STEWART INFORMATION SERVICES CORP - Quarter Report: 2024 June (Form 10-Q)

Cash used by financing activities()()Effects of changes in foreign currency exchange rates() Change in cash and cash equivalents()()Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

Common Stock

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Treasury stock

Noncontrolling interests

Total

($000 omitted)

Six Months Ended June 30, 2024

Balance at December 31, 2023

()

Net income attributable to Stewart

—

Dividends on Common Stock ($ per share)

—

()

—

()

Stock-based compensation

—

Stock repurchases

()

—

()

Stock option and employee stock purchase plan exercises

—

Change in net unrealized gains and losses on investments, net of taxes

—

()

—

()

Reclassification adjustment for realized gains and losses on investments, net of taxes

—

Foreign currency translation adjustments, net of taxes

—

()

—

()

Net income attributable to noncontrolling interests

—

Distributions to noncontrolling interests

—

()

Net effect of other changes in ownership

—

Balance at June 30, 2024

()

Six Months Ended June 30, 2023

Balance at December 31, 2022

()

Net income attributable to Stewart

—

Dividends on Common Stock ($ per share)

—

()

—

()

Stock-based compensation

—

Stock repurchases

()

—

()

Stock option and employee stock purchase plan exercises

—

Change in net unrealized gains and losses on investments, net of taxes

—

Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes

—

Foreign currency translation adjustments, net of taxes

—

Net income attributable to noncontrolling interests

—

Distributions to noncontrolling interests

—

()

Balance at June 30, 2023

()

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)

Common Stock

Additional paid-in capital

Retained earnings

Accumulated other comprehensive loss

Treasury stock

Noncontrolling interests

Total

($000 omitted)

Three Months Ended June 30, 2024

Balance at March 31, 2024

()

Net income attributable to Stewart

—

Dividends on Common Stock ($ per share)

—

()

—

()

Stock-based compensation

—

Stock repurchases

()

—

()

Stock option and employee stock purchase plan exercises

—

Change in net unrealized gains and losses on investments, net of taxes

—

Reclassification adjustment for realized gains and losses on investments, net of taxes

—

Foreign currency translation adjustments, net of taxes

—

()

—

()

Net income attributable to noncontrolling interests

—

Distributions to noncontrolling interests

—

()

Net effect of other changes in ownership

—

Balance at June 30, 2024

()

Three Months Ended June 30, 2023

Balance at March 31, 2023

()

Net income attributable to Stewart

—

Dividends on Common Stock ($ per share)

—

()

—

()

Stock-based compensation

—

Stock repurchases

()

—

()

Change in net unrealized gains and losses on investments, net of taxes

—

()

—

()

Reclassification adjustment for realized gains and losses on investments, net of taxes, net of taxes

—

Foreign currency translation adjustments, net of taxes

—

Net income attributable to noncontrolling interests

—

Distributions to noncontrolling interests

—

()

Balance at June 30, 2023

()

See notes to condensed consolidated financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

C. million and $ million at June 30, 2024 and December 31, 2023, respectively. In addition, included within cash and cash equivalents are statutory reserve funds of approximately $ million and $ million at June 30, 2024 and December 31, 2023, respectively. Although these cash statutory reserve funds are not restricted or segregated in depository accounts, they are required to be held pursuant to state statutes. If the Company fails to maintain minimum investments or cash and cash equivalents sufficient to meet statutory requirements, the Company may be subject to fines or other penalties, including potential revocation of its business license. These funds are not available for any other purpose. In the event that insurance regulators adjust the determination of the statutory premium reserves of the Company’s title insurers, these restricted funds as well as statutory surplus would correspondingly increase or decrease.

NOTE 2

Agency Escrow fees Real estate solutions and abstract fees Other revenues

NOTE 3

million and $ million, respectively (refer to Note 5).

Corporate Foreign U.S. Treasury Bonds

Foreign debt securities consist of Canadian government, provincial and corporate bonds, United Kingdom treasury and corporate bonds, and Mexican government bonds.

