Stewart Information Services Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Stewart provides title insurance and settlement services, along with real estate solutions. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenues | $717.6 | $829.8 | $2,412.1 | $2,313.2 |
| Total revenues, including investment results | $716.4 | $836.7 | $2,413.4 | $2,344.1 |
| Pretax income | $45.5 | $116.4 | $211.9 | $319.9 |
| Net income attributable to Stewart | $29.4 | $88.7 | $149.0 | $237.7 |
| Diluted EPS | $1.08 | $3.26 | $5.45 | $8.78 |
| Cash from operations | Not presented by quarter | Not presented by quarter | $167.0 | $257.3 |
- Q3 pretax margin was approximately 6.4%, versus 13.9% a year earlier. Title-segment pretax margin was 8.0%, down from 15.4%; real estate solutions margin was 4.8%, up from 4.3%.
- Q3 total revenues fell 14% year over year, primarily as higher mortgage rates sharply reduced title transaction volumes. Title-segment operating revenues declined 16%; real estate solutions revenues rose 13%, partly reflecting acquisitions.
- For the first nine months, total revenues increased 3%, but pretax income fell 34%. Higher employee, other operating, depreciation and amortization, and interest expenses contributed to the decline.
- Net realized and unrealized investment results were a $6.4 million loss in Q3 2022, versus a $2.9 million gain in Q3 2021; the nine-month results were a $14.2 million loss versus a $17.8 million gain.
Balance sheet, cash flow and liquidity
- At September 30, cash and cash equivalents were $320.9 million, down from $485.9 million at year-end 2021. Total assets were $2.71 billion and stockholders’ equity was $1.36 billion.
- Notes payable were $446.4 million, down from $483.5 million at year-end. The credit line was fully available. Excluding Section 1031 notes, management reported debt-to-equity of approximately 33% and debt-to-capitalization of 25%.
- Nine-month operating cash flow was $167.0 million, versus $257.3 million in 2021. Investing activities used $225.3 million and financing activities used $98.1 million; cash declined $165.0 million over the period.
- Cash and investments, including statutory-reserve amounts, totaled approximately $1.01 billion. Of this, $541.0 million in securities and $10.5 million in cash were statutory reserve funds and unavailable for other purposes. The company cited $330.3 million of cash and investments available for underwriter operations, including claims payments, and acquisitions.
- Stewart paid $32.5 million in common dividends during the first nine months ($1.20 per share). Book value per share was $49.59 at September 30, versus $47.67 at December 31, 2021.
Business changes, outlook and risks
- Mortgage-market weakness was pronounced: Q3 opened orders fell 40% and closed orders fell 39% year over year. Refinance opened and closed orders declined 69% and 70%, respectively; purchase orders declined 18%. Management attributed the volume pressure mainly to rising mortgage rates.
- Management anticipated title losses of approximately 4% of title revenues for full-year 2022. It also described industry expectations for Q4 2022 mortgage originations to be 50% below Q4 2021, with existing and new home sales down 23% and 21%, respectively; these are market expectations, not company earnings guidance.
- Management said it was emphasizing cost control, automation, systems consolidation and improved production margins, while continuing technology investment. It stated that available resources should fund ongoing operations and claims, but warned additional financing could be needed for strategic goals or unforeseen circumstances.
- Effective October 1, 2022, after quarter-end, Stewart acquired FNC Title Services and affiliates, which provide title and settlement services to the reverse-mortgage industry.
- Investment portfolio fair values were pressured by higher interest rates and credit spreads. Nine-month other comprehensive loss was $65.1 million, including $42.2 million of after-tax investment losses and $22.9 million of foreign-currency translation losses. Management said it did not intend to sell debt securities in unrealized-loss positions and did not consider them credit-impaired.
- Title loss reserves were $547.2 million, including $471.6 million for incurred-but-not-reported claims. Management cautioned that ultimate claims may differ materially from estimates. It expected no material adverse effect from disclosed litigation or regulatory matters and said reserves were adequate.
- Other stated risks include continued real-estate market volatility, mortgage rates and financing availability, cyber risks, agency or employee fraud, regulatory changes, acquisition integration, and access to financing. The filing reported no material changes to risk factors since the 2021 Form 10-K.
Important facts for investors to verify
- Whether transaction volumes and revenue continue to weaken if mortgage rates remain elevated, and how purchase, refinance and commercial activity trend.
- Whether cost reductions and operating initiatives offset revenue declines, particularly in employee and other operating costs.
- Claims experience, reserve adequacy, and the timing and size of large claim payments.
- Liquidity available at the parent and regulated subsidiaries, including statutory restrictions, debt maturities and Section 1031-related borrowings.
- FNC acquisition performance and integration, and whether subsequent results support management’s stated outlook and assumptions.