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Stewart Reports Results of Operations for Fourth Quarter and Full Year 2011

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HOUSTON, Feb. 16, 2012 --

  • Full year 2011 pretax earnings before noncontrolling interests increased to $18.0 million while total revenues decreased 2.2 percent
  • New senior management team appointed with emphasis on smart growth, a strategic focus on the company's core real estate-related expertise and sustained profitability
  • Full year 2011 net earnings improved by $14.9 million to $2.3 million on revenues of $1.6 billion
  • Earnings per share for 2011 of $0.12 improved $0.81 from a $0.69 loss per share for 2010
  • Fourth quarter 2011 earnings of $2.2 million, or $0.11 per share
  • Significant improvement in results from title operations
  • Real estate information (REI) operations continued strong growth and solid profitability

Stewart Information Services Corporation (NYSE-STC) today reported the results of its operations for the fourth quarter and year ended December 31, 2011. Stewart reported net earnings of $2.3 million for the year ended December 31, 2011, a $14.9 million improvement from a net loss of $12.6 million for 2010. Earnings per share were $0.12 for 2011, compared with a loss per share of $0.69 for 2010. Total revenues for 2011 of $1.6 billion declined 2.2 percent from 2010 while operating revenues declined 0.9 percent compared to the prior year, and operating revenues net of agency retention improved $14.4 million or 1.6 percent.

For the year, our pretax earnings before noncontrolling interests increased to $18.0 million compared with $2.9 million in 2010. The REI segment's contribution to pretax earnings before noncontrolling interests increased by $10.0 million, with the remaining $5.1 million improvement coming from core title operations. Of particular significance, this improvement was achieved even though investment income and other gains fell $22.4 million year-over-year. For the most part, none of the investment income and other gains are attributable to REI operations, thus title operating results improved by approximately $27.5 million in 2011.

Net earnings for the fourth quarter 2011 were $2.2 million ($0.11 per diluted share) compared with $10.0 million ($0.46 per diluted share) in the fourth quarter 2010. Total revenues for the fourth quarter 2011 were $445.1 million, compared with $449.5 million in the fourth quarter 2010. Operating revenues increased 0.3 percent compared to the prior year fourth quarter, but operating revenues net of agency retention declined 3.1 percent. The decline in fourth quarter 2011 earnings is attributable to $5.9 million lower investment income and other gains as well as the decline in operating revenues net of agency retention.

The board of directors of Stewart announced in November that Matthew W. Morris had been elected chief executive officer with responsibility for all operations. Matthew Morris succeeded Malcolm S. Morris and Stewart Morris, Jr., who had served as co-chief executive officers and will now serve as vice chairmen of the board. In addition, the chairman of the board and chief executive officer positions were separated, and Dr. E. Douglas Hodo was elected as chairman of the board of directors.

Summary results of operations are as follows (dollar amounts are in millions, except for per share amounts):

4th Quarter

Year

2011

2010

2011

2010

Total revenues

$445.1

$449.5

$1,634.9

$1,672.4

Pretax earnings before noncontrolling interests

11.0

16.0

18.0

2.9

Income tax expense

6.8

3.8

9.3

8.1

Net earnings (loss) attributable to Stewart

2.2

10.0

2.3

(12.6)

Net earnings (loss) per diluted share attributable to Stewart

0.11

0.46

0.12

(0.69)


The fourth quarter and full year 2011 included pretax credits and charges as follows (dollar amounts are in millions):

4th Quarter

Year

2011

2010

2011

2010

Loss reserve strengthening, charges for large claims and defalcations

6.9

5.1

22.2

15.3

Gains on sales of investments, subsidiaries, real estate, and other assets

(7.6)

(10.5)

(10.6)

(22.3)

Provision for legal matters

(2.3)

Impairment of investments

2.3

3.5

Loan guarantee obligation

3.9

Total pretax charges (credits)

1.6

(5.4)

19.0

(9.3)


