Stewart Information Services Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The interim financial statements are unaudited. Stewart provides title insurance and settlement services, alongside real estate solutions operations.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Operating revenues | $519.5 million | $845.2 million |
| Total revenues, including investment income and realized/unrealized investment results | $524.3 million | $852.9 million |
| Loss before taxes and noncontrolling interests | $10.2 million | Income of $79.6 million |
| Net income (loss) attributable to Stewart | Loss of $8.2 million | Income of $57.9 million |
| Diluted earnings (loss) per share | $(0.30) | $2.11 |
| Cash from (used in) operating activities | $(51.1) million | $34.9 million |
Operating revenue fell 38% year over year. Title segment revenue was $461.6 million and the segment recorded a pretax loss of $0.7 million, compared with pretax income of $82.8 million a year earlier. Real estate solutions revenue fell 30% to $62.6 million, with pretax income down to $1.4 million from $6.8 million. Corporate and other reported a pretax loss of $10.9 million.
Consolidated employee costs declined 17% and other operating expenses declined 36%, but revenue contraction left these costs higher relative to operating revenue. Title loss expense was $17.7 million, or 3.9% of title operating revenue, versus $29.2 million and 4.0% a year earlier. Investment income rose 82% to $6.6 million, while net realized and unrealized investment results shifted to a $1.8 million loss from a $4.1 million gain. The 2023 results included a $4.9 million income tax benefit; the reported effective tax rate was 38%, or 25% excluding discrete tax adjustments.
Balance sheet, liquidity and capital
- At March 31, cash and cash equivalents were $174.8 million; total assets were $2.68 billion and total stockholders’ equity was $1.36 billion.
- Notes payable totaled $445.1 million, down from $447.0 million at December 31, 2022. The company reported its line of credit facility was fully available and debt-to-equity and debt-to-capitalization ratios, excluding Section 1031 notes, of approximately 33% and 25%.
- Stewart reported $891.0 million in total cash and investments, including statutory premium reserves. Approximately $541.6 million of investments and $10.3 million of cash were statutory reserve funds and unavailable for other purposes. Parent and unregulated subsidiaries held $48.4 million in cash.
- Estimated title loss reserves were $533.4 million, including $74.3 million for known claims and $459.1 million for incurred-but-not-reported claims. Reserve payments are substantially made within eight years, but actual timing and ultimate losses are uncertain.
- Operating cash use was $51.1 million, primarily reflecting the net loss and higher claims payments, including payments on existing claims. Investing cash use was $4.8 million, including $21.5 million for acquisitions; financing cash use was $17.4 million, including $12.3 million of dividends. The quarterly dividend was $0.45 per share.
Material changes and business conditions
- Management attributed the revenue decline principally to lower real estate transaction volumes amid elevated mortgage rates. Total closed orders fell 45%; purchase closed orders declined 33% and refinance closed orders declined 72%. Stewart said total closed orders were its lowest in more than 15 years.
- Direct title revenue fell 35%; independent-agency gross revenue declined 38%. Domestic commercial revenue declined 42%, including a 34% decrease in average commercial fee per file.
- Real estate solutions revenue was down 30%, reflecting lower transaction volumes. The prior-year comparison also included $33.9 million of revenue from a real estate brokerage business sold in Q2 2022.
- Average employee count was down 8% year over year, to approximately 6,900. Corporate expenses increased, primarily due to higher legal and technology costs.
- Goodwill increased by $21.4 million, mainly from acquisitions of a financial and personal information verification services provider and several title offices.
Outlook, risks and contingencies
The filing provides no specific company earnings or revenue guidance. Management said it is focused on cost control, automation, systems and production consolidation, and acquisition integration to improve operating margins. It stated that it believes available liquidity and operating cash flows will be sufficient for operations and claims, subject to regulatory restrictions, while noting that additional borrowing or equity funding could be needed in some circumstances.
Management cited industry estimates available at March 31, 2023: Fannie Mae and MBA expected 2023 mortgage rates to average 5.9% and total mortgage originations to decline 26% versus 2022. The filing also described continued pressure from the housing and mortgage market: the average 30-year mortgage rate was 6.4% in Q1 2023 versus 3.9% a year earlier, and first-quarter mortgage originations were down 56%.
Key risks include further weakness in real estate activity and mortgage financing, adverse title claims or reserve revisions, regulatory limits on transfers from regulated subsidiaries, cyber and technology risks, agency fraud or noncompliance, acquisition integration, litigation and regulatory matters, and access to financing. Stewart said it did not expect pending ordinary-course litigation, other claims, or regulatory inquiries to materially affect its financial condition or results, and believed reserves were adequate. Unused letters of credit totaled $4.9 million; the company did not expect payments on its guarantees. Statutory reserve funds are restricted and cannot be used for other purposes.
Important facts for investors to verify
- Whether transaction volumes and order closings stabilize, particularly purchase and refinance activity, and how that affects revenue and margins.
- Whether planned cost actions offset fixed-cost pressure as revenue changes, and whether segment profitability recovers.
- Developments in title claims, large losses, reserve estimates and cash claim payments; these involve substantial estimation uncertainty.
- Availability of cash at the parent level and regulated subsidiaries, statutory reserve requirements, and any restrictions on dividends or intercompany transfers.
- Acquisition performance and integration, including the effects of the acquired businesses and the prior-year brokerage sale on comparisons.
- Investment portfolio valuation and interest-rate sensitivity, along with the company’s stated expectation that it can hold debt securities through recovery or maturity.