Stewart Information Services Corporation — 2022 Form 10-K
Business context and reporting period. Annual report for the fiscal year ended December 31, 2022, including fourth-quarter results. Stewart provides title insurance and related services, real estate solutions, and corporate services, primarily in the United States. Results are highly sensitive to housing transactions and mortgage activity.
Financial performance
Amounts are in U.S. dollars; annual figures are for 2022 versus 2021 unless noted.
| Metric | 2022 | 2021 |
|---|---|---|
| Operating revenues | $3.048 billion | $3.265 billion |
| Income before taxes and noncontrolling interests | $232.7 million | $434.0 million |
| Pretax margin | 7.6% | 13.1% |
| Net income attributable to Stewart | $162.3 million | $323.2 million |
| Diluted earnings per share | $5.94 | $11.90 |
| Cash provided by operating activities | $191.9 million | $390.3 million |
| Cash used by investing activities | $300.7 million | $645.3 million |
| Cash provided by (used in) financing activities | ($123.2 million) | $310.4 million |
- Operating revenues fell 7%; operating expenses declined 1% to $2.837 billion. Lower title transaction volumes were the primary pressure, partly offset by acquisition contributions.
- Title segment annual revenue was $2.734 billion and pretax income was $255.1 million, versus $3.003 billion and $440.5 million in 2021. Real estate solutions revenue was $296.7 million and pretax income was $16.6 million, versus $265.5 million and $13.0 million. Corporate and other recorded a $39.1 million pretax loss, compared with a $19.4 million loss.
- Title loss expense was $102.7 million, down 19%; the loss provision ratio declined to 3.8% from 4.2%. Estimated title-loss reserves were $549.4 million, essentially unchanged year over year.
- Investment income rose 33% to $22.4 million. Net realized and unrealized results were a $1.5 million loss, compared with a $24.3 million gain in 2021.
- Cash and investments, including statutory-reserve amounts, totaled $982.8 million at year-end. Cash and cash equivalents were $248.4 million, down from $485.9 million. Some insurer-held funds are subject to statutory restrictions.
- Debt was $447.0 million, compared with $483.5 million; this included $444.6 million of 3.6% senior notes due 2031. The company reported $197.5 million of available revolving credit capacity and compliance with its credit covenants. Debt-to-equity was approximately 32% and debt-to-capitalization approximately 25%, excluding short-term Section 1031 loans.
Fourth-quarter results and changes
- Net income attributable to Stewart was $13.3 million, or $0.49 per diluted share, versus $85.5 million, or $3.12 per diluted share, in fourth-quarter 2021. Pretax income before noncontrolling interests was $20.8 million versus $114.1 million.
- Title segment revenue declined 30% to $581.6 million; pretax income fell 77% to $26.9 million and pretax margin was 4.5%, down from 14.0%. Residential purchase and refinance transactions declined 55% year over year.
- Real estate solutions segment revenue declined 35% to $54.7 million, with pretax income of $0.4 million versus $5.3 million.
- Fourth-quarter results included $12.7 million of pretax net realized and unrealized gains and $16.7 million of combined office-closure, severance, regulatory-settlement and litigation expenses. The filing does not clearly break out each component of those expenses.
- For full-year context, mortgage originations fell 49% in 2022, refinancing transactions fell 74%, and existing-home sales fell 13%, amid sharply higher mortgage rates.
Outlook, risks and unusual items
- Management described continued cost control, automation, systems consolidation and technology investment as priorities, and stated it expects operating cash flows and available underwriter funds, subject to regulatory restrictions, to fund operations and claims. The filing provides no specific company earnings or revenue guidance.
- Industry forecasts cited by Stewart anticipated further housing-market weakness in 2023: mortgage originations down 22%, existing-home sales down 17%, and new-home sales down 9% versus 2022. These are external forecasts cited in the filing, not company guidance.
- Key risks include housing and mortgage-market cyclicality, rising rates and inflation, title-reserve estimation and large claims, independent-agent fraud or defalcation, wire fraud and cybersecurity incidents, regulatory requirements, acquisition integration, competition, and limits on dividends from regulated insurance subsidiaries.
- Title-loss reserve estimates are a significant judgment area. Management estimated that a 100-basis-point change in the loss-provision rate would change 2022 pretax results by approximately $27.1 million. The auditor identified title-loss reserves and goodwill valuation for certain reporting units as critical audit matters.
- Debt-securities fair value was $611.9 million against amortized cost of $646.7 million, reflecting unrealized losses largely associated with higher interest rates. A 100-basis-point interest-rate increase was estimated to reduce portfolio fair value by about $20.6 million.
- Escrow and Section 1031 customer funds are not included on the balance sheet; related contingent liabilities were approximately $1.5 billion and $1.6 billion, respectively. The company stated it did not expect ordinary-course litigation, regulatory matters or guarantees to have a material adverse effect.
- Stewart acquired FNC Title Services and BCHH in 2022 and sold a real estate brokerage business during the year. It reported no known material cybersecurity breach during the three years ended December 31, 2022. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether transaction volumes, revenues and margins stabilize or continue to decline, particularly in residential title and real estate solutions.
- Whether title-loss reserves remain adequate as claims develop; compare reported claims, large-loss payments and actuarial estimates over time.
- How much reported cash and investment liquidity is available to the parent and operating businesses after statutory restrictions and claims needs.
- Whether acquisitions generate returns sufficient to support goodwill and intangible-asset carrying values, especially as housing-market forecasts evolve.
- The terms, maturity profile and covenant headroom of debt, and the sustainability of dividends given regulated-subsidiary distribution limits.
- How recurring operating performance compares with results affected by investment valuation changes, acquisition-related items, settlements and restructuring costs.