STEWART INFORMATION SERVICES CORP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

(Mark One)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2003

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number 1-12688

STEWART INFORMATION SERVICES CORPORATION
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(Exact name of registrant as specified in its charter)

Delaware 74-1677330
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

1980 Post Oak Blvd., Houston TX 77056
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(Address of principal executive offices, including zip code)

(713) 625-8100
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(Registrant's telephone number, including area code)

- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of October 31, 2003.

Common 16,861,618
Class B Common 1,050,012

FORM 10-Q
QUARTERLY REPORT
Quarter Ended September 30, 2003

TABLE OF CONTENTS

As used in this report, "we", "us", "our" and "Stewart" mean Stewart Information
Services Corporation and our subsidiaries unless the context indicates
otherwise.

STEWART INFORMATION SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS
FOR THE QUARTERS AND NINE MONTHS ENDED
SEPTEMBER 30, 2003 and 2002

See notes to condensed consolidated financial statements.

-1-

STEWART INFORMATION SERVICES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

See notes to condensed consolidated financial statements.

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STEWART INFORMATION SERVICES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002

See notes to condensed consolidated financial statements.

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STEWART INFORMATION SERVICES CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Interim Financial Statements

The financial information contained in this report for the three and nine month
periods ended September 30, 2003 and 2002, and as of September 30, 2003, is
unaudited. In the opinion of our management, all adjustments necessary for a
fair presentation of this information for all unaudited periods, consisting only
of normal recurring accruals, have been made. The results of operations for the
interim periods are not necessarily indicative of results for a full year. This
report should be read in conjunction with the Company's Annual Report on Form
10-K for the year ended December 31, 2002.

Certain amounts in the 2002 condensed consolidated financial statements have
been reclassified for comparative purposes. Net earnings, as previously
reported, were not affected.

Note 2: Segment Information

Our two reportable segments are title and real estate information. Selected
financial information related to these segments follows:

Note 3: Earnings Per Share

Our basic earnings per share figures were calculated by dividing net earnings by
the weighted average number of shares of Common Stock and Class B Common Stock
outstanding during the reporting period. The only potentially dilutive effect on
earnings per share relates to our stock option plans.

In calculating the effect of the options and determining a figure for diluted
earnings per share, the average number of shares used in calculating basic
earnings per share was increased by 113,000 and 92,000 for the three month
periods ended September 30, 2003 and 2002, respectively, and 111,000 and 96,000
for the nine month periods ended September 30, 2003 and 2002, respectively.

-4-

Note 4: Stock-based Compensation

The Company has two fixed stock-based employee compensation plans. The Company
accounts for the plans under the intrinsic value method. Accordingly, no
stock-based employee compensation cost is reflected in net earnings, as all
options granted under the plans had an exercise price equal to the market value
of the underlying Common Stock on the date of grant.

The Company applies APB No. 25 and related Interpretations in accounting for its
plans. Under SFAS No. 123, compensation cost would be recognized for the fair
value of the employees' purchase rights, which is estimated using the
Black-Scholes model. The Company assumed a dividend yield of 0%, an expected
life of ten years for each option, expected volatility of 33.1% and 34.7% and a
risk-free interest rate of 4.3% and 4.8% for the nine months ended September 30,
2003 and 2002, respectively.

Had compensation cost for the Company's plans been determined consistent with
SFAS No. 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:

Note 5: Equity in Investees

The amount of earnings from equity investments was $2.4 million and $0.9 million
for the quarters ended September 30, 2003 and 2002, respectively, and $5.4
million and $2.3 million for the nine month periods ended September 30, 2003 and
2002, respectively. These amounts are included in "title insurance revenues -
direct operations" in the condensed consolidated statements of earnings and
comprehensive earnings.

Note 6: Contingent Liabilities and Commitments

We adopted the disclosure requirements for guarantees required by FASB
Interpretation No. 45 effective December 31, 2002. We have also adopted the
initial recognition and measurement provision of the non-contingent aspects of
guarantees issued or modified after December 31, 2002.