Corporate Foreign U.S. Treasury Bonds

After one year through five years After five years through ten years After ten years

Corporate Foreign U.S. Treasury Bonds

The number of specific debt investment holdings held in an unrealized loss position as of June 30, 2024 was . Of these securities, were in unrealized loss positions for more than 12 months. Total gross unrealized investment losses at June 30, 2024 slightly increased compared to December 31, 2023, primarily due to the continuing high interest rate environment which started in late 2022. Since the Company does not intend to sell and will more likely than not maintain each investment security until its maturity or anticipated recovery in value, and no significant credit risk is deemed to exist, these investments are not considered as credit-impaired. The Company believes its investment portfolio is diversified and expects no material loss to result from the failure to perform by issuers of the debt securities it holds. Investments made by the Company are not collateralized.

Corporate Foreign U.S. Treasury Bonds

During the first six months of 2024, goodwill recorded in the title segment was related to an acquisition of a title office.

NOTE 7

Provisions:Current year Previous policy years Total provisions Payments, net of recoveries:Current year()()Previous policy years()()Total payments, net of recoveries()()Effects of changes in foreign currency exchange rates()

Balances at June 30

Loss ratios as a percentage of title operating revenues:Current year provisions % %Total provisions % %

NOTE 8

. The Company has not granted stock options since 2021 and all outstanding stock option awards are fully vested at June 30, 2024. The compensation expense associated with the share-based awards is calculated based on the fair value of the related award and recognized over the corresponding vesting period.

million ( units with an average grant price per unit of $) and $ million ( units w).

NOTE 9

Denominator (000):Basic average shares outstanding Average number of dilutive shares relating to options

Average number of dilutive shares relating to restricted units

Diluted average shares outstanding

Basic earnings per share attributable to Stewart

Diluted earnings per share attributable to Stewart

NOTE 10

million related to workers’ compensation and other insurance. The Company does not expect to make any payments on these guarantees.

NOTE 11

NOTE 12

reportable operating segments: the title segment, the real estate solutions segment, and the corporate and other segment. The title segment provides services needed to transfer title to property in a real estate transaction and includes services such as searching, abstracting, examining, closing and insuring the condition of the title to the property. In addition, the title segment includes home and personal insurance services, Internal Revenue Code Section 1031 tax-deferred exchanges, and digital customer engagement platform services. The real estate solutions segment supports the real estate industry and primarily includes credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment is primarily comprised of the parent holding company and centralized support services departments.

Depreciation and amortization

Income before taxes and noncontrolling interest

Real estate solutions segment:Revenues Depreciation and amortization Income before taxes Corporate and other segment:Revenues (net realized losses)()()()()Depreciation and amortization Loss before taxes()()()()Consolidated Stewart:Revenues Depreciation and amortization

Income before taxes and noncontrolling interest

International

NOTE 13

()()()Reclassification adjustments for realized gains and losses on investments ()()()Foreign currency translation adjustments()()()

Other comprehensive loss

()()()()()()

)()() Reclassification adjustment for realized gains and losses on investments ()()() Foreign currency translation adjustments()()()

Other comprehensive (loss) income

()()()

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT’S OVERVIEW

Second quarter 2024 overview. We reported net income attributable to Stewart of $17.3 million ($0.62 per diluted share) for the second quarter 2024, compared to net income of $15.8 million ($0.58 per diluted share) for the second quarter 2023. Pretax income before noncontrolling interests for the second quarter 2024 was $29.0 million compared to pretax income before noncontrolling interests of $25.2 million for the prior year quarter. The second quarter 2024 results included $0.5 million of pretax net realized and unrealized losses primarily driven by fair value changes of equity securities investments in the title segment, while second quarter 2023 results included $1.1 million of pretax net realized and unrealized losses primarily due to a realized loss related to a previous disposition of a business recorded in the corporate and other segment, partially offset by net unrealized gains on fair value changes of equity securities investments in the title segment.

