STC

Business Context and Reporting Period

Company: Stewart Information Services Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2002
Business Overview: The Company operates in two primary segments: Title Insurance (direct and agency operations) and Real Estate Information (REI) services. It issues title insurance policies in all 50 states and provides electronic real estate services and mapping products.

Key Financial Metrics

Note: Balance sheet figures are as of June 30, 2002. Q2 2001 balance sheet data is not provided in the text.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 29.7% in Q2 2002 and 35.4% for the six months ended June 30, 2002, compared to the prior year periods.
  • Title Segment: Revenues increased 31.2% in Q2 and 37.1% for the six months. Direct operations revenue rose 12.8% (Q2) and 26.9% (6 months), while agency operations revenue surged 47.1% (Q2) and 45.5% (6 months).
  • REI Segment: Revenues increased 2.7% in Q2 and 7.8% for the six months, driven by increased post-closing services and electronic mortgage documents.
• Profitability: Net earnings increased 14.7% in Q2 and 57.0% for the six months ended June 30, 2002.
  • Expense Increases: Employee costs rose 16.6% (Q2) and 23.7% (6 months) due to acquisitions and staff expansion in California. Other operating expenses increased 20.0% (Q2) and 25.0% (6 months).
  • Loss Ratios: Title loss provisions as a percentage of title revenues were 4.3% in Q2 2002 and 4.4% for the six months, compared to 4.1% in the prior year periods.
• Investment Activity: Investment income decreased 3.4% for the six months due to lower yields. A $1.2 million after-tax loss on the sale of WorldCom bonds offset gains from the sale of investment real estate.

Guidance, Outlook, and Risks

• Market Drivers: Management attributes strong performance to a favorable mortgage interest rate environment (averaging 6.8% in Q2 2002 vs. 7.1% in Q2 2001), rising home prices, and increased refinancing activity.
• Seasonality: The business is seasonal, with the third quarter typically being the most active and the first quarter the least active.
• Accounting Changes: The Company adopted SFAS No. 142 on January 1, 2002, ceasing the amortization of goodwill. This resulted in pro forma earnings adjustments for comparative periods but no impact on current period earnings.
• Risks and Contingencies:
  • Legal Proceedings: The Company is involved in routine lawsuits regarding disputed policy claims, some seeking treble damages. Management does not expect a material adverse effect.
  • Market Risk: Results are sensitive to changes in mortgage interest rates, employment levels, and real estate market conditions.
  • Liquidity: A substantial majority of cash and investments are held by Stewart Title Guaranty Company and are subject to legal restrictions on transfer.

Investor Verification Checklist

• Loss Reserve Adequacy: Verify the assumptions used for title loss reserves, which are subject to significant judgment and actuarial review.
• Agent Retention Rates: Confirm the stability of the 81.2% (Q2) and 81.7% (6 months) agent retention rates, as this directly impacts net revenue.
• Acquisition Integration: Assess the impact of recent acquisitions (notably in California) on future operating costs and revenue synergies.
• Investment Portfolio: Review the composition of the investment portfolio, particularly given the recent loss on WorldCom bonds and the shift in investment yields.
• Goodwill Impairment: Monitor future annual impairment testing of goodwill under SFAS No. 142, as the carrying value is significant ($55.9 million).