We lease under a non-cancelable operating lease expiring in 2019 approximately 183,000 square feet in an office building in Houston, Texas, which is used for our corporate offices and for offices of several of our subsidiaries. Additionally, we lease offices at approximately 530 locations for title office operations, production, administrative and technology centers. These additional locations include significant leased facilities in Houston, Texas; Glendale, California; Dallas, Texas; New York, New York; Tampa, Florida; St. Louis, Missouri; San Diego, California; and Toronto, Canada.
We reported net income attributable to Stewart of $15.1 million ($0.64 per diluted share) for the fourth quarter 2017 compared to net income attributable to Stewart of $16.7 million ($0.71 per diluted share) for the fourth quarter 2016. Pretax income before noncontrolling interests for the fourth quarter 2017 was $17.5 million compared to pretax income before noncontrolling interests of $23.0 million for the fourth quarter 2016.
$2.9 million of third party advisory expenses recorded in other operating expenses in the ancillary services and corporate segment relating to our previously announced review of strategic alternatives,
$3.5 million of office closure costs, primarily lease termination and litigation expenses recorded in other operating expenses in the title segment,
$1.0 million of acquisition integration expenses recorded in other operating expenses in the title segment, and
$6.6 million of net income tax benefits related to the effects of the recently-enacted Tax Cuts and Jobs Act.
Summary results of the ancillary services and corporate segment are as follows ($ in millions):
The segment’s pretax results for the fourth quarter 2017 improved to a $9.6 million pretax loss, which included $2.9 million of expenses relating to our strategic alternatives review, compared to the prior year quarter’s pretax loss of $15.1 million, which included net realized losses of $4.9 million primarily related to the sale of certain ancillary services business lines. This improvement was primarily due to the higher reduction in overall segment expenses relative to the decrease in revenues. The segment’s results for the fourth quarter 2017 and 2016 included approximately $8.8 million and $6.4 million, respectively, of net expenses attributable to parent company and corporate operations.
Provisions for title losses, as a percentage of title operating revenues, were 5.1%, 4.8% and 5.6% for the years ended December 31, 2017, 2016 and 2015, respectively. Actual loss payment experience, including the impact of large losses, is the primary reason for increases or decreases in our loss provision. A change of 100 basis points in the loss provisioning percentage, a reasonably likely scenario based on our historical loss experience, would have increased or decreased our provision for title losses and pretax operating results by approximately $18.8 million for the year ended December 31, 2017.
We consider our actual claims payments and incurred loss experience, including the frequency and severity of claims, compared to our actuarial estimates of claims payments and incurred losses in determining whether our overall loss experience has improved or worsened compared to prior periods. We also consider the impact of economic or market factors on particular policy years to determine whether the results of those policy years are indicative of future expectations. In addition, large claims, including large title losses due to independent agency defalcations, are analyzed and reserved for separately due to the potential higher dollar amount of loss, lower volume of claims reported and sporadic reporting of such claims. We evaluate the frequency and severity of large losses in determining whether our experience has improved or worsened. Our method for recording the reserves for title losses on both an interim and annual basis begins with the calculation of our current loss provision rate which is applied to our current premium revenues, resulting in a title loss expense for the period. This loss provision rate is set to provide for losses on current year policies and is determined using moving average ratios of recent actual policy loss payment experience (net of recoveries) to premium revenues.
In 2017, total known claims provisions decreased to $77.5 million from $85.4 million in 2016, as a result of a relatively lower dollar amount of claims reported to us relating to both current and prior year policies. Current year provisions - IBNR increased in 2017 by $1.8 million to $53.8 million compared to 2016, principally due to a slight increase in the loss provisioning rate related to certain foreign operations. In 2016, total known claims provisions decreased to $85.4 million from $95.1 million in 2015, primarily as a result of relatively lower dollar amount of claims reported to us relating to policies issued in previous years. Current year provisions - IBNR decreased in 2016 by $2.0 million to $52.0 million compared to 2015, principally due to the decrease of our overall provisioning rate in 2016. As a percentage of title operating revenues, provisions - IBNR (current year) was 2.9%, 2.7% and 2.9% in 2017, 2016 and 2015, respectively. Provisions - IBNR relating to prior policy years increased in 2017 as compared to 2016 primarily due to unfavorable loss experience. Provisions - IBNR relating to prior policy years decreased in 2016 as compared to 2015 mainly due to the losses experienced in 2015 relating to certain older policy years with higher than normal claims.
