Stewart Information Services Corporation (NYSE: STC) — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; includes fourth-quarter results. Stewart provides title insurance and related services, real estate solutions, and centralized corporate services. Figures are in U.S. dollars.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Operating revenues | $2.212 billion | $3.048 billion | Down 27% |
| Income before taxes and noncontrolling interests | $60.9 million | $232.7 million | Down 74% |
| Net income attributable to Stewart | $30.4 million | $162.3 million | Down 81% |
| Diluted earnings per share | $1.11 | $5.94 | Down 81% |
| Cash provided by operating activities | $83.0 million | $191.9 million | Down $108.8 million |
Consolidated total revenues, including investment income and realized/unrealized gains or losses, were $2.257 billion in 2023 versus $3.069 billion in 2022. Total expenses were $2.196 billion versus $2.837 billion. Pretax margin was 2.7%, compared with 7.6% in 2022. The effective tax rate rose to 33.4% from 23.9%, primarily reflecting nondeductible expenses against lower pretax income and a greater foreign-income contribution.
- Title segment: Revenue was $1.977 billion, down 28%; pretax income was $97.5 million versus $255.1 million. Direct title revenue fell 23%, and agency revenue fell in line with lower market activity.
- Real estate solutions: Revenue was $263.7 million, down 11%; pretax income was $8.7 million versus $16.6 million.
- Corporate and other: Pretax loss was $45.3 million versus $39.1 million.
Fourth quarter: Net income attributable to Stewart was $8.8 million ($0.32 per diluted share), versus $13.3 million ($0.49) in the fourth quarter of 2022. Pretax income before noncontrolling interests was $18.8 million versus $20.8 million. Title revenue fell 14%, while real estate solutions revenue rose 12%.
Liquidity, debt and capital
- Cash and cash equivalents were $233.4 million at year-end; total cash and investments, including statutory-reserve amounts, were $952.3 million.
- Debt was $445.3 million, principally $445.1 million of 3.6% senior notes due 2031. The company reported $197.5 million of available capacity on its revolving credit facility and compliance with credit covenants.
- Debt-to-equity and debt-to-capitalization ratios were approximately 32% and 25%, respectively, excluding short-term Section 1031 loans.
- Estimated title-loss reserves totaled $528.3 million, including $70.2 million for known claims and $458.1 million for incurred-but-not-reported claims. The reserve was above the actuarial midpoint.
- Dividends paid totaled $50.5 million, or $1.85 per common share. Guaranty, the principal title underwriter, paid no dividend to the parent in 2023; such transfers are subject to regulatory limits.
Changes, outlook and key risks
Higher mortgage rates and weaker transaction activity were the primary drivers of the annual decline. The average 30-year fixed mortgage rate was 6.80% in 2023 versus 5.33% in 2022. Mortgage originations fell 33%, existing-home sales declined 19%, and Stewart’s closed orders decreased 25%. Expense reductions did not fully offset the revenue contraction, and employee costs and other operating expenses rose as a share of operating revenue.
Management said it expects operating cash flows and cash available from underwriters, subject to regulatory restrictions, to fund operations and claims. It is pursuing cost and margin improvements through automation, systems consolidation, production consolidation and acquisition integration. The filing gives no formal company earnings or revenue guidance. It cites Fannie Mae and MBA forecasts for a gradual 2024 housing recovery, including higher originations and home sales; these are industry forecasts, not Stewart guidance.
Fourth-quarter results included $4.8 million of pretax net realized and unrealized gains, primarily investment fair-value gains and acquisition-liability adjustments, offset by $6.4 million of office-closure and severance expenses. The 2022 quarter included $12.7 million of pretax gains and $16.7 million of office-closure, severance, regulatory-settlement and litigation expenses. For the full year, net realized and unrealized losses were approximately $0.03 million.
Principal risks include real-estate market and interest-rate cyclicality; uncertainty in long-tail title-loss estimates; agent misconduct, escrow losses and wire fraud; cybersecurity and technology disruption; extensive insurance regulation; investment-market exposure; and limits on dividends from regulated subsidiaries. The company disclosed approximately $1.9 billion of third-party escrow funds and $770.1 million of Section 1031 exchange funds held off balance sheet in segregated or customer-related accounts. It reported no known material cyber breaches in the three years ended December 31, 2023 and no identified cyber threat with a material effect as of the report date. Management and KPMG reported effective internal control over financial reporting; KPMG issued unqualified audit opinions and identified title-loss reserves and goodwill valuation as critical audit matters.
Investor verification priorities
- Track mortgage rates, purchase and refinance volumes, commercial transactions, and whether market recovery improves Stewart’s order counts and margins.
- Review title-loss reserve development, claims payments and large claims; a 100-basis-point change in the loss-provision rate would have affected 2023 pretax results by approximately $19.5 million.
- Assess accessible liquidity separately from statutory-reserve investments and confirm the impact of restrictions on subsidiary dividends and parent-company funding.
- Monitor cash generation, debt service, revolver availability, and the ability to sustain dividends during a prolonged downturn.
- Review the scale and controls around escrow and Section 1031 funds, agency oversight, cybersecurity incidents, and any changes in material litigation or regulatory matters.