On September 30, 2003, the Company was contingently liable for guarantees of
indebtedness owed primarily to banks and others by unconsolidated equity
investees and other third parties. The guarantees relate primarily to business
expansion and generally expire no later than December 15, 2006. The maximum
potential future payments on the guarantees amount to $1,691,000 for equity
investees and $8,211,000 for other third parties. Management believes that the
related underlying assets and the collateral available, primarily title plants
and the guarantees of corporate stock, would enable the Company to recover the
amounts paid under the guarantees. The Company believes no provision for losses
is needed because no loss is expected on these guarantees.

In the ordinary course of business, the Company guarantees the third party
indebtedness of its consolidated subsidiaries. On September 30, 2003, the
maximum potential future payments on the guarantees is not more than the notes
payable recorded on the condensed consolidated balance sheets.

-5-

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

GENERAL. Our primary business is title insurance. We close transactions and
issue policies on homes and other real property located in all 50 states, the
District of Columbia, U.S. territories and several foreign countries through
more than 7,000 issuing locations. Our direct operations include affiliated
agencies while agency operations include nonaffiliated agencies that have
underwriting contracts with us. We also sell electronically delivered real
estate services and information, as well as mapping products and geographic
information systems, to domestic and foreign governments and private entities.

Our business has two main segments: title insurance and real estate
information (REI). These segments are closely related due to the nature of their
operations and common customers. The segments provide services throughout the
United States through a network of offices, including both direct operations and
agencies. Although we conduct operations in several international markets, at
current levels non-USA operations are immaterial with respect to our
consolidated financial results.

Generally, the principal factors that contribute to increases in our
operating revenues for our title and REI segments include:

o declining mortgage interest rates, which usually increase home
sales and refinancing transactions;

o rising home prices;

o higher premium rates;

o increased market share;

o opening of new offices and acquisitions; and

o a higher ratio of commercial transactions that, although
relatively few in number, typically yield higher premiums.

These factors may override the seasonal nature of the title business.

Our employee costs and certain other operating costs are sensitive to
inflation. To the extent inflation causes increases in the prices of homes and
other real estate, premium revenues are also increased. Premiums are determined
in part by the insured values of the transactions we handle.

CRITICAL ACCOUNTING POLICIES. We believe the accounting policies that are the
most critical to our financial statements, and that are subject to the most
judgment and estimates, are those relating to title loss reserves, premium
revenue recognition and recoverability of long-lived assets, such as goodwill
and title plants.

Title loss reserves represent the aggregate future payments, net of
recoveries, that we expect to incur on policy and escrow losses and in costs to
settle claims. Future title loss payments are difficult to estimate due to the
complex nature of title claims, the length of time over which claims are paid,
the significantly varying dollar amounts of individual claims and other factors.
Loss provision amounts are based on reported claims, historical loss experience,
title industry averages, the current legal environment and the types of policies
written. The title loss reserves are continually reviewed and adjusted, as
appropriate. Independent actuaries review the adequacy of the reserves on an
annual basis.

Premium revenues on title insurance written by our direct title
operations are recognized as revenue at the time of the closing of the related
real estate transaction. Premium revenues on title insurance policies written by
agencies are recognized primarily when policies are reported to us. Revenues are
recorded on a total premium basis versus net to the underwriter. We accrue for
unreported policies where reasonable estimates can be made based on historical
reporting patterns of agencies, current trends and known information about
agencies.

We review the carrying values of title plants and other long-lived
assets if certain events occur that may indicate impairment. Impairment is
indicated when the projected undiscounted cash flow over the estimated life of
an asset is less than its carrying value. If impairment is determined by
management, the book amount is written down to fair value by calculating the
discounted value of the projected cash flow. In accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets", goodwill for each reporting unit is
tested for impairment annually by an independent valuation and goodwill
determined to be impaired is expensed to current operations.

RESULTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002

OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed rate mortgages, excluding points, for the first nine months of
2003 averaged 5.8% as compared with 6.7% for the same period in 2002. Comparable
rates averaged 6.5% for the full year 2002.

