Stewart Reports Improved Second-Quarter Results
July 29, 2010
Improvements to its direct operations, reduced operating costs and monetization of internally developed software helped Stewart Information Services post earnings of $18 million during the second quarter of 2010.
A $28.4 million decrease in charges attributable to title losses also helped the company improve from a loss of $16.1 million in the prior year quarter.
"We are pleased to have achieved operational profitability this quarter and year-to-date in our direct operations,” said Stewart Morris, Jr., president and co-chief executive officer. “We are carefully monitoring our order volume and are prepared to implement further operational efficiencies commensurate with the level of transaction volumes. We have also enhanced sales activity to yield market share growth.”
Total revenues rose 2.5 percent in the second quarter of 2010 compared to the same period in 2009, and operating revenues increased 1.3 percent. Revenues from direct title operations decreased 6.7 percent in the second quarter of 2010 compared to the same period in the prior year.
Although total orders closed declined 25.9 percent from 142,700 to 77,300, revenue per order increased 21.9 percent to $1,901. This increase in overall revenue per order is due to the current quarter's closings being more heavily weighted to purchase transactions rather than refinancing transactions. Revenues from agency operations increased 6.0 percent in the second quarter of 2010 compared to the second quarter of 2009, continuing the trend noted in the past three quarters of improvement in Stewart’s independent agency channel.
Title revenues for the quarter were positively impacted by the homebuyer tax credit, which required contracts to be signed by April 30, 2010 and (originally) closed by June 30, 2010. However, the expiration of that credit as of April 30 negatively impacted orders for purchase transactions in May and June. That decline was partially offset by an increase in refinancing orders due to record low mortgage interest rates.
On June 30, 2010, Congress extended the closing deadline on contracts that qualify for the homebuyer tax credit to September 30, 2010. This extension should positively influence third quarter results, as Stewart reported it incurred processing expenses in the second quarter on orders that would not otherwise have closed and generated revenue. An industry estimate is that overall 180,000 transactions remain to be closed in the third quarter of 2010 under the homebuyer tax credit.
Commercial title revenues grew 20.4 percent in the second quarter of 2010 to $23 million compared to the same quarter in the prior year and rose 17.8 percent from the first quarter of 2010. International operations remained strongly profitable due to a significant increase in revenues and earnings in Canadian operations. Since beginning operations in Canada in 1988, Stewart reported it has steadily gained market share in the populous eastern provinces, and now holds a leading position among title insurance underwriters.
Agency retention increased 40 basis points to 83.2 percent of agency revenues for the second quarter of 2010 compared with 82.8 percent for the second quarter of 2009, but down slightly from 83.3 percent from the first quarter of 2010. As noted in previous quarters, transactional volume improved in those states in which the agents have historically retained a greater share of revenue.
Employee costs were 27.9 percent of operating revenues for the second quarter of 2010, as compared to 29.0 percent in the second quarter of 2009. Stewart reported it maintained appropriate staffing through June 30, 2010 to close the transactions resulting from the homebuyer tax credit. Staffing levels are now being adjusted to reflect market activity. In addition, the company said it remains focused on achieving operational efficiencies, including the merger of three of its underwriters into Stewart Title Guaranty Company in the second quarter, which reduced ongoing expenses by almost $1 million annually. The company reported it remains on schedule with the implementation of its enterprise resource planning system, which will result in further efficiencies in operating and employee costs. Stewart also continues to consolidate operations into a centralized and shared services environment, aligning people, processes and technology to better provide customer interaction and reduce its cost structure.
“We anticipate further opportunities to monetize investments and reduce expenses relating to our proprietary technology and are aggressively pursuing these options,” said Malcolm S. Morris, chairman and co-chief executive officer. “We also reviewed our business model in all states, and are modifying our agency operations to become more profitable while strengthening agency services."
While Stewart believes that title claims are trending downward, claims payments in the second quarter relating to prior year claims continued at elevated levels. Title losses and related claims for the second quarter of 2010 were 9.3 percent of title revenues as compared to 16.4 percent for the second quarter of 2009. Previously canceled agents accounted for more than 27 percent of cash claim payments in the quarter.