Stewart Information Services Corporation — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Stewart provides title insurance and settlement services, alongside real estate solutions operations. Unless otherwise noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Operating revenues | $849.2 | $802.0 | $1,694.4 | $1,483.4 |
| Total revenues, including investment income and realized/unrealized gains or losses | $844.1 | $818.8 | $1,697.0 | $1,507.4 |
| Income before taxes and noncontrolling interests | $86.8 | $129.5 | $166.4 | $203.5 |
| Net income attributable to Stewart | $61.7 | $94.8 | $119.6 | $149.1 |
| Diluted EPS | $2.26 | $3.50 | $4.37 | $5.51 |
| Cash provided by operating activities | — | $118.2 | $150.5 |
Q2 consolidated pretax margin was approximately 10.3%, versus 15.8% a year earlier. Q2 title-segment pretax margin was 12.3%, versus 16.7%; real estate solutions margin was 7.4%, versus 3.8%. For the six months, operating cash flow declined $32.3 million, mainly due to lower net income and higher payments of previously outstanding operating liabilities.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $405.3 million; total cash and investments, including statutory-reserve amounts, were approximately $1.1 billion. Management reported $53.9 million of cash at the parent and unregulated subsidiaries.
- Notes payable were $444.9 million, down from $483.5 million at December 31, 2021. Stockholders’ equity was $1.36 billion. The credit line was fully available; debt-to-equity and debt-to-capitalization ratios, excluding Section 1031 notes, were approximately 33% and 25%.
- Cash used in investing activities was $111.1 million and cash used in financing activities was $84.3 million for the first six months. Cash and cash equivalents fell $80.6 million to $405.3 million.
- Estimated title-loss reserves were $562.7 million, including $77.3 million for known claims and $485.4 million for IBNR claims. Statutory reserve funds are not available for general use or current claim payments; transfers and dividends from regulated subsidiaries are subject to restrictions.
Material changes and drivers
- Q2 operating revenues rose 5.9%, but Stewart-attributable net income fell 35.0%. The earnings decline included a $11.9 million pretax net realized and unrealized loss, compared with an $11.7 million gain in Q2 2021. The 2022 loss primarily reflected equity-security valuation declines and losses on business dispositions; the prior-year gain included building-sale gains.
- Title-segment Q2 revenue increased 2%, while pretax income declined 26%. Higher agency revenues were partly offset by lower direct-title revenue and higher operating costs, including employee and other expenses associated with acquisitions.
- Real estate solutions Q2 revenue increased 42% and pretax income rose to $6.1 million from $2.2 million, primarily reflecting acquisitions. Corporate and other reported a $12.9 million pretax loss, versus $1.6 million income, with higher interest expense and losses related to the sale of a real estate brokerage business.
- Higher mortgage rates weighed on housing activity: Q2 closed orders declined 28%, including a 57% drop in refinance closings. Commercial direct-title revenues grew 22%, partly offsetting weaker non-commercial activity. Acquisition-related costs contributed to employee costs, other operating expenses, and amortization increases.
- Q2 other comprehensive loss was $21.0 million, including investment and foreign-currency losses. For the first six months, other comprehensive loss was $40.5 million, primarily from lower bond fair values amid higher interest rates and credit spreads and from currency movements.
Outlook, risks, and contingencies
- Management anticipated title losses of approximately 4% of title revenues for full-year 2022. It cited cost management, automation, and systems and production consolidation as priorities to improve margins.
- Based on industry forecasts available as of June 30, management expected Q3 2022 total single-family mortgage originations to be 45% below Q3 2021, existing-home sales 13% lower, and new-home sales flat. These are stated expectations, not company earnings guidance.
- Management said it expected operating cash flows and available underwriter funds, subject to regulatory restrictions, to fund operations and claims. It also noted that borrowing or equity funding could be needed for strategic objectives or unforeseen circumstances, potentially on less favorable or dilutive terms.
- Key risks include housing and mortgage-market weakness, interest rates and affordability, claim-reserve estimation and large claims, agency and employee fraud or noncompliance, regulatory limits on subsidiary cash transfers, acquisition integration and costs, foreign exchange, litigation, and access to financing. Management reported no material changes to the risk factors in its 2021 Form 10-K.
- Ordinary-course legal and regulatory matters were not expected by management to materially affect results or financial condition; the company stated it had adequate reserves. It also had $4.9 million of unused letters of credit and stated it did not expect payments under its guarantees.
Important facts for investors to verify
- Whether falling refinance and home-sale volumes are offset by commercial activity, agency revenue, and higher transaction values.
- Whether acquisition-driven revenue growth translates into improved margins after employee, operating, and amortization costs.
- Whether title-loss reserves and management’s approximately 4% full-year loss-ratio expectation remain appropriate as claims develop.
- How much reported liquidity is available for general corporate purposes after statutory reserve requirements and other regulatory limits.
- How investment-market volatility, foreign exchange, and any further business dispositions affect earnings and equity.
The filing recast 2021 segment presentation to show title, real estate solutions, and corporate and other as separate segments; comparisons use the recast figures.