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In 2002, rates were steady at about 7% until April. Rates then declined
through December 2002, reaching a low of 5.9%. In 2003, rates began the year at
5.9%, decreasing to 5.6% in March and then increasing to 5.9% by the end of
March. Rates fell in the second quarter until they reached a low of 5.2% in
June. Rates then increased to 5.9% again in July. Rates continued to increase,
reaching a high of 6.4% in September, but decreased to 6.0% by the end of
September.

Operating in these mortgage interest rate environments, real estate
activity was much stronger in the first nine months of 2003 as compared with the
first nine months of 2002. Nationwide, refinancing transactions remained strong
in 2003. The ratio of refinancings to total loan applications was 69.7% for the
first nine months of 2003, compared with 53.7% for the same period in 2002.
Refinancings were lower in the third quarter of 2003 compared to the first two
quarters, averaging 57.3% in the third quarter. Refinancings usually have lower
title insurance premium rates than real property sales.

New order counts in August 2003 began to show significant unfavorable
comparisons with the same period in 2002. However, orders in the second quarter
of 2003 provided strong volume in the third quarter. Existing home sales
increased 8.7% in 2003 over the same period in 2002.

TITLE REVENUES. Our revenues from title operations increased 34.0% in the first
nine months of 2003 over the first nine months in 2002. Revenues from direct
operations increased 46.4% in 2003, as the number of direct closings we handled
increased 44.5%. The largest revenue increases in 2003 were primarily in
California, Texas and Washington. Direct closings relate only to files closed by
our underwriters and subsidiaries and do not include closings by agencies. The
average revenue per closing increased 1.3% in 2003.

Premium revenues from agencies increased 25.5% to $863.6 million in
2003 from $687.9 million in 2002. The increase in 2003 was primarily due to the
increases in both refinancings and real property sales. The largest revenue
increases in 2003 were primarily in California, Florida and New York.

REI REVENUES. Real estate information revenues were $61.6 million in 2003 and
$51.6 million in 2002. The increase in 2003 resulted primarily from providing an
increased number of product and service deliveries resulting from the large
volume of real estate transactions.

INVESTMENTS. Investment income decreased 3.4% in 2003, primarily because of
lower yields, partially offset by increases in average balances invested. We
realized a gain on the sale of investment real estate during the second quarter
of 2002, but it was offset by a comparable after-tax loss of $1.2 million on the
sale of WorldCom bonds. Certain investment gains and losses were realized as
part of the ongoing management of the investment portfolio for the purpose of
improving performance.

AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues
from agency operations, were 82.3% in 2003 and 82.2% in 2002. Amounts retained
by title agencies are based on contracts between the agencies and our title
insurance underwriters. The percentage that amounts retained by agencies bears
to agency revenues may vary from year to year because of the geographical mix of
agency operations and the volume of title revenues.

EMPLOYEE COSTS. Employee costs for the combined business segments increased
34.1% in 2003. The number of persons we employed at September 30, 2003 and
September 30, 2002 was approximately 8,700 and 7,400, respectively. The increase
in staff in 2003 was primarily due to the increased title and REI volume and the
acquisitions of new offices. In our REI segment, employee costs increased in
2003 and 2002 primarily due to the increase in REI volume.

OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 25.5% in 2003. The increase was primarily due to new offices,
search fees, business promotion and premium taxes. Other operating expenses also
include rent, supplies, telephone, title plant expenses and travel and auto.
Most of these operating expenses follow, to varying degrees, the changes in
transaction volume and revenues.

TITLE LOSSES. Provisions for title losses, as a percentage of title operating
revenues, were 4.3% in 2003 and 4.5% in 2002. We continue to experience low loss
ratios because of our improved practices. Also, increases in refinancing
transactions, which generally result in lower loss exposure, have led to lower
loss ratios.

INCOME TAXES. The provision for federal, state and foreign income taxes
represented effective tax rates of 37.8% and 38.6% in 2003 and 2002,
respectively.

-7-

THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002

OPERATING ENVIRONMENT. According to published industry data, interest rates for
30-year fixed rate mortgages, excluding points, for the three months ended
September 30, 2003 averaged 6.0% as compared with 6.3% for the same period in
2002.

In the third quarter of 2003, rates increased from 5.2% in June to 5.9%
in July. Rates continued to increase in August and reached a high of 6.4% in
September. Rates then decreased to 6.0% by the end of September.

