HOUSTON, Oct. 28-- Stewart Information Services Corporation (NYSE: STC) reported a third quarter 2010 loss per diluted share of $0.17 compared to a loss of $1.30 per diluted share in the third quarter of 2009, an improvement of 87 percent over the prior year quarter. Year-to-date the loss per diluted share was $1.23 in 2010 compared to a loss per diluted share of $4.51 in the first nine months of 2009, an improvement of 73 percent over the comparable 2009 period.
Our combined direct title operations and real estate information (REI) operations were profitable again for the quarter and are profitable year-to- date. Our employee and other operating costs continue to show significant improvement, declining a combined 8.9 percent from the third quarter of 2009. Title losses, although declining 29.6 percent for the third quarter of 2010 from the prior year third quarter, remain elevated as described more fully below. We generated operating cash flow of $8.7 million for the quarter ended September 30, 2010, doubling the prior year quarter's $4.3 million.
Third Quarter Nine Months
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2010 (a) 2009 (b) 2010 (a) 2009 (b)
-------- -------- -------- --------
Total revenues $430.1 $460.0 $1,222.9 $1,204.2
Pretax loss before noncontrolling
interests (1.3) (21.6) (13.0) (72.0)
Income tax expense (c) - 0.2 4.3 3.8
Net loss attributable to Stewart (3.0) (23.7) (22.6) (81.9)
Net loss per diluted share
attributable to Stewart (0.17) (1.30) (1.23) (4.51)
(a) The third quarter of 2010 includes a pretax charge of $4.9 million
resulting from changes in the estimated legal costs for several existing
large title claims that we are working to resolve. The first nine months
of 2010 include pretax gains of $6.3 million primarily relating to the
monetization of internally developed software, $1.2 million relating to
the buyout of a royalty agreement and $1.2 million on the sale of an
interest in a subsidiary; a pretax credit of $2.3 million relating to a
change in the estimate of a previously recorded reserve for a legal
matter; and a $10.2 million pretax charge relating to adjustments to
previously recorded large title losses.
(b) The third quarter of 2009 includes pretax charges of $12.5 million
relating to title loss reserve strengthening adjustments for prior policy
years, $3.8 million relating to an increase in the 2009 title loss
provision rate, $6.1 million relating to large title losses and $2.2
million relating to the impairment of other assets. The first nine months
of 2009 includes pretax charges of $31.7 million relating to title loss
reserve strengthening adjustments for prior policy years and $27.2
million relating to several agency defalcations and large title losses
offset by $10.5 million relating to recoveries of previously recognized
title losses, credits of $5.9 million for the settlements of legal
matters in the Company's favor and a pretax charge of $11.1 million
relating to the impairment of investment securities and other assets.
(c) Income tax expense in 2010 and 2009 is related primarily to taxes in
foreign jurisdictions for our international operations and on entities
not included in our consolidated tax returns. The Company did not
recognize an income tax benefit during the first nine months of 2010 or
2009 relating to its pretax loss due to the recording of a valuation
allowance against deferred tax assets.
Total revenues declined 6.5 percent in the third quarter of 2010 compared to the same period in 2009, and operating revenues decreased 6.9 percent. Revenues from direct title operations decreased 8.4 percent in the third quarter of 2010 compared to the same period in the prior year. Although total orders closed for the quarter declined 15.5 percent revenue per closing increased 3.2 percent to $ 1,845. This increase in overall revenue per order is due to the current quarter's closings being less heavily weighted to refinancing transactions than in the prior year's quarter. Revenues from agency operations decreased 7.9 percent in the third quarter of 2010 compared to the third quarter of 2009. Our lender services operations in the REI segment reported an increase in revenues of 27.8 percent for the third quarter of 2010 compared to the third quarter of 2009, but down 26.2 percent sequentially from the second quarter of 2010. Demand for loan modification services, a product introduced in the second quarter of 2009, retreated somewhat in the third quarter relative to the second quarter of 2010 as demand for this product is dependent on the number and scale of government programs and lender projects and can fluctuate significantly from quarter to quarter.
