Stewart Reports Operating Results for the Third Quarter and First Nine Months of 2008
HOUSTON, Oct. 29, 2008/ -- Stewart Information Services Corporation NYSE-STC today reported the results of its operations for the third quarter and nine months ended September 30, 2008. (Dollar amounts in the table below are in millions, except per share figures.)
Third Quarter (a) 2008 2007 Total revenues $395.2 $501.9 Pretax loss before minority interests (39.7) (19.9) Net loss (30.0) (14.3) Net loss per share (1.66) (0.79) Nine Months (b) 2008 2007 Total revenues $1,217.9 $1,607.0 Pretax loss before minority interests (124.7) (5.3) Net loss (83.9) (8.9) Net loss per share (4.64) (0.49) (a) The third quarter of 2008 includes net pretax charges of $5.6 million ($3.6 million after taxes, or $0.20 per share), comprising a charge of $10.5 million for loss reserves relating to large title claims, an impairment charge of $2.6 million relating to equity securities held for investment and office closure costs of $2.5 million offset by a reduction in title losses due to recoveries recorded on a fidelity bond of $10.0 million. The third quarter of 2007 includes pretax charges of $17.1 million ($11.1 million after taxes, or $0.61 per share) relating to large title claims totaling $6.0 million and a reserve adjustment of $11.1 million relating to current and prior year policies. The third quarter of 2007 also includes a pretax gain on the sale of property of $5.6 million ($2.0 million after taxes and minority interests, or $0.11 per share). (b) The first nine months of 2008 include net pretax charges of $41.3 million ($26.8 million after taxes, or $1.48 per share) relating to reserve adjustments of $10.0 million for prior policy years, $28.2 million relating to large title claims and agency defalcations, a software impairment charge of $6.0 million, office closure costs of $4.4 million and an impairment of equity securities held for investment of $2.6 million. These charges were offset somewhat by a reduction in title losses due to recoveries recorded on a fidelity bond of $10.0 million. The first nine months of 2007 includes pretax charges of $24.5 million ($15.9 million after taxes, or $0.87 per share) relating to a charge of $13.4 million for large title claims and a $11.1 million charge for reserve adjustments relating to current and prior year policies. These charges were offset by gains from the sales of businesses and property totaling $8.8 million ($4.1 million after taxes and minority interests, or $0.22 per share).
Issues in the credit markets intensified significantly during the third quarter of 2008, which resulted in a severe tightening of available credit. Residential building permits on an annualized basis have fallen to the lowest level since prior to 1980. Existing home sales were 7.7 percent less on a seasonally-adjusted annualized basis in the third quarter of 2008 when compared with the same period in 2007. This is a direct result of oversupply, foreclosures, declining prices, economic uncertainty and more stringent loan underwriting standards, in spite of lower interest rates. Commercial transactions have also been negatively impacted as a result of the financial market tightening and limited lending due to more stringent underwriting standards. As a result, our orders opened dropped 26.9 percent in the third quarter compared with a year ago.
Revenues in the third quarter of 2008 fell to $395.2 million, a decline of 21.3 percent from the $501.9 million in the same period last year. The decline in revenues contributed to a loss (before taxes and minority interests) of $39.7 million in the third quarter of 2008 compared with a loss of $19.9 million in the third quarter of 2007.
Total revenues for the first nine months of 2008 were $1.2 billion, down 24.2 percent from $1.6 billion for the same period in 2007. Overall, the Company reported a loss (before taxes and minority interests) of $124.7 million in the first nine months of 2008 compared with a loss of $5.3 million in the same period in 2007.
Our international operations remained profitable for the third quarter and year-to-date periods, somewhat offsetting the loss in our U.S. residential operations. In addition, our overall results for the third quarter and year-to-date 2008 reflect the benefits of our ongoing cost reduction initiatives. Employee costs and other operating expenses decreased significantly in the third quarter and year-to-date periods of 2008 when compared with the same periods in 2007. Although lower in the current year periods compared with 2007, other operating expenses have not declined at the same rate as our revenues due to the relatively fixed cost nature of many of our operations.
Our provision for title losses in the third quarter 2008 decreased over the same period in 2007, due primarily to charges recorded to strengthen reserves last year in the third quarter that were not required in the current year. We also recorded $10.0 million of insurance recoveries in the third quarter of 2008 relating to title losses filed against our fidelity bond, which were offset by a comparable increase in reserves for large losses. Our loss provision ratio remains at an elevated level compared to normal levels due to adverse payment experience relating to prior policy years and an increase in the frequency of large title losses and agency defalcations, which is to be expected during down-market cycles.
"We continue to aggressively cut operations that show continuing losses and unacceptable risk exposure. We have also canceled 1,750 independent agencies since June 1, 2008," said Malcolm S. Morris, co-chief executive officer and chairman. "Even though the agencies being canceled are relatively minor to our total revenues, they represent a sizeable portion of our claims and management-related expenses. These cancellations are being accompanied by significant staff and overhead expense reductions within our underwriting companies," added Morris.
"Development of new revenue and expense controls are our daily focus," said Stewart Morris, Jr., co-chief executive officer and president. "We closed another 40 branch and office locations during the quarter and reduced headcount by 470 in the third quarter of 2008, bringing the total of our employee reductions to 2,900, or 29.3 percent, since December 31, 2006. Total closed branch and office locations since the beginning of 2008 is 110, which resulted in closure costs of $4.4 million. Revenue growth is being driven by sales training and marketing support to assist our existing sales associates in more effectively executing our strategies.
