Stewart Reports Results of Operations for Fourth Quarter and Full Year 2010

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HOUSTON, Feb. 17, 2011 -- Stewart Information Services Corporation (NYSE-STC) today reported the results of its operations for the fourth quarter and year ended December 31, 2010. Stewart earned $0.46 per diluted share for the fourth quarter 2010 compared with $1.49 for the fourth quarter 2009. Earnings per share for the fourth quarter 2009 were driven by a one-time tax benefit resulting from a change in tax law. On a pretax basis before noncontrolling interests, earnings for the fourth quarter 2010 improved 62.2 percent over the fourth quarter 2009. For the year, on a pretax basis, results of operations improved to a profit of $2.9 million in 2010 from a loss of $62.2 million in 2009.  Stewart reduced its loss per share to $0.69 in 2010 from $2.80 in 2009.

As a result of continued gains in operational efficiency in our core title operations and revenue growth in our real estate information services (REI), international and commercial businesses, Stewart realized significant improvements in its pretax profits for the fourth quarter and year 2010 compared with the same periods in the prior year.  Total revenues decreased 10.7 percent in the fourth quarter 2010 compared with the fourth quarter 2009, and declined slightly by 2.0 percent for the year 2010 compared with 2009. Total expenses decreased 12.1 percent and 5.7 percent for the quarter and year 2010, respectively, compared with the same periods in 2009.  On a full year basis, all expense categories, except interest, decreased on a percentage basis more than operating revenues decreased, with the most significant expense decreases realized in agency retention expense (corresponding to a decline in agency revenues) and, importantly, title loss expense. We again achieved increased revenues and strong profit margins in our REI segment. Revenues in our REI segment increased 88.5 percent and 42.7 percent, respectively, for the fourth quarter and year 2010 versus the comparable periods in 2009.

 

 

 

4th Quarter

Year

 

 

2010

2009

2010

2009

 

 

 

 

 

 

 

Total revenues

$449.5

$503.1

$1,672.4

$1,707.3

 

Pretax earnings (loss) before noncontrolling interests

16.0

9.8

2.9

(62.2)

 

Income tax expense (benefit)

3.8

(23.5)

8.1

(19.8)

 

Net earnings (loss) attributable to Stewart

10.0

31.0

(12.6)

(51.0)

 

Net earnings (loss) per diluted share attributable to Stewart

0.46

1.49

(0.69)

(2.80)

 

 

 

 

 

 

 

 

 

 

The fourth quarter and full year 2010 included pretax credits and charges as follows (dollar amounts are in millions):

 

 

 

4th Quarter

Year

 

 

2010

2009

2010

2009

 

 

 

 

 

 

 

Loss reserve strengthening, charges for large claims and defalcations

5.1

4.2

15.3

52.6

 

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

(10.5)

(16.1)

(22.3)

(17.7)

 

Provision for legal matters

(2.3)

(5.9)

 

Impairment write-downs of investment securities and other assets

0.8

11.9

 

Office closing and restructuring costs

0.3

1.8

 

Total pretax (credits) charges

(5.4)

(10.8)

(9.3)

42.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Our combined direct and REI operations posted a profit for the full year and in every quarter of 2010 except the first quarter.  In the REI segment, we focused on increasing revenues from existing major product offerings (such as loan loss mitigation solutions, distressed borrower contact services and loan servicing support) and also from expanding services into short sale support and REO (Real Estate Owned) solutions, county government support services and international land record enhancement. 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 high margin operations.

Revenues from direct operations for the fourth quarter 2010 were comparable to the fourth quarter 2009 and declined 6.0 percent for the year 2010 compared to 2009.  As long term interest rates began to rise and refinance transactions declined, closed title orders decreased 1.4 percent in the fourth quarter 2010 compared with the fourth quarter 2009, and declined 18.1 percent for the year 2010 compared to 2009. Agency revenues decreased 19.8 percent and 3.3 percent in the fourth quarter and year 2010, respectively, compared with the same periods in 2009. Revenue per closed order for the year increased 14.9 percent from the previous year as our business mix shifted to include more commercial and sale transactions and fewer refinance transactions. Agency revenues represented 57.9 percent of total title revenues for the fourth quarter and 59.0 percent for the year.  

