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Stewart Information Services Corp. Reports Operating Results (10-Q)

May 07, 2009 | About:

Stewart Information Services Corp. (STC) filed Quarterly Report for the period ended 2009-03-31.

Stewart Information Services Corporation's primary business is title insurance. Stewart issues policies through issuing locations on homes and other real property located in all 50 states the District of Columbia and several foreign countries. Stewart also sells computer-related services and information as well as mapping products and geographic information systems to domestic and foreign governments and private entities. Stewart Information Services Corp. has a market cap of $383.8 million; its shares were traded at around $21.11 with and P/S ratio of 0.2. The dividend yield of Stewart Information Services Corp. stocks is 0.5%.

Highlight of Business Operations:

Managements overview. We reported a net loss attributable to Stewart of $42.0 million for the three months ended March 31, 2009 compared with a net loss attributable to Stewart of $25.3 million for the same period in 2008. On a diluted per share basis, our net loss attributable to Stewart was $2.31 for the first three months of 2009 compared with a net loss attributable to Stewart of $1.40 for the first three months of 2008. Revenues for the first three months of 2009 decreased 20.5% to $313.5 million from $394.1 million for the same period last year.

The first quarter of 2009 includes pretax charges of $8.9 million relating to the impairment of investment securities and other assets. The first quarter of 2009 also includes pretax credits of $2.6 million relating to a recovery on a previously recognized agency defalcation and $3.0 million relating to the reversal of an accrual for a legal matter resolved in our favor. The first quarter of 2008 includes a pretax charge of $4.6 million relating to an agency defalcation.

Income taxes. Our effective tax rates, based on losses before taxes and after deducting noncontrolling interests (losses of $38.8 million and $42.1 million for the three months ended March 31, 2009 and 2008, respectively), were (8.3%) and 39.9% for the quarters ended March 31, 2009 and 2008, respectively. Our effective income tax rate for the first quarter of 2009 was significantly impacted by a valuation allowance of $15.1 million against our deferred tax assets. The valuation allowance will be evaluated for reversal, subject to certain potential limitations, as we return to profitability. The income tax expense of $3.2 million recorded in the first quarter of 2009 is related to certain goodwill book/tax differences and taxes in foreign jurisdictions for our profitable international operations.

Cash payments on title claims for the three months ended March 31, 2009 and 2008 were $36.5 million and $30.5 million, respectively. This increase is consistent with our historical experience that title claims are filed more quickly and there is a higher incidence of agency defalcations in declining real estate markets. While it is difficult to predict the amount of cash to be paid for policy claims, our expectation for the full year 2009 is that claims payments will be generally equivalent to the 2008 level, and begin to decline in 2010. The insurance regulators of the states in which our underwriters are domiciled require our statutory premium reserves to be fully funded, segregated and invested in high-quality securities and short-term investments. At March 31, 2009, cash and investments funding the statutory premium reserve aggregated $375.0 million and our statutory estimate of claims that may be reported in the future totaled $313.4 million. In addition to this restricted cash and investments, we had unrestricted cash and investments (excluding investments in affiliates) of $161.0 million which is available for underwriter operations, including claims payments.

Cash from investing activities was generated principally by proceeds from investments matured and sold in the amounts of $68.9 million and $162.5 million for the three months ended March 31, 2009 and 2008, respectively. We used cash for the purchases of investments in the amounts of $25.9 million and $154.5 million for the three months ended March 31, 2009 and 2008, respectively. The cash generated from sales and maturities not reinvested was used principally to fund operations.

Other comprehensive (loss) earnings. Unrealized gains and losses on investments and changes in foreign currency exchange rates are reported net of deferred taxes in accumulated other comprehensive earnings, a component of stockholders equity, until realized. For the three months ended March 31, 2009, net unrealized investment losses of $2.5 million, which increased our comprehensive loss, were related to temporary declines in market values of corporate and government bond investments and partially offset by increases in municipal bond and equity investments. For the three months ended March 31, 2008, net unrealized investment gains of $1.7 million, which increased our comprehensive earnings, were related to temporary increases in market values of equity and corporate bond investments and partially offset by decreases in government and municipal bond investments. Changes in foreign currency exchange rates, primarily related to our Canadian operations, increased comprehensive loss by $1.6 million, net of taxes, for the three months ended March 31, 2009 and decreased comprehensive earnings $1.5 million, net of taxes, for the three months ended March 31, 2008.

Read the The complete ReportSTC is in the portfolios of Ken Heebner of CAPITAL GROWTH MANAGEMENT LP, Richard Pzena of Pzena Investment Management LLC, Charles Brandes of Brandes Investment.

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