Summary results of the title segment are as follows ($ in millions, except pretax margin):


	2024		2023		% Change

Operating revenues	496.2		466.7		6	%
Investment income	14.3		12.1		18	%
Net realized and unrealized (losses) gains	(0.5)		2.0		(125)	%
Pretax income	33.4		35.5		(6)	%
Pretax margin	6.5	%	7.4	%

Title segment operating revenues improved $29.5 million, or 6%, in the second quarter 2024 primarily driven by increased revenues from our domestic commercial, international and agency title operations, partially offset by lower domestic noncommercial revenues, while total segment operating expenses increased $31.3 million, or 7%, compared to the second quarter 2023. Agency retention expenses in the second quarter 2024 increased $28.4 million, or 17%, primarily driven by $32.0 million, or 15%, improvement in gross agency revenues compared to the second quarter 2023, while the average independent agency remittance rate in the second quarter 2024 decreased to approximately 16.9%, compared to 17.7% during the prior year quarter, primarily due to increased agency revenues in states with relatively higher agent retention rates.

Total title segment employee costs and other operating expenses slightly increased by $2.0 million, or less than 1%, in the second quarter 2024 compared to the prior year quarter, primarily due to increased outside search expenses related to higher commercial revenues. As a percentage of operating revenues, these expenses were 49.7% in the second quarter 2024 compared to 52.4% in the second quarter 2023. Title loss expense in the second quarter 2024 increased $1.3 million, or 7%, primarily driven by higher title revenues compared to the prior year quarter. As a percentage of title revenues, title loss expense was 4.2% for both the second quarters 2024 and 2023.

Investment income improved by $2.2 million in the second quarter 2024 compared to the prior year quarter, primarily resulting from higher interest income on eligible escrow balances in the second quarter 2024. Included in the title segment’s pretax income for the second quarters 2024 and 2023 were acquisition intangible asset amortization expenses of $2.8 million and $3.3 million, respectively.

Summary results of the real estate solutions segment are as follows ($ in millions, except pretax margin):


	2024		2023		% Change

Operating revenues	92.2		71.4		29	%
Pretax income	5.1		3.3		56	%
Pretax margin	5.5	%	4.6	%

The segment's operating revenues increased $20.8 million, or 29%, in the second quarter 2024 compared to the prior year quarter, primarily due to increased revenues from credit information and valuation services. On a combined basis, employee costs and other operating expenses in the second quarter 2024 increased $19.0 million, or 31%, primarily due to the higher operating revenues. Included in the segment's results for the second quarters 2024 and 2023 were acquisition intangible asset amortization expenses of $5.5 million and $5.8 million, respectively.

In regard to the corporate and other segment, pretax results were driven by net expenses attributable to corporate operations which decreased to $9.5 million in the second quarter 2024, compared to $10.5 million in the second quarter 2023, primarily driven by management’s cost discipline. The segment’s results for the second quarter 2023 included net realized losses of $3.1 million, primarily driven by a loss adjustment resulting from a previous disposition of a business.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company’s condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of certain assets, liabilities, revenues, expenses and related disclosures surrounding contingencies and commitments.

Actual results can differ from our accounting estimates. While we do not anticipate significant changes in our estimates, there is a risk that such changes could have a material impact on our consolidated financial condition or results of operations for future periods. During the six months ended June 30, 2024, we made no material changes to our critical accounting estimates as previously disclosed in Management’s Discussion and Analysis in the 2023 Form 10-K.

Operations. Our primary business is title insurance and settlement-related services. We close transactions and issue title policies on homes, commercial and other real properties located in all 50 states, the District of Columbia and international markets through policy-issuing offices, agencies and centralized title services centers. Our real estate solutions operations include credit and real estate information services, valuation management services, online notarization and closing services, and search services. The corporate and other segment includes our parent holding company and centralized support services departments.