"2011 marked a pivotal year of progress towards our commitment to sustained profitability and delivering returns to our shareholders," said Matthew W. Morris, chief executive officer. "Today, we are pleased to report our third consecutive quarter of profitability and our first annual profit since 2006, reflecting the significant work of our management to alter our cost structure and improve the quality of our customer base. While hard work remains, we are encouraged by the improving results in our financial and operational performance. Our direct title operations posted a marked improvement in results year over year and the lender services operations within our REI segment continue to achieve profitable growth and expand our mortgage related services.  Revenues from our international and commercial channels recorded year-over-year increases in excess of 10 percent. We recently reorganized our core title operations so as to achieve better alignment with our customers while streamlining the management team, and are developing our long-term strategic plan to capitalize on our 119 year history of integrity and service excellence in the title and real estate services industry," commented Mr. Morris.

While total revenues declined 2.2 percent in 2011 compared to 2010, operating revenues declined 0.9 percent compared to the prior year, and operating revenues net of agency retention improved 1.6 percent. Within direct operations, total title orders closed decreased 7.7 percent, but revenue per file increased from the prior year due to fewer refinance transactions in 2011 as well as an increase in commercial transactions. Commercial revenues grew 11.1 percent to $103.0 million and international operating revenues grew 11.7 percent to $108.7 million while direct revenues from title offices declined 4.6 percent.  According to data from the Mortgage Bankers Association, total residential mortgage originations for the nine months ended September 30, 2011 (most recent data) declined approximately 19 percent from the same period in 2010.  The latest forecasts for 2012 residential lending anticipate increased purchase transactions and reduced refinance volumes, which should result in a continued increase in revenue per order closed in 2012. For the fourth quarter 2011, commercial revenues declined 6.9 percent, international operating revenues increased 12.4 percent to $27.1 million and direct revenues from title offices declined 5.6 percent from the prior year fourth quarter.

In 2011, we continued to improve the quality of our network of independent agencies, achieving an increase in the average revenue per agency while lowering the overall number of agencies as well as reducing our risk of future title losses. Revenues from agency operations declined 4.1 percent for 2011 as compared to 2010, while agency operations revenues net of agency retention declined 4.9 percent, in-line with the decline in revenues from our direct title offices. Notwithstanding the increases in premium rates and remittance rates we have implemented throughout the country, the remittance rate from independent title agencies decreased slightly on a year over year basis, from 17.6 percent for 2010 to 17.5 percent for 2011, attributable to a shift in geographic mix of revenues from independent agencies, as relatively more revenues were realized in states with lower remittance rates, thus lowering the overall average remittance rate. We consider improving the overall remittance rate of agency operations a top priority and will continue to pursue that goal in an economically prudent manner.

Revenues in our REI operations increased 26.1 percent in 2011 compared to 2010, and increased 11.1 percent for the fourth quarter 2011 versus the same quarter in the prior year. Throughout 2011 we focused on increasing revenues from existing major service offerings such as loan loss mitigation solutions, distressed borrower contact services and loan servicing support as well as expanding services into short sale support and REO (Real Estate Owned) solutions. With the goal of achieving additional revenues and supporting the evolving lending and real estate markets, we continue to develop innovative new services in the REI segment to produce additional revenues from these higher margin operations.

Investment income and other gains declined 55.7 percent and 42.6 percent for the year and fourth quarter 2011, respectively, compared to the same periods in 2010. The $22.4 million decline for the year, which has no corresponding expense reduction offset, was due to several gains realized in 2010, slightly lower realized gains on sales of investment securities in 2011, and a non-recurring  charge in second quarter 2011 relating to a loan guarantee obligation.

