Stewart Information Services Corp. - 10-Q Summary (Q2 2010)
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2010. Stewart Information Services Corporation operates in two primary segments: Title Insurance (direct and agency operations) and Real Estate Information (REI). The company provides title insurance, settlement services, and post-closing lender services across the U.S. and international markets. The reporting period was significantly influenced by the expiration and subsequent extension of the federal homebuyer tax credit.
Key Financial Metrics
| Metric ($000s) | 3 Months Ended June 30, 2010 | 6 Months Ended June 30, 2010 | 6 Months Ended June 30, 2009 |
|---|---|---|---|
| Total Revenues | 441,541 | 792,854 | 744,221 |
| Net Earnings (Loss) Attributable to Stewart | 9,428 | (19,535) | (58,245) |
| Diluted EPS (Attributable to Stewart) | $0.45 | Not Applicable (Loss) | Not Applicable (Loss) |
| Cash and Cash Equivalents | 125,621 | 125,621 | 97,971 (Dec 31, 2009) |
| Total Debt (Notes + Convertible Notes) | 78,177 | 78,177 | 83,783 (Dec 31, 2009) |
| Operating Cash Flow (6 Months) | 5,643 | 5,643 | (21,353) |
| Investment & Other Gains (Losses) - Net | 7,795 | 10,708 | (6,040) |
Material Changes vs. Prior Period
- Profitability Improvement: The company reported a net loss of $19.5 million for the six months ended June 30, 2010, a significant improvement from the $58.2 million loss in the same period in 2009. The second quarter of 2010 returned to profitability with $9.4 million in net earnings.
- Revenue Growth: Total revenues increased 6.5% year-over-year for the six-month period ($792.9M vs. $744.2M). This was driven by a 12.7% increase in agency operations revenue and a 31.1% increase in REI revenue, partially offset by a 7.8% decline in direct title operations.
- Investment Gains: A major driver of the improved results was a $10.7 million net gain from investments and other items in the first half of 2010, compared to a $6.0 million loss in 2009. This included a $6.3 million gain from the transfer of rights to internally developed software.
- Title Loss Provisions: Provisions for title losses decreased significantly to 8.7% of title operating revenues in the first half of 2010, down from 12.1% in 2009. This reflects a $28.4 million decrease in charges attributable to title losses compared to the prior year.
- Debt Reduction: The company extinguished a $241.5 million line of credit related to auction rate securities by transferring the underlying assets to the bank at par value on June 30, 2010, with no net financial impact.
Guidance, Outlook, and Risks
- Homebuyer Tax Credit: The expiration of the homebuyer tax credit on April 30, 2010, negatively impacted orders in May and June. However, Congress extended the closing deadline to September 30, 2010. Management expects this extension to positively influence third-quarter results, with an estimated 180,000 transactions remaining to be closed.
- Operational Efficiencies: The company is merging three underwriters into Stewart Title Guaranty Company to reduce annual expenses by nearly $1.0 million. Staffing levels are being adjusted to reflect current market activity following the tax credit rush.
- Rate Increases: Stewart has increased title premium rates in 19 states and is renegotiating agency remittance rates to improve profitability.
- Legal and Regulatory Risks:
- Georgia Settlement: Settled allegations regarding insurance law violations with a fine and corrective action plan; management does not expect a material financial impact.
- Antitrust Litigation: Facing multiple class-action lawsuits alleging antitrust violations regarding rate filings. The company has obtained dismissals in several states but faces appeals and ongoing proceedings in others.
- Agency Defalcations: Risks associated with independent agency fraud remain, though large losses have decreased significantly in recent quarters.
- Liquidity: The company holds $613.2 million in cash and investments. Management believes existing cash flows and available credit lines are sufficient to fund operations and claims payments.
Investor Verification Checklist
- Verify the sustainability of the $6.3 million software rights gain and its impact on future earnings.
- Monitor the volume of closings in Q3 2010 resulting from the extended homebuyer tax credit deadline.
- Review the status of the antitrust class-action lawsuits, particularly pending appeals in Ohio and New Jersey.
- Assess the trend in title loss provisions and the adequacy of the $492.2 million estimated title loss reserve.
- Track the success of premium rate increases and agency remittance renegotiations in improving margins.