Stewart Information Services Corporation — Q3 2021 Form 10-Q
Business context and period. Stewart provides title insurance, real-estate transaction and ancillary services. This unaudited filing covers the three and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Operating revenues | $829.8 million | $590.7 million | $2,313.2 million | $1,543.2 million |
| Total revenues, including investment income and realized/unrealized gains | $836.7 million | $595.7 million | $2,344.1 million | $1,551.7 million |
| Income before taxes and noncontrolling interests | $116.4 million | $76.3 million | $319.9 million | $134.6 million |
| Net income attributable to Stewart | $88.7 million | $55.9 million | $237.7 million | $95.2 million |
| Diluted EPS | $3.26 | $2.21 | $8.78 | $3.93 |
| Cash provided by operating activities | Not presented for the quarter | $257.3 million | $140.9 million |
Q3 total revenue increased 40% year over year and Stewart-attributable net income rose 59%. Management reported adjusted Q3 net income, excluding net realized and unrealized gains and losses, of $86.4 million, or $3.17 per diluted share, up 55% from the prior-year quarter. The company did not provide a comparable adjusted figure for the nine-month period in the supplied filing text.
Q3 title-segment pretax income was $119.1 million, up 45%, and pretax margin improved to 15.4% from 14.5%. Title loss expense was 4.0% of title revenues versus 5.1% a year earlier. Ancillary services and corporate reported a $2.7 million pretax loss, improved from a $6.0 million loss.
At September 30, cash and cash equivalents were $607.6 million; total assets were $2.38 billion, notes payable $275.3 million, and stockholders’ equity $1.22 billion. Book value per share was $44.92 versus $37.60 at year-end 2020. Total cash and investments were reported as $1.13 billion, or $585.1 million net of statutory reserves. Statutory cash and investments are not freely available for general purposes.
Material changes and drivers
- Growth reflected higher direct and agency title revenues, purchase and commercial activity, increased home prices, international growth, and acquisitions. Q3 direct title revenues grew 31%; gross independent agency revenues grew 42%.
- Ancillary services revenue increased 122% in Q3, primarily due to acquired appraisal-management and online-notarization businesses. Acquisitions also contributed to higher employee, operating, depreciation and amortization expenses.
- Q3 refinance orders opened fell 26% and closed orders fell 15% year over year, while purchase orders closed rose 8%. Management noted normalization in refinancing activity.
- Operating cash flow for the first nine months rose by $116.5 million, primarily reflecting higher net income and lower claim payments. Investing used $200.7 million and financing provided $120.2 million; cash increased by $174.9 million to $607.6 million.
Outlook, risks and unusual items
The filing provides no company earnings or revenue guidance. Management described housing demand as strong but noted supply constraints, and cited industry forecasts available at the time that Q4 2021 mortgage originations would be 43% below the prior-year quarter and existing/new home sales would soften. Results remain sensitive to mortgage rates, home prices, transaction volumes and mix, agency remittance rates, and seasonality.
- Q3 included $2.9 million of pretax realized and unrealized gains, including a $2.5 million gain from an acquisition contingent-liability adjustment. Nine-month gains included $7.3 million from building sales and a $2.5 million loss on disposal of an equity-method investment.
- Effective October 1, 2021, Stewart completed its $192 million acquisition of Informative Research, a credit, consumer and real-estate data and technology provider. The company also reported an October $135 million dividend from its regulated title insurer to the parent.
- On October 28, 2021, Stewart entered a new credit agreement with a $200 million revolving facility and a $400 million delayed-draw term loan, with an option to increase the revolver by up to $125 million. It drew $370 million and repaid the $273.9 million balance on its former facility.
- Key exposures include uncertainty in long-tail title-loss reserves, claim severity and escrow fraud; real-estate and refinancing market changes; acquisition integration and execution; and regulatory limits on cash transfers from insurance subsidiaries. Title-loss reserves were $534.6 million, including $466.4 million for incurred-but-not-reported claims.
- Management said it expected available operating cash flows and underwriter resources, subject to regulatory restrictions, to fund operations and claims, but warned that additional financing could be needed and might be less favorable or dilutive. Ordinary-course litigation and regulatory matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- How much of earnings growth is sustainable from underlying operations versus housing-market strength, acquisitions and investment gains?
- Whether purchase, refinance and commercial order trends—and industry forecasts cited in the filing—develop as expected.
- Acquisition performance, integration costs and financing impact, including the post-quarter Informative Research purchase and new credit agreement.
- Whether title-loss reserve assumptions and claim experience remain adequate as the reserve balance and insured business grow.
- The amount of cash actually available to the parent after statutory reserve requirements and insurance-regulatory restrictions.