Business Context and Reporting Period
Company: Stewart Information Services Corporation (Stewart)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Stewart provides title insurance and settlement-related services, as well as real estate information services. The company operates in all 50 U.S. states, the District of Columbia, and international markets. The reporting period reflects the impact of a severe downturn in the real estate and lending markets, characterized by declining home sales, lower prices, and a shift from purchase transactions to refinancing.
Key Financial Metrics
| Metric ($000 omitted) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | 313,459 | 394,137 |
| Net Loss Attributable to Stewart | (42,019) | (25,292) |
| Loss Per Share (Basic & Diluted) | (2.31) | (1.40) |
| Cash and Cash Equivalents | 58,353 | 76,558 |
| Total Cash & Investments (incl. statutory) | 586,000 | — |
| Notes Payable | 108,147 | 135,276 |
| Line of Credit | 221,794 | 222,684 |
| Stockholders' Equity | 461,321 | 507,069 |
Segment Performance:
- Title Insurance Revenues: $306.1 million (2009) vs. $379.4 million (2008).
- Real Estate Information (REI) Revenues: $7.4 million (2009) vs. $14.7 million (2008).
- Title Loss Provision: 7.0% of title operating revenues (2009) vs. 8.0% (2008).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 20.5% year-over-year. Direct operations revenue fell 21.1%, and agency operations revenue fell 12.7%. This was driven by a 6.3% decline in closed title orders and a 16.4% drop in average revenue per file due to a shift toward lower-yield refinancing transactions.
- Increased Net Loss: Net loss attributable to Stewart widened to $42.0 million from $25.3 million. This was exacerbated by $8.9 million in pretax charges for investment and asset impairments.
- Cost Reductions: Total expenses declined 19.4% to $350.8 million. Employee costs dropped 24.5% following a reduction of approximately 170 employees in Q1 2009 (28.2% reduction since Dec 2007). Other operating expenses fell 21.6%.
- Investment Losses: Investment and other losses increased significantly to $8.8 million (net) from $0.3 million, primarily due to $7.6 million in impairment of other assets and $1.3 million in impairment of equity securities.
- Tax Impact: The company recorded a $15.1 million valuation allowance against deferred tax assets, resulting in an income tax expense of $3.2 million despite a pre-tax loss.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
Management notes that while purchase originations are expected to decline further in 2009, total mortgage originations may increase due to refinancing activity. The company observed increasing new title orders and closings in March and April 2009. Significant cost reductions and operational efficiencies (e.g., regional production centers) are expected to support future results. Management believes current liquidity is sufficient to meet ongoing needs without supplemental debt or equity funding.
Risks and Contingencies:
- Regulatory: California Department of Insurance regulations regarding payments to real estate agents are pending; rate decreases could materially affect results.
- Legal Proceedings: The company is a defendant in multiple "wage and hour" class actions in California, an antitrust class action regarding rate filings in New York (78 complaints filed), and various other lawsuits related to loan defaults and policy claims. Management does not believe these will materially affect financial condition.
- Market Risk: Continued decline in home sales and prices, tightening of mortgage lending standards, and potential impairment of goodwill or long-lived assets if market conditions worsen.
Investor Verification Checklist
- Investment Impairments: Verify the nature and recoverability of the $8.9 million in impairment charges recorded in Q1 2009.
- Loss Reserve Adequacy: Review the $445.6 million estimated title losses liability and the 7.0% loss provision rate against historical loss development trends.
- Liquidity Constraints: Confirm the availability of the $161 million in unrestricted cash and investments versus the $375 million held in statutory reserves subject to regulatory restrictions.
- Debt Maturities: Assess the impact of $81 million in debt callable by banks at any time and the lack of material available borrowing capacity.
- Legal Exposure: Monitor the status of the California wage and hour lawsuits and the New York antitrust class action for potential settlement costs or judgments.