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Stewart Information Services (STC) |
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WIKI ANALYSIS
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Stewart Information Services depends on forces that affect the volume and profitability of its Title Insurance Business.[2] The amount that the company can charge for a premium on its policies is often set by government regulations. With high fixed costs, Stewart benefits from having a larger volume of policies. Title Insurance policies are issued at real estate transactions and with mortgage originations and refinancings. The decreased volume in mortgage originations has decreased the volume of policies Stewart Information Services has issued.[3]
Compared to the five largest Title Insurers, Stewart Information Services earns the largest proportion of its revenue from Title Insurance operations. First American (FAF) and Fidelity National Financial (FNF), the largest two Title Insurers in 2007, each earned 70% of their 2007 revenues from Title Operations,[4] [5] compared to 94% for Stewart.[2] LandAmerica Financial Group (LFG) earned 88% of its 2007 revenue from Title Operations, but filed for bankruptcy in November of 2008.[6] [7]
Company Overview
Business Financials
In 2007, Stewart Information Services reported a net loss of $40.2 million and a decline in revenues from $2.5 billion in 2006 to $2.1 billion in 2007.[9] Management cites the Subprime lending collapse, declining home sales, and falling home prices as reasons for the net loss.[9] The company plans to cut a lot of costs to adjust to the changing economic conditions, but they note that many of their costs, such as rent, are fixed costs.[9]
Stewart Information Services reported a pre-tax gain of $8.8 million from the sale of property and two of its subsidiaries.[9]
Cash provided by operations decreased from $105.1 million in 2006 to $4.6 million in 2006, a 95.6% decrease.[10] Management claims that this decrease occurred because of decreased Title revenues and increased loss payments.[10]
Business Segments
- Direct Operations (45% of sales) are Title Insurance policies that are issued directly from Stewart Information Services. The company creates the policy and performs the search and inspection of the land title. The company is responsible for any losses from the Title policy. Direct operations earn higher revenues per policy because Stewart Information Services retains all of the revenue from a policy. In 2007, Stewart Information Services earned revenues of $947 million from Direct Operations.[8]
- Agency Operations (49% of sales) are Title Insurance revenues that come from policies issued by an agent operating outside of Stewart Information Services. STC contracts with an agent to do the search and inspection on a title. Then, the agent gives the policy to STC, who assumes all the risk in the underlying title policy in exchange for a portion of the premium on the policy. The agent retains part of the premium, meaning smaller revenues per policy for STC from Agency Operations. In 2007, Stewart Information Services earned revenues of $1.04 billion from Agency Operations.[8]
Together, Title Insurance Operations ran an operating loss of $57.2 million in 2007, making up 110% of the $51.9 million overall operating loss in 2007.[8]
- Real Estate Information (3% of sales, 10% of net income[8]) provides real estate transaction closing services to lenders. The segment also offers appraisals, electronic filing of real estate records, and the mapping of real property. The Real Estate Information segment earned revenues of $69.2 million in 2007.[8] It also earned a pre-tax income of $5.3 million in 2007.[8]
| Operating Metrics | 2005 | 2006 | 2007 |
| Average Premium per Direct Title Order | $1,600[11][2] | $1,909[11][2] | $2,178[11][2] |
| Number of Direct Title Orders Closed (thousands) | 651[11] | 539[11] | 435[11] |
| Claims loss provision (millions) | $128.1[12] | $141.6[12] | $168.5[12] |
| Title Premiums (millions) | $2,314[2] | $2,350[2] | $1,988[2] |
| Loss Ratio | 5.5%[12] | 6.0%[12] | 8.5% [12] |
The following are operating metrics that describe measurements of performance specific to Stewart Information Services's industry:
- Average Premium per Direct Title Order is calculated as total revenue from Direct Operations divided by the number of Direct Title Orders Closed. This measures the revenue per closed order. This does not measure average premium revenues from Indirect Operations. Management claims that the increase in this measure is due to a larger proportion of policies on commercial properties, which typically yield higher revenues.[13]
- Number of Direct Title Orders Closed is a measure of the volume of title orders processed. A title order is closed after the search and inspection of the title is complete and the real estate transaction involving the title is closed. The full title premium is not received until the order is closed.
- Claims Loss Provision is the amount of money that Stewart Information Services sets aside to cover claims on insurance policies. The money set aside in a given year is intended to cover not only claims from that year, but also claims from previous years.
- Title Premiums are the total revenues from premiums from both Direct and Agency operations. These premiums are the primary income for Stewart Information Services.
- A company's Loss Ratio is calculated by dividing claims - the amount an insurance company pays out - by the company's premiums - the revenue it's taking in on its policies. This measure shows profitability because it measures how much Stewart Information Services's insurance policies are costing the company relative to how much revenue they generate.