Year-to-date total revenues for 2010 increased 1.6 percent compared to the same period in 2009. Revenues from direct title operations decreased 8.0 percent, agency title revenues improved 4.3 percent and REI revenues increased 30.0 percent.
Third quarter title revenues were not impacted by the temporary suspension of foreclosures announced by certain lenders. Although a disruption in the foreclosure process by lenders could negatively impact revenues and, ultimately, earnings in the short term, the anticipated volume of REO properties for sale indicates that a number of properties will soon be placed on the market. Distressed properties (including REO and short sales) that will be marketed are generally offered at some discount and combined with historically low interest rates creates a positive environment for home sales. Stewart Title Guaranty Company issued a bulletin to title agencies and its owned offices providing underwriting guidelines and standards to enable them to insure REO sale transactions. The American Land Title Association has also completed work on a standardized agreement to be issued by lenders to title insurers to indemnify title insurers against acts of lenders in the foreclosure process. Stewart stands ready to issue its title insurance to purchasers of foreclosed properties from institutional lenders representing that they have followed all applicable legal processes.
Commercial title revenues grew 26.4 percent in the third quarter of 2010 to $ 22.6 million compared to the same quarter in the prior year, and declined 1.9 percent from the second quarter of 2010. International operations remain profitable and are experiencing continued growth in total revenues and profits.
Agency retention was unchanged during the third quarter of 2010 relative to the second quarter at 83.2 percent of agency revenues, but increased 100 basis points from the third quarter of 2009. We are making progress on increasing remittance rates in those states that have not met our profitability goals, and have targeted a 20 percent aggregate remittance rate within the next 12 months.
Employee costs totaled 26.7 percent of operating revenues for the third quarter of 2010, as compared to 27.4 percent in the third quarter of 2009. We continued to lower headcount in the quarter, even while total orders opened increased 6.7 percent compared to the third quarter of 2009, including increased refinance orders. Implementation of our enterprise resource planning system remains on schedule to be substantially complete by the end of 2010, which will result in further improvement in operating and employee costs.
Other operating costs declined 8.0 percent compared to the third quarter of 2009. The third quarter of 2010 included approximately $3.5 million of accruals related to adjustments for several legal matters described in our filings with the Securities and Exchange Commission.
Title losses in the third quarter of 2010 were 9.6 percent of title revenues, declining from 12.6 percent in the third quarter of 2009, and slightly higher than the 9.3 percent recorded in the second quarter of 2010. Included in the current quarter's title losses are accruals aggregating $4.9 million resulting from changes in the estimated legal costs for several existing large title claims that we are working to resolve. Included in the third quarter of 2009 were accruals totaling $18.6 million relating to a reserve strengthening charge and large title claims. Losses incurred on known claims year-to-date have decreased 14.6 percent compared to the prior year period. Nevertheless, cash claims payments remain elevated, and consequently we have maintained a relatively high provisioning rate for title losses. We have had no reserve strengthening charges for the last four quarters, and agency defalcation losses greater than $1 million have been greatly reduced. Five such losses were reported in the last five quarters (averaging less than $1.5 million each), and none were reported in the current quarter. Previously canceled agents accounted for approximately 45 percent of cash claim payments in the third quarter of 2010.
"The comparatively high level of claims paid in the third quarter is based predominantly on claims recognized in prior quarters, which in some cases called for increasing reserves due to additional legal expenses of discovery in the ongoing legal process," said Malcolm S. Morris, chairman and co-chief executive officer. "The good news is that fewer new claims are being reported and claim amounts are smaller," added Morris.
"Over the past year we have transformed our title operations into a sales oriented organization yielding a growth in market share and a higher order count than we would otherwise enjoy," said Stewart Morris, Jr., president and co-chief executive officer. "Driven by record low interest rates, the increased level of refinance activity has stressed lender capacity resulting in lengthened closings times," added Morris. "We are proud of the financial performance of Stewart Lender Services as well as the cost cutting efforts throughout the entire company which have improved performance of the operations this year-to-date over last year."