Although operating revenues declined 0.9 percent for 2011 compared with 2010, total expenses declined at the higher rate of 3.1 percent. Employee costs were essentially unchanged for both the full year and fourth quarter 2011 compared with the same periods in 2010, as an overall decline in employee count of approximately 240 for the year was largely offset by the acquisition of PMH Financial in the third quarter and by increased incentive compensation expense driven by the improvement in pretax earnings before noncontrolling interest. Other operating costs declined 6.2 percent and 6.5 percent for the full year and fourth quarter 2011, respectively, compared with the same periods in 2010 due largely to our ongoing efforts to reduce fixed costs, including occupancy costs, as well as lower costs related to litigation and bad debts. We expect employee and certain other operating costs to rise slightly in the first quarter 2012 as we ramp up to provide services under new REI contracts recently awarded.

Title losses expense declined 4.3 percent and 10.7 percent for the full year and fourth quarter 2011, respectively, compared to the same periods in 2010. Title losses as a percentage of title operating revenues were reduced to 9.4 percent for the full year and 9.9 percent for the fourth quarter 2011 compared to 9.6 percent and 11.1 percent for the full year and fourth quarter 2010, respectively. Claims expense in the fourth quarter 2011 included charges of $6.9 million (1.7 percent of title operating revenues) attributable to reserves for large claims relating primarily to prior policy years, while fourth quarter 2010 included charges of $5.1 million (1.2 percent of fourth quarter title operating revenues) relating predominantly to a reserve strengthening charge for prior policy years. Additionally, a $2.6 million catch-up provision adjustment relating to the full year was recorded in the fourth quarter 2010. For the 2011 year, title loss provisions on large claims relating primarily to prior policy years, including defalcations, totaled $22.2 million (1.5 percent of title operating revenues), net of recoveries. Similar provisions for 2010, as well as the reserve strengthening charge mentioned above, totaled $15.3 million (1.0 percent of title operating revenues), net of recoveries.

During the fourth quarter 2011, we resolved a significant number of large claims from prior policy years. Although some large claims remain outstanding, significant progress was made in resolving the existing large claim inventory which will reduce future risk for the company. Notwithstanding the provision activity relating to settlement of large claims, we continued to experience decreases in cash claims payments as well as in newly incurred claims. Cash claim payments for 2011 declined 15.2 percent compared to 2010, and losses incurred on known claims for 2011 decreased 11.3 percent compared to 2010. Incurred losses for the fourth quarter 2011 dropped 11.0 percent from the fourth quarter 2010.

Cash provided by operations in 2011 was $23.4 million, a decrease of $17.8 million from the $41.2 million provided by operations in 2010. However, the first quarter 2010 included the receipt of an income tax refund of $50.9 million. Excluding the impact of this receipt, cash provided by operations in 2011 improved $33.1 million. Cash provided by operations for the fourth quarter 2011 was $28.4 million, an increase of $1.5 million from the $26.8 million in the fourth quarter 2010.

Mr. Morris concluded: "Over the past several years, Stewart has persevered through significant economic headwinds.  Rather than waiting for a market recovery, we have taken the opportunity to revamp our operations for future success.  Steps taken to reduce our risk profile, align and focus our sales and operations around customer segments and enhance productivity will not only allow us to generate positive returns in current market conditions, but will yield tremendous margin benefit within a market recovery."

Stewart Information Services Corp. (NYSE-STC) is a customer-focused, global title insurance and real estate services company offering products and services through our direct operations, network of approved agencies and other companies within the Stewart family. Stewart provides these services to homebuyers and sellers; residential and commercial real estate professionals; mortgage lenders and servicers; title agencies and real estate attorneys; home builders; and United States and foreign governments. Stewart also provides loan origination and servicing support; loan review services; loss mitigation; REO asset management; home and personal insurance services; tax-deferred exchanges; and technology to streamline the real estate process. Offering personalized service, industry expertise and customized solutions for virtually any type of real estate transaction, Stewart is the preferred real estate services provider. More information can be found at http://www.stewart.com/news.