Factors affecting revenues. The principal factors that contribute to changes in our operating revenues include:

•interest rates;

•availability of mortgage loans;

•number and average value of mortgage loan originations;

•ability of potential purchasers to qualify for loans;

•inventory of existing homes available for sale;

•ratio of purchase transactions compared with refinance transactions;

•ratio of closed orders to open orders;

•home prices;

•consumer confidence, including employment trends;

•demand by buyers;

•premium rates;

•foreign currency exchange rates;

•market share;

•ability to attract and retain highly productive sales associates;

•independent agency remittance rates;

•opening and integration of new offices and acquisitions;

•office closures;

•number and value of commercial transactions, which typically yield higher premiums;

•government or regulatory initiatives;

•acquisitions or divestitures of businesses;

•volume of distressed property transactions; and

•seasonality and/or weather.

Premiums are determined in part by the values of the transactions we handle. To the extent inflation or market conditions cause increases in the prices of homes and other real estate, premium revenues are also increased. Conversely, falling home prices cause premium revenues to decline. Home price changes may override the seasonal nature of the title insurance business. Historically, our first quarter is the least active in terms of title insurance revenues as home buying is generally depressed during winter months. Our second and third quarters are typically the most active as the summer is the traditional home buying season, and while commercial transaction closings are skewed to the end of the year, individually large commercial transactions can occur any time of the year. On average, title premium rates for refinance orders are lower compared to a similarly priced purchase transaction.

RESULTS OF OPERATIONS

Comparisons of our results of operations for the three and six months ended June 30, 2024 with the corresponding periods in the prior year are set forth below. Factors contributing to fluctuations in the results of operations are presented in the order of their monetary significance, and we have quantified, when necessary, significant changes. Segment results are included in the discussions and, when relevant, are discussed separately.

Our statements on home sales, interest rates and loan activity are based on published U.S. industry data from sources including Fannie Mae, the Mortgage Bankers Association (MBA), the National Association of Realtors® (NAR) and the U.S. Census Bureau as of June 30, 2024. We also use information from our direct operations.

Operating environment. Existing home sales in June 2024 were 3.9 million units (seasonally-adjusted basis), which were 5% lower from both a year ago and May 2024, primarily due to the continuing elevated interest rate environment accompanied by rising home prices. According to NAR, the June 2024 median home price of $427,000 was the highest ever recorded, further affecting housing affordability and increasing unsold home inventory, which at the end of June 2024 was 23% higher than a year ago and 3% higher than May 2024. On new residential construction, U.S. housing starts (seasonally-adjusted) in June 2024 were 3% better than May 2024, but 4% lower than a year ago, while June 2024 newly-issued building permits were 3% higher than May 2024, but 3% lower compared to June 2023.

Regarding lending activity, total U.S. single family mortgage originations during the second quarter 2024 totaled $441 billion, which was comparable to $442 billion in the second quarter 2023, as the purchase lending decline of 3% was offset by a 12% improvement in refinancing originations, according to Fannie Mae and MBA (averaged). During the second quarter 2024, the average 30-year fixed interest rate averaged 7.0% compared to 6.5% in the second quarter 2023 and 6.7% in the first quarter 2024. For the full year 2024, Fannie Mae and MBA expect the interest rate to average 6.8%, similar to the 2023 average, while total originations for the year 2024 are expected to be 13% higher compared to 2023, with total lending volumes in the third and fourth quarters of 2024 anticipated to improve 17% and 29%, respectively, compared to the same periods in 2023.

Title revenues. Direct title revenue information is presented below:


	Three Months Ended June 30,					Six Months Ended June 30,
	2024	2023	Change	% Chg		2024	2023	Change	% Chg
	($ in millions)					($ in millions)
Non-commercial
Domestic	169.4	184.5	(15.1)	(8)	%	304.6	334.9	(30.3)	(9)	%
International	28.1	25.9	2.2	8	%	47.3	45.0	2.3	5	%
	197.5	210.4	(12.9)	(6)	%	351.9	379.9	(28.0)	(7)	%
Commercial:
Domestic	51.0	41.5	9.5	23	%	100.8	74.2	26.6	36	%
International	7.0	6.1	0.9	15	%	13.4	11.8	1.6	14	%
	58.0	47.6	10.4	22	%	114.2	86.0	28.2	33	%
Total direct title revenues	255.5	258.0	(2.5)	(1)	%	466.1	465.9	0.2	—	%

Domestic non-commercial revenues decreased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily driven by lower residential transactions with total purchase and refinancing closed orders decreasing 9% and 8% in the second quarter and first six months of 2024, respectively. Additionally, average residential fee per file in both the second quarter and first six months of 2024 decreased to $3,000 (or 7% and 11%, respectively) compared to the same periods in 2023, primarily due to a lower purchase transaction mix in 2024.