Stewart Information Services Corporation (NYSE-STC) is a customer-driven technology-enabled, strategically competitive real estate information, title insurance and transaction management company. Stewart provides title insurance and related information services required for settlement by the real estate and mortgage industries throughout the United States and in international markets. Stewart also provides post-closing lender services, automated county clerk land records, property ownership mapping, geographic information systems, property information reports, flood certificates, document preparation, background checks and expertise in tax-deferred exchanges. More information can be found at www.stewart.com.
Forward-looking statements. Certain statements in this news release are " forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to future, not past, events and often address our expected future business and financial performance. These statements often contain words such as "expect," "anticipate, " "intend," "plan," "believe," "seek," "will" or other similar words. Forward- looking statements by their nature are subject to various risks and uncertainties that could cause our actual results to be materially different than those expressed in the forward-looking statements. These risks and uncertainties include, among other things, the severity and duration of current financial and economic conditions; continued weakness or further adverse changes in the level of real estate activity; changes in mortgage interest rates, existing and new home sales, and availability of mortgage financing; our ability to respond to and implement technology changes, including the completion of the implementation of our enterprise systems; the impact of unanticipated title losses on the need to further strengthen our policy loss reserves; any effect of title losses on our cash flows and financial condition; the impact of our increased diligence and inspections in our agency operations; changes to the participants in the secondary mortgage market and the rate of refinancings that affect the demand for title insurance products; regulatory non-compliance, fraud or defalcations by our title insurance agents or employees; our ability to timely and cost-effectively respond to significant industry changes and introduce new products and services; the impact of changes in governmental and insurance regulations, including any future reductions in the pricing of title insurance products and services; our dependence on our operating subsidiaries as a source of cash flow; the continued realization of expected expense savings resulting from our expense reduction steps; our ability to access the equity and debt financing markets when and if needed; our ability to grow our international operations; and our ability to respond to the actions of our competitors. These risks and uncertainties, as well as others, are discussed in more detail in our documents filed with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2009, our quarter reports on Form 10-Q, and our Current Reports on Form 8-K. We expressly disclaim any obligation to update any forward-looking statements contained in this news release to reflect events or circumstances that may arise after the date hereof, except as may be required by applicable law.
STEWART INFORMATION SERVICES CORPORATION
STATEMENTS OF OPERATIONS (condensed)
(In thousands of dollars, except per share amounts and except where noted)
Three months ended Nine months ended
September 30 September 30
2010 2009 2010 2009
--------- --------- ------------ -----------
Revenues:
Title insurance:
Direct operations 161,949 176,795 462,654 502,915
Agency operations 242,938 263,822 675,962 648,015
Real estate information 19,673 15,394 57,874 44,532
Investment income 4,281 4,952 14,496 15,763
Investment and other gains
(losses) -- net 1,224 (972) 11,932 (7,013)
--------- --------- ------------ -----------
430,065 459,991 1,222,918 1,204,212
Expenses:
Amounts retained by
agencies 202,167 216,798 562,722 534,254
Employee costs 113,160 124,968 346,795 362,108
Other operating expenses 70,476 76,616 202,558 213,889
Title losses and related
claims 39,050 55,462 102,836 141,325
Depreciation and
amortization 5,132 6,962 16,744 21,823
Interest 1,355 756 4,307 2,847
--------- --------- ------------ -----------