Large title losses due to independent agency defalcations typically occur when the independent agency misappropriates funds from escrow accounts under its control. Such losses are usually discovered when the independent agency fails to pay off an outstanding mortgage loan at closing (or immediately thereafter) from the proceeds of the new loan. These incurred losses are typically more severe in terms of dollar value compared with traditional title policy claims since the independent agency is often able, over time, to conceal misappropriation of escrow funds relating to more than one transaction through the constant volume of funds moving through its escrow accounts. In declining real estate markets, lower transaction volumes result in a lower incoming volume of funds, making it more difficult to cover up the misappropriation with incoming funds. Thus, when the defalcation is discovered, it often relates to several transactions. In addition, the overall decline in an independent agency’s revenues, profits and cash flows increases the agency’s incentive to improperly utilize the escrow funds from real estate transactions. For the three years ended December 31, 2017, our net title losses due to independent agency defalcations were immaterial.
We have an option to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. In performing the qualitative assessment, we consider factors that include macroeconomic conditions, industry and market considerations, overall actual and expected financial performance, market perspective on the Company, as well as other relevant events and circumstances determined by management. We evaluate the weight of each factor to determine whether an impairment more-likely-than-not exists. If we decide not to use a qualitative assessment or if the reporting unit fails the qualitative assessment, we perform the quantitative impairment analysis.
In 2017 and 2016, we concluded that the goodwill related to each of our reporting units was not impaired after performing our impairment analysis. We utilized the qualitative assessment in 2017 and the quantitative analysis in 2016. Refer to "Results of Operations" and Note 8 to our audited consolidated financial statements for details of our analysis.
Industry data. Published mortgage interest rates and other selected residential housing data for the years ended December 31, 2017, 2016 and 2015 follow (amounts shown for 2017 are preliminary and subject to revision). The amounts below may not relate directly to or provide accurate data for forecasting our operating revenues or order counts.
A comparison of our consolidated results of operations for 2017 to 2016 and 2016 to 2015 is discussed as follows. Factors contributing to fluctuations in our results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Results from our ancillary services and corporate segment are included in year-to-year discussions and, when relevant, are discussed separately. Our employee costs and certain other operating expenses are sensitive to inflation.
Realized investment and other gains (loss) - net. In 2017, realized investment and other gains - net included $3.2 million of net realized gains from the sale of investments available-for-sale, partially offset by $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.
Overall employee costs and other operating expenses in 2017 decreased 5% from 2016 in comparison to the 3% decline in operating revenues. In 2016, total employee costs and other operating expenses decreased 7% from 2015 compared to the 2% decline in operating revenues.
Retention by agencies. Amounts retained by title agencies are based on agreements between the agencies and our title underwriters. Amounts retained by independent agencies, as a percentage of revenues generated by them, averaged 82.4%, 81.8% and 81.7% in 2017, 2016 and 2015, respectively. The average retention percentage may vary from year-to-year due to the geographical mix of agency operations, the volume of title revenues and, in some states, laws or regulations. Due to the variety of such laws or regulations, as well as competitive factors, the average retention rate can differ significantly from state to state. In addition, a high proportion of our independent agencies are in states with retention rates greater than 80%. The increase of the agency retention rate in 2017 compared to 2016 was primarily due to decreased revenues in higher-remitting states and increased revenues in lower-remitting states. 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.
Employee costs. Employee costs for the combined business segments in 2017 decreased $38.2 million, or 6%, from 2016 primarily due to an 8% reduction in average employee counts, related to volume declines in our ancillary services and centralized title operations and staff departures in direct operations during the second quarter 2017. Consolidated employee costs in 2016 decreased $53.9 million, or 8%, compared to 2015, primarily as a result of the Cost Management Program we completed at the end of 2015, as well as reductions in employee counts tied to volume declines. As a percentage of total operating revenues, employee costs were 29.3%, 30.4% and 32.6% in 2017, 2016 and 2015, respectively. Our total employee count at December 31, 2017, 2016 and 2015 was approximately 5,960, 6,350 and 6,940, respectively.
