Business Context and Reporting Period
Company: Stewart Information Services Corp (SISCO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: SISCO operates in two primary segments: title insurance-related services and real estate information (REI). The company provides title insurance, settlement services, and post-closing lender services across the U.S. and internationally. The reporting period reflects a severe downturn in the real estate market, characterized by declining home sales, lower home prices, and tightened credit markets.
Key Financial Metrics
| Metric ($000 omitted) | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | 822,684 | 1,105,103 |
| Net (Loss) Earnings | (53,880) | 5,362 |
| Net (Loss) Earnings Per Share (Diluted) | (2.98) | 0.29 |
| Cash Used by Operating Activities | (46,640) | 16,806 |
| Cash and Cash Equivalents (End of Period) | 102,900 | 126,170 |
| Notes Payable (Debt) | 116,799 | 108,714 |
| Stockholders' Equity | 694,959 | 754,059 |
Loss Ratio: Provisions for title losses were 10.1% of title operating revenues for the six months ended June 30, 2008, compared to 6.4% in the prior year period.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 25.6% year-over-year. Direct title operations revenue fell 23.8%, and agency operations revenue fell 26.3%. This was driven by a 19.6% decrease in order levels and a 21.9% decrease in direct closings.
- Profitability Reversal: The company reported a net loss of $53.9 million compared to net earnings of $5.4 million in the prior year. The loss was driven by lower revenues, increased title loss provisions, and a $6.0 million impairment charge in the REI segment.
- Investment Losses: The company incurred a realized investment loss of $4.7 million for the six months ended June 30, 2008, compared to a gain of $5.1 million in the prior year, primarily due to write-downs of equity and cost-basis investments.
- Cost Reductions: Employee costs decreased 16.3% to $298.0 million. The company reduced its employee count by 810 (9.6%) in the first half of 2008, bringing the total reduction since early 2007 to 2,400 employees. Additionally, 68 unprofitable branch and office locations were closed.
- Impairment Charge: A $6.0 million pretax charge was recorded in the REI segment for internally developed software that will not be deployed into production.
Guidance, Outlook, and Risks
Outlook: Management expects the downturn in real estate and lending markets to continue through at least 2009. Consequently, consolidated financial condition and results of operations are expected to remain subject to adverse market conditions. The company is aggressively reducing variable and fixed expenses and consolidating corporate entities to streamline operations.
Key Risks and Contingencies:
- Auction Rate Securities (ARS): The company holds approximately $355.0 million of ARS within customer exchanger funds (contingent liability of $407.7 million). Since mid-February 2008, there has been no normal market for these securities. While the company believes the underlying value is not materially affected, liquidity is constrained. The company has advanced $40.2 million of cash to exchanger funds subsequent to June 30, 2008, to manage liquidity.
- Title Loss Reserves: The company is experiencing higher-than-expected claim payments for prior policy years. A 100 basis point change in the loss provision ratio would impact pretax earnings by approximately $7.9 million.
- Legal Proceedings: At least 73 antitrust class action complaints are pending, alleging violations of the Sherman Act regarding collective rate filings in New York. The company intends to vigorously defend these actions and does not currently believe the outcome will be material.
- Regulatory Environment: Ongoing regulatory reviews in California and other states regarding rate structures and market conduct could materially affect operations if rate decreases are mandated.
Investor Verification Checklist
- Loss Reserve Adequacy: Verify the assumptions used for the 10.1% loss ratio and the $15.8 million in additions to reserves for agency defalcations and fraud.
- Auction Rate Securities Liquidity: Monitor the status of the $355 million in ARS held in exchanger funds and the company's ability to meet redemption requests without further capital infusion.
- Cost Cutting Sustainability: Assess whether the 24.6% reduction in workforce since 2007 is sufficient to offset the continued decline in transaction volume.
- Legal Exposure: Track the status of the 73+ pending antitrust class actions and potential settlement costs.
- REI Segment Viability: Evaluate the impact of the $6.0 million software impairment and the 21.2% revenue decline in the REI segment on future profitability.