Business Context and Reporting Period
Company: Stewart Information Services Corp (SISCO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: SISCO provides title insurance-related services and real estate information (REI). The company operates in all 50 U.S. states, D.C., and international markets. The reporting period was significantly impacted by a severe tightening of credit markets, a downturn in the residential real estate market, and liquidity issues related to auction rate securities.
Key Financial Metrics
| Metric ($000 omitted) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenues | 395,232 | 1,217,917 | 1,607,020 |
| Net Loss | (29,975) | (83,856) | (8,908) |
| Loss Per Share (Basic/Diluted) | (1.66) | (4.64) | (0.49) |
| Cash Used by Operating Activities | N/A | (71,706) | 14,810 (Provided) |
| Total Cash & Equivalents | 199,161 | 199,161 | 109,239 (Dec 31, 2007) |
| Notes Payable & Line of Credit | 334,861 | 334,861 | 108,714 (Dec 31, 2007) |
| Stockholders' Equity | 655,176 | 655,176 | 754,059 (Dec 31, 2007) |
Segment Performance (Nine Months 2008 vs 2007):
- Title Insurance Revenues: $1.18 billion (2008) vs $1.55 billion (2007).
- REI Revenues: $35.1 million (2008) vs $49.5 million (2007).
- Title Loss Ratio: 9.3% (2008) vs 7.5% (2007).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 24.2% year-over-year for the nine-month period, driven by a 24.0% drop in direct title operations and a 21.8% drop in agency operations. This reflects a 22.4% decrease in order levels due to falling home sales and tighter lending standards.
- Increased Losses: Net loss widened significantly to $83.9 million for the nine months ended Sep 30, 2008, compared to $8.9 million in the prior year. This was driven by lower revenues, higher title loss provisions (9.3% vs 7.5%), and investment losses.
- Investment Impairments: The company recorded a net realized investment loss of $10.5 million for the nine-month period. Notably, an $11.2 million impairment charge was recorded in Q3 related to auction rate securities, offset by a fair value credit on a related line of credit.
- Cost Reductions: Employee costs decreased 16.8% ($88.3 million) due to a reduction of 1,300 employees in the first nine months of 2008 and the closure of 110 unprofitable branches. Other operating expenses decreased 14.2%.
- Liquidity Shift: Operating cash flow turned negative, using $71.7 million compared to providing $14.8 million in the prior year. The company drew $199.3 million on a new line of credit in September 2008 to address liquidity needs related to auction rate securities.
Guidance, Outlook, Risks, and Unusual Items
- Market Outlook: Management expects the downturn in real estate and lending markets to continue through mid-2009. Consolidated results are expected to remain subject to adverse market conditions.
- Auction Rate Securities (ARS): A significant liquidity issue exists regarding $101.0 million of ARS held in exchanger funds (as of Oct 2008) and $230.3 million on the balance sheet. There is no normal market for these securities. The company entered a $241.5 million line of credit secured by these assets to provide liquidity to exchanger funds.
- Unusual Items:
- Impairment: A $6.0 million charge was recorded in Q2 2008 for internally developed software in the REI segment that will not be deployed.
- Real Estate Sale (2007): The prior year included a $5.6 million gain from the sale of real estate, which is not present in the current period.
- Legal & Regulatory Risks:
- Antitrust Litigation: At least 77 class action complaints are pending alleging violations of the Sherman Act regarding rate filings in New York. Management intends to defend vigorously and does not expect a material impact.
- California Regulations: Ongoing regulatory discussions in California regarding rate reductions and data reporting requirements. Final regulations are expected by end of 2008.
- Contingent Liabilities: The company holds approximately $262.7 million in exchanger funds for tax-deferred property exchanges, representing a contingent liability not included on the balance sheet.
Investor Verification Checklist
- Auction Rate Securities Exposure: Verify the current status of the $230.3 million in pledged ARS and the $101.0 million in exchanger funds, including any potential for further impairment or liquidity constraints.
- Title Loss Reserves: Review the adequacy of the $447.1 million loss reserve given the increased loss ratio (9.3%) and the impact of large claims and agency defalcations.
- Debt Covenants: Confirm compliance with the terms of the new $241.5 million line of credit and existing notes payable, particularly regarding interest payment defaults.
- Legal Proceedings: Monitor the status of the 77+ antitrust class actions and the finalization of California insurance regulations for potential rate impacts.
- Cost Cutting Sustainability: Assess whether the 29.3% workforce reduction since early 2007 is sustainable or if further cuts are required to match the projected revenue decline through mid-2009.