Stewart Information Services Corporation — Q1 2022 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2022, compared with Q1 2021. Stewart provides title insurance and settlement services, real estate solutions, and related services. Beginning in 2022, it reported three segments—title, real estate solutions, and corporate and other—and recast 2021 segment results for comparison.
Key financial metrics
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue, including investment income and gains | $852.9 | $688.6 | +23.9% |
| Operating revenue | $845.2 | $681.4 | +24.0% |
| Income before taxes and noncontrolling interests | $79.6 | $74.0 | +7.6% |
| Net income attributable to Stewart | $57.9 | $54.2 | +6.8% |
| Diluted earnings per share | $2.11 | $2.01 | +5.0% |
| Cash from operating activities | $34.9 | $47.4 | Down $12.6 |
- Margins and expenses: Consolidated pretax income as a share of total revenue was approximately 9.3%, versus 10.7% in Q1 2021. Title segment pretax margin fell to 11.4% from 12.2%; real estate solutions margin rose to 7.6% from 4.8%. The corporate and other segment reported a $10.0 million pretax loss, versus $5.7 million.
- Cash flow and investment: Investing activities used $65.2 million and financing activities used $58.6 million. Cash and cash equivalents declined $89.3 million during the quarter to $396.6 million. Cash flow from operations decreased primarily because of payments of liabilities outstanding at year-end.
- Debt and liquidity: Notes payable were $445.9 million at March 31, down from $483.5 million at year-end; stockholders’ equity was $1.32 billion. The credit line was fully available. Management reported $1.1 billion of total cash and investments, including statutory reserves; $709.6 million was held in the U.S., of which $440.7 million was net of statutory reserves. Parent-company and unregulated-subsidiary cash was $65.7 million.
- Claims and investment marks: Estimated title losses were $560.7 million, including $485.3 million of incurred-but-not-reported reserves. Title loss expense was $29.2 million, with a 4.0% loss ratio versus 4.6%. Other comprehensive loss was $19.5 million, largely reflecting lower fair values of debt securities as interest rates and credit spreads rose.
Material changes versus the prior period
- Growth was led by agency title revenue and real estate solutions. Direct title revenue rose 14%, agency revenue rose 17%, and real estate solutions and other revenue increased 120%, in part due to acquisitions and revenue from a brokerage business later sold.
- Residential refinancing weakened: opened refinance orders fell 50% and closed refinance orders fell 47%. Purchase orders closed rose 4%, while commercial orders closed rose 31%. Stronger commercial activity and higher average transaction fees supported direct title revenue.
- Expense growth weighed on margins. Employee costs rose 21%, other operating expenses 51%, and depreciation and amortization 114%, reflecting acquisitions, higher activity-related costs, and acquired intangible amortization. Net income still increased, but more slowly than revenue.
- Acquisition-related goodwill increased by $19.9 million before purchase-accounting adjustments. Q1 cash paid for a title-segment acquisition was $17.9 million, compared with $52.6 million of acquisition payments in Q1 2021.
Outlook, commentary, and risks
- The filing provides no specific company earnings or revenue guidance. Management said it believed liquidity and capital resources were sufficient for ongoing operations, including under current economic and real-estate conditions. It also noted that additional financing might be needed for strategic goals, acquisitions, or unforeseen circumstances.
- Management cited rising mortgage rates and inflation as pressures on housing affordability and refinancing. Industry estimates discussed in the filing anticipated Q2 2022 total mortgage originations 32% below the prior-year quarter, with purchase originations up 10%; these are industry expectations, not Stewart guidance.
- Key sensitivities include mortgage rates, housing and commercial transaction volumes, home prices, agency remittance rates, employee retention, claims experience, regulation, fraud, litigation, and the ability to realize acquisition and technology-related efficiencies. Management is focused on automation, system consolidation, lower unit costs, and improved margins.
- Statutory reserve assets are legally designated and unavailable for general purposes; transfers and dividends from regulated insurance subsidiaries are subject to restrictions. Management said ordinary-course litigation and regulatory matters were adequately reserved and were not expected to have a material adverse effect. Unused letters of credit totaled $4.9 million; the company did not expect payments under its guarantees.
- Stewart sold the recently acquired real estate brokerage company in Q2 2022, after the reporting period. Its Q1 revenue was $33.9 million; excluding the business, the corporate and other segment’s Q1 pretax loss would have been $8.6 million.
Important facts for investors to verify
- Whether title and real estate solutions margins can recover as acquisitions are integrated and expense growth moderates.
- How continued rate increases and lower refinancing activity affect order volumes, revenue, and the mix of purchase and commercial transactions.
- The adequacy and development of the $560.7 million title-loss reserve, particularly given the uncertainty in long-tail claims and large-loss experience.
- How much reported growth reflects acquired or subsequently divested businesses, and the ongoing contribution of the brokerage sale to results.
- Liquidity available for general corporate needs after accounting for statutory restrictions, claim payments, debt service, and acquisition needs; verify also the composition and terms of notes payable.
- The effect of further interest-rate and credit-spread changes on investment values and accumulated other comprehensive income.