In 2016, excluding the costs listed above, costs fixed in nature were comparable to 2015 as increased costs related to third-party outsourcing provider fees were offset by decreases in rent and other occupancy expenses, technology costs, attorney and professional fees and insurance expenses. Costs that follow, to varying degrees, changes in transaction volumes and revenues increased $9.5 million, or 6%, mainly due to increases in outside search fees and fee attorney splits driven by higher title revenues. Excluding the non-operating litigation-related costs, costs that fluctuate independently of revenues decreased $9.8 million, or 19%, in 2016 compared to 2015, primarily due to reduced business promotion and marketing, travel and general legal expenses.
Our liability for estimated title losses as of December 31, 2017 and 2016 comprises both known claims and our IBNR. Known claims reserves are reserves related to actual losses reported to us. Our reserve for known claims comprises both claims related to title insurance policies as well as losses arising from escrow closing and funding operations due to fraud or error (which are recognized as expense when discovered). The amount of the reserve represents the aggregate, non-discounted future payments (net of recoveries) that we expect to incur on policy and escrow losses and in costs to settle claims.
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, since in many cases claims, may be open for several years before resolution and payment occur. As a result, the estimate of ultimate amount to be paid on any claim may be modified over that time period. As of December 31, 2017 and 2016, our reserve balance was above the actuarial midpoint of total estimated policy loss reserves.
Contractual obligations. Our material contractual obligations at December 31, 2017 were:
Material contractual obligations consist primarily of amounts drawn on our line of credit facility (which expires in October 2019), other notes payable, operating leases and estimated title losses. The timing above for payments of notes payable is based upon contractually stated payment terms of each debt agreement. Operating leases are primarily for office space and expire over the next eleven years. The timing shown above for the payments of estimated title losses is not set by contract. Rather, it is projected based on historical payment patterns. The actual timing of estimated title loss payments may vary materially from the above projection since claims, by their nature, are complex and paid over long periods of time.
Cash held at the parent company totaled $11.6 million at December 31, 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).
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 $490.8 million and $485.4 million at December 31, 2017 and 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 $14.2 million and $13.9 million at December 31, 2017 and 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 December 31, 2017, our known claims reserve totaled $69.8 million and our estimate of claims that may be reported in the future, under generally accepted accounting principles, totaled $411.2 million. In addition to this, we had cash and investments (excluding equity method investments) of $268.0 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 and $108.5 million for 2017 and 2018, respectively) 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 December 31, 2017, our liquidity ratio for our principal underwriter was 107% based on its statutory balance sheet. 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. Guaranty paid dividends of $20.0 million to its parent during each of 2017 and 2016.
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.
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 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 amounted to $110.9 million, $108.2 million and $111.5 million, while cash used for purchases of available-for-sale investments approximated $179.7 million, $166.4 million and $147.7 million in 2017, 2016 and 2015, respectively. Cash (used) generated by net (purchases) sales of short-term investments amounted to $(2.2) million, $17.5 million and $(14.7) million in 2017, 2016 and 2015, respectively.
During 2017, we used $17.8 million of cash for acquisitions of new subsidiaries, while cash used for purchases of property and equipment amounted to $16.4 million. Cash used for purchases of property and equipment during 2016 and 2015 was $18.2 million and $19.7 million, 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.
During 2017, 2016 and 2015, we paid total dividends of $1.20, $1.20 and $0.80 per common share, which aggregated $28.1 million, $27.8 million and $18.0 million, respectively. In 2016, 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.
Other-than-temporary impairments of investments. During 2017 and 2016, no impairment was recorded on any of our investments. Additionally, during 2015, we recognized $2.7 million of other-than-temporary impairment on certain equity securities available-for-sale.
In 2016, net unrealized investment losses of $1.6 million, net of taxes, which increased our other comprehensive loss, were primarily related to temporary decreases in fair values of municipal, corporate and foreign bond investments, partially offset by the increase in fair values of equity securities investments. Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased other comprehensive loss by $3.4 million, net of taxes, in 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. 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.