STC

Business Context and Reporting Period

Company: Stewart Information Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended June 30, 2007
Business Overview: The Company provides title insurance and settlement-related services, as well as real estate information (REI) services. Operations are conducted through direct offices and independent agencies across the U.S. and international markets.

Key Financial Metrics

All figures in thousands, except per share data.

Segment Performance (Six Months 2007):

• Title Segment: Revenues of $1,068.9 million; Earnings before taxes of $11.8 million.
• REI Segment: Revenues of $36.2 million (includes $3.2 million gain on sale of subsidiaries); Earnings before taxes of $2.8 million.

Material Changes vs. Prior Period

Revenue Decline: Total revenues decreased 6.7% year-over-year. This was driven by a 15.9% decrease in direct closings and an 11.8% decrease in agency revenues, attributed to declining home sales, lower home prices, reduced new construction, and a significant contraction in the sub-prime lending market. These declines were partially offset by a $23.8 million increase in commercial transaction revenues and $11.3 million in revenue from recent acquisitions.

Profitability Compression: Net earnings dropped significantly to $5.4 million from $18.4 million in the prior year. While operating expenses were managed through headcount reductions (approx. 540 employees in Q2), the revenue decline and increased title loss provisions (6.4% of title revenues in 2007 vs. 5.7% in 2006) pressured margins.

Asset Sales: The Company sold its mapping and aerial photography businesses (GlobeXplorer and AirPhotoUSA) in January 2007, recording a pretax gain of $3.2 million. This transaction contributed to the REI segment earnings but reduced future REI operating revenues.

Guidance, Outlook, Risks, and Contingencies

Management Commentary: Management notes that the real estate market downturn continues to impact order levels, which were down 10.7% for the six months ended June 30, 2007. The Company has aggressively reduced staff and expenses to align with market conditions while maintaining investment in web-based technology.

Regulatory Risks:

• California: The California Commissioner of Insurance is seeking approximately $42 million in fines and penalties regarding captive reinsurance agreements. An administrative hearing is scheduled for August 2007. Management believes reserves are adequate and the outcome will not be material.
• Rate Regulation: Title insurance rates in Florida are under review. In California, proposed regulations could reduce rates by 26% effective 2010, though a previous order was rejected. Management states that future rate decreases could materially affect financial results.

Subsequent Event: On July 27, 2007, the Company announced a plan to repurchase up to 1.5% (approx. 258,000 shares) of its outstanding Common Stock.

Contingent Liabilities: The Company has guarantees of indebtedness for third parties with a maximum potential payment of $10.1 million, though no loss is currently expected.

Investor Verification Checklist

• Market Exposure: Verify the extent of exposure to the sub-prime lending market and specific states with declining home sales (Florida, Nevada, California, Arizona).
• Loss Reserves: Review the adequacy of the $406.1 million estimated title loss reserve, particularly given the increase in the loss provision ratio to 6.4%.
• Regulatory Outcomes: Monitor the August 2007 administrative hearing in California regarding the $42 million penalty and the status of rate reviews in Florida and California.
• Acquisition Integration: Assess the performance of recent acquisitions which added $11.3 million in revenue but also increased employee and operating costs.
• Stock Repurchase: Track the execution of the newly announced stock repurchase plan and its impact on share count and liquidity.