Operating in these mortgage interest rate environments, real estate
activity was much stronger in the third quarter of 2003 as compared to the third
quarter of 2002. Nationwide, refinancing transactions remained strong in the
first half of the year 2003. The ratio of refinancings to total loan
applications was 57.3% for the third quarter of 2003, compared with 68.0% for
the same period in 2002. Refinancings usually have lower title insurance premium
rates than real property sales.

New order counts in August 2003 began to show significant unfavorable
comparisons with the same period in 2002. However, orders in the second quarter
of 2003 provided strong volume in the third quarter. Existing home sales
increased 20.0% in 2003 over the same period in 2002.

TITLE REVENUES. Our revenues from title operations increased 33.6% in the third
quarter of 2003 over the third quarter of 2002. Revenues from direct operations
increased 49.1% in 2003, as the number of direct closings we handled increased
41.1%. The largest revenue increases in the third quarter of 2003 were primarily
in California, Texas and Washington. Direct closings relate only to files closed
by our underwriters and subsidiaries and do not include closings by agencies.
The average revenue per closing increased 4.8% in 2003.

Premium revenues from agencies increased 23.7% to $340.7 million in the
third quarter of 2003 from $275.4 million in 2002. The increase in 2003 were
primarily due to the increases in both refinancings and real property sales. The
largest revenue increases in 2003 was primarily in California, Florida and Ohio.

REI REVENUES. Real estate information revenues were $21.7 million for the third
quarter of 2003 and $18.4 million for the third quarter of 2002. The increase in
2003 resulted primarily from providing an increased number of product and
service deliveries resulting from the large volume of real estate transactions.

INVESTMENTS. Investment income decreased 6.0% in the third quarter of 2003
compared to the third quarter of 2002 primarily because of lower yields,
partially offset by increases in average balances invested. Certain investment
gains and losses were realized as part of the ongoing management of the
investment portfolio for the purpose of improving performance.

AGENCY RETENTION. The amounts retained by agencies, as a percentage of revenues
from agency operations, were 82.2% and 82.9% in the third quarters of 2003 and
2002, respectively. Amounts retained by title agencies are based on contracts
between agencies and our title underwriters. The percentage that amounts
retained by agencies bears to agency revenues may vary from year to year because
of the geographical mix of agency operations and the volume of title revenues.

EMPLOYEE COSTS. Employee costs for the combined business segments increased
36.8% in 2003. The number of persons we employed at September 30, 2003 and
September 30, 2002 was approximately 8,700 and 7,400, respectively. The increase
in staff in 2003 was primarily due to the increased title and REI volume and the
acquisitions of new offices. In our REI segment, employee costs increased in
2003 primarily due to the increase in REI volume.

OTHER OPERATING EXPENSES. Other operating expenses for the combined business
segments increased 31.6% in the third quarter of 2003. The increase was
primarily in search fees, new offices, premium taxes and business promotion.
Other operating expenses also include rent, supplies, telephone, title plant
expenses and travel and auto. Most of these operating expenses follow, to
varying degrees, the changes in transaction volume and revenues.

TITLE LOSSES. Provisions for title losses, as a percentage of title operating
revenues, were 4.3% in the third quarter of 2003 and 4.6% in the third quarter
2002. We continue to experience low loss ratios because of our improved
practices. Also, increases in refinancing transactions, which generally result
in lower loss exposure, have led to lower loss ratios.

INCOME TAXES. The provisions for federal, state and foreign income taxes
represented effective tax rates of 38.6% and 39.1% in the third quarters of 2003
and 2002, respectively.

-8-

LIQUIDITY AND CAPITAL RESOURCES. Cash provided by operations was $158.0 million
and $92.4 million in 2003 and 2002, respectively. Cash flow from operations has
been the primary source of financing for additions to property and equipment,
expanding operations and other requirements. This source may be supplemented by
bank borrowings. We do not have any material source of liquidity or financing
that involves off-balance sheet arrangements.

