We reported net income attributable to Stewart of $16.7 million ($0.71 per diluted share) for the fourth quarter 2016 compared to net income attributable to Stewart of $2.6 million ($0.11 per diluted share) for the fourth quarter 2015. Pretax income before noncontrolling interests for the fourth quarter 2016 was $23.0 million compared to pretax income before noncontrolling interests of $3.1 million for the fourth quarter 2015.
$2.1 million of net realized losses, $1.4 million of which were in the title segment and $0.7 million in the ancillary services and corporate segment,
$2.2 million of income tax benefits, primarily from utilization of state tax loss carryforwards.
Our title segment revenues, which include revenues from our centralized title services, were $511.6 million for the fourth quarter 2016, an increase of 8.2% from the fourth quarter 2015 and a decline of 3.4% from the third quarter 2016. In the fourth quarter 2016, the title segment generated pretax income of $38.1 million, a 7.4% margin, compared to the fourth quarter 2015 pretax income of $23.1 million, a 4.9% margin, and the third quarter 2016 pretax income of $50.3 million, a 9.5% margin. As mentioned above, the segment’s fourth quarter 2016 pretax income included $0.5 million of net realized losses, composed primarily of $1.7 million additional contingent consideration expense related to a prior successful acquisition, offset by net gains on sale of investments in securities available-for-sale and other assets. The fourth quarter 2015 segment results included $1.4 million of net realized losses (composed primarily of $3.7 million of asset impairment charges, offset by net gains on sale of investments in securities available-for-sale and other assets) and $0.8 million of severance costs.
Provisions for title losses, as a percentage of title operating revenues, were 4.8%, 5.6% and 4.7% for the years ended December 31, 2016, 2015 and 2014, 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 $19.0 million for the year ended December 31, 2016.
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 during the year 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, and increased in 2015 by $7.8 million to $54.0 million compared to 2014 principally due to the decrease and increase, respectively, of our provisioning rate for those years. As a percentage of title operating revenues, provisions - IBNR (current year) was 2.7%, 2.9% and 2.7% in 2016, 2015 and 2014, respectively. 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. In 2016, changes in the estimated aggregate loss associated with large claims resulted in a decrease to expense of $3.1 million compared with a $22.1 million increase in 2015 and an $8.0 million decrease in 2014.
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. 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. Once the previous lender determines that its loan has not been paid off timely, it will file a claim against the title insurer. It is at this point that the title insurance underwriter is alerted to the potential theft and begins its investigation. As an industry practice, these claims are considered a claim on the newly issued title insurance policy since such policy insures the holder (in this case, the new lender) that all previous liens on the property have been satisfied. Accordingly, these claim payments are charged to policy loss expense. 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. As long as new funds continue to flow into escrow accounts, an independent agency can mask one or more defalcations. 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.
Internal controls relating to independent agencies include, but are not limited to, periodic audits, site visits and reconciliations of policy inventories and premiums. The audits and site visits cover examination of the escrow account bank reconciliations and an examination of a sample of closed transactions. In some instances, the scope of our review is limited by attorney agencies that cite client confidentiality. Certain states have mandated annual reviews of all agencies by their underwriter. We also determine whether our independent agencies have appropriate internal controls as defined by the American Land Title Association's best practices and us. However, even with adequate internal controls in place, their effectiveness can be circumvented by collusion or improper override of the controls by management at the independent agencies. To aid in the selection of independent agencies to review, we have developed an agency risk model that aggregates data from different areas to identify possible problems. This is not a guarantee that all independent agencies with deficiencies will be identified. In addition, we are typically not the only underwriter for which an independent agency issues policies, and independent agencies may not always provide complete financial records for our review. Due to improved agency internal controls as well as better overall economic conditions, we did not experience any significant agency defalcation losses during the three years ended December 31, 2016.
The step one analysis is performed, using a combination of the income approach (discounted cash flow (DCF) technique) and the market approach (guideline company and precedent transaction analyses), to determine if the carrying value of the goodwill exceeds its fair value, which would indicate a potential impairment. The DCF model utilizes historical and projected operating results and cash flows, initially driven by estimates of changes in future revenue levels, and risk-adjusted discount rates. Our projected operating results are primarily driven by anticipated mortgage originations, which we obtain from projections by industry experts, for our title reporting units and forecasted contractual revenues for our ancillary services reporting unit. Fluctuations in revenues, followed by our ability to appropriately adjust our employee count and other operating expenses, or large and unanticipated adjustments to title loss reserves, are the primary reasons for increases or decreases in our projected operating results. Our market-based valuation methodologies utilize (i) market multiples of earnings and/or other operating metrics of comparable companies and (ii) our market capitalization and a control premium based on market data and factors specific to our ownership and corporate governance structure. If we determine that the carrying value of the reporting unit's goodwill is greater than its fair value, we then perform the step two analysis to determine the implied fair value of the goodwill and calculate the amount of impairment.