Declines in revenues from direct operations were somewhat offset by growth in our international and commercial businesses, which were up 20.2 percent and 25.3 percent, respectively, for the year 2010 compared to 2009.  

Our Regional Production Centers now account for 65 percent of all affiliated title searches and commitments for our direct title business, up from 47 percent in December 2009.  In addition to reducing costs, we expect the improved utilization of our most skilled people in these centers to reduce claims related to the search and examination process.

Losses from title policy claims decreased 18.8 percent for the year 2010 compared to 2009 but increased 10.0 percent in the fourth quarter 2010 compared to the fourth quarter 2009. As a percentage of title revenues, title losses were 11.1 percent in the fourth quarter 2010 and 8.8 percent in the fourth quarter 2009.  Excluding the impact of the reserve strengthening charges, large losses, and defalcations (net of recoveries) in both years, title losses were 8.6 percent of title revenues in 2010 and 8.0 percent in 2009. We recorded a $5.1 million reserve strengthening charge in the fourth quarter 2010 relating primarily to policy years 2007 and 2008 due to continuing adverse claims experience attributable to those policy years and to charges for large claims. This adverse claims experience also resulted in an increase in the loss provision related to revenues recognized on policies issued in 2010, and, accordingly, a $2.6 million catch-up adjustment was recorded in the fourth quarter 2010.  For the years 2010 and 2009, title losses as a percentage of title revenues were 9.6 percent and 11.3 percent, respectively. Charges related to reserve strengthening, including large losses and defalcations, fell 71 percent from $52.6 million in 2009 to $15.3 million in 2010. Charges recorded in 2010 for large losses resulted primarily from changes in the estimated legal costs for several existing large title claims that we are working to resolve.  We had no agency defalcation losses exceeding $1.0 million in the fourth quarter 2010 and only five such claims reported (averaging less than $1.5 million each) in the previous six quarters.

Losses incurred on known claims in 2010 decreased 15.7 percent compared to 2009. Cash claims payments remained elevated for the fourth quarter and year 2010, and consequently, we have maintained a relatively high provisioning rate for title losses. Nonetheless, we believe we are on track to return to a normal loss ratio by the end of 2012.  The loss ratio on known claims from the independent agencies cancelled in recent years was 9.2 percent in 2010 while the loss ratio from the current independent agency network was 2.9 percent.  More than 70 percent of independent agency claims payments in 2010 were related to agencies cancelled in recent years.

Where possible, we have renegotiated independent agency remittance agreements with a goal of increasing the average overall remittance rate to near 20 percent.  Not all increases will be seen immediately in our results as some existing agency contracts are not expiring in 2011. We experienced an overall increase in the average percentage remitted by independent agents from 17.1 percent in 2009 to 17.6 percent in 2010. The average remittance rate is also influenced by the geographic mix of agency revenues, as a result of the housing market having experienced an uneven recovery across the nation. As markets recover nationally, the mix of agency business should normalize, which, when coupled with the changes to agency agreements, is expected to result in higher overall net agency remittance rates.

We continued to closely manage employee costs in 2010 which resulted in a decrease in total employee costs of 2.9 percent from 2009. Employee costs in the fourth quarter 2010 increased slightly when compared with the fourth quarter 2009 due primarily to the substantial improvement in operating results. We anticipate a further reduction in employee costs in 2011 as we continue to deploy the new and more efficient title production system and begin implementation of our new underwriter policy and claims management system.

