anniversary of the date of grant, September 1, 2020.


•	Group Variable Universal Life Insurance (Basic Coverage Company paid)


•	Nonqualified Deferred Compensation Plan provided through the Company


•	Paid Association/Membership Dues as needed for the position and with Management approval


•	Executive Development as needed for the position up to $5,000 and with Management approval


•	Relocation assistance in the form of a taxable bonus in an amount up to $150,000, payable as mutually agreed.



(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;



(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and