Domestic commercial revenues increased in the second quarter and first six months of 2024, compared to the same periods in 2023, primarily as a result of increased average transaction size (primarily in the energy and industrial sectors). Average domestic commercial fee per file improved to $13,500 (or 17%) and $13,700 (or 39%) in the second quarter and first six months of 2024, respectively, while domestic commercial orders closed increased 6% in the second quarter 2024 and slightly decreased 2% in the first six months of 2024, compared to the same periods in 2023.

Orders information for the three and six months ended June 30 is as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2024	2023	Change	% Chg		2024	2023	Change	% Chg
Opened Orders:
Commercial	3,526	3,294	232	7	%	7,219	7,136	83	1	%
Purchase	55,057	57,443	(2,386)	(4)	%	103,081	106,912	(3,831)	(4)	%
Refinance	16,731	16,860	(129)	(1)	%	33,102	32,989	113	—	%
Other	11,407	7,588	3,819	50	%	22,654	12,009	10,645	89	%
Total	86,721	85,185	1,536	2	%	166,056	159,046	7,010	4	%

Closed Orders:
Commercial	3,787	3,585	202	6	%	7,355	7,509	(154)	(2)	%
Purchase	37,832	42,226	(4,394)	(10)	%	67,576	73,854	(6,278)	(9)	%
Refinance	9,978	10,583	(605)	(6)	%	19,331	20,196	(865)	(4)	%
Other	7,902	3,855	4,047	105	%	15,696	6,589	9,107	138	%
Total	59,499	60,249	(750)	(1)	%	109,958	108,148	1,810	2	%

Other opened and closed orders, which typically have a lower average fee per file compared to residential purchase transactions, increased in the second quarter and first six months of 2024 compared to the same periods in 2023, primarily due to higher institutional bulk securitization and reverse mortgage transactions resulting from the ramp up of acquisitions completed in late 2022.

Gross revenues from independent agency operations improved $32.0 million, or 15%, in the second quarter 2024 and $23.8 million, or 5%, in the first six months of 2024, compared to the same periods in 2023, primarily due to increased agent activity in 2024. Agency revenues, net of retention, increased $3.7 million, or 10%, in the second quarter 2024 and $1.2 million, or 2%, in the first six months of 2024, compared to the same periods in 2023, primarily due to higher gross agency revenues, partially offset by higher average agent retention rates influenced by the geographical transaction mix of additional gross revenues. Refer further to the "Retention by agencies" discussion under Expenses below.

Real estate solutions revenues. Real estate solutions revenues improved $20.8 million, or 29%, in the second quarter 2024 and $41.2 million, or 31%, in the first six months of 2024, primarily driven by higher revenues from credit-related information and valuation services businesses compared to the same periods in 2023.

Investment income. Investment income in the second quarter and first six months of 2024 increased $2.2 million, or 18%, and $8.5 million, or 45%, respectively, compared to the same periods in 2023, primary due to higher interest income in 2024 resulting from earned interest from eligible escrow balances, which was an initiative that we started during the late second quarter 2023.

Net realized and unrealized (losses) gains. Refer to Note 5 to the condensed consolidated financial statements.

Expenses. An analysis of expenses is shown below:

Three Months Ended June 30,

Six Months Ended June 30,

2024

2023

Change*

% Chg

2024

2023

Change*

% Chg

($ in millions)


* Filed herewith
† Management contract or compensatory plan

SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


August 6, 2024
Date


						Stewart Information Services Corporation
						Registrant

By:						/s/ David C. Hisey
						David C. Hisey, Chief Financial Officer and Treasurer

STEWART INFORMATION SERVICES CORP - Quarter Report: 2024 June (Form 10-Q)

Similar companies