Other operating expenses declined by 6.7 percent and 5.7 percent for the fourth quarter and year 2010, respectively, compared with the same periods in 2009. These declines were primarily related to our ongoing efforts to reduce fixed costs, including occupancy costs, as well as lower costs related to litigation and bad debts.

As was the case in the fourth quarter 2009, we were able to lock in favorable positions in our investment portfolio and realized gains of $7.5 million in the fourth quarter 2010 by selling certain securities (the proceeds were reinvested in similar securities such that our ongoing investment performance will not be significantly affected).  

Cash provided by operations for the fourth quarter and year 2010 was $26.8 million and $41.2 million, respectively, representing significant improvements of $33.0 million and $58.1 million from net cash used in operations reported in the fourth quarter and year 2009 of $6.2 million and $17.0 million, respectively.

"We continue to refine our field policy issuance practices which we believe will lead to lower future claim levels.  We are also focused on improving the overall quality of our agency network and increasing remittance rates from independent title agencies," said Malcolm S. Morris, chairman and co-chief executive officer. "Our target return on equity in a normal year is 10 percent. We will continue taking the necessary steps to streamline our operations to reach that goal.  Complicating achievement of our 2011 goals is a consensus forecast of significant reductions in 2011 residential lending which is expected to fall below $1.0 trillion for the first time since 1997. While having to adjust to residential lending volumes of almost half of 2009 levels, we foresee a rise in commercial business which we expect to more than double from the 2009 volumes."

"We are pleased with the greatly improved performance of our affiliated operations which saw our leaner title organization structure produce higher profits and profit margin," said Stewart Morris, Jr., president and co-chief executive officer.  "Our primary focus is on sales growth and higher productivity from our utilization of the Regional Production Centers.  In addition, the substantial completion and deployment of our newly developed Production Engine will reduce the time and cost of title production while delivering higher quality in the coming year," said Morris. "We are also encouraged by the substantial growth in our commercial business in 2010, and increased revenues and contribution margins in our non-title businesses which consist primarily of lender services and also include local government and global land record enhancement services."

As previously disclosed, Citigroup Global Markets Realty Corp., and its borrowers through a third party claim, filed a lawsuit in Harris County, Texas against subsidiaries of ours with respect to title policies on 16 parcels of land in Mexico. We strongly believe that the claims related to these title policies are without merit and are vigorously defending against those claims.  A jury trial began February 15, 2011. Due to the complex factual and legal issues, including those involving Mexican law, it is not possible to reasonably estimate the ultimate outcome of this litigation or determine whether that outcome would materially affect our consolidated financial condition or results of operations.

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," "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, 2009, 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

 

 

2010

2009

2010

2009

 

Revenues:

 

 

 

 

 

Title insurance:

 

 

 

 

 

Direct operations       

173,800

173,842

636,454

676,756

 

Agency operations

238,619

297,466

914,581

945,481

 

Real estate information

23,302

12,363

81,176

56,895

 

Investment income

3,901

5,041

18,397

20,804

 

Investment and other gains – net

9,850

14,378

21,782

7,366

 

 

449,472

503,090

1,672,390

1,707,302

 

Expenses:

 

 

 

 

 

Amounts retained by agencies

190,716

249,152

753,438

783,406

 

Employee costs

120,696

119,427

467,491

481,535

 

Other operating expenses

70,698

75,759

273,253

289,648

 

Title losses and related claims

45,600

41,456

148,438

182,781

 

Depreciation and amortization

4,677

6,242

21,422

28,064

 

Interest

1,115

1,209

5,423

4,056

 

 

433,502

493,245

1,669,465

1,769,490

 

 

Earnings (loss) before taxes and noncontrolling interests

15,970

9,845

2,925

(62,188)

 

Income tax expense (benefit)

3,781

(23,543)

8,075

(19,757)

 

Net earnings (loss)

12,189

33,388

(5,150)

(42,431)

 

Less net earnings attributable to noncontrolling interests

2,208

2,423

7,432

8,544

 