A substantial majority of consolidated cash and investments is held by
Stewart Title Guaranty Company (Guaranty) and its subsidiaries. Cash transfers
between Guaranty and its subsidiaries and the Company are subject to certain
legal restrictions. See Notes 2 and 3 to our consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Our liquidity, excluding Guaranty and its subsidiaries, is comprised of
cash and investments aggregating $10.0 million and short-term liabilities of
$0.8 million at September 30, 2003. We know of no commitments or uncertainties
that are likely to materially affect our ability to fund cash needs.

We consider our capital resources to be adequate. Our capital resources
are represented by a low debt-to-equity ratio, in which notes payable is $24.7
million and stockholders' equity is $604.3 million at September 30, 2003. We are
not aware of any trends, either favorable or unfavorable, that would materially
affect notes payable or stockholders' equity, and we do not expect any material
changes to the cost of such resources. However, significant acquisitions in the
future could materially affect the notes payable or stockholders' equity
balances.

FORWARD-LOOKING STATEMENTS. All statements included in this report, other than
statements of historical fact, that address activities, events or developments
that we expect or anticipate will or may occur in the future, are
forward-looking statements. Such forward-looking statements are subject to risks
and uncertainties including, among other things, changes in mortgage interest
rates, employment levels, actions of competitors, changes in real estate
markets, general economic conditions, legislation (primarily legislation related
to title insurance) and other risks and uncertainties discussed in our filings
with the Securities and Exchange Commission.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our investment strategies, types
of financial instruments held or the risks associated with such instruments
which would materially alter the market risk disclosures made in our Annual
Statement on Form 10-K for the year ended December 31, 2002.

Item 4. Controls and Procedures

Our principal executive officers and our principal financial officer,
based upon their evaluation of our disclosure controls and procedures conducted
as of September 30, 2003, have concluded that those disclosure controls and
procedures are effective.

There have been no changes in our internal controls or in other factors
known to us that could significantly affect these controls, nor were any
corrective actions necessary with regard to significant deficiencies and
material weaknesses.

-9-

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We are a party to routine lawsuits incidental to our business, most of which
involve disputed policy claims. In many of these suits, the plaintiff seeks
exemplary or treble damages in excess of policy limits based on the alleged
malfeasance of an issuing agent. We do not expect that any of these proceedings
will have a material adverse effect on our consolidated financial condition.

Item 5. Other Information

We paid regular quarterly cash dividends on our Common Stock from 1972
through 1999. Our Board of Directors has approved a plan to repurchase up to 5
percent (up to 838,000 shares) of our outstanding Common Stock. Our Board
decided to discontinue our regular quarterly dividend in favor of returning
those and additional funds to stockholders' equity through the stock repurchase
plan. Under this plan, we repurchased 116,900 shares of Common Stock during
2000. We did not repurchase any shares of our Common Stock in 2001, 2002 or in
the first nine months of 2003.

In June 2003, the Board voted to recommence an annual dividend payout due to
recent favorable tax law changes. The amount and timing of the dividend payout
will be determined in the fourth quarter of 2003.

In 2002, primarily in the second quarter, we acquired 208,769 shares of
treasury stock. The majority of these shares were acquired as a result of the
consolidation of a majority-owned subsidiary that was previously held as an
equity method investment. All of these shares were held by us at September 30,
2003.

We had a book value per share of $33.75 and $27.84 at September 30, 2003 and
December 31, 2002, respectively. At September 30, 2003, this measure is based on
approximately $604.3 million in stockholders' equity and 17.9 million shares
outstanding. At December 31, 2002, this measure was based on approximately
$493.6 million in stockholders' equity and 17.7 million shares outstanding.

-10-

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

* A management compensation plan, contract or arrangement.

(b) Reports on Form 8-K:

During the quarterly period covered by this report, we filed a report on Form
8-K dated July 25, 2003, reporting financial results for the three and six
months ended July 25, 2003.

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SIGNATURE

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

Stewart Information Services Corporation
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(Registrant)

November 4, 2003
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Date

/s/ MAX CRISP
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Max Crisp
(Executive Vice President and Chief Financial
Officer, Secretary-Treasurer, Director and
Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

* A management compensation plan, contract or arrangement.