Business Context and Reporting Period
Company: Stewart Information Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company provides title insurance-related services and real estate information. Operations are divided into two segments: Title Insurance and Real Estate Information (REI). The Company operates in all 50 U.S. states, D.C., and international markets.
Key Financial Metrics (Nine Months Ended Sept 30, 2009)
| Metric | 2009 (9 Months) | 2008 (9 Months) |
|---|---|---|
| Total Revenues | $1,204.2 million | $1,219.3 million |
| Net Loss | $(75.8) million | $(79.1) million |
| Net Loss Attributable to Stewart | $(81.9) million | $(83.9) million |
| Loss Per Share (Basic & Diluted) | $(4.51) | $(4.64) |
| Cash and Cash Equivalents | $108.7 million | $199.2 million (End of Period 2008) |
| Total Debt (Notes Payable) | $82.5 million | $135.3 million |
| Stockholders' Equity | $440.2 million | $501.2 million |
Segment Performance (9 Months):
- Title Revenues: $1,159.7 million (Decrease of 2.0% vs. 2008)
- REI Revenues: $44.5 million (Increase of 22.9% vs. 2008)
- Title Loss Provision: 12.3% of title revenues (vs. 9.3% in 2008)
Material Changes vs. Prior Period
- Revenue Stability: Total revenues remained relatively flat year-over-year. Direct title operations revenue decreased 9.9% due to fewer commercial transactions and lower home prices, while agency operations revenue increased 5.7% due to new agency additions.
- Profitability Improvement: Loss before taxes decreased by $52.6 million compared to the prior year, driven by significant expense reduction efforts (employee costs down 17.3%) and improved core operational profitability.
- Title Loss Reserves: The loss provision ratio increased to 12.3% from 9.3%. This was primarily due to $31.7 million in reserve strengthening for prior policy years and $30.6 million in charges for large title claims (including agency defalcations).
- Investment Income: Decreased 30.1% to $15.8 million due to lower average invested balances and yields. Net investment losses were $7.0 million, including impairments of equity method and cost-basis investments.
- Liquidity: Cash and cash equivalents increased by $22.5 million during the period, despite negative operating cash flow of $10.7 million, largely due to net proceeds from investment sales ($89.5 million investing cash flow).
Guidance, Outlook, Risks, and Unusual Items
Management Commentary & Outlook:
- Management expects purchase and refinance originations to be lower in the second half of 2009 due to tightened credit markets, despite low interest rates.
- The Company continues to reduce costs through regional production centers and back-office centralization, anticipating further savings upon completion of enterprise systems in late 2010.
- Management believes liquidity is sufficient to meet ongoing needs without supplemental funding.
Unusual Items:
- Reserve Strengthening: $12.5 million in Q3 2009 and $31.7 million for the nine months related to prior policy years.
- Large Claims: $8.6 million in Q3 and $30.6 million for the nine months related to large title claims and agency defalcations.
- Convertible Notes: On October 15, 2009 (subsequent to period end), the Company issued $65.0 million of 6.0% Convertible Senior Notes due 2014. Net proceeds were approximately $62.0 million. This introduces an embedded derivative that may increase earnings volatility.
Risks and Contingencies:
- Regulatory: Ongoing reviews of premium rates in various states; potential for rate reductions or split modifications.
- Legal: Subject to multiple class actions, including antitrust claims regarding rate filings in New York and "wage and hour" lawsuits in California (settled in October 2009 within reserves).
- Market Risk: Fluctuations in stock price will impact the fair value of the embedded derivative in the new convertible notes.
Investor Verification Checklist
- Reserve Adequacy: Verify the assumptions used for the $31.7 million reserve strengthening and the $30.6 million large claim charges, as these significantly impacted the loss ratio.
- Convertible Note Impact: Assess the potential volatility in future earnings caused by the fair value accounting of the embedded derivative in the $65 million Convertible Senior Notes issued in October 2009.
- Agency Risk: Review the Company's controls regarding independent agency defalcations, which contributed significantly to title losses.
- Regulatory Rate Changes: Monitor outcomes of rate reviews in California, New Mexico, and other states, as rate reductions could materially affect profitability.
- Liquidity Position: Confirm the availability of unrestricted cash ($134.1 million) versus restricted statutory reserves ($391.5 million) to ensure ability to meet claim obligations.