Net earnings (loss) attributable to Stewart

9,981

30,965

(12,582)

(50,975)

 

 

 

 

 

 

 

Net earnings (loss) per diluted share attributable to Stewart

0.46

1.49

(0.69)

(2.80)

 

Average number of dilutive shares (000)

23,384

21,249

18,313

18,182

 

 

 

 

 

 

 

Segment information:

 

 

 

 

 

Title revenues

426,170

490,727

1,591,214

1,650,407

 

Title pretax earnings (loss) before noncontrolling interests

5,092

9,253

(29,921)

(73,263)

 

 

 

 

 

 

 

REI revenues

23,302

12,363

81,176

56,895

 

REI pretax earnings before noncontrolling interests

10,878

592

32,846

11,075

 

 

 

 

 

 

 

Selected financial information:

 

 

 

 

 

Cash provided (used) by operations

26,834

(6,237)

41,194

(16,952)

 

Title loss payments - net of recoveries

38,609

39,141

158,309

149,331

 

Other comprehensive (loss) earnings

(10,792)

(8,783)

2,650

10,667

 

 

 

 

 

 

 

Number of title orders opened (000):

 

 

 

 

 

October

36.0

39.1

 

 

 

November

32.8

31.9

 

 

 

December

26.4

31.8

 

 

 

Quarter

95.2

102.8

 

 

 

 

 

 

 

 

 

Number of title orders closed (000): Quarter

80.2

81.4

 

 

 

 

 

 

 

 

 

 

 

 

December 31

2010

December 31

2009

 

Stockholders' equity

 

 

448,333

462,066

 

Number of shares outstanding (000)

 

 

18,375

18,232

 

Book value per share

 

 

24.40

25.34

 

 

 

 

 

 

 

 

 

 

STEWART INFORMATION SERVICES CORPORATION

BALANCE SHEETS (condensed)

(In thousands of dollars)

 

 

 

December 31

December 31

 

 

2010

2009

 

Assets:

 

 

 

 

Cash and cash equivalents

144,564

97,971

 

 

Cash and cash equivalents – statutory reserve funds

9,926

18,129

 

 

    Total cash and cash equivalents

154,490

116,100

 

 

 

 

 

 

 

Short-term investments

33,457

24,194

 

 

 Investments – statutory reserve funds

396,317

386,235

 

 

 Investments – other

54,007

79,969

 

 

Receivables – premiums from agencies

45,399

42,630

 

 

Receivables – other

52,721

103,153

 

 

Allowance for uncollectible amounts

(19,438)

(20,501)

 

 

Property and equipment

61,569

70,633

 

 

Title plants

77,397

78,421

 

 

Goodwill

206,861

212,763

 

 

Intangible assets

8,228

6,406

 

 

Other assets

70,198

67,150

 

 

Investments – pledged, at fair value

            –

202,007

 

 

 

 

 

 

 

 

1,141,206

1,369,160

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Notes payable

8,784

19,620

 

 

Convertible senior notes payable

64,338

64,163

 

 

Line of credit, secured by pledged investments

202,007

 

 

Accounts payable and accrued liabilities

95,666

101,881

 

 

Estimated title losses

495,849

503,475

 

 

Deferred income taxes

28,236

15,948

 

 

 

 

 

 

 

 

692,873

907,094

 

 

 

 

 

 

 

Contingent liabilities and commitments

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

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

143,264

145,530

 

 

Retained earnings

282,666

296,116

 

 

Accumulated other comprehensive earnings

13,610

10,960

 

 

Treasury stock

(4,330)

(4,330)

 

 

Stockholders' equity attributable to Stewart

435,210

448,276

 

 

Noncontrolling interests

13,123

13,790

 

 

Total stockholders' equity

448,333

462,066

 

 

 

 

 

 

 

 

1,141,206

1,369,160

 

 

About Stewart

Stewart Title Guaranty Co. 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.

Trademarks are the property of their respective owners.

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