Key Trends and Forces
Declining Mortgage Originations Adversely Affect Title Revenues and Volume
Title Insurance policies are typically required for any mortgage and refinancing to assure the lender clear title to the collateral backing their loan. Therefore, the more mortgages issued and refinanced, the more potential revenue for Stewart Information Services. Mortgage originations decreased 16.6% from 2005 to 2007.[11] Over this same time period, the number of Direct Title Orders Closed by Stewart Information Services decreased from 651,000 to 435,000.[11]
Government Regulations Set Title Premiums in many States
Title Insurance rates are heavily regulated in the United States. Rates are usually set by the state or county in which the corresponding real estate title is located. For example, the Texas Department of Insurance lowered Title Insurance Premium Rates by 3.2%.[15] Management claims that this decrease reduced premiums retained by Stewart Information Services by $6.2 million in 2007.[16]
Interest Rates Affect the Volume of Refinances
The Federal Funds Rate remained low during 2003, moving between 1.00% and 1.25%.[17] When interest rates are low, mortgage refinance volumes grow because property owners can pay off their old mortgage and get a new, cheaper one. More refinances mean more Title Insurance policies, because a new policy is issued along with each refinance. When rates rise, the number of refinances decreases. The Fed rose rates from 2003 until September of 2007.[17] As rates rose from 2005 to 2007, Direct Title Orders Closed decreased from 651,000 to 435,000.[11]
Competition
Stewart Information Services competes with other Title Insurers and with companies offering real estate information and closing services. The following are Stewart Information Services's four largest competitors in these industries:
- First American (FAF) is a holding company and has earned at least 69% of its revenue from Title Insurance premiums over the past three years. First American has the largest market share in U.S. title insurance and competes directly with Stewart Information Services for premiums. First American also operates an Information Technology Segment, which provides Mortgage and Property Information.[18] This segment competes with Stewart Information Services's Real Estate Information segment.
- Fidelity National Financial (FNF) is the second largest title insurer in the US by revenue.[1] Fidelity earned 70% of its 2007 revenue from Title Insurance.[19]
- LandAmerica Financial Group (LFG) is the third largest title insurer in the US by revenue.[1] LandAmerica focuses primarily on Title Insurance, earning 88.1% of its 2007 income from Title Insurance Operations.[20] LandAmerica filed for for bankruptcy on November 26, 2008, and sold off two of its underwriting companies to Fidelity National Financial (FNF).[7] This occurred after Fidelity backed out of a merger agreement with LandAmerica.[21]
- Old Republic International (ORI) is an insurance underwriter operating in three segments: General Insurance, Mortgage Guaranty, and Title Insurance. Old Republic's primary source of revenue is its General Insurance segment, which earned nearly 60% of the company's 2007 revenue. The General Insurance segment provides property and liability insurance. Only 21.4% of the company's revenue came from Title Insurance.[22] While Old Republic has a smaller share of the Title Insurance Market than STC,[1] Old Republic is not as susceptible to fluctuations in the real estate market because of its uncorrelated revenues in its large General Insurance segment.
| Competition | Stewart Information Services | First American | Fidelity National Financial |
| Total Title Insurance Premiums (millions) | $1,988[2] | $5,516 [23] | $3,800 [24] |
| Claims loss provision (millions) | $168.5[12] | $893.9 [25] | $502.3 [26] |
| Total Revenue (millions) | $2,107 [8] | $8,196 [27] | $5,524 [28] |
| Claims loss provision/Premiums | 8.5% [12] | 12.9% [29] | 13.2% [30] |
Market Share
| Rank | Company | Market Share |
|---|---|---|
| 1 | First American (FAF) | 30.04% |
| 2 | Fidelity National Financial (FNF) | 26.4% |
| 3 | LandAmerica Financial Group (LFG) | 19.34% |
| 4 | Stewart Information Services | 11.73% |
| 5 | Old Republic International (ORI) | 5.48% |
Stewart Information Services is small relative to its two main competitors, First American (FAF) and Fidelity National Financial (FNF). As of December, 2008, STC had a market capitalization of $268.9 million, compared to $2.31 billion for FAF and $2.53 billion for FNF.[31] STC has only 8,500 employees, compared to 14,278 for FNF and 37,354 for FAF.[31] Competitor LandAmerica Financial Group (LFG) filed for bankruptcy in November of 2008 and sold two of its subsidiary Title underwriting companies to Fidelity National Financial (FNF).[7]
References
- ↑ 2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10 STC 2007 10-K, Consolidated Statement of Earnings, page F-4
- ↑ "Mortgage and Title Insurers Suffer from Housing Woes" from seekingalpha.com
- ↑ FAF 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 29
- ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
- ↑ LFG 2007 Annual Report, Item 1: Business, page 8
- ↑ 7.0 7.1 7.2 LandAmerica Signs Stock Purchase Agreement for Underwriters
- ↑ 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 STC 2007 10-K, Item 6: Selected Financial Data, page 13
- ↑ 9.0 9.1 9.2 9.3 STC 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 14
- ↑ 10.0 10.1 STC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 21
- ↑ 11.0 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 STC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 17
- ↑ 12.0 12.1 12.2 12.3 12.4 12.5 12.6 12.7 STC 2007 10-K, Item 6: Selected Financial Data, page 13
- ↑ STC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 18
- ↑ Seeking Alpha Chart
- ↑ "Texas Title Insurance Rates Decrease"
- ↑ STC 2007 10-K, Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 19
- ↑ 17.0 17.1 Historical Federal Funds Rates from moneycafe.com
- ↑ FAF 2007 Annual Report, Item 1: Business, page 3
- ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 42
- ↑ LFG 2007 Annual Report, Item 1: Business, page 8
- ↑ Merger Agreement With Fidelity National Financial, Inc. Terminated
- ↑ ORI 2007 Annual Report, Item 1: Business, page 3
- ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 29
- ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, pages 106
- ↑ FAF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 34
- ↑ FNF 2007 10-K, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations, page 36
- ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 46
- ↑ FNF 2007 10-K, Item 8: Financial Statements and Supplementary Data, page 58
- ↑ FAF 2007 10-K, Item 8: Financial Statements and Supplementary Data, Page 66
- ↑ FNF 2007 10-K, Item 6: Selected Financial Data, page 27
- ↑ 31.0 31.1 Yahoo! Competitors for STC
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