STC

Business Context and Reporting Period

Company: Stewart Information Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: The Company operates in two primary segments: Title Insurance-related services and Real Estate Information (REI). It provides title insurance, settlement services, and post-closing lender services across the U.S. and international markets. The first quarter is historically the least active period due to seasonality, further impacted in 2010 by poor weather, revised HUD-1 rules, and a decline in refinance volumes.

Key Financial Metrics

Note: The Line of Credit is fully funded and collateralized by pledged investments; management does not consider this $192.4 million as debt for liquidity purposes.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 12.1% to $351.3 million, driven primarily by a 21.5% increase in agency operations revenue ($202.6 million) and a 56.7% surge in Real Estate Information (REI) revenue ($11.5 million) due to loan modification services.
• Direct Operations Decline: Direct title operations revenue decreased 9.1% to $129.5 million, attributed to a 27.2% drop in direct orders closed and fewer refinancing transactions.
• Profitability Improvement: Net loss attributable to Stewart narrowed by 23.0% to $29.0 million. Loss per share improved from $2.07 to $1.59.
• Investment Gains: Investment and other gains (losses) swung from a net loss of $8.8 million in Q1 2009 to a net gain of $2.9 million in Q1 2010, largely due to realized gains from the sale of investments and subsidiaries, contrasting with significant impairment losses in the prior year.
• Cash Flow: Operating cash flow turned positive ($13.6 million) compared to a use of cash ($27.0 million) in the prior year, primarily due to a $50.9 million income tax refund received.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Market Conditions: Management expects refinance volumes to remain low in 2010 due to historically low interest rates and borrowers being underwater on loans. However, existing and new home sales are expected to rise.
• Revenue Mix: A shift toward purchase transactions and commercial closings is expected to improve revenue per closing, partially offset by lower real estate values.
• Rate Increases: The Company has increased title premium rates or has increases pending in 28 states and has renegotiated remittance rates with independent agents to improve profitability.
• Liquidity: Management believes liquidity is sufficient to meet ongoing obligations, with $617.8 million in cash and investments (including statutory reserves).

Risks and Contingencies

• Regulatory Actions: A settlement was reached with the Georgia Commissioner of Insurance regarding alleged violations; a fine and corrective action plan were agreed upon, though management does not expect a material financial impact.
• Antitrust Litigation: The Company is a defendant in multiple antitrust class actions regarding rate filings in New York and other states. While many claims have been dismissed, some remain pending. Management intends to vigorously defend these actions.
• Title Loss Reserves: The most critical accounting estimate is the title loss reserve ($492.9 million). A 100 basis point change in the loss provision rate would impact pretax operating results by approximately $3.3 million.
• Agency Defalcations: Risks persist regarding independent agency misappropriation of escrow funds, particularly in declining markets where transaction volumes are lower.

Investor Verification Checklist

• Refinance Volume Trends: Verify the extent of the decline in refinance originations and its impact on future direct operations revenue.
• Title Loss Reserve Adequacy: Review the actuarial assumptions and the $337.9 million estimate for future claims, given the sensitivity of the loss provision rate.
• Income Tax Refund Impact: Confirm that the $50.9 million tax refund was a one-time event and assess the sustainability of operating cash flows without it.
• Antitrust Litigation Status: Monitor the status of pending antitrust motions in Delaware, New Jersey, and West Virginia.
• Line of Credit Repayment: Verify the plan to repay the $192.4 million line of credit by June 30, 2010, via the surrender of pledged investments.