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," "foresee" 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 outcome of pending litigation; 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, 2010, our quarterly 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

December 31

Twelve months ended

December 31

2011

2010

2011

2010

Revenues:

 Title insurance:

   Direct operations

168,069

173,800

637,550

636,454

   Agency operations

243,237

238,619

877,225

914,581

 Real estate information

25,881

23,302

102,324

81,176

 Investment income

3,476

3,901

15,505

18,397

 Investment and other gains – net

4,415

9,850

2,302

21,782

445,078

449,472

1,634,906

1,672,390

Expenses:

 Amounts retained by agencies

199,840

190,716

723,943

753,438

 Employee costs

120,866

120,696

469,839

467,491

 Other operating expenses

66,099

70,698

256,194

273,253

 Title losses and related claims

40,717

45,600

142,101

148,438

 Depreciation and amortization

5,200

4,677

19,542

21,422

 Interest

1,340

1,115

5,268

5,423

434,062

433,502

1,616,887

1,669,465


Earnings before taxes and noncontrolling interests

11,016

15,970

18,019

2,925

 Income tax expense

6,770

3,781

9,341

8,075

Net earnings (loss)

4,246

12,189

8,678

(5,150)

 Less net earnings attributable to noncontrolling interests

2,087

2,208

6,330

7,432

Net earnings (loss) attributable to Stewart

2,159

9,981

2,348

(12,582)

Net earnings (loss) per diluted share attributable to Stewart

0.11

0.46

0.12

(0.69)

Average number of dilutive shares (000)

19,239

23,384

19,131

18,313

Segment information:

 Title revenues

419,198

426,170

1,532,582

1,591,214

 Title pretax earnings (loss) before noncontrolling interests

2,660

5,092

(24,822)

(29,921)

 REI revenues

25,880

23,302

102,324

81,176

 REI pretax earnings before noncontrolling interests

8,356

10,878

42,841

32,846

Selected financial information:

 Cash provided by operations

28,344

26,834

23,409

41,194

 Title loss payments - net of recoveries

28,694

38,609

134,320

158,309

 Other comprehensive (loss) earnings

(3,343)

(10,792)

3,071

2,650

Number of title orders opened (000):

 October

32.4

36.0

 November

30.0

32.8

 December

28.3

26.4

 Quarter

90.7

95.2

Number of title orders closed (000): Quarter

73.2

80.2

December 31

2011

December 31

2010

Stockholders' equity

463,457

448,333

Number of shares outstanding (000)

19,304

18,375

Book value per share

24.01

24.40


STEWART INFORMATION SERVICES CORPORATION

BALANCE SHEETS (condensed)

(In thousands of dollars)

December 31

December 31

2011

2010

Assets:

 Cash and cash equivalents

117,196

144,564

 Cash and cash equivalents – statutory reserve funds

23,647

9,926

   Total cash and cash equivalents

140,843

154,490

 Short-term investments

33,137

33,457

 Investments – statutory reserve funds

397,074

396,317

 Investments – other

63,911

54,007

 Receivables – premiums from agencies

47,351

45,399

 Receivables – other

57,466

52,721

 Allowance for uncollectible amounts

(16,056)

(19,438)

 Property and equipment

56,437

61,569

 Title plants

77,406

77,397

 Goodwill

214,492

206,861

 Intangible assets

8,693

8,228

 Other assets

75,387

70,198

1,156,141

1,141,206

Liabilities:

 Notes payable

11,722

8,784

 Convertible senior notes payable

64,513

64,338

 Accounts payable and accrued liabilities

86,389

95,666

 Estimated title losses

502,611

495,849

 Deferred income taxes

27,449

28,236

692,684

692,873

Contingent liabilities and commitments

Stockholders' equity:

 Common and Class B Common stock and additional paid-in capital

152,102

143,264

 Retained earnings

284,097

282,666

 Accumulated other comprehensive earnings

16,681

13,610

 Treasury stock

(2,666)

(4,330)

   Stockholders' equity attributable to Stewart

450,214

435,210

 Noncontrolling interests

13,243

13,123

   Total stockholders' equity

463,457

448,333

1,156,141

1,141,206



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