Stewart Information Services Corporation (STC) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited interim results. Stewart provides title insurance and settlement services, alongside real estate information, valuation, online closing and related services.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenues | $538.1m | $849.2m | $1,057.6m | $1,694.4m |
| Total revenues, including investment income and investment losses | $549.2m | $844.1m | $1,073.5m | $1,697.0m |
| Income before taxes and noncontrolling interests | $25.2m | $86.8m | $15.0m | $166.4m |
| Net income attributable to Stewart | $15.8m | $61.7m | $7.6m | $119.6m |
| Diluted EPS attributable to Stewart | $0.58 | $2.26 | $0.28 | $4.37 |
Q2 title-segment pretax margin was 7.4%, down from 12.3%; real estate solutions pretax margin was 4.6%, down from 7.4%. Consolidated pretax income was approximately 4.6% of total revenues, versus 10.3% in Q2 2022.
Material changes and operating drivers
- Q2 operating revenues fell 37%, largely reflecting lower direct and agency title transaction volumes; title-segment operating revenues declined 39% and pretax income declined 62% year over year.
- Q2 direct title revenues fell 27%; agency gross revenues fell 49%. Closed orders declined 29% overall, including a 53% fall in refinance closings and a 22% decline in purchase closings.
- Management attributed weaker activity to elevated mortgage rates. The reported average 30-year fixed mortgage rate was 6.5% in Q2 2023 versus 5.3% a year earlier. Investment income rose 80% to $12.1m, mainly from higher rates and interest earned on eligible escrow balances.
- Cost reductions did not offset the revenue decline: Q2 employee costs fell 13% and other operating expenses fell 20%, but each rose as a percentage of operating revenues. Employee count was approximately 6,900 at quarter-end, versus 7,700 a year earlier.
- Title loss expense was $19.8m in Q2, or 4.2% of title revenues, versus 3.5% a year earlier. The title loss reserve was $524.1m at June 30, down from $549.4m at year-end; management cautions that ultimate claims may differ materially from estimates.
Cash, debt and liquidity
- Cash and cash equivalents were $190.0m at June 30, down from $248.4m at December 31, 2022. Cash and investments totaled $896.8m, including statutory-reserve amounts that are not available for general use or current claim payments.
- Operating cash flow was negative $16.0m for the first six months, compared with positive $118.2m in the prior-year period, principally due to lower earnings and higher claims payments. Investing and financing cash flows were negative $7.3m and $35.7m, respectively.
- Notes payable totaled $445.0m; stockholders’ equity was $1.37bn. The credit line was fully available. Excluding Section 1031 notes, the company reported debt-to-equity of approximately 33% and debt-to-capitalization of approximately 25%.
- Six-month dividends were $24.5m, or $0.90 per share. Management believes available resources and operating cash flows are adequate for ongoing needs, while noting that borrowing or equity funding could be needed in adverse circumstances. Transfers and dividends from regulated insurance subsidiaries are subject to regulatory restrictions.
Outlook, risks and unusual items
- No specific company earnings or revenue guidance is provided. Management described continued focus on cost control, automation, systems consolidation and acquisition integration to improve margins. Industry forecasts cited by management anticipated a 6.3% average mortgage rate and a 27% decline in 2023 mortgage originations versus 2022.
- Q2 included $1.1m of net realized and unrealized investment losses, including a $3.2m adjustment to a contingent receivable from a prior business disposition, partly offset by equity-security valuation gains. The real estate solutions segment also recorded a $1.2m state sales-tax assessment related to an acquisition.
- The six-month effective tax rate was 6%; excluding discrete adjustments, primarily involving increased use of acquired net operating loss carryforwards, management said it would have been 26%.
- Risks highlighted include mortgage-rate and real-estate activity changes, title claims and reserve uncertainty, regulatory limits on subsidiary cash transfers, cyber risks, technology implementation, acquisition integration, litigation and access to financing. The company said it did not expect ordinary-course legal proceedings or identified regulatory matters to materially affect results; outcomes remain uncertain.
Important facts for investors to verify
- Whether transaction volumes and margins stabilize as mortgage rates and housing activity evolve.
- Whether cost actions can offset lower revenue without impairing service, sales capacity or growth.
- Claims development, particularly prior-year large claims, cash claim payments and adequacy of the $524.1m title-loss reserve.
- How much reported cash and investments are subject to statutory restrictions, and the availability of subsidiary distributions to the parent.
- The sustainability of cash generation, acquisition spending, dividend payments and debt levels if the downturn persists.