Stewart Information Services Corporation — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited. Stewart provides title insurance and settlement services, alongside real estate information, valuation, notarization and related services.
Financial results
Amounts below are in millions of dollars, except per-share data. “Total revenue” includes investment income and realized and unrealized investment losses.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Operating revenues | $590.3 | $717.6 | $1,647.9 | $2,412.1 |
| Total revenue | $601.7 | $716.4 | $1,675.2 | $2,413.4 |
| Income before taxes and noncontrolling interests | $27.1 | $45.5 | $42.1 | $211.9 |
| Net income attributable to Stewart | $14.0 | $29.4 | $21.6 | $149.0 |
| Diluted EPS attributable to Stewart | $0.51 | $1.08 | $0.79 | $5.45 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $43.6 | $167.0 |
Q3 title-segment pretax income was $35.4 million, down 32%; its pretax margin was 6.6%, versus 8.0%. Real estate solutions pretax income was $2.6 million, down 22%, with a 3.8% margin versus 4.8%. The corporate and other segment recorded a $10.9 million pretax loss.
Balance sheet and liquidity
- At September 30, cash and cash equivalents were $203.0 million; total cash and investments, including statutory-reserve amounts, were $901.0 million. Cash was $248.4 million at December 31, 2022.
- Notes payable were $445.2 million, compared with $447.0 million at year-end 2022. Stockholders’ equity was $1.36 billion. The line of credit was fully available; debt-to-equity and debt-to-capitalization ratios excluding Section 1031 notes were approximately 33% and 25%.
- For the first nine months, investing activities used $36.8 million and financing activities used $51.2 million. Cash declined $45.4 million over the period. Dividends paid were $37.5 million, or $1.38 per share.
- Management said it believes resources are sufficient for operations and claims. However, statutory reserves and regulatory limits restrict access to some cash and investments; $43.3 million was held at the parent and unregulated subsidiaries.
Material changes and operating drivers
- Q3 operating revenues fell 18% and nine-month operating revenues fell 32%. The decline reflected reduced real estate transaction volumes amid elevated mortgage rates. Nine-month comparisons also include 2022 revenue from a brokerage business sold in Q2 2022.
- Q3 direct title revenue fell 17%; gross independent-agency revenue fell 22%. Closed orders fell 10% in Q3 and 30% for the nine-month period. Q3 refinance closed orders were down 28% year over year.
- Q3 investment income rose to $13.4 million from $5.2 million, primarily because of higher rates, interest earned on eligible escrow balances and higher short-term investment balances. This partly offset lower operating revenue.
- Cost reductions did not keep pace with lower revenue: Q3 employee costs and other operating expenses together were 47.4% of operating revenues, versus 43.4% a year earlier. Title loss expense as a share of title revenue increased to 4.3% from 3.9%.
- Nine-month operating cash flow fell to $43.6 million from $167.0 million, primarily due to lower net income and higher claims payments. The nine-month effective tax rate rose to 31% from 25%, partly due to Q3 discrete federal-return adjustments tied to lower foreign tax credit utilization.
Outlook, risks and contingencies
The filing gives no company-specific earnings or revenue guidance. Management described plans to improve margins through automation, system and production consolidation, cost management and acquisition integration. It cited industry forecasts for 2023 average mortgage rates of 6.5% and mortgage originations 31% below 2022; these are external forecasts cited in the filing, not Stewart guidance.
Key exposures include mortgage rates and housing activity, transaction volumes, agency remittance rates, title claims and reserve estimates, fraud and escrow losses, regulatory restrictions on subsidiary distributions, technology implementation and cyber risks, and acquisition integration. Title loss reserves were $521.4 million, including $451.3 million for incurred-but-not-reported claims; management cautioned that ultimate claims may differ materially from estimates. Statutory reserve funds are not available for other purposes. Management said ordinary-course litigation and regulatory matters are not expected to have a material adverse effect and believes reserves are adequate. Gross unrealized losses on debt securities were $43.0 million, including $36.9 million on securities in a loss position for more than 12 months; the company said it did not intend to sell those securities and did not consider them credit-impaired.
Important facts for investors to verify
- Whether housing and mortgage-market conditions, order trends and agency revenues improve or weaken further.
- Whether cost actions can restore margins as revenues remain below prior-year levels.
- The adequacy and development of title-loss reserves, including large claims and escrow losses.
- How much cash and investment capacity is practically available after statutory and regulatory restrictions.
- The effects of higher interest rates on investment income, debt-security values and real estate demand, and whether discrete tax items recur.