In 2016, we performed a quantitative assessment for each of our reporting units to determine whether it was more likely than not that the fair value of each reporting unit was less than its carrying amount, including goodwill. Based on our analysis, management concluded that the goodwill related to each reporting unit was not impaired.
In 2015, we utilized the qualitative assessment option for the title reporting units and concluded that the goodwill related to the title reporting units was not impaired. Further, in 2015, based on our decision to exit the delinquent loan servicing activities included within the ancillary services reporting unit, we performed a two-step quantitative assessment of ancillary services' goodwill. Based on the impairment analysis, we recorded a $35.7 million impairment of goodwill for 2015, which was presented as impairment of goodwill in the 2015 consolidated statement of operations and comprehensive income (loss). As a result of realigning our reportable segments in 2016, we reclassified $1.6 million of the total goodwill impairment to the title segment (refer to Notes 8 and 19 for details).
Operations. As discussed in Note 19 to the audited consolidated financial statements, we changed our reportable operating segments to title insurance and related services (title) and ancillary services and corporate effective in the first quarter 2016. 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.
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% increase in median home prices results in an approximate 3.5% increase 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.
Order counts. Open and closed order information for the years 2016, 2015 and 2014 are as follows:
Revenues from direct title operations in 2016 decreased $2.8 million (or 0.3%) compared to 2015 primarily due to the 4.7% decline in closed orders, mainly in commercial and refinancing orders, partially offset by an improvement in international revenues. Revenues in 2015 increased $88.8 million, or 11.0%, compared to 2014, primarily due to higher refinancing and residential resale (purchase) closed orders, as the result of the rise in new and existing home sales, and contribution from our centralized title operations acquired in mid-2014. International revenues (including foreign-sourced commercial revenues of $19.0 million and $19.7 million for 2016 and 2015, respectively) increased $9.5 million, or 8.8%, in 2016 compared to 2015 and decreased $8.6 million, or 7.4%, in 2015 compared to 2014. International revenues grew in 2016 mainly on a local currency basis (reflecting increased unit volume), primarily from our Canadian operations, partially offset by the weakening of the British pound and Canadian dollar against the U.S. dollar; while the international revenues decrease in 2015 resulted mainly from the weakening of the Canadian dollar against the U.S. dollar, slightly offset by increased revenues from our Canada operations on a local currency basis. Total commercial revenues in 2016 decreased $2.4 million, or 1.2%, compared to 2015 and increased $15.0 million, or 8.2%, in 2015 compared to 2014 consistent with the trend of our commercial orders closed. While year-to-year results for commercial business can fluctuate considerably due to timing of when large transactions close, our commercial operations continued to be stable in the marketplace.
Revenues from independent agencies increased $18.5 million, or 1.9%, in 2016 compared to 2015 and increased $85.3 million, or 9.4%, in 2015 compared to 2014. Revenues from independent agencies fluctuate based on the same general factors that influence revenues from direct title operations, although we do not specifically know our agents’ order composition. The 2016 gross agency revenue increase was driven by increased revenues primarily from Texas, Michigan, Washington and Florida, offset by declines in New York, California and New Jersey. The 2015 gross agency revenue increase resulted from increases primarily in Utah, Georgia, California, Florida and Minnesota, offset by declines in Texas and New York. 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.
Investment and other (losses) gains - net. In 2016, investment and other losses - net included $3.4 million of office closure and early lease termination costs and $3.3 million of realized losses from the sale of certain businesses within ancillary services operations, partially offset by $4.0 million of net realized gains from the sale of investments available-for-sale, $1.2 million of realized gain on a cost-basis investment transaction and $0.4 million of realized gain from the sale of certain title offices.
Overall employee costs and other operating expenses in 2016 declined from 2015 at a faster rate (6.9%) than the decline (1.5%) in operating revenues. This is compared to the 7.1% increase in overall employee costs and other operating expenses on a 9.3% increase in operating revenues in 2015 from 2014.
Expense comparisons for the three years ended December 31, 2016 are influenced by the following charges:
Selected cost ratios (by segment). The following table shows employee costs and other operating expenses as a percentage of related segment operating revenues.
