Stewart Information Services Corporation has reported a profit of $23.7 million, or $0.97 per diluted share, for the third quarter 2014, compared to a profit of $0.63 per diluted share in the same quarter a year ago, even though revenues of its title insurance segment dropped by nearly ten percent over the same period.
"Our third quarter 2014 financial results were a solid improvement over both second quarter 2014 and third quarter 2013," said Matthew W. Morris, chief executive officer. "Although the residential housing market continues to be somewhat lackluster, we are seeing the beneficial results from executing on our strategic initiatives. We remain focused on integrating our recent acquisitions and continuing to execute on our cost management program as we accelerate organic sales growth. We continued our stock buyback program, and, subsequent to quarter-end, we converted the remaining convertible senior notes at their maturity date into shares of common stock. Overall, it was an active quarter building on our 2012 strategic plan. We remain committed and confident these steps will result in the service and financial stability our customers expect and produce the financial rewards our shareholders expect."
Total title revenues decreased 9.5 percent in the third quarter 2014 compared to the third quarter 2013. Revenues from direct operations for the third quarter 2014 increased 13.3 percent compared to the same quarter last year and increased 11.3 percent sequentially from the second quarter 2014. Direct title revenues were favorably influenced by the title-related component of acquisitions closed in the second quarter of 2014. Title orders closed declined 9.7 percent for the third quarter 2014 compared to the third quarter 2013 largely due to the continued decline in refinancing orders. We closed 74 percent of title orders opened in the third quarter 2014 compared to 81 percent in the third quarter 2013. Revenues from independent agency operations declined 24.6 percent compared to the third quarter 2013 but increased 10.1 percent sequentially from the second quarter 2014.
Comparing the year-to-date 2014 and 2013 periods, title revenues decreased 10.3 percent, while mortgage services revenues increased 10.8 percent. Revenues for the first nine months of 2014 were negatively impacted by the significant decline in refinancing transactions as the number of title orders closed declined 19.3 percent compared to the first nine months of 2013. We closed 69 percent of title orders opened during the first nine months of 2014 compared to 74 percent for the prior year period. Mortgage services revenues increased primarily due to the aforementioned acquisitions.
Real Estate Market
Our title revenues are closely related to the level of activity in the real estate markets we serve and the prices at which real estate sales are made. U.S. existing home sales declined 3.8 percent in the third quarter 2014 from a year ago, while, following the usual seasonal pattern, home sales increased 5.2 percent sequentially from the second quarter 2014. September existing home sales rose to the highest level this year at an annualized pace of 5.2 million. Median home prices rose 4.7 percent from a year ago and 2.2 percent from the second quarter of this year. September housing starts rose 6.3 percent from August and were up 17.8 percent from a year ago. Newly issued building permits in September increased 1.5 percent sequentially from August and 2.5 percent from a year ago. As in the second quarter 2014, refinance lending volume continued to fall significantly, declining 50.8 percent from the third quarter 2013.
Title Insurance Segment
Our title segment revenues for the third quarter 2014 were $440.5 million, a decrease of 12.6 percent from the third quarter 2013, but an increase sequentially of 8.5 percent from the second quarter 2014. In the third quarter 2014, the title segment generated pretax earnings of $74.9 million (17.0 percent margin), a 24.2 percent increase over the third quarter 2013's pretax earnings of $60.3 million (12.0 percent margin) and a 64.2 percent increase sequentially from the second quarter 2014 pretax earnings of $45.6 million (11.2 percent margin). Title segment results for the quarter include the title loss recovery described above, partially offset by $3.8 million of litigation-related accruals.
"Overall during the third quarter, the housing market continued the trend from the second quarter 2014, experiencing a reasonably consistent flow of refinancing transactions, and resale transactions showing steady, if modest, improvement," Morris continued. "By quarter end, the effect of refinancing transactions on year-over-year comparisons was largely over, and we saw a small improvement in opened title orders per day while the mix continued to shift to more residential resale and commercial orders. We are very pleased with the performance of our commercial business as it continues to improve its position in the marketplace. The title operations acquired in the second quarter 2014 were meaningful contributors to our title revenues, even as the work to fully integrate them into our processes and systems continues."
Our direct operations include local offices, commercial and international operations. We generate commercial revenues both domestically and internationally. U.S. and Canadian commercial revenues increased 31.2 percent to $41.2 million from the third quarter 2013, and 20.5 percent sequentially from the second quarter 2014. (On a year-to-date basis, commercial revenues increased 13.8 percent.)
Total opened title orders in direct domestic operations (excluding offices acquired in the past two quarters) decreased 0.8 percent and 2.8 percent from the third quarter 2013 and sequentially from the second quarter 2014, respectively. Refinancing orders were 21.3 percent of total opened orders in the third quarter 2014, up slightly from 20.8 percent in the third quarter 2013 and up sequentially from 18.1 percent in the second quarter 2014. Title orders closed per workday in direct operations decreased 8.2 percent from the third quarter 2013 but rose 1.8 percent from the second quarter 2014. Title revenue per closed order in direct operations increased 22.9 percent and 7.7 percent from the third quarter 2013 and the second quarter 2014, respectively. The increases in both comparisons are primarily due to home price appreciation and a shift in order mix to more resale and commercial orders. Only orders that have a premium component are included in our open and closed order counts. Independent agency revenues decreased 24.6 percent from the third quarter 2013 and rose 10.1 percent sequentially from the second quarter 2014. Our independent agency remittance rate of 18.4 percent was unchanged from the third quarter 2013 but declined sequentially 20 basis points from the second quarter 2014.
As a percentage of title revenues, title losses were 2.0 percent in the third quarter 2014, 6.4 percent in the third quarter 2013, and 4.4 percent in the second quarter 2014. Title loss expense declined 72.2 percent to $9.1 million in the third quarter 2014 compared to $32.6 million in the third quarter 2013. Title policy loss expense in the third quarter 2014 includes a credit relating to the recovery of a portion of a previously recognized large loss; excluding this credit, title losses were 5.2 percent of title revenues. Title policy loss experience, including both incurred losses and claims payments, remained below our estimates during the third quarter 2014, reflecting our ongoing attention to prudent risk management with an emphasis on the quality and profitability of our independent agency network. As a result, we lowered our loss provisioning rate modestly in the third quarter 2014. The title loss ratio in any given quarter can be significantly influenced by changes in title revenues, insurance recoveries, new large claims incurred as well as adjustments to reserves for existing large claims. Total balance sheet policy loss reserves were $491.5 million at September 30, 2014.
About Stewart
Stewart Information Services Corp. (NYSE: STC) is a leading provider of real estate services, including global residential and commercial title insurance, escrow and settlement services, lender services, underwriting, specialty insurance, loan due diligence, compliance solutions, service performance management and other solutions that facilitate successful real estate transactions. Stewart offers personalized service, industry expertise and customized solutions for virtually any type of real estate transaction, through our direct operations, network of approved agencies and other companies within the Stewart family. Through a focus on integrity, smart growth and conservative management, Stewart remains committed to serving our customers, innovating and improving to meet their needs in an ever-changing market.