Business Context and Reporting Period
Company: Stewart Information Services Corporation (STC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Business Overview: Stewart is a real estate information, title insurance, and transaction management company operating primarily in the United States and international markets (Canada, UK, Mexico, Australia). The company operates through two main segments: Title Insurance and Related Services, and Real Estate Information (REI). The business is highly sensitive to real estate market activity, mortgage interest rates, and consumer confidence.
Key Financial Metrics
| Metric ($ millions) | 2010 | 2009 | 2008 |
|---|---|---|---|
| Total Revenues | 1,672.4 | 1,707.3 | 1,555.3 |
| Net Loss Attributable to Stewart | (12.6) | (51.0) | (247.5) |
| Loss Per Share (Basic/Diluted) | (0.69) | (2.80) | (13.68) |
| Pretax Earnings (Loss) | 2.9 | (62.2) | (237.5) |
| Cash Provided by Operations | 41.2 | (17.0) | (104.8) |
| Total Assets | 1,141.2 | 1,369.2 | 1,448.4 |
| Long-term Debt | 71.2 | 67.8 | 71.3 |
| Stockholders' Equity | 448.3 | 462.1 | 501.2 |
| Title Loss Provision (% of Title Rev) | 9.6% | 11.3% | 11.2% |
Material Changes vs. Prior Period
- Profitability Improvement: The company significantly reduced its net loss from $51.0 million in 2009 to $12.6 million in 2010. Pretax earnings improved by $65.1 million (104.7%) year-over-year, moving from a loss to a profit of $2.9 million.
- Revenue Decline: Total revenues decreased 2.0% to $1,672.4 million. Direct title operating revenues declined 6.0% due to an 18.1% drop in closed title orders, driven by rising long-term interest rates and a decline in refinance transactions. However, revenue per closed order increased 14.9% due to a shift toward commercial and sale transactions.
- REI Segment Growth: Real Estate Information (REI) revenues increased 42.7% to $81.2 million, driven by high demand for loan modification and distressed borrower services.
- Loss Reserves: Title loss provisions decreased to 9.6% of title revenues in 2010 compared to 11.3% in 2009. This improvement was aided by a reduction in large loss charges and defalcations, which fell 71% to $15.3 million. However, a $4.8 million reserve strengthening charge was recorded for policies issued in 2007 and 2008.
- Cash Flow: Operating cash flow turned positive, providing $41.2 million in 2010 compared to a use of $17.0 million in 2009. This was largely due to a $50.9 million income tax refund and increased cash receipts from loan modification services.
Guidance, Outlook, and Risks
- Outlook: Management anticipates improved operating results and cash flow in 2011 due to ongoing rate increases and cost reduction initiatives. The company expects to return to a "normal" loss ratio by the end of 2012.
- Rate Actions: As of December 31, 2010, the company had increased title premium rates in 22 states and increased remittance rates with independent agencies in 38 states.
- Liquidity: The company holds $638.3 million in cash and investments. It believes current cash flows and available funds from underwriters are sufficient to fund operations and claims. However, it may need to access debt or equity markets if unforeseen circumstances arise.
- Key Risks:
- Real Estate Market: Continued weakness in real estate activity and rising interest rates could further reduce revenues.
- Claims Experience: Uncertainty in estimating future title losses remains a critical risk. Adverse claims development could require additional reserve strengthening.
- Litigation: Significant pending litigation includes a lawsuit in Texas regarding Mexican land policies (Citigroup Global Markets Realty Corp. v. Stewart) and multiple class actions regarding antitrust and wage/hour issues. Management does not currently believe these will have a material adverse effect, but outcomes are uncertain.
- Regulatory: The company is subject to extensive state and federal regulations regarding rates, reserves, and capital requirements.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for the $495.8 million estimated title loss liability, particularly regarding the $4.8 million strengthening charge for 2007-2008 policies and the projected return to normal loss ratios by 2012.
- Real Estate Market Exposure: Assess the sensitivity of future revenues to mortgage interest rate hikes and the volume of refinance vs. purchase transactions.
- Litigation Exposure: Monitor the status of the Citigroup Mexico lawsuit and the antitrust class actions, as unfavorable outcomes could impact financial condition.
- Dividend Restrictions: Note that the principal underwriter, Stewart Title Guaranty Company, is restricted from paying dividends exceeding $73.9 million in 2011 without regulatory approval, limiting cash flow to the parent company.
- REI Concentration: Review the concentration risk in the REI segment, where a single customer accounted for 70.4% of REI revenues in 2010.