Other operating expenses for the combined business segments decreased $18.0 million, or 4.7%, in 2016 compared to 2015 and increased $34.7 million, or 10.0%, in 2015 compared to 2014. As a percentage of total operating revenues, other operating costs were 18.3%, 18.9% and 18.8% in 2016, 2015 and 2014, respectively. In 2016, other operating expenses included approximately $3.6 million for litigation-related accruals, $1.2 million of shareholder activism costs and $2.2 million of costs associated with the Class B common stock exchange agreement. In 2015, other operating expenses included approximately $6.0 million for litigation-related accruals and $19.5 million of aggregate costs related to our cost management program (consisting of consulting and third party service provider transition costs), costs associated with a shareholder settlement announced in the first quarter 2015, and CFPB integrated disclosure preparations. Excluding the impact of these non-operating charges, other operating expenses as a percentage of total operating revenues would have been 18.0% and 17.7% in 2016 and 2015, respectively.
Excluding the impact of the reserve reductions and large losses (net of recoveries), title losses as a percent of title operating revenues were 5.2%, 5.4% and 5.6% in 2016, 2015 and 2014, respectively. Title losses paid were $92.0 million, $123.6 million and $86.7 million in 2016, 2015 and 2014, respectively. The 25.6% decrease in cash claim payments in 2016 compared to 2015 was primarily influenced by the favorable loss experience during the year, as compared with the 42.6% increase in cash claim payments during 2015 resulting from a $22.5 million payment for a large, previously reserved, claim.
Our liability for estimated title losses as of December 31, 2016 and 2015 comprises both known claims and our estimate of claims that may be reported in the future (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.
Income taxes. Our effective tax rates were 26.1%, (1,019.4)% and 31.2% for 2016, 2015 and 2014, respectively, based on income (loss) before taxes, after deducting noncontrolling interests, of $75.1 million, $(0.6) million and $43.3 million in 2016, 2015 and 2014, respectively. Our 2016 effective tax rate reflected a $4.1 million tax benefit for the 2015 return-to-provision and true-up adjustments and $3.4 million of tax benefit relating to previously unrecognized research and development tax credits. Our 2015 effective tax rate resulted principally from the $35.7 million goodwill impairment recorded during the year 2015, of which $20.3 million was not subject to tax benefits, combined with the effects of minimal pretax earnings for that year.
Contractual obligations. Our material contractual obligations at December 31, 2016 were:
Our liquidity and capital resources reflect our ability to generate cash flow to meet our obligations to shareholders, customers (payments to satisfy claims on title policies), vendors, employees, lenders and others. As of December 31, 2016, our cash and investments, including amounts reserved pursuant to statutory requirements, aggregated $839.5 million ($340.2 million, net of statutory reserves on cash and investments). Of our total cash and investments at December 31, 2016, $616.7 million ($257.6 million, net of statutory reserves) was held in the United States and the rest internationally, principally in Canada.
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 $485.4 million and $483.3 million at December 31, 2016 and 2015, respectively, are required to be fully funded and invested in high-quality securities and short-term investments. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $13.9 million and $17.2 million at December 31, 2016 and 2015, 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, 2016, our known claims reserve totaled $76.5 million and our estimate of claims that may be reported in the future totaled $386.1 million. In addition to this, we had cash and investments (excluding equity method investments) of $223.8 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 December 31, 2016, our statutory liquidity ratio for our principal underwriter was 106%. 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 credit 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. During 2016 and 2015, Guaranty paid to its parent dividends of $20.0 million and $15.0 million, respectively.
Cash provided by operations in 2016 increased by approximately $42.5 million to $123.0 million compared to 2015. This increase was primarily the result of the higher net income and lower payment of claims liabilities in 2016. Cash provided by operations in 2015 was $80.5 million, an increase of $16.5 million from $64.0 million provided by operations in 2014. This increase was primarily the result of the increase in net income when adjusted for non-cash charges compared to 2014, collections on accounts receivable and lower payments of liabilities relative to the prior period.
Cash payments on title claims in 2016, 2015 and 2014 were $92.0 million, $123.6 million and $86.7 million, respectively. The decrease in cash claims payments in 2016 was primarily due to the $22.5 million payment in 2015 to fully resolve a large prior policy year claim. Claim payments made on large title claims, net of insurance recoveries, during 2016, 2015 and 2014 were $14.6 million, $48.4 million and $5.4 million, respectively.
Capital expenditures were $18.2 million, $19.7 million and $19.5 million and cash used for acquisitions of subsidiaries was $0.3 million, $4.0 million and $40.0 million in 2016, 2015 and 2014, respectively. Also in 2016, we received total net cash proceeds of $1.3 million from the sale of the loan file review and quality control services and government services operations. 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.
The effect of changes in foreign currency rates on the consolidated statements of cash flows was a net decrease in cash and cash equivalents of $0.1 million, $7.7 million and $5.2 million in 2016, 2015 and 2014, 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 2016 and decreased during 2015.
Other comprehensive (loss) income. Unrealized gains and losses on investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive (loss) income, a component of stockholders’ equity, until realized. In 2016, net unrealized investment losses of $1.6 million, 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.