Stewart Reports 3Q Earnings
October 28, 2010
Stewart Information Services reported a loss of $3.02 million during the third quarter as order volume continued to shrink and the company paid legal costs for several existing large title claims.
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.
"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."
Stewart’s 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.
During the quarter, Stewart opened 117,000 orders compared to 109,700 open orders during the same period a year ago. The company closed 74,800 orders during the third quarter of 2010, while closing 88,500 orders during the third quarter of 2009. 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 Co. issued a bulletin to title agencies and its owned offices providing underwriting guidelines and standards to enable them to insure REO sale transactions. The company said it will issue title insurance to purchasers of foreclosed properties from institutional lenders representing that they have followed all applicable legal processes.
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, Stewart reported cash claims payments remain elevated requiring the company to maintain a relatively high provisioning rate for title losses. The company 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.”
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. The company said it is making progress on increasing remittance rates in those states that have not met 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. Stewart 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 its 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, Stewart reported.