"Hurricane Ike in September had a significant adverse effect on revenues in the greater Houston area as a result of the postponement of transactions by affected participants," added Morris. "While certain offices were closed following the hurricane, we lost no ongoing work and were not prevented from completing closings that needed to take place, once again proving the value of our investment in our paperless, Internet-based title processing and transaction management technology. Our prior planning and investment in preemptive actions and scripted disaster recovery were resources well spent."
A major accomplishment this quarter was an agreement reached with UBS Bank regarding $241.5 million of auction rate securities held in exchanger funds by our tax-deferred property exchange business. UBS has provided a line of credit collateralized by the full par value of the auction rate securities. This line of credit has provided significant liquidity to the exchanger funds of our tax-deferred property exchange business. We expect the line of credit to be repaid in full through the transfer to UBS of the securities held as collateral at par value or pursuant to the settlement among UBS and various states and state regulatory agencies.
Stewart Information Services Corporation 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, document preparation, background checks and expertise in tax-deferred exchanges. More information can be found at http://www.stewart.com.
This press release may contain forward-looking statements, which include all statements other than statements of historical facts. Forward-looking statements are not guarantees of performance and no assurance can be given that Stewart's expectations will be achieved. Factors that could cause expected or anticipated results to differ from those described in the forward-looking statements include those factors described in Item 1A of Stewart's annual report on Form 10-K for the year ended December 31, 2007. In particular, historical order counts do not necessarily indicate future revenues since Stewart cannot predict the number of orders that will result in closings.
STEWART INFORMATION SERVICES CORPORATION STATEMENTS OF EARNINGS (In thousands of dollars, except per share amounts) Three months ended Nine months ended September 30 September 30 2008 2007 2008 2007 Revenues Title insurance: Direct operations 176,381 234,161 557,655 734,203 Agency operations 208,558 235,621 613,124 784,309 Real estate information 9,110 16,510 35,128 49,540 Investment income 7,015 8,800 22,551 27,018 Investment and other (losses) gains - net (5,832) 6,826 (10,541) 11,950 395,232 501,918 1,217,917 1,607,020 Expenses Amounts retained by agencies 169,333 189,596 499,457 634,738 Employee costs 140,006 170,422 438,045 526,310 Other operating expenses 86,108 103,245 259,355 302,129 Title losses and related claims 29,644 46,642 108,961 113,618 Depreciation and amortization 8,360 10,403 26,401 30,437 Impairment of other assets - - 6,011 - Interest 1,433 1,512 4,369 5,054 434,884 521,820 1,342,599 1,612,286 Loss before taxes and minority interests (39,652) (19,902) (124,682) (5,266) Income tax benefit (11,269) (9,162) (45,556) (6,241) Minority interests 1,592 3,530 4,730 9,883 Net loss (29,975) (14,270) (83,856) (8,908) Loss per share (1.66) (0.79) (4.64) (0.49) Average number of shares (000) 18,109 18,114 18,082 18,206 Segment information: Title revenues 386,122 485,408 1,182,789 1,557,480 Title pretax loss before minority interests (35,118) (19,976) (112,425) (8,170) REI revenues 9,110 16,510 35,128 49,540 REI pretax (loss) earnings before minority interests (4,534) 74 (12,257) 2,904 Selected financial information: Cash (used) provided by operations (25,066) (4,622) (71,706) 14,810 Title loss payments - net of recoveries 30,809 34,356 100,272 82,233 Changes in other comprehensive earnings - net of taxes (10,331) 7,360 (17,827) 7,907 Number of title orders opened (000): July 40 54 August 35 53 September 35 43 Quarter 110 150 Number of title orders closed (000): Quarter 78 107 September 30 December 31 2008 2007 Stockholders' equity 655,176 754,059 Number of shares outstanding (000) 18,155 18,031 Book value per share 36.09 41.82 STEWART INFORMATION SERVICES CORPORATION BALANCE SHEETS (condensed) (In thousands of dollars) September 30 December 31 2008 2007 Assets Cash and cash equivalents 53,464 78,797 Cash and cash equivalents - statutory reserve funds 145,697 30,442 Total cash and cash equivalents 199,161 109,239 Short-term investments 54,735 79,780 Investments - statutory reserve funds 344,655 518,586 Investments - other 75,730 98,511 Receivables - premiums from agencies 35,903 48,040 Receivables - other 107,320 93,335 Allowance for uncollectible amounts (13,994) (11,613) Property and equipment 87,165 96,457 Title plants 78,873 78,245 Goodwill 210,033 208,824 Intangible assets 11,999 17,157 Other assets 122,477 105,413 Other assets - pledged (a) 230,250 - 1,544,307 1,441,974 Liabilities Notes payable 146,811 108,714 Line of credit (a) 188,050 - Accounts payable and accrued liabilities 92,933 122,167 Estimated title losses 447,078 441,324 874,872 672,205 Minority interests 14,259 15,710 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 143,996 141,196 Retained earnings 513,262 597,118 Accumulated other comprehensive earnings 2,015 19,842 Treasury stock (4,097) (4,097) Total stockholders' equity 655,176 754,059 1,544,307 1,441,974 (a) The remaining $42.2 million available under the line of credit was drawn on October 1, 2008, resulting in an outstanding balance of $241.5 million, which is fully collateralized by auction rate securities noted above as other assets - pledged. The auction rate securities and line of credit, as recorded above, are each reduced by $11.3 million relating to fair value adjustments. These fair value adjustments offset in investment and other (losses) gains - net and result in no net impact to the consolidated statement of earnings.