431,340 481,562 1,235,962 1,276,246
Loss before taxes and
noncontrolling interests (1,275) (21,571) (13,044) (72,034)
Income tax (benefit)
expense (30) 249 4,294 3,786
--------- --------- ------------ -----------
Net loss (1,245) (21,820) (17,338) (75,820)
Less net earnings
attributable to
noncontrolling interests 1,783 1,876 5,225 6,121
--------- --------- ------------ -----------
Net loss attributable to
Stewart (3,028) (23,696) (22,563) (81,941)
========= ========= ============ ===========
Net loss per diluted share
attributable to Stewart (0.17) (1.30) (1.23) (4.51)
--------- --------- ------------ -----------
Average number of dilutive
shares (000) 18,335 18,196 18,304 18,177
========= ========= ============ ===========
Segment information:
Title revenues 410,392 444,597 1,165,044 1,159,680
Title pretax loss before
noncontrolling interests (9,250) (27,199) (35,012) (82,517)
REI revenues 19,673 15,394 57,874 44,532
REI pretax earnings before
noncontrolling interests 7,975 5,628 21,968 10,483
Selected financial
information:
Cash provided (used) by
operations 8,717 4,349 14,360 (17,004)
Title loss payments - net
of recoveries 44,934 38,732 119,699 110,190
Other comprehensive
earnings 9,609 10,291 13,442 19,450
Number of title orders opened
(000):
July 36.7 38.1
August 40.6 35.0
September 39.7 36.6
--------- ---------
Quarter 117.0 109.7
========= =========
Number of title orders closed
(000): Quarter 74.8 88.5
========= =========
September 30 December 31
2010 2009
------------ -----------
Stockholders' equity 449,539 462,066
Number of shares outstanding
(000) 18,374 18,232
Book value per share 24.47 25.34
STEWART INFORMATION SERVICES CORPORATION
BALANCE SHEETS (condensed)
(In thousands of dollars)
September 30 December 31
2010 2009
------------ -----------
Assets:
Cash and cash equivalents 125,969 97,971
Cash and cash equivalents -- statutory reserve
funds 10,576 18,129
------------ -----------
Total cash and cash equivalents 136,545 116,100
Short-term investments 27,881 24,194
Investments -- statutory reserve funds 406,197 386,235
Investments -- other 47,919 79,969
Receivables -- premiums from agencies 43,591 42,630
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Receivables -- other 60,817 103,153
Allowance for uncollectible amounts (21,000) (20,501)
Property and equipment 63,507 70,633
Title plants 77,401 78,421
Goodwill 206,861 212,763
Intangible assets 8,490 6,406
Other assets 71,763 67,150
Investments -- pledged, at fair value 0 202,007
------------ -----------
1,129,972 1,369,160
============ ===========
Liabilities:
Notes payable 6,278 19,620
Convertible senior notes payable 64,294 64,163
Line of credit, secured by pledged investments 0 202,007
Accounts payable and accrued liabilities 99,599 101,881
Estimated title losses 487,543 503,475
Deferred income taxes 22,719 15,948
------------ -----------
680,433 907,094
Contingent liabilities and commitments
Stockholders' equity:
Common and Class B Common stock and additional
paid-in capital 143,310 145,530
Retained earnings 273,553 296,116
Accumulated other comprehensive earnings 24,402 10,960
Treasury stock (4,330) (4,330)
------------ -----------
Stockholders' equity attributable to Stewart 436,935 448,276
Noncontrolling interests 12,604 13,790
------------ -----------
Total stockholders' equity 449,539 462,066
------------ -----------
1,129,972 1,369,160
============ ===========
About Stewart
Stewart Title Company is a wholly owned subsidiary of Stewart Information Services Corp. (NYSE-STC), a customer-driven, technology-enabled, strategically competitive, real estate information, title insurance and transaction management company. Stewart provides title insurance and related information services required for settlement by the real estate and mortgage industries throughout the United States and international markets. Stewart also provides post-closing lender services, automated county clerk land records, property ownership mapping, geographic information systems, property information reports, flood certificates, document preparation, background checks and expertise in tax-deferred exchanges. More information can be found at http://www.stewart.com, subscribe to the Stewart blog at http://blog.stewart.com or follow Stewart on Twitter @stewarttitleco.
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