Business Context and Reporting Period
Company: Stewart Information Services Corp (STC)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Stewart is a leading provider of title insurance and real estate information services. Operations are divided into two segments: Title Insurance (searching, examining, closing, and insuring real property titles) and Real Estate Information (REI) (electronic data delivery, lender services, and tax-deferred exchanges). The company operates in all 50 U.S. states and international markets including Canada, the UK, and Australia.
Key Financial Metrics
| Metric ($ millions) | 2009 | 2008 |
|---|---|---|
| Total Revenues | 1,707.3 | 1,555.3 |
| Net Loss Attributable to Stewart | (51.0) | (247.5) |
| Loss Per Share (Basic/Diluted) | (2.80) | (13.68) |
| Cash Flow from Operations | (17.0) | (104.8) |
| Total Assets | 1,369.2 | 1,448.4 |
| Long-term Debt | 67.7 | 71.3 |
| Stockholders' Equity | 462.1 | 501.2 |
| Title Loss Provision Ratio | 11.3% | 11.2% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.8% ($152.0 million) compared to 2008. This was driven by a 17.7% increase in agency operations revenue and a 27.9% increase in REI revenues, partially offset by a 4.2% decline in direct title operations.
- Profitability Improvement: The net loss narrowed significantly from $247.5 million in 2008 to $51.0 million in 2009. The company reported a pretax profit in the fourth quarter of 2009.
- Cost Reductions: Employee costs decreased 13.1% ($72.3 million) and other operating expenses decreased 20.6% ($75.1 million) due to headcount reductions (approx. 200 employees in 2009) and efficiency initiatives.
- Debt Restructuring: The company repaid $54.8 million in bank debt and issued $65.0 million in 6.0% Convertible Senior Notes due 2014 to extend maturities and improve liquidity.
- Loss Reserves: Title loss provisions increased to 11.3% of title revenues, including a $32.7 million strengthening charge for policy years 2005-2007 due to higher-than-expected loss experience.
Guidance, Outlook, and Risks
- Outlook: Management expects the real estate market to remain challenging in 2010. While home sales may improve, residential refinance volumes are forecast to decline. Commercial activity is expected to improve but may be distressed-driven.
- Liquidity: The company believes it has sufficient liquidity to meet ongoing cash needs without supplemental debt or equity funding, citing available cash/investments of $606.5 million and expected operating cash flows.
- Key Risks:
- Real Estate Activity: Revenues are highly sensitive to mortgage interest rates, home prices, and consumer confidence.
- Claims Experience: Adverse development in title loss reserves (particularly from agency defalcations) could materially impact earnings.
- Regulatory/Legal: Ongoing litigation includes a Georgia insurance commissioner investigation alleging 600,000 violations and multiple antitrust class actions regarding rate-setting.
- Dividend Restrictions: As a holding company, Stewart relies on dividends from its underwriting subsidiary (Guaranty), which are subject to regulatory approval and voluntary restrictions to maintain surplus.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the $32.7 million reserve strengthening charge for 2005-2007 policies and the total estimated liability of $503.5 million for title losses.
- Debt Covenants: Review the terms of the new $65.0 million Convertible Senior Notes and the impact of the embedded derivative on future earnings volatility.
- Regulatory Proceedings: Monitor the outcome of the Georgia insurance investigation and the status of the antitrust class actions (78 complaints filed).
- Agency Network Risk: Assess the exposure to independent agency defalcations, which contributed significantly to loss provisions in 2009.
- Dividend Policy: Note the reduction in cash dividends to $0.05 per share in 2009 and the regulatory constraints on future